There are plenty of SF startups (and full-sized companies like Twitter etc.) that never make a profit. But startups in SF that can make a profit will still win out over European equivalents since they're granted such huge runways to perfect their product before they're under pressure to go to market.
I agree that the incentive system for startups right now is broken, as so many are simply aiming for an IPO before they're exposed as jokes but there's an inherent advantage to being in SF for any type of fledgling tech business.
"perfect their product before they're under pressure to go to market."
This maybe the wrong way to think about it. Outside of hard-tech I see very few companies that are benefitted by building in a void.
Though your larger point still stands, once you have product market fit, the funding regime in SF gives an unfair advantage to companies that know how to use it for their particular domains.
Restricting access to funding will exclude companies that are capital intensive. This means that rather than incubate, say, a company seeking to build technology related to the "smart" electrical grid (time-horizon ten years minimum) we'd see incubation of things like greeting card companies. (Mature market, very little risk.)
This and also if that campus is active promoting itself (meetups, hackatons, events, accelerators…), the VC's will come over themselves – they need the talent. Europe is small and geographically that's really not a problem.
Rather than build a startup to raise funding, they might build a startup to sell products.