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1 Web Investors Forum Boosting digital startup financing in Europe FINAL REPORT A study prepared for the European Commission DG Communications Networks, Content & Technology by:
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Final report of France Digitale - startups financing - web investors forum

Apr 21, 2017

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Page 1: Final report of France Digitale - startups financing - web investors forum

 

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Web Investors Forum Boosting digital startup financing in Europe

 

 

 

 

 

 FINAL  REPORT  A  study  prepared  for  the  European  Commission  DG  Communications  Networks,  Content  &  Technology  by:    

 

 

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This  study  was  carried  out  for  the  European  Commission  by  

 

 

 

France  Digitale  12  rue  Vivienne  75002  Paris  –  France  www.francedigitale.org    Authors:    Emanuele  Levi  Member  of  the  Board  of  Directors  at  France  Digitale  General  Partner  at  360  Capital  Partners    Delphine  Villuendas  General  Counsel  at  France  Digitale  General  Counsel  at  Partech  Ventures    Taro  Ugen  VP  Venture  Capital  at  France  Digitale  [email protected]    

 Internal  identification  

Contract  number:  30-­‐CE-­‐0557783/00-­‐36            

No  SMART  number    

DISCLAIMER  By  the  European  Commission,  Directorate-­‐General  of  Communications  Networks,  Content  &  Technology.    

The  information  and  views  set  out  in  this  publication  are  those  of  the  author(s)  and  do  not  necessarily  reflect  the  official  opinion  of  the  Commission.  The  Commission  does  not  guarantee  the  accuracy  of  the  data   included  in  this  study.  Neither  the  Commission  nor  any  person  acting  on  the  Commission’s  behalf  may  be  held  responsible  for  the  use  which  may  be  made  of  the  information  contained  therein.  

978-­‐92-­‐79-­‐39285-­‐6  

10.2759/64203  

©   European   Union,   2014.   All   rights   reserved.   Certain   parts   are   licensed   under   conditions   to   the   EU.    

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Abstract  

France  Digitale  was  contracted  by   the  European  Commission   to   run   the  Web   Investors  Forum  (WIF),   one   of   the   pillars   of   the   Startup   Europe   initiative.   Since   May   of   2013,   we   have   been  engaging   and   connecting  with   the   European   venture   capital   community   to   draw   a   panoramic  view   of   current   activities   and   challenges   observed   in   the   European   professional   investment  arena.   Our   research   has   been   focused   on   internet-­‐driven   companies.   We   conducted   44  interviews  in  the  seven  countries  of  focus  for  this  study  (France,  The  United  Kingdom,  Germany,  Sweden,  Portugal,  Spain  and  Italy)  and  discussed  our   findings  during  a  high-­‐level  workshop   in  Paris  on  June  11th,  2014.    

The   first   priority   in   Europe   is   to   support   the   feeding   of   a   positive   feedback   loop   through   the  unlocking   of   the   exit   environment.   Europe’s   first   priority   is   to   create   a   support   structure   that  will  improve  the  exit  environment.  Successful  exits  allow  investors  and  entrepreneurs  to  achieve  their  goals  and  start  new  businesses  with  new  money  inflow.  

Our   second   recommendation   aims   at   providing   balance   to   the   European   finance   value   chain,  which   is   currently   suffering   from  shortages  on   some  or  all   levels  depending  on  countries,   and  especially  for  those  companies  willing  to  become  Global  leaders.    

As   a   third   recommendation,   cross-­‐fertilization   between   hubs   would   also   need   considerable  improvement  through  facilitated  interactions  between  ecosystems.  

Finally,   European   corporations   should  be   incentivized   to   play   a   larger   role   in   the   ecosystem’s  evolution  for  knowledge  acquisition  and  innovation  purposes.  

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Executive  Summary  

 

Startup  Europe  is  a  Digital  Agenda  initiative  championed  by  Commission  Vice  President  Neelie  Kroes  to  promote  web  entrepreneurship  in  Europe.    

France   Digitale   was   contracted   in   2013   to   lead   the   investors’   pillar   of   the   Startup   Europe  initiative  called  the  Web  Investors  Forum.  The  work  of  the  Web  Investor’s  Forum  is  focused  on  7  EU  countries:  Germany,  the  United  Kingdom,  Spain,  Italy,  Portugal,  Sweden,  and  France,  with  the  following  objectives:  

• Draw   an   overview   of   the   activity   of   the   professional   investment   industry   on   a   pan-­‐European  and  local  level;  

• Pinpoint   challenges   faced   by   the   industry   that   slow   down   the   evolution   of   European  funding  landscape  for  funding  and  entrepreneurial  growth;    

• Showcase  European  best  practices  in  the  field  of  public  policy  and  industry  support;    • Propose  an  action  plan  to  increase  investment  in  the  European  Internet  and  mobile  tech  

startups  and  grow  that  investment  throughout  Europe.    

For   the  purpose  of   this  mission,  we   travelled   across  Europe   and   interviewed  over  40  General  Partners  and  business  angels  in  seven  countries,  and  drew  the  following  conclusions.  

 

Main  conclusions  

1.  THE  EUROPEAN  EXIT  MARKET  IS  THE  MOST  CRITICAL  ISSUE.  

The  exit  environment  in  Europe  is  regarded  by  interviewed  venture  capitalists  (9.5  out  of  10)  as  Europe’s  most  critical  challenge.      

Exits  represent  a  liquidity  event  for  investors  or  entrepreneurs  that  allows  them  to  gain  full  or  partial  return  for  their  initial  investment.  There  are  three  different  types  of  exits  in  the  VC  world:  Initial  Public  Offerings   (IPOs)   (listing   the  company  on  public  markets),   trade  sales   (selling   the  company  to  an  acquirer),  and  private  equity  buyouts  or  growth  capital  (selling  the  company  fully  or  partially  to  a  specialist  private  equity  fund).  

