Government agencies and corporates are increasingly active in venture – but they should push further in support of European VC, argues Olivier Marty
Government agencies and corporates are both getting more involved in European venture, according to recent statistics (see graph below).
Between 2007 and 2011, the proportion of government agencies' contribution to venture funds increased six-fold, going up from 9% to a staggering 54%. This is likely a result of the exodus of former backers; both insurance companies and banks are fleeing the asset class due to venture's historically poor returns and their own regulatory constraints. On the other hand, pension funds have been facing market downturns and reduced their assets under management, while individual investors have increased precautionary savings to defend against feared tax changes on venture schemes.
Public and private investors still need to tailor their cooperation in venture
The debate on the need for public investors' involvement is unlikely to end soon. Public money has become a necessity in the current economic climate, not just to react to a lack of alternative funding, but also to act as a momentum driver for some funds. Also, the experience of public investment teams is generally recognised both at the national and European levels.
"Though public finance in venture is necessary, the state must not be directly involved," argues Pierre de Fouquet, managing partner of Iris Capital Management and former president of AFIC, whose firm manages a new corporate venture scheme (OP Venture) created by Orange and Publicis. Furthermore, the length of time for public involvement in venture must be well targeted and strictly managed, and may benefit from conditionality. Investment impact studies, as well as differentiated returns schemes for public and private investors, should be promoted, according to an experienced investor in a public body.
In lieu of competition, one of the keys to success is the appropriate mixing of public support with private funding and involvement, a sentiment increasingly shared by those present at the AFIC conference held in Paris recently. "The plurality of investors involved remains essential," says de Fouquet, who argues that this was a notable trend in countries with buoyant venture markets, such as the US and Israel.
Corporates are serious about venture
In this regard, the fact corporate venturing is making a comeback throughout Europe and now stands at around 12% of commitments is to be welcomed. The latest Iris Capital OP Ventures, ST Microelectronics, and Atos Origins initiatives all illustrate the variety of this type of corporate transactions, and a rise in joint corporate investment has been noted. The balance between the main strategic intelligence and return objectives will continue to depend on which sectors are the most commercially attractive, however.
The common rise of both public and corporate investments then turns the spotlight on the need to bridge the gap between companies in the research and early-stage phases, as well as on the recent initiatives taken to enhance the depth of the European venture market.
What remains to be done in Europe?
For one, intensifying links between "corporate research centres, SMEs and universities is essential", argues de Fouquet, as is facilitating technology transfer more broadly. Promoting R&D investments and protecting intellectual property are linked to this objective and would also help venture. Creating platforms of proof of concept so as to facilitate IP is an idea suggested in the current debate.
It is also in the interest of public agencies and corporates alike to facilitate the further integration of the European VC market. The European Angels Fund, created last January by the EIF (see "Public Involvement in Private Equity Key to Activity", unquote" Analysis, April, page 18), to help business angels co-invest was one of the initiatives taken.
But to further the industry, venture "must also be considered separately from private equity in European regulation," argues de Fouquet, who is wary on the outcome of the European Venture Capital Fund label, the new European "venture passport," and its articulation with the AIFM Directive. A common, simplified corporate legal status is another idea that could help venture.
Working on the development of a stronger private institutional investor base, the channelling of individual savings in venture schemes, the creation of a common venture fund structure, and the fostering of experience of European venture capitalists are all long-term objectives. In the meantime, Europe should be proud of its assets (breadth of university and research clusters; leading companies in the life science, electronics and communication sectors; experienced public and private GPs) and have all players interested in venture capital's success at responding proactively and pragmatically to the markets' and economies' constraints.
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