Italian VC ecosystem shows signs of maturity

Amy King
08 January 2015

Tweet
Facebook
LinkedIn
Google plus
Send to

Despite a dip in activity last year, the Italian venture market shows signs of rejuvenation thanks to improving legal frameworks coupled with recent fundraising successes. Amy King reports

Italian venture had an uplifting year in 2013, with the highest number of early-stage deals recorded since 2000, according to unquote" data. Such success was not mirrored in 2014 statistics, but the year was triumphant nevertheless, with several changes made to the legislative framework and a number of fund closings boosting the local community.

"This is a time when venture capital in Italy could really go somewhere," said the European Investment Fund's John Holloway, echoing general sentiment at the unquote" Italia private equity forum in Milan in November. "Italy has now got a few good VC teams who have shown they can come to market a second time. That's a real stamp of approval for me when a VC team can come back and get its second fund away," said Holloway.

One team to hold a close for its second fund is Innogest. The VC's sophomore vehicle collected €70m at second close in November – hitting its target with further commitments anticipated. In December, Principia celebrated a €160m first close for its third vehicle, Principia III Venture Capital Fund, proving its enduring credentials. Earlier in the year, United Ventures held an $80m final close for its maiden vehicle. But it was not the team's first effort; United Ventures was formed by the merger of JV Capital and Annapurna Ventures in 2013.

Where there's a will
The legislative framework has evolved accordingly, strengthened by proposals made by veterans of the venture community in the Re-start Italia report. The resulting Start-Up Act, which proved that proposals put forward by the venture community were strong enough to withstand Italy's umpteenth change in government, has led to a reduction in red tape, overhauled bankruptcy laws, tax relief for start-up investments and entrepreneur visas. According to Stefano Firpo, chief of the Italian Minister of Economic Development's Technical Secretariat, start-up loans are soon to be introduced, with 0% interest on amounts of up to €1.5m, with a war chest totalling €220m available for lending.

But perhaps most relevant for the local community has been the attempt to address Italy's cumbersome, costly and chaotic labour laws. The tailor-made labour law for start-ups below a certain size facilitates fixed-term contracts, tax credits and the right to pay employees in stock options. Start-ups are also able to pay external providers using the company's shares. "We're now able to assign stock options in a way that hasn't been possible for 15 years," says Andrea di Camillo, managing partner at P101, which counts Firpo on its investment committee. "The mind-set is changing," adds di Camillo.

Foreign fears
But though the maturing ecosystem may be cause for celebration among local players, international investors remain hesitant. "Very seldom you have a situation where growth is linear. In reality it's a bumpy ride and sometimes companies over-hire or they develop a new line of products, which becomes dated and the skills aren't necessarily transferable. These are small companies, and sometimes they have to let go of people for survival," says Marcos Battisti, vice president and managing director for western Europe at Intel Capital. The new Start-up Law only applies to companies under a certain size; once a business scales up, it falls back under the expensive and bureaucratic labour laws that have long weighed on the Italian business landscape. "Fundamentally, it has a hindering effect against driving growth," adds Battisti.

Size remains another deterrent for international investors. With the average series-A funding round in Italy lying at €1.5-2.5m, more akin to a seed round in the UK, native deals are dropping off the radars of global VCs used to making much larger equity investments. Though the environment may have improved for local players, Italy still fails to entice venture capitalists with a global reach. But should native VCs succeed in fattening up companies to meet the appetite of equity hungry global investors, Italy's next chapter could be a very different story.