A  favorable  exit  market  creates  a  positive  feedback  loop  that  supports  a  virtuous  cycle:    

→ Exits  allow  entrepreneurs   to   find   liquidity  and  create  new  companies  and/or   invest  as  business  angels  in  new  entrepreneur.      

→ They  generate  performance  for  the  venture  capital  industry  and  foster  attractiveness  of  the  asset  class  for  private  institutional  investors.      

→ This  leads  to  a  smoother  path  of  capital  inflow  into  VC  funds  and  further  investment  in  startups  in  the  long  run.      

→ They  create  success  stories  and  role  models  for  future  entrepreneurs.  

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However,   in  Europe,   there   is  a  scarcity  of  exit  opportunities   for   two  main  reasons:  First,   trade  sales   almost   always   occur   to   the   benefit   of   a   US   player   as   there   are   almost   no   European  corporate  buyers  and   few  appetites   for  purchases   in  Europe.  The  second   is   that  conditions   for  tech  IPOs  (liquidity,  limited  presence  of  peers,  demand,  pricing)  are  not  favorable.    

Specific  focus  on  trade  sales  

As  our  ecosystem  is  still  young,  there  is  a  lack  of  key  players  in  the  European  acquisition  market.  For  example,  as  of  April  2013,  the  total  market  value  of  the  7  largest  US  technology  companies  (Apple,  Microsoft,   IBM,   Google,   Facebook,   Amazon,   and   Yahoo)1  was   close   to   USD   1.7   trillion.  Whereas   in  Europe,   the  only  company  competing   in  terms  of  size   is  SAP  with  a  EUR  63  billion  valuation  (as  of  Q2  2014)2.    

Moreover,  corporations  from  traditional  industries  struggle  to  innovate  outside  the  boundaries  of   their   own   organization.   Corporate   buyers   are   often   buying   market   shares   instead   of  integrating  companies  for  their  technology  or  talents  when  they  do  make  an  acquisition.    

The  result  of  these  unfavorable  conditions  leads  us  to  an  overwhelming  statistic:  large  American  buyers  acquire  9  out  of  10  European  startup  companies.    

The  industry  needs  large  European  tech  companies  that  can  compete  with  US  players.  

 

2.   THE   FINANCING   VALUE   CHAIN   IS   UNBALANCED   FROM   A   LOCAL   AND   PAN-­‐EUROPEAN  PERSPECTIVE  

Southern   Europe   suffers   from   a   lack   of   early   stage   capital   at   the   seed   and   pre-­‐seed   level.  Portugal  and  Italy  are  countries  where  entrepreneurs  have  a  hard  time  finding  enough  capital  to  start  developing  their  product.  

For  other  countries,  equity  shortage  is  most  troublesome  at  the  later  stages  of  investment,  even  if  there  is  still  further  room  for  early  stage  capital.  

Later  stage   funding  demonstrates  a   true  equity  shortage   in  Europe  as  only   four   to  six  venture  capital  firms  are  able  to  fund  these  types  of  deals.  Later  stage  investments  are  essential  when  the  ambition  of  an  entrepreneur  is  to  become  a  global  leader  in  his  or  her  field.  

There   is   a   significant   number   of   premature   sell   offs   of   companies   that   are   not   able   to   find  enough   capital   to   finance   their   aggressive   growth.   In   2013   in   Europe,   deals   over   the   USD   10  million   mark   only   accounted   for   9%3   of   overall   deals   with   70   deals   out   of   772   (across   all  

                                                                                                                         1 http://www.statista.com/statistics/216657/market-capitalization-of-us-tech-and-internet-companies/ 2 SAP half-year report 2014 3 Clipperton/Digimind data

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sectors).  For  the  same  year  in  the  US,  later-­‐stage  and  expansion  deals  accounted  for  44%4  of  the  total  number  deals,  corresponding  to  1,795  out  of  4,077  (all  sectors  included).  

The  consequence  of   this   lack  of  capital  supply   for   later  stage  companies   is   the   formation  of  an  unbreakable  barrier   for  European  startup  companies.  This  barrier  prevents  a   large  number  of  startups   from  maintaining  operations   in  Europe  while  attracting  capital   for   their   international  growth  or  pre-­‐exit   financing.  Plainly  stated,   in  Europe  companies   face  difficulties  raising   funds  passed  a  certain  maturity,  and  a  large  number  of  them  either  move  operations  to  the  US  to  seek  late  stage  capital  where  it  is,  or  sell  prematurely.    

 3.  THERE  IS  NOT  SUFFICIENT  INTERACTION  BETWEEN  TOP  EUROPEAN  TECH  HUBS  

The   development   of   a   certain   number   of   tech   hubs   in   Paris,   Berlin,   London,   Stockholm   and  Helsinki   is   improving   the   overall   quality   of   the   deal   flow   for   investors   and   is   contributing   to  develop  the  entrepreneurial/startup  culture.  

But   the   competition   between   nations   for   entrepreneurial   supremacy   creates   a   lack   of  cooperation  between  hubs  that  harm  companies  in  expanding  easily  across  different  markets.  

As  key  players  in  the  ecosystem,  venture  capitalists  could  play  the  role  of  communicator  across  these  hubs   if   they   invested  more   freely  outside  of   their   local  markets.  However,  we  witnessed  few  players  that  are  truly  able  to  achieve  a  pan-­‐European  investment  activity.  This  lack  of  pan-­‐European  players  results  from  the  misalignment  between  the  complexity  and  cost  that  investing  in  a  multitude  of  countries  would  imply.    The  average  size  of  European  funds  does  not  generate  enough  management  fees  to  serve  those  costs.      

