Why I think that venture capital in Europe will grow

By January 14, 2009Venture Capital

As I’ve said before I believe that the European venture capital market is under-funded right now and is therefore set to grow.  That isn’t to say that I think 2009 and nine will be a great year for the industry – I don’t think it will be a great year for many people, and VC is no exception.  Funds will be tough to raise this year and I know of at least two funds that are close to giving up.

So my comment is focused on the medium term.

The logic is simply that the economy in western Europe is a larger than the US and there is as much innovation here as the US, so over time I expect there to be similar sized startup and venture industries.  The current situation is very far from that, before the US venture investment rate started falling last year investment levels were 3-5 times the level here in Europe.

I don’t buy the argument that different cultures, languages, regulation and so on across the different European countries are sufficient to explain a difference of this magnitude.  Nor do I think there are any other structural explanations.

Rather I think that the reason investment levels here are lower is that we started later than the US – in the mid to late 1990s rather than the 1950s or 1960s.  As a result the entrepreneurial culture and the financial infrastructure (VCs and angels) are less well developed.  I think that both of these have been improving over recent years and in the internet sector at least are getting towards critical mass.  The critical ingredients for both are success and confidence – once we have enough of those we will get on a virtuous cycle of growth which will be good for everyone.

And we can see the beginnings of that now – successful founders of companies are putting their experience and new found wealth back into the ecosystem in increasing numbers, still small, but increasing.  I won’t name names here, but I could.  Similarly there are more and more events for entrepreneurs around London which are adding to the buzz and confidence in the sector.

All of this I believe will play out positively over the medium term.

The short term, however, won’t be pretty for anyone, and my fear is that the fragile confidence that has been building up could take a knock in the next twelve months that will take some time to recover from.

I’m writing this largely in response to Fred Destin’s post of last week where he does a great job of explaining the environment in which VCs have to work and how tough it is at the moment, but questions whether there is scope for future growth in the industry.

  • Tks James – I hope you are right

    Nic Brisbourne
    Partner, DFJ Esprit
    Email: [email protected]
    Tel: 07990 567 993
    Blog: http://www.theequitykicker.com

  • Hi Nic,

    I'm not so sure confidence is fragile with those starting out/bootstrapping. The opportunities are once-in-a-lifetime for businesses small and VC scale at the moment and I get the sense that most business people (certainly the ones I know) *get* this. Sure, realistic about the year ahead, but optimistic beyond.

  • Is your comment ICT-centric or in general?

  • it is ICT centric Scott. Thanks for the clarification. I have minimal life sciences experience so I can't really speak for that sector. I wouldn't be surprised if it were true there too though.

    Nic Brisbourne
    Partner, DFJ Esprit
    Email: [email protected]
    Tel: 07990 567 993
    Blog: http://www.theequitykicker.com

  • Interesting point – I agree that timing is a big factor. However, different cultures, languages, regulation etc make it much harder to achieve the big exits. Big exits have a disproportionate effect on a start up ecosystem. This includes: 1. General perception (how many US school kids want to be like Larry & Sergey? I don't know the % of computer science grads in the US v Europe, however, I suspect it is much higher in the US); 2. the big exits help balance vcs' books 3. Big exit founders setting up funds – they will naturally be more inclined to fund early stage start ups due to their background; It would be interesting to see a graph of big exits ($500m+ in today's money?) over time for the US market.

  • Henry – the points you raise mostly fall within what I would describe as the entrprenneurial culture. We have had the first few big exits in recent years (e.g. Skype, MySql, CSR QCells and Bebo) and these are having the effect of making ‘entrepreneur’ a more acceptable career choice.

    This stuff takes time, but it is coming.

    The differences between European countries are a different matter. They don’t help, but they are becoming less important over time.

    Nic Brisbourne
    Partner, DFJ Esprit
    Email: [email protected]
    Tel: 07990 567 993
    Blog: http://www.theequitykicker.com

  • I was just clarifying to make sure I knew that I was completely on the opposite side of the argument. I think ICT is so, so cheap to build at this point that your argument doesn't hold up. We have lots of need of support, but almost none of that is money.

  • Not so sure about that Scott – most of the big exits recently have still been venture backed. Even if there haven't been many ;(
    Nic Brisbourne
    Partner, DFJ Esprit
    Email: [email protected]
    Tel: 07990 567 993
    Blog: http://www.theequitykicker.com

  • Hey man, sorry I missed this response. I think we have a problem right now: we have not shown that we can make money, and most LPs have run out of patience. I think there are few funds who have returned significantly more than capital, probably Index, Mangrove, Banexi in the old days, but not many since 1998. So many funders have run out of patience or stopped believing in the “asset class”. And who would blame them. That adds to our woes as an industry. I am naturally bearish, but right now preparing for the worst, unfort.

  • Hey man, sorry I missed this response. I think we have a problem right now: we have not shown that we can make money, and most LPs have run out of patience. I think there are few funds who have returned significantly more than capital, probably Index, Mangrove, Banexi in the old days, but not many since 1998. So many funders have run out of patience or stopped believing in the “asset class”. And who would blame them. That adds to our woes as an industry. I am naturally bearish, but right now preparing for the worst, unfort.

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