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.