 

4.   TAX   &   LEGAL   ENVIRONMENT   NEEDS   TO   BE   IMPROVED   (ADAPTED)   IN   CERTAIN  GEOGRAPHIES  

In   certain   parts   of   Europe   like   Spain   and   Italy,   stock   options   and   similar   instruments   are  regarded  as  a  means  for  large  organizations  to  pay  high  compensation  to  their  top  managers  and  are  taxed  accordingly.  However,   this  view  impacts  startups  negatively.  Although  as  mentioned,  stock  option  plans  serve  a  rather  different  and  more  labor-­‐friendly  purpose  for  this  ecosystem.  

Throughout  Europe,  some  member  states  have  proven  their  ability  to  tackle  stock  options  with  a  positive  thinking  and  favorable  tax  treatment  such  as  in  France  (with  the  Bons  de  Souscription  de  Part  de  Créateur  d’Entreprise5)  or  in  the  United  Kingdom  (through  the  Share  Incentive  Plans  or  Company  Share  Option  Plan6)  

                                                                                                                         4 NVCA 2014 yearbook: http://www.nvca.org/index.php?option=com_content&view=article&id=257&Itemid=103 5 http://www.apce.com/cid5724/bons-de-souscription-de-parts-de-createur-d-entreprise.html&pid=10324 6 https://www.gov.uk/tax-employee-share-schemes/company-share-option-plan

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Unlike  American  venture   capital   funds,  European  VCs  do  not   rely  on  a   solid  base  of  European  private   investors.   Indeed,   for   many   reasons,   venture   capital,   as   an   asset   class,   has   a   poor  reputation   within   the   European  money  management   community.   This   creates   an   ever-­‐higher  degree  of  public  funding  in  the  overall  capital  available  for  European  startup  companies.  

Moreover,   in   some   regions   like   Spain,   capital   gain   taxes   are   not   favorable   to   the   alignment   of  interests   between   entrepreneurs,   General   Partners   (GPs)   and   Limited   Partners   (LPs),   which  negatively  impacts  the  reputation  of  the  venture  capital  profession.    

 

5.   EUROPEAN   CORPORATIONS   ARE   STILL   FACING   THE   “NOT   INVENTED   HERE”   (NIH)7

SYNDROME  

European   corporations   often   struggle   to   understand   the   rationale   behind   acquiring   external  innovation   through   procurement   or   M&A,   and   are   therefore   unable   to   efficiently   integrate  innovative  companies.  In  fact,  European  corporations  from  traditional  industries  do  not  rely  on  a  solid   experience   of   integrating   innovative   startup   companies   for   their   technology,   talents   or  market  at  all.  

Even  though  corporate  co-­‐working,  or  acceleration  structures  are  booming  in  Europe,  they  are  often  brought  about  as  part  of  a  public  relations  strategy  to  improve  the  company’s  image  rather  than  incorporated  into  a  long-­‐term  strategic  vision.  In  the  beginning  of  the  2000s,  corporations  started  a  large  number  of  internal  VC  arms  that  did  not  survive  top  management  turnover  and  the  dot  com  bubble  burst8.    

Thus,   European   Corporations   should   think   twice   before   engaging   in   an   effort   to   build   an   in-­‐house  venture  structure,  which  requires  true  engagement  and  expertise.    

Another   option   that   is   often   underexplored   by   European   corporations   is   the   “platform”  approach.   The   platform   approach   means   investing   through   an   external   VC   or   acceleration  program.   Currently,   their   involvement   is  marginal,   as   demonstrated   by   the   European  Venture  Capital  Association  (EVCA),  in  2013.  Corporations  accounted  for  around  5%  of  total  funds  raised  by  VCs.  

The  “platform”  approach  should  be  defended  in  Europe,  with  external  VC  funds  and  accelerators  acting  as  a  platform  for  corporations  to  gain  knowledge  on  their  disrupted  industries  and  scout  potential  targets.    

 

                                                                                                                             7 The Not Invented Here syndrome was first introduced by Katz and Allen in 1982 in economics of innovation and refer to the tendency of organizations to reject externally-developed solutions in favor of internally-developed ones. The concept has been validated and refered by many economists later on. 8 http://www.lesechos-etudes.fr/fr/catalogue/etudes/sectorielles/banque-assurance/corporate-venture.html

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Recommendations  

With   regards   to   the   stated   conclusions   of   the   report,   the   Web   Investors   Forum   has   set   the  following  recommendations  in  a  four-­‐step  action  plan  to  further  develop  the  European  venture  capital  landscape  and  allow  for  better  financing  of  European  entrepreneurs.  

Policy  1:  Boost  the  European  exit  market  

Purpose   The   European   exit   market   is   the   most   challenging   obstacle   faced   by   venture  capitalists  in  Europe.  European  corporations  should  be  incentivized  to  make  more  acquisitions  and  increase  their  willingness  to  innovate  through  external  means.  

This   is  a   crucial  point  because  exits  generate  a  huge  amount  of  positive   feedback  within   the  European  startup  ecosystem.  They  allow  entrepreneurs   to  cash-­‐in  and  either  become  angels  or  repeat  the  entrepreneurial  process  and  build  new  startups.  Moreover,   they  allow  VCs   to  gain   substantial   success  and  keep  raising  new   funds  towards  private  institutions  and  individuals.  

9  out  of  10  European  startups  are  acquired  by  non-­‐European  buyers,  among  which  a  large  proportion  comes  from  the  United  States.  

Examples  (how?)  

The  exit  environment  is  a  crucial  part  of  the  startup  ecosystem  and  must  be  supported.    

