The European venture capital (VC) landscape has had a chaotic time lately, affecting investors and start-ups alike.
Headlines now warn that investors have become more select, prioritising funding for those businesses which are more likely to bring a fast return on investment over those who are looking for first-round funding.
It is not all doom and gloom however. Investors may be spreading their finances less widely – the number of deals being reported over the last year has virtually halved – but the investments they are making are considerably higher, as our monthly Headline Transaction Index (HTI) has shown.
For example, in March, we reported on seven so-called landmark transactions – those greater than €20m ($30m) – compared with only three for the same period last year. Then in April we identified 88 transactions worth a total of €683m.
These are the latest figures to show the steady upward progress of European VC since September 2009, with a total of €876.5m invested in the region so far in 2011.
Competing against a developing US bubble of interest in internet and technology companies, these transactions are slowly evolving towards a higher risk profile. Activity is still very much up at the growth equity end of the market but there are also substantial A and B rounds for successful companies.
So with fewer opportunities but an increased appetite for risk and greater prizes on offer, how can European startups and investors find the right partner without breaking the bank or damaging a fledgling business in the process?
Looking across borders
The simple answer is look beyond the traditional US model of VC where proximity rules the roost. If European VC is to grow – and if the businesses it funds are to develop – investors and start-ups can no longer rely on partners within their immediate geographic regions.
This presents a unique set of challenges. Overcoming language barriers is an immediate and obvious concern.
However, the issues of different regulatory regimes and cultural idiosyncrasies can prove just as difficult. Finally, there is also the weight of history.
Because VC investment markets in European countries are fragmented, cross-border VC fund investment and fundraising have been inhibited for quite some time – and overcoming this is no small task.
So why go to the trouble? Simply put, because European growth needs cross-border investment. Small and medium-sized enterprises (SMEs) are seen as key to improving competitiveness and meeting the aims of the Lisbon Strategy for Growth and Jobs. VC has been identified as a crucial way of financing them because SMEs often face issues raising money via more traditional avenues.
The shape of success
Jean-Michel Deligny, managing director, Go4VentureA successful, cross-border VC market presents considerable potential for the growth of innovative SMEs. VCbacked companies tend to generate significant jobs and research and development.
How can Europe overcome current barriers to cross-border VC investment and fundraising? This huge task has already begun. The European Commission’s Tax Policy Group recently concluded that EU member states should do more to co-ordinate tax policy to eradicate the double taxation risk cross-border investors often face.
The hallmarks of success for this would be an integrated financial market with easy, free movement of VC, improved conditions for fundraising by institutional investors, and a better regulatory framework for funds based on greater efficiency and fewer administrative obstacles. In the short term a mutual recognition of existing national frameworks as the most pragmatic approach would be the first sign that Europe is on the right track to cross-border success.
There are other, immediate options for those start-ups and investors looking to exploit cross border opportunities.
The European Tech Tour Association (ETT) was founded in Geneva in 1998 in response to the growing interest in emerging technology companies in various European regions. As an independent, non-profit organisation, the ETT brings VCs from across Europe together with the brightest start-ups in a given region to turn innovative projects into tomorrow’s technology leaders.
Such initiatives are leading the way in accelerating cross-border VC development throughout Europe. If the ETT is any measure, the prize for early adopters is the inside track on some truly international opportunities. Tech Tour companies that have gone on to exits in excess of $100m include Comtelco, Parthus, SuSe, Memscap, Chipcom, Mellanox and U-blox to name but a few.
To continue this success, energise European SMEs and drive economic growth, bringing down national barriers and lighting the fire of cross-border investment is critical.