5 risks that European VC’s see for the entrepreneurial landscape
We already wrote about the European VC panel debate that was organised by the Louvain Management School Alumni and the INSEAD Private Equity Network. But aside from the culture of success that was discussed, the VC’s present also gave their assessment of the current entrepreneurial climate in Europe by answering the question what they see as the biggest opportunity in Europe as well as the main risks today. We’ll present their main points here.
On the opportunities side, Tony Zappalà said he saw a new generation of entrepreneurs, as well as a democratisation of technology. Tech that was once exclusive to large enterprises is now available to everyone – like cloud servers and computing powers. This would lead to these techs reaching other industries than purely technology driven industries, he said.
Maurice Olivier, partner of ‘angel fund’ Nausicaa, said he was pretty pleased with the available knowledge, science and – yes, even entrepreneurial drive in Europe.
Jos Peeters agreed with this, stating: “When we started 20 years ago, we had to go out every evening to talk about what we did – we had to spell venture capital. Now people know how it works. But the main infrastructure is still missing: a properly functioning stock market with investment banks that can advise investors to invest.”
The VC’s were a lot more vocal on the question about threats and risks.
1. Exit, exit, exit
Every one of them agreed that Europe misses an opportunity to exit – mostly in the form of a stock exchange for tech companies and investment bankers who have experience in advising investors who are looking for growth companies.
As Alex Brabers of GIMV said: “I’m convinced that if you look at the returns of VC’s, they’re closely related to the IPO markets, and they’re now closed most of the time. They’re open only for large caps, not small and mid, while they’ve always been the bread and butter for the industry. “
Jos Peeters: “Why do European companies not get bigger? I’m not talking about raising five or ten million, but thirty, fifty million to become a billion euro company – that’s the step we’re missing in Europe, and that’s why startups are moving away from here. That has everything to do with the lack of an exit here in Europe.”
2. “VC’s die slowly”
Another big risk factor for the European scene is the dwindling number of active funds. Or as Alex Brabers put it: “VC’s don’t die all of a sudden – they die slowly, because they have funds to manage. There are still a number of VC’s active in Europe, but only a very limited number who are actively investing.”
This is a risk for entrepreneurs, he said: “The ecosystem is reduced, and there are less players to syndicate with as a VC – we’re colleagues more than competitors, we often do due diligence together, share financial risks.”
This was echoed by Peeters, who said: “The financing is a more lengthy process than it used to be, because you know you’ll need follow up financing. In the past, when you knew a company needed funding for two years, you’d start. But nobody feels comfortable doing that today – everybody wants to get enough funding in place to get to the second or third inflection point. That’s not good for entrepreneurs.”
3. Regulatory – a VC is not a hedge fund
Jos Peeters said that he felt that the regulatory environment was now lumping VC funds in with multibillion dollar hedge funds, which he felt was a distorted view of the activity of VC’s. “We are now regarded as a systemic risk – a VC fund that has a couple of tens of millions of euros, the same as a multibillion dollar hedge fund. When I talk to people in Europe about this, they say that regrettably we’re “collateral damage”.”
The upside, he noted, is that companies who get regulated will have an advantage, because it lowers the number of players competing for deals.
4. Regulatory – labor
Alex Brabers added that he thought European labor laws stifled entrepreneurship in Europe: “I think you shouldn’t underestimate the regulatory climate too. In the US, the the entrepreneurship scene is very dependent on immigrants from China and India. In Europe, it’s very hard to hire a non-European.”
5. Government funding
Finally, Brabers said that he thought that European funding had become dependent on governments to a degree that is no longer sustainable. “The government is becoming the most important funder in our industry, with more than 50 percent of the funding in the industry done by governments. That’s not sustainable. It’s beginning to feel like a nationalised industry – with VC’s beginning to look like civil servants. That’s not good. We are being funded by regional and national funds – often small funds.”
“For many people VC is about funding very small new companies – that’s wrong. You’re trying to fund innovation, to fund hypergrowth, from very early to very late stages – and it takes a lot of money to exit. Small funds just have a weaker performance – so governments are not doing the industry a favor by stimulating small funds. It’s popular to say that you support startups, but startups have to grow into large companies.”
“VC money creates labor in the later stages – most of it sometimes after an IPO. But some regional governments would like to create a fund in every villag. That doesn’t make sense. You have to concentrate resources in centres of excellence like London, Berlin, Ghent, Paris.”
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Photo: look for the exit sign
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