• Incentivize   European   corporations   to   directly   or   indirectly   invest   in  startups   and   acquire   knowledge   through   external   VCs   or   accelerators   by  replicating  and  tweaking  initiatives  such  as  the  French  “Corporate  Venture  Plan9”.  

• More   favorable   conditions   for   tech   IPOs   could   be   developed   throughout  Europe  as  a  secondary  target.    The  best  means  would  be  to  create  demand  incentives   (i.e.   tax   efficient   investment   vehicles   dedicated   to   listed   tech  companies).  The  objective  of  improving  the  conditions  for  IPOs  would  be  to  increase   the   number   of   financing   options   for   later   stage   companies,   and  facilitate  alternative  exit  options  for  VCs  and  entrepreneurs.  

Time   to  impact  

Without  action,  we  estimate  the  time  for  a  virtuous  acquisition  ecosystem  to  build  itself  from  10  years  to  15  years  in  absence  of  major  crisis.  

With   high   impact   incentives   programs,   we   estimate   this   period   to   be   radically  shorter,  showing  improvements  within  the  next  5  years  to  8  years.  

Comments  and   how  to  implement  

This  could  be   implemented  through  dedicated  policy  programs  with   the   initiative  of  the  European  Commission  under  directives  to  unlock  the  European  exit  market  with  huge  positive  impact  potential.  

 

Policy  2:  Reduce  equity  shortage  

                                                                                                                         9 http://www.economie.gouv.fr/corporate-venture-financer-innovation

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Purpose   Everywhere   in  Europe,   equity   shortages   appear   at   various   stages   of   a   company’s  lifecycle.    

The   pan-­‐European   ecosystem   and   more   specifically   developed   industries   from  North  and  Central  Europe  are  witnessing  a  shortage  of  capital   for  companies  that  have   the   potential   of   becoming   large-­‐scale   global   leaders.   Very   few   companies  make  it  to  the  EUR  10-­‐50  million  funding  landmark  as  only  a  handful  of  European  funds   are   able   to   provide   this   level   of   capital.   The   consequence   of   this   lack   of  capital  for  more  mature  startups  is  an  important  number  of  premature  sell  offs  for  companies  that  could  have  had  the  potential  to  grow  further  before  an  acquisition.  In  Southern  and  Eastern  Europe,  equity  shortages  appears  at  an  earlier  stage,  with  a  low  number  of  funding  rounds  in  the  EUR  1-­‐10  million  range.    

The  following  recommendations  aim  at  reducing  this  equity  shortage.  

Examples  (how?)  

• Redirect   a   small   proportion   of   European   savings   towards   innovative  companies   financing   through   adjustments   in   Basel   III   and   Solvency   II  regulations  and  tax  efficient  investment  vehicles.  

• Support   the   creation   or   expansion   of   public   driven   fund   or   funds   in  Southern   and   Eastern   Europe.   Public   funds   are   not   a   tool   traditionally  employed   by   local   governments.   However,   it   has   been   proven   to   be   an  efficient   means   of   creating   momentum   for   young   industries   or  reestablishing   balance   in   local   financing   chains,   as   was   the   case   in  Barcelona.    

• Support  the  creation  of  pan-­‐European  later-­‐stage  capital  funds  dedicated  to  internet-­‐driven   and   software   companies   which   are   crucial   for   creating  global  leaders.    

• Empower  smart  business  angels   through   further   support  of   the  European  Investment   Fund   (EIF),   angel   co-­‐investment   program   in   terms   of   capital  and   closing   of   agreements  with   local   counterparts.   Smart   business   angels  who   are   capable   of   adding   a   significant   amount   of   non-­‐financial   value   to  their  portfolio  companies  should  also  be  empowered.  

• Support   the  creation  of  a  small  number  of   later  stage  capital   funds  with  a  pan-­‐European  focus.  

• Support   the  organization  of   a   large-­‐scale  pan-­‐European  event  with   strong  involvement  of  top-­‐tier  public  representatives  such  as  Vice  President  Neelie  Kroes,   aiming   at   promoting   the   potential   of   internet   and   mobile   tech  companies   to   potential   limited   partners   (pension   funds,   large   corporates,  insurance  companies,  banks,  family  offices,  etc.)  and  connecting  them  with  general  partners.  

Time   to  impact  

Gradual  raise  in  investments  from  year  1,  up  to  5  years.  

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Comments  and   how  to  implement  

For  each  countries,  the  Web  Investors  Forum  could  engage  local  VC  communities  in  order  to  measure  the   local  equity  shortage  and  drive  the  creation  of  either  public  fund  of  funds,  and/or  later  stage  direct  investment  funds.  

Smart   business   angels   should   be   empowered   everywhere.   The   European  Commission  could  grant  a  mandate  to  the  EIF  to  invest  with  smart  angels  according  to  the  existing  guidelines  of  their  program  under  trial.  This  mandate  should  come  along  with  support  to  find  local  counterparts  to  the  EIF.  The  Web  Investors  Forum  is  ready  to  help  in  the  primary  identification  of  potential  local  smart  angels.  

Later  stage  capital  funds  creation  could  be  supported  by  the  European  Commission  through  dedicated  envelopes  in  addition  of  private  and  other  public  capital  inflow  in  new  funds.  

 

Policy   3:   Strengthen   the   integration   and   coordination  of   European   tech  hubs   through   a  pan-­‐European  investment  vehicle  

Purpose   Currently  in  Europe,  tax  treatment  and  the  marketability  of  investment  vehicles  are  very  heterogeneous  across  countries.  

