Last week, Carlos Moedas, European Commissioner for Research, Science and Innovation, unveiled a new €1.6 billion venture capital fund for Europe.
The fund will be seeded with up to €400 million of European Union money, which the Commission and European Investment Fund (EIF) hopes will ‘crowd in’ up to three times that amount from other sources, including pension funds and other large private investors from around the world.
Unlike other EU programmes that support venture capital and innovation, this one will be run by the private sector, using the contacts and the credibility of a recognised fund manager to encourage institutional investors to look again at this asset class.
With this announcement, the Commission will begin the hunt for a manager to run the programme. It will complement, but run independently of, the EIF, which already invests in small businesses, including through venture capital. Soon this new fund could be investing money with some of Europe’s best venture capital managers who, in turn, will support Europe’s brightest ideas and smartest innovations.
We have high hopes. Invest Europe’s research has shown that a vehicle backed by the EU could attract at least €3 billion of new capital that could support 1,300 additional start-ups and early-stage companies in Europe. Last year, venture capital invested €3.8 billion into close to 2,800 companies across the continent, according to our own data. More capital will enable these companies to expand, develop and commercialise the cutting-edge medical technology or the new consumer-focused app they have built, push into new markets, and – by so doing – create jobs. It will also be good for investors and the venture capital ecosystem across the continent.
The new programme is designed to attract large international pension funds, insurers and sovereign wealth funds that often struggle to access venture capital opportunities. The average venture capital fund in Europe is around €65 million, which is simply too small to absorb the minimum investments these global investors need to make. Investors that manage hundreds of billions of euros of pension or insurance assets simply have to write pretty big cheques.
The time and energy they have to commit to the due diligence process – to work out precisely who to invest with – is not very different for a small fund than a big one. So, it’s just not cost effective (and not in the interest of the pensioner or the saver who is the ultimate beneficiary) to go through that entire process to invest only a few million euros.
That mismatch cuts these investors off from much of the European venture capital scene. And this is a scene they want to access because it has spawned success stories like Skype, Spotify and Delivery Hero. According to data groups tracking the VC space, there are 47 so-called “unicorns” in Europe – start-ups that have grown to achieve a valuation in excess of $1 billion. This VC fund of funds programme will be big enough to accommodate large investors’ commitments of tens or even hundreds of millions of euros, and will give them a way to contribute to (and benefit from) the next wave of world-leading companies.
We expect that the whole industry will receive a boost and could start to close the funding gap that exists between Europe and the US. Some €5.3 billion was raised for European venture in 2015, up from about €4.5 billion the previous year. But Europe still lags well behind the US, where some €25.3 billion was raised in 2015. More available capital will mean more companies can choose to stay and prosper in Europe, rather than be lured away to Silicon Valley.
Invest Europe has long called for a VC fund of funds on behalf of its members for all these reasons. So, we are delighted that the Commission has taken our recommendations on board and recognises how important venture capital is for innovation, economic growth and jobs.
It’s also important to acknowledge that this is a very positive step by the Commission towards its aim of creating a European Capital Markets Union. The publication of its action plan a year ago put venture very much at the heart of its proposals and also envisaged measures to stimulate infrastructure and private equity investment by long term investors, such as insurers.
The fund of funds is a concrete measure that will encourage more private investment into venture capital in Europe, in turn fuelling more entrepreneurs, more bright ideas, and ultimately bigger successes.
Michael Collins is Chief Executive of Invest Europe
This is an updated version of an article first published in EurActiv.