Intel's Battisti calls for increased venture regulation

There is substantially less money in venture capital than is needed to foster innovation and GDP growth. Furthermore, there is a clear funding gap between seed stage and growth deals. The investor mix is also worrying: more than 40% of all investments in venture capital now come from government agencies. At the end of 2007 this figure was less than 10%. With an overwhelming focus on government intervention and funds aimed at helping underperforming VCs to raise money, current proposals to solve the situation are wrongheaded.

Instead, we need to see a real brainstorming, where the venture community discusses a solution that doesn't involve government money flowing freely into the sector and ensures successful people secure the funding they need to continue doing what they're doing.

Venture capital has an inimitable power to grow companies and create jobs, as one can see from studies done in the US. Because of this, governments across Europe have rightly voiced their support for innovation, entrepreneurialism and the opportunities the industry creates, but their actions have not always been supportive. Public money has been thrown at the problem with no real consideration of direction of travel or impact.

The public origin of venture funds is neither healthy nor sustainable. Given some of the poor returns it is clear this government strategy is not working as it is fostering even more dependency. This is without even considering whether or not it is correct to spend taxpayers' money on these investments. If we are to nurture an effective venture ecosystem, this state of affairs needs to change.

Change needed
Firstly, if public money is to be used, it needs to be used differently. We cannot continue to throw money indiscriminately at the system with a vague hope that growth will come. Any allocations made should be thought through and subject to the same investment criteria found in the private sector. Doling out money to funds on a first come first served basis is not expedient and will only rarely generate the right results. This is why I am very critical of the EVCA's proposal to set up a European fund-of-funds. Can a sustainable venture market emerge with yet more government money? The strategy seems to suggest that private funds will put money in just because government funds are involved. If anything, we need less government money and less government intervention in this segment.

Regulation is rarely the answer but here, I believe it could have a place. For European venture, additional sources of VC funding (such as endowments, family offices, pension funds and funds-of-funds) are today relatively untapped. This is partially because US VC performance is, according to industry data, slightly superior to European VC performance. While this only tells us part of the story, it creates a perception of Europe as an unviable region for venture investing. This is because people have different incentives in Europe, where investing is so often linked to government funds and not performance.

However, the market in Europe has matured dramatically from 15 years ago and we are now seeing much more capable and internationally-minded management teams, as well as very interesting technologies. I will be bold enough to say that top European funds' performance would be considered as good, or at least consistent with the risk they are taking.

Unfortunately, it feels these traditional, institutional sources of funds are not giving an opportunity to European GPs. However, they are more than happy to invest in the US, even with similarly performing funds. Governments could change this by introducing some new incentives: an example would be to provide an income and capital gains tax exemption to these investors when they invest in EU-based VCs. This exemption would be applicable only for them; it would not be passed on to the funds they invested in. This would guarantee these funds operate as they should, ie seeking the highest possible returns.

Forceful persuasion
Another, more forceful way of doing this, would be for governments to encourage pension funds to invest a small percentage of their private equity allocation into venture funds operating in their country of origin. This would need to be handled carefully, so that Europe is not seen as a hostile investment environment. Governments would need to positively present the case to funds and engage in real dialogue before coming to a workable solution together. This would help grow a healthier, self-sustaining venture ecosystem in Europe.

These don't need to be permanent measures and should be reviewed in five years. Considering the fallout from the 2007 crisis is still being felt, five years would provide enough time to gauge the results. This would only work if it focuses purely on allocation; the selection of the GPs has to be solely down to criteria set by the investors. One would hope these are linked to performance, as this is what would make the sector fully viable as it is in the US.

Global marketing
Beyond this, governments could concentrate their resources elsewhere to much greater effect. Foreign investors rarely hear about anything other than the risks involved in Europe, when in reality we have a relevant pool of talented VCs and exciting companies. There are plenty of success stories in Europe and we need to better promote them abroad. Governments should take a lead here using official visits and events as a platform to encourage LPs to take a closer look.

Governments could also make better use of immigration policy to improve the venture market. Top talent makes top businesses, so immigration and innovation should go hand in hand. The US is a prime example of this, where a substantial proportion of successful founders and contributors were born abroad. Maybe, if we were more open and had less prejudice, we could have convinced people who created companies such as Google (Russian founder), Whatsapp (Ukranian founder), Instagram (Brazilian founder), Nvidia (Taiwanese founder) and Yahoo (Taiwanese founder) to have set up in Europe.

It's not often that I call for government intervention but here I think it may be justified. European tech has the potential to be world-class, and European governments have it within their power to bring about the changes needed to create a flourishing venture ecosystem.

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