A   pan-­‐European   tax   transparent   investment   vehicle,   marketable   internationally,  would  be  considered  by  the  Venture  Capital  community  as  a  major  achievement.  If  an   effort   were   put   in   to   place   to   create   such   vehicle,   the   Web   Investors   Forum  would  be  ready  to  engage  with  the  entire  community  in  consultations  and  support  of  the  European  Commission  with  expertise  in  the  field.  

A   VC   that   invests   internationally   is   always   of   good   value   to   an   entrepreneur.  However,   only   a   very   limited   number   of   investors   work   outside   their   local  environment.  In  order  to  support  coordination  between  ecosystems,  the  European  Commission  should  support  the  creation  of  pan-­‐European  GPs  with  enough  critical  mass  to  be  able  to  invest  globally.  

Examples  (how?)  

Create  simpler,  uniform  tax10  and  legal  environments  between  hubs  through  the   European   Commission’s   dedicated   startup   directives   by   leveling   up   the  frameworks  according  to  European  best  practices  in  terms  of:  

• Attractiveness   of   the   VC   profession:   In   southern   and   eastern   countries  where   the   investment   industry   is   still   in   development   and   in   need   of  momentum,  talented  investors  should  be  incentivized  to  gather  into  teams  and  invest  in  startup  companies.  

• Alignment   of   interest   between   VCs,   founders,   and   employees   (dedicated  startup   stock   option   plans   and   more   generally   employee-­‐ownership  

                                                                                                                         10 http://startupmanifesto.eu/files/manifesto.pdf

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taxation)  

• Attractiveness   of   the   asset   class   for   institutional   and   individual   investors  (tax   incentives   on   investments   in   VC   by   individuals,   corporates,   banks,  insurance  companies,  pension  funds,  etc.)    

• Attractiveness   to   invest   in   startups   as   seed   investors:   EIS/SEIS-­‐like  programs  

Time   to  impact  

Gradual  raise  in  investments  from  year  1  up  to  5  years.  

Comments  and   how  to  implement  

If  these  issues  were  addressed  (and  above  all  for  the  pan-­‐European  tax  transparent  investment  vehicle),  the  venture  capital  community  in  Europe  would  consider  it  a  huge  achievement.  

The   Web   Investors   Forum   is   ready   to   gather   the   VC   community   to   work   on  consultations  with  the  European  Commission  to  work  on  these  specific  issues  and  deliver  top-­‐tier  solutions.  

 

Policy  4:  Grow  public  and  private  involvement  in  the  industry  

Purpose   The  interviews  and  workshop  have  demonstrated  a  lack  of  dialogue  between  large  corporations   and   the   startup   world.   A   pathway   to   further   involvement   of  corporations  and  the  public  sector  in  digital  startups  across  Europe.      

Corporations  could  be  the  engine  to  power  a  faster  evolution  of  the  European  ecosystem.  

Examples  (how?)  

• Incentivize  European  Corporates  to  invest  in  external  accelerators,  venture  funds,   or   co-­‐working   spaces   in   order   to   foster   platforms   pooling   several  Corporates   rather   than   internal   structures   that  usually  do  not   result   from  long-­‐term   Corporate   strategy.   For   example,   this   could   be   done   through  Private  Public  Partnership  such  as  the  High  Tech  Gründerfonds  in  Germany  that  could  be  generalized  to  every  country  and  supported  by  the  European  Commission  or  dedicated  tax  relief  schemes.  

• Push   the   “Small   business   act   for   Europe11”   further   by   integrating  procurement  measures  

• Work   towards  a  Small  Business  Act-­‐like  agreement  between  Corporations  and  startup  representatives  

Time   to  impact  

5  years  

Comments  and   how  

Local   replicates   of   the  High  Tech  Gründerfonds  would   also  bring  high   value:   this  could   be   implemented   through   envelopes   of   capital   unlocked  by   the  Commission  

                                                                                                                         11 http://ec.europa.eu/enterprise/policies/sme/small-business-act/index_en.htm

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to  implement  

for   this   purpose   with   selection   of   local   public   counterparts   to   manage   these  envelopes  and  engage  with  local  Corporates  community.  

 

The   Web   Investors   Forum   is   a   strong   supporter   of   the   European   Commission   DG   CNECT’s  attempt  to  implicate  professionals  and  ecosystem-­‐stakeholders  in  its  effort  to  create  a  smoother  environment   for   digital   entrepreneurship   on   our   continent.   The   community   is   ready   to  work  closely   with   the   Commission   with   regards   to   above   stated   action   plan   recommendations,  especially  on  matters  requiring  particular  expertise.  

   

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Table  of  content    

Introduction  ..................................................................................................................  15  

Mapping  the  European  funding  landscape  .................................................................  17  Methodology  .......................................................................................................................................................................  17  2013  Analysis  .....................................................................................................................................................................  18  Venture  capital  funding  per  industry  ........................................................................................................................  18  Investments  distribution  in  European  ICT  ..............................................................................................................  19  Focus:  Software,  internet-­‐driven  and  mobile  tech  companies  .......................................................................  21  

Outlook  for  2014  ...............................................................................................................................................................  24  

Current  status  of  the  European  VC  industry  ...............................................................  26  

Post-­‐interviews  and  workshop  conclusions  ..............................................................  27  The  European  Exit  market  is  the  most  critical  issue  .........................................................................................  27  Trade  Sales  ............................................................................................................................................................................  27  The  IPO  market  ...................................................................................................................................................................  29  Private  equity  .......................................................................................................................................................................  30  

An  unbalanced  European  financing  value  chain  .................................................................................................  31  Promoting  Internet  and  mobile  tech  venture  capital  to  LPs  ..........................................................................  31  Explanatory  elements  ......................................................................................................................................................  33  Present  challenges  .............................................................................................................................................................  36  Difference  between  regions  ...........................................................................................................................................  37  

