Ladies and gentleman, there are many important things to cover in next 48 hours. This morning, I want to focus on public sector support for venture capital.
It is an understatement to say that the fundraising market is extremely difficult for European venture. A situation that was strained before the financial crisis is now critical, to the extent that commentators have begun to question whether the venture model itself is broken – not just in Europe, but in the US as well.
There are a number of reasons that institutional investors are avoiding venture. There is a growing risk aversion, partly motivated by regulatory reforms such as Solvency II, Basel II and the capital requirements directives; it is partly based on the fact that institutional investors are basing their investment case exclusively on historical data rather than market potential; it is partly a result of a mismatch in the size of investment programmes managed by major institutions relative to the average ticket size of a venture fund investment; and finally, it is partly a result of changing board attitudes as a consequence of the economic crisis and the losses in investment programmes.
As a result, it is quite uncontroversial to conclude that we do not have a class of private institutional investors whose investment strategies are currently aligned to the venture capital investment model.
In contrast to the US’s university endowments and foundations, most pension funds and insurance companies are rarely partners for Europe’s venture capitalists. If there is a market failure in Europe today, this is it.
At the same time, EVCA’s Venture Platform acknowledges an increasing willingness of the political world to ensure there is access to capital for Europe’s technology companies. We are seeing very significant and sizable initiatives being introduced in in different countries across Europe. All of them are motivated by a willingness to ensure that there is access to capital for technology SMEs, while a few focus on the key role of venture capital.
Past initiatives at EU-level, based on or motivated by the European Commission’s Risk Capital Action Plan, which was launched ten years ago, have directly or indirectly contributed to a total of €75bn being invested in more than 30,000 high-tech companies, and for SME funding in general, EVCA estimates a total of €147bn invested in nearly 70,000 SMEs.
Clearly, the aim of establishing a base of investment and entrepreneurial experience has been comprehensively accomplished. Now is the time to build on this very solid foundation. Indeed if we don’t grasp this opportunity a dependence on public money will inhibit the long-term goal of creating a self-sustaining VC industry.
Our proposal is to use public support schemes, not just to provide money to technology and SME focused funds, but also to ensure that professional venture capitalists are able to fulfill their role of very selectively backing the best innovation Europe has to offer and propelling it towards global success.
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.
Our proposal is that in addition to the numerous public schemes focused on access to capital for SMEs in general, there would be 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.
In a political context as well, this is a good time to reassess public policy in this regard. A new European Commission and a newly elected European Parliament in President Barroso’s second term offer an opportunity to set a fresh agenda, and the EU is currently defining its policy priorities for next five to 10 years. EU institutions are therefore seeking new approaches for innovation and competitiveness.
As a first step, today we are calling for policymakers to take a new look at venture capital within a new Risk Capital Action Plan for 2020. This Action Plan would cover the whole spectrum of SME finance, and confront the many market and regulatory obstacles that are today facing access to finance for innovation.
But it would also accommodate a specific treatment for Europe’s high potential venture industry, as I have outlined.
Prior to putting forward a concrete proposal to the Commission, we need to gather feedback and build a clear industry consensus around this new approach to deploying public funding in the European venture industry, which enables the industry to be sustainable in the long term. I look forward to speaking with as many of you as possible over the next two days to discuss this proposal.