The issue of whether the European venture capital industry needs public money is always a divisive one. In one camp, you have those who say that in an ideal world it wouldn’t be needed, that venture capital should be able to stand on its own two feet, but that in reality, state sponsorship of some kind is not only needed but crucial to the survival of the venture capital industry as well as the technology sectors it supports.
In the other, admittedly minor, camp are those who are completely against the idea, those that argue public support distorts the market, that venture capital should live and die on merit and be able to justify its existence through the generation of good returns.
It was against a backdrop of falling fund raising figures that the European Venture Capital & Private Equity Association (EVCA) made its call for the creation of a new pan-European fund-of-funds.
“It is an understatement to say that the fundraising market is extremely difficult for European venture,” said Javier Echarri, secretary general of EVCA at its venture forum in Berlin this month before spelling out what his organisation thinks is needed, a “specific programme focused on attracting long term private sector funding for European venture capital by incentivising privately managed funds-of-funds to select the best European venture capital managers and sell their potential to investors across the world. To succeed, those funds of funds must be free to propose commercially-driven strategies.”
This would come in the shape of a €1.5bn investment programme which will commit €300m every two years to one or two private fund-of-funds on the basis that private investors match the EU’s contribution. “This proposal would ensure that public funding is used to generate a strong interest in European venture capital and ultimately ensure the advent of European institutional investors focused on European venture,” said Echarri.
The key point is that such a programme must operate a commercial strategy and not act as a welfare state for venture capitalists. The task now is to ensure that fund managers are appropriately incentivized to make the best, return-driven decisions possible. It is in no-ones interests, other than partners at a failing venture fund, for an EU-backed fund-of-funds to operate otherwise. Turn to p9 for more on this.
A publicly- financed fund-of-funds for European VC does already exist of course, in the shape of the European Investment Fund. Speaking to EVCJ on p12, Uli Grabenwarter, head of equity fund investments, admits that, at the moment, investors are justified in ignoring venture capital and if the industry fails to grab the attention of LPs now, it may never do so: “This is probably European venture capital’s last chance to prove itself.”