Insufficient  coordination  between  European  Tech  Hubs  ...............................................................................  40  Tax  &  legal  environment  needs  to  be  improved  (adapted)  in  certain  geographies  ............................  41  Between  entrepreneurs  and  employees  ...................................................................................................................  41  Between  GPs  and  LPs  ........................................................................................................................................................  41  Attractiveness  of  the  asset  class  ..................................................................................................................................  42  

Action  plan  recommendation  ......................................................................................  45  

Conclusion  .....................................................................................................................  50        

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 Aknowledgement    We  would  like  to  express  our  deepest  gratitude  to  the  following  friends  for  their  involvement  in  our  report:    David  Dana  (European  Investment  Fund),  Isidro  Laso  Ballesteros  and  Bogdan  Ceobanu  (European  Commission),  Stephane  Gantchev  (LAUNCHub),  Jan  Borgstadt  (BDMI),  Jan  Gisbert  Schultze  (Acton  Capital   Partners),   Nicolas   Wittenborn   (Point   Nine   Capital),   Claudio   Giuliano   (Innogest),   Fausto  Boni  and  Cesare  Maifredi  (360  Capital),  Gianluca  Dettori  (dPixel),  Paolo  Gesess  (United  Ventures),  Andrea  Di  Camillo  (P101),  Alberto  Onetti   (Mind  the  Bridge),   José  Da  Franca  (Portugal  Ventures),  Tatjana   Zabasu   (RSG   Capital),   Carles   Ferrer   and   Jordi   Vinas   (Nauta   Capital),   Luis   Cabiedes  (Cabiedes   Partners),   Ricard   Soderberg   (Active  Venture  Partners),   Roque  Velasco   (Inspirit),   Klaus  Hommels  (Lakestar),  Dominique  Vidal  and  Martin  Mignot  (Index),  Haakon  Overli  (Dawn  Capital),  Nenad   Marovac   (DN   Capital),   Sitar   Teli   (Connect   Ventures),   Carlos   Espinal   (Seedcamp),   Nico  Goulet  (Adara),  Martin  Mccourt  (Gemalto),  Simon  Devonshire  (Wyra/Telefonica),  Nicolas  Dufourq  and  Paul-­‐François  Fournier  (BPI  France),  Guy  Levin  (Coadec),  Pedro  Rocha  (Beta-­‐i),  Marie  Ekeland  (Elaia  Partners),  Philippe  Collombel  (Partech  Ventures),  Guillaume  Dupont  (Cap’Horn  Invest),  Jean-­‐David   Chamboredon   (ISAI),  Nicolas   Celier   (Alven   Capital),   Benoist   Grossman   (Idinvest   Partners),  Melissa   Blaustein   (Allied   for   Startups),   Mathieu   Daix   (France   Digitale),   Willy   Braun   (France  Digitale).  

 

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Introduction  Startup  Europe  is  a  Digital  Agenda  initiative  championed  by  Commission  Vice  President  Neelie  Kroes   to   promote   web   entrepreneurship   in   Europe.   The   initiative’s   goal   is   to   strengthen   the  startup  ecosystem  landscape  in  Europe  to  provide  an  environment  that  fosters  the  emergence  of  future  global  leaders.    Startup  Europe  hopes  to  grow  the  business  environment  for  web  and  ICT  entrepreneurs  so  that  their  ideas  and  business  can  be  established,  grow,  and  flourish  in  the  EU.    Startup  Europe   serves   various   objectives.   The   first   objective   is   to   reinforce   the   links   between  people,  business  and  associations  who  build  and  scale  up   the   startup  ecosystem  (e.g.   the  Web  Investors  Forum,  the  Accelerator  Assembly,  the  Crowdfunding  Network).  Its  second  objective  is  to   inspire   entrepreneurs   and   provide   role   models   (e.g.   the   Leaders   Club   and   their   Startup  Manifesto,   the   Startup   Europe   Roadshow.)   Finally,   it   aims   at   celebrating   new   and   innovative  startups  (with  Tech  All  Stars  and  Europioneers),  to  help  them  to  expand  their  business  (Startup  Europe   Partnership,   ACE   Acceleration   Programme),   and   give   them   access   to   funding   under  Horizon  2020.  

France   Digitale   was   contracted   in   2013   to   lead   the   investors’   pillar   of   the   Startup   Europe  initiative  (Web  Investors  Forum)  focusing  on  7  countries:  Germany,  the  United  Kingdom,  Spain,  Italy,  Portugal,  Sweden,  and  France,  with  the  following  objectives:  

- Drawing   an  overview  of   the   activity  of   the  professional   investment   industry  on   a  pan-­‐European  and  local  level  

- Pinpointing  challenges  faced  by  the  industry  that  slow  down  the  evolution  of  European  funding  and  the  creation  of  champions  

- Showcasing   European   best   practices   in   the   field   of   public   policy   and   support   to   the  industry  

- Gathering  the  European  VC  community  around  a  network  

France  Digitale  is  a  unique  alliance  of  startups,  professional  investors  and  business  angels  who  aim  to  promote  the  potential  of  the  French  and  European  digital  startup  landscape  and  develop  the  ecosystem  to  foster  the  creation  of  future  global  leaders  on  our  continent.  As  of  June  2014,  the  association  consists  of  400  members  including  successful  French  startups  like  Criteo,  Blabla  Car,  Dailymotion,  Leetchi  and  many  more.    

