Where does it go from here for venture capital in Europe? There are those who might mischievously reply “nowhere” (this opinion might even be privately voiced by some in the limited partner community, who regularly express scepticism on this segment of the private equity industry when surveys are conducted).
Better perhaps to identify constructive ways forward. In this spirit, the European Private Equity and Venture Capital Association (EVCA) recently held a forum in Berlin, bringing together early-stage investment specialists from all over Europe. Here are ten “takeaways” that captured the mood of the event:
1. European governments must help stimulate private sector interest in European venture capital, given institutional investors' unwillingness or inability to commit to the asset class. EVCA believes matching public funding can be a powerful incentive to attract private capital, which the European venture industry lacks, and is working with governments to create a €1.5 billion fund of funds platform.
2. Paul Drayson, UK minister of science and innovation (and a former venture capital-backed entrepreneur), also emphasised that “urgent government intervention” is the way forward for Europe's venture industry. Like his UK Innovation Investment Fund, seeded by a cornerstone investment of £150 million (€166 million; $249 million) from the government, he proposed a €3 billion European government-backed vehicle to support SMEs that will increase innovation and highly skilled job growth, as well as help solve issues including climate change.
3. Europe continues to lag behind countries like the US and Israel in terms of venture capital investment as a proportion of GDP. However, it takes less capital to take a company public in Europe, indicating that capital is more efficiently put to work.
4. Listing companies sooner is better than waiting for them to scale up to a certain size, according to Paul Deninger, vice chairman of investment bank Jefferies. Since 2001, smaller IPOs (€100 million to €249 million) have had tighter IPO pricing and solid post-IPO performance.
5. LPs must stop over-funding the best venture firms, because large funds need capital inefficiency to raise the bar on exits.
6. The future decision-makers for enterprise computing will be, Deninger said, the “Millennials” – people for whom the iPhone is preferred to the PC, who have never known life without “the cloud”, that live on Facebook, prefer virtual organisations to real ones, are comfortable with complete transparency, insist on democratic access and are always ‘on’.”
7. Secondaries have increasingly become a part of venture firms' activities, whether they realise it or not, with documentation allowing easy secondary sales to become standard. Corporates are often one of the largest sellers of portfolios, or partial interests, usually as a means to garner additional capital or expertise for portfolio companies.
8. Venture capital exits are still weak. Liquidity in the third quarter dropped 49 percent year-over-year. The IPO market is slowly stabilising but still weak, while venture M&A declined and volumes stagnated.
9. It's a myth that Europe-headquartered companies cannot scale up beyond the $1 billion mark or that buyers do not want to purchase European companies. “The buyers don't give a damn where the company is, if the company is good,” said Antoine Papiernik of Paris-based venture capital firm Sofinnova Partners.
10. Venture capitalists are concerned that the EC Directive on Alternative Investment Fund Managers unfairly proposes heavy-handed regulation of all alternative asset classes without properly distinguishing between them, and will hamper venture capital's investment abilities.