Addressing Europe’s VC full cycle funding challengeBy Stephan Morais on 29 September 2015
More successful start-ups than ever before are being born in Europe. However, the European VC industry is short of funding to take these early-stage companies global. New venture fund of funds backed by EU financing could pull in more institutional investor capital and ensure that bright ideas get the support they need to succeed.
For the first time in Europe, there are meaningful numbers of €100m-plus enterprise value European companies, and even a significant number of so-called “unicorns” – businesses that are global champions in music, gaming or financial technology. It’s now just as common to see smart ideas get off the ground in London, Stockholm or Berlin as in Silicon Valley in the US.
But the funding to propel these companies to global enterprises worth over €1bn remains in short supply in Europe. Some companies still choose to relocate to the US to access funds from large venture capital firms. But many that stay are being stifled because of a lack of capital, particularly for later stage rounds.
This is a problem the venture capital industry is working to address. At the EVCA’s Venture Capital Forum in Berlin on October 22, I will present findings from an European Venture Fund Investors Network (EVFIN) commissioned study into how to draw more investment from institutional investors. It’s an issue the EVCA – very soon to become Invest Europe to reflect its broad membership with a focus on long term investment – is also working hard to tackle, because more venture capital funding also means stronger businesses, more jobs and more money in Europe’s real economy.
While the combined EU economy is marginally larger than the US economy, European venture capital fundraising is a fraction of the US figure. European venture funds raised €4.1bn in 2014, according to EVCA data, compared with roughly €20bn in the US, based on Preqin figures. Just as tellingly, early stage fundraising increased by 32% to account for 56% of all funds raised in Europe, while the venture total decreased by 12% – indicating the lack of bigger funds for later-stage investments.
Part of the reason is that institutional investors are wary of venture capital because of a perceived lack of track record (which is being addressed by the growth in successful European start-ups), limited risk appetite and restrictive regulation. As a result, over a third of venture funding last year came from European and Member State funds. While this capital has really helped companies start up and develop, it often comes with strings attached, limiting where managers can invest and hence also limiting the average size of the funds and teams they manage.
One solution could be to use public money as a catalyst to draw in private capital. Venture capital fund of funds, seeded with European funds and managed by professional investment teams, could help institutions access the best managers and create a diversified, lower risk portfolio than many could manage themselves. The EVCA has proposed such an idea as part of its contribution to the debate about the creation of a €315bn European Fund for Strategic Investments.
The need for more venture capital also resonates with the creation of a Capital Markets Union that can provide more funding options for European companies. Long term investment is also a priority and a critical ingredient for venture capital. When combined with venture capital business expertise, it provides the ideal mix to transform Europe’s exciting young companies into dynamic international successes. That’s a story both policymakers and investors can relate to.