For   the   purpose   of   the   present   report,   we   were   able   to   connect   with   the   European   venture  capital  (VC)  community  thanks  to  the  networks  of  France  Digitale  and  the  European  Investment  Fund.  44  interviews  were  conducted  with  with  VC  partners  in  the  seven  countries  of  focus  pre-­‐determined   by   the   European   Commission:   France,   the   United   Kingdom,   Germany,   Sweden,  Spain,  Italy,  and  Portugal.  

The   entire   European   VC   community   was   invited   to   discuss   our   findings   during   an   exclusive  workshop   organized   on   June   11th   in   Paris   at   the   France   Digitale   Day,   which   met   the   highest  quality   standards   in   the   industry.   Nine   countries   were   represented   with   52   investors   and  Corporations  involved  in  the  discussions  and  additional  startup  ecosystem  stakeholders.  

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The  following  report  aims  at  presenting  an  overview  of  the  venture  capital  activity  throughout  Europe,  and  present  the  conclusions  drawn  based  upon  interviews  and  lessons  learned  from  the  June  11th  workshop   in  Paris.  Additionally,  we  have  prepared  a  set  of  recommendations   for   the  Commission  to  bring  the  European  investment  industry  to  the  next  level  of  maturity  and  boost  investments   in   internet-­‐driven   startup   companies.   In   a   final   section   of   the   document,  we  will  give  a  sound  description  of  the  tasks  that  we  have  been  performing  within  our  contract.  

   

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Mapping  the  European  funding  landscape  Methodology  The   following   analysis   of   the   European   venture   landscape   was   created   with   data   obtained  through  Whogotfunded.com  and  reprocessed  by  Clipperton  Finance.    

The   analysis   follows   the   guideline   set   by   the   European   Commission   with   a   focus   on   seven  countries:  France,  United  Kingdom,  Germany,  Sweden,  Italy,  Spain,  and  Portugal.  

Leveraging  data  provided  by  WhoGotFunded.com,  the  Digimind  text-­‐mining  engine  monitoring  worldwide   funding   activity,   Clipperton   Finance,   analyzes   financing   trends   amongst   European  innovative  companies  on  a  quarterly  basis.  

Digimind   is   a   SaaS   intelligence   software   company   based   in   Paris,   Boston   and   Singapore,  providing  advanced  information  management  platforms  and  technologies  that  perform  massive  data  collection,  automatic  intelligence  extraction  and  visualization.  Using  its  unique  web  mining  expertise,   Digimind   developed  WhoGotFunded.com,   the   world’s   most   comprehensive   funding  database,  discovering  over  100  fresh  funding  deals  every  day  in  real  time  all  across  the  world.  

Clipperton   is  a   leading  European  corporate   finance  boutique  exclusively  dedicated   to   the  High  Tech  and  Media  industries.  Clipperton  advises  high  growth  companies  on  financial  transactions,  fundraisings,  capital  increases  or  Mergers  and  Acquisitions.  With  teams  based  in  London,  Berlin  and   Paris   and  with   an   extensive   international   reach,   Clipperton   is   a   recognized   leader   in   the  sector.    

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2013  Analysis  In   2013,   the   European   technology   landscape   showed   some   signs   of   recovery   after   several  stagnant   years   following   the   financial   turmoil.   European   tech   companies   attracted   USD   5.3  billion  in  capital  and  completed  a  total  of  1302  deals.    

Venture  capital  funding  per  industry  

 

 

Source:  whogotfunded.com,  Clipperton  Finance,  France  Digitale  

Tech   financing   in   Europe   was   driven   by   ICT   companies   (hardware,   software   and   internet-­‐driven)  with  583  rounds  raised  for  USD  3.7  billion.    

 

   

Source:  whogotfunded.com,  Clipperton  Finance,  France  Digitale  

 

396

1203

3651

583

136

583

Cleantech

Life Sciences

IT

Venture Capital funding in Europe (2013)

Number of deals Amount (in USDm)

45%

10%

45%

Number of deals in Europe (2013)

Cleantech Life Sciences IT

7%

23%

70%

Amount invested in Europe (2013)

Cleantech Life Sciences IT

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In  2013,  Cleantech  and  IT  both  accounted  for  45%  of  the  deals  completed  in  Europe.  Life  science  companies  represented  10%  of  the  total  number  of  funding  rounds  that  same  year.  

On   the   other   hand,   IT   was   the   big   winner,   with   70%   of   the   total   funds   invested   in   startup  companies  in  2013.  

Investments  distribution  in  European  ICT  

 

Source:  whogotfunded.com,  Clipperton  Finance,  France  Digitale  

Most  deals   in  Europe  occur  at   the  seed  and  early   stages  with  262  deals   completed   in   the  USD  500K  to  2  million  range.  Deals  over  USD  50  million  were  rare   in  Europe   in  2013  with  only  10  deals  reported.  

 

Source:  whogotfunded.com,  Clipperton  Finance,  France  Digitale  

The  United  Kingdom  represents  a  fair  balance  at  all  stages  and  accounts  for  around  30%  of  the  total  deals  at  all  stages  and  40%  for  all  deals  over  USD  50  million.  

262 208

63 10

500K - 2m (USD) 2m - 10m (USD) 10m - 50m (USD) >50m (USD)

Number of venture backed ICT deals per funding range in Europe (2013)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

500K - 2m 2m-10m 10m - 50m >50m

Investment range distribution per country in Europe (2013)

Other

Nordics

Portugal

Spain

Italy

Germany

UK

France

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France  on  the  other  hand  is  the  top  European  market  for  early  stage  investments,  with  35%  of  all   European   deals   ranging   from   500K   to   USD   2  million   taking   place   in   the   country,   but   it   is  surpassed  by  other  countries  immediately  after  the  USD  2  million  mark.  

