Risk capital funds have been closing more deals in Europe recently. Investment activity in VC-backed European tech companies reached a four-year high in both deals and dollars in 2014. Also, U.S. venture-capital investment in Europe is increasing steadily, a recent report by Germany’s Earlybird Venture Capital has found. I was curious to know if this is a trend. I questioned Dörte Höppner, the boss of European Venture Capital Association (EVCA). The EVCA covers full range of private equity activity, from early-stage venture capital to the largest private equity firms, investors such as pension funds, insurance companies, fund-of-funds and family offices and associate members from related professions. With 700 member firms and 500 affiliate members, the EVCA shapes the future direction of the industry.
Please give us a short summary of your role as Chief Executive of EVCA
I have been representing the European venture capital industry for many years, first in Germany and for four years now in Brussels. In my role, I promote VC to investors, entrepreneurs and the media, and together with my colleagues at EVCA work with policymakers to secure rules which make it easier for European VCs to raise and invest capital across Europe. I couldn’t do this job if I wasn’t passionate about Europe’s start-up culture and the great companies that VC is building.
VC investment activity in Europe is up. What major trends do you see?
The conditions for VC investment in Europe have never been better. Cloud computing and high-speed internet have made the start-up scene much more democratic, enabling ideas to be born and companies to grow up in Europe. It is no longer necessary to go to Silicon Valley to start a tech company. Start-up clusters are emerging in cities like Berlin, London and Stockholm to name but a few, and there are really exciting developments across the continent. We expect VC investments to pick up slightly over the course of 2015. They have remained stable but rather low over the last three to four years. After all, Europe has a long history of innovation and no shortage of entrepreneurial talent – almost 3,000 companies receive VC backing every year. But we do need to encourage more institutions and private investors to give Europe’s VC funds the financial firepower to invest in innovative ideas and build global companies.
What are the factors that the best performing VCs have in common?
They certainly need to be passionate and visionary. That’s necessary, but not sufficient. They also need to act highly professional, which means that they must be diligent and extremely well organized. and last but not least they need to be firm decision makers.
Is there a public database of VCs investing in Europe? Where should European companies go to search for investors?
You can find a list of European VCs on the EVCA’s website – we call it the investor search. It lists all our members that invest in European companies from VC to large buyout. You can filter the list by geography, industry sector and amount of capital you seek to raise.
There is a big gap between US VC investments per capita and EU VC investment per capita. Do you think that EU will ever catch up with US levels?
The US VC market is some seven to eight times bigger than the European market. However, the good news is that the Europe’s policymakers are serious about creating a financial ecosystem that supports start-ups and SMEs with the financing they need. So I think we will soon be able to start to close that gap.
The European Commission has recently launched an initiative to strengthen Europe’s capital markets – Capital Markets Union – which echoes rather than copies the US market structure. It aims to draw investors into equity financing for business, and provide companies with a range of cheap and flexible funding options. There is a very clear place in the plans for VC, which could in time help the industry grow. But we also should not fall in the trap to always compare Europe to the US. We are different in many ways, we should focus on our strengths. We don’t need to copy the US way to do VC, we have great VCs that know best how to create value in Europe.
What by your opinion would be one single thing which EC could implement on EU market and which could produce biggest impact on growth of VC market in EU?
Fundraising is the biggest obstacle that European VCs face. It is essential that we get more private investors on board. The EVCA has proposed the creation of private sector-managed, pan-European, fund-of-funds with a high commitment to venture capital. The EU budget should provide the cornerstone funding for the scheme and would act as a catalyst for private sector backing. This fund would then be invested in other European VC funds, giving them the resources to back more innovative start-ups, and the firepower to help them grow.
There is a significant gap in valuations between US and EU. US startups in every round get at least 100% more funding. Does this influence European startups, failure ratios? Should European startups raise in the US to get more funding?
We want to ensure that great ideas born in Europe get the backing they need to grow in Europe, where they can create jobs, flourish and act as magnet for even more innovation. We need to encourage more capital into VC at the early stages, and ensure there are keen investors in public markets and hungry strategic buyers when companies reach maturity. More enthusiastic capital at all levels of company development should inevitably lead to higher valuations. Similarly, we need to create the conditions for entrepreneurs who create dynamic and trendsetting businesses to stay in Europe and repeat their successes. A deep pool of driven and experienced people will be a significant factor in ensuring fewer failures.
Do you know what percentage of VC money are invested cross-border in Europe? What could be done to increase cross-border VC investments?
Around 30% of VC investments made into European companies are cross-border. And two-thirds of those cross-border investments come from VC managers in other European countries, while the other third comes from international fund managers. That means that the proportion of international VC firms investing in Europe is almost 10% – a figure that has been growing and is likely to continue to increase.
Which EU country has best developed VC market and why?
Germany, France and the UK have Europe’s largest VC markets. Together they account for more than 50% of all investments. But in terms of capital invested per capita the Nordics, Switzerland and Ireland top the list – those are countries with a longer tradition for VC, so their markets are more mature.
What is your take on equity crowdfunding / business angel & clubs in Europe? Do VCs invest with them?
Equity crowdfunding and angel investors are still a very small part of the start-up
ecosystem. However, they are becoming increasingly more important – policymakers are considering crowdfunding within their proposals for a European Capital Markets Union. We don’t have any data on the size of co-investments, but it is not unusual that VCs invest in companies that received their earliest funding from those sources.