The   German   industry   is   driven   by   large   rounds,   demonstrating   a   favorable   later   stage  environment  with   27%   of   European   deals   ranging   from  USD   10   to   50  million   taking   place   in  Germany.  However,  these  results  should  be  taken  with  caution  as  German  early  stage  deals  are  more  rarely  made  public  as  confirmed  by  Digimind’s  CEO  Paul  Vivant.  

The   Nordic   region   demonstrates   a   well-­‐balanced   availability   of   capital   for   internet-­‐driven  startup   companies,   with   around   10%   of   global   European   funding   at   every   stages   and   capital  available  for  large  rounds  (>  USD  50  million).  

Source:  whogotfunded.com,  Clipperton  Finance,  France  Digitale  

In  terms  of  number  of  single  deals,  Europe  is  dominated  by  France  (154  deals)  and  the  United  Kingdom  (148  deals).  However,  both  countries  present  different  capital  distribution  profiles.  

In  2013,  France  was  a  market  of  choice  for  early  stage  deals  ranging  from  USD  500K  to  USD  2m  rounds.  Passed  the  2  million  round  size,  the  United  Kingdom  demonstrated  more  intensity  with  80  deals  against  61.    

In  terms  of  amounts,  capital  deployed  to  startup  companies  was  almost  two  times  higher  in  the  United  Kingdom  with  USD  715  million  in  2013,  compared  to  USD  415  million  in  France  or  USD  403  million  in  the  Nordic  regions.    

93

70

24

7 11

5

21

52 58

22

3 7

1

19

9

19 17

0 2 0 6

0 3 1 0 1 0 2

0

10

20

30

40

50

60

70

80

90

100

France UK Germany Italy Spain Portugal Nordics

Number of deals per country (2013)

Number of deals (500K - 2m) Number of deals (2m-10m) Number of deals (10-50m) Number of deals (>50m)

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Focus:  Software,  internet-­‐driven  and  mobile  tech  companies  

The  following  section  of  our  analysis  focuses  on  deal  activity  for  software,  mobile  tech  and  more  generally,  internet-­‐driven  companies.  

Country  comparison  for  2013  (software,  internet  and  mobile  tech  companies)  

Amount  raised  by  

startups  (in  USDm)  

 

Num

ber  of  deals  

 

Average  investment  

round  

 

Num

ber  of  active  VC  

(21pprox.)  

 

0

200

400

600

800

1000

France Germany Spain Nordics UK Portugal Italy

0

50

100

150

200

France Germany Spain Nordics UK Portugal Italy

0

2

4

6

8

10

12

France Germany Spain Nordics UK Portugal Italy

0

5

10

15

20

France Germany Spain Nordics UK Portugal Italy

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Num

ber  of  business  

angels  (source  Eban)  

 

Num

ber  of  deals  

(USD  500K  –  2m)  

 

   Num

ber  of  deals  

(USD  2m-­‐10m

)  

 

Num

ber  of  deals  

(USD  10-­‐50m)  

 

Num

ber  of  deals  

(>USD  50m

)  

   

     

0

5000

10000

15000

20000

25000

30000

France Germany Spain Nordics UK Portugal Italy

0

25

50

75

100

France Germany Spain Nordics UK Portugal Italy

0 10 20 30 40 50 60 70

France Germany Spain Nordics UK Portugal Italy

0

5

10

15

20

France Germany Spain Nordics UK Portugal Italy

0

1

2

3

4

France Germany Spain Nordics UK Portugal Italy

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Country  ranking  per  stage  (number  of  deals  in  2013)    

Rank   Early  Stage  (up  USD  10m)   Later  Stage  (over  USD  10  m)  

1   France   United  Kingdom  

2   United  Kingdom   Germany  

3   Germany   Nordics  

4   Nordics   France  

5   Spain   Spain  

6   Italy   Italy  (ex-­‐aequo)  

7   Portugal   Portugal  (ex-­‐aequo)  

 

With  respect   to  results  shown  above,  our  selection  of  countries  could  be  divided   in   two  parts:  southern   countries   (Italy,   Portugal,   Spain)   and   central   and   northern   countries   (France,   the  United   Kingdom,   Germany,   Nordics).   The   north   and   center   demonstrate   a   higher   degree   of  maturity   of   their   ecosystems,   and   the   south   is   still   under   construction   and   building   a  momentum.  

The   United   Kingdom   is   the   number   one   market   for   startup   funding,   with   a   well-­‐balanced  financing  value  chain  at  all  stages  and  a  high  number  of  both  professional  and  angel   investors.  France,   Germany   and   the   Nordics   (considering   the   size   of   their   captive   market)   come   next.  France  is  a  very  good  market  for  early  stage  startup  financing  but  is  rather  unbalanced  and  has  not  been  able   in  2013  to  attract  as  much  later  stage  capital  as   its  peers.  Germany  on  the  other  hand   is  a   smaller  market   for   startup   funding  but  enjoys  a  greater   supply  of   later   stage  capital  with  17  deals  over  USD  10  million  and  1  deal  over  USD  50  million.  Finally  Nordic  countries  are  acclaimed  by  the  European  investor  community  for  the  quality  of  their  ecosystem.  They  are  able  to   attract   large   investments   as   demonstrated   by   the   top-­‐10   deal   ranking   below   where   they  maintain  the  first  and  second  position  with  the  Spotify  and  Supercell  deals.  

In  the  group  of  southern  countries,  Spain  presents  the  highest  degree  of  maturity.  With  Softonic  in   2013,   the   country   has  managed   to   attract   international  money   from  Switzerland   through   a  USD  100+  million  growth  round.  Conversely,  Italy  and  Portugal  do  not  enjoy  a  large  investment  industry   like   Spain’s.   This   spread   is   mirrored   in   the   number   of   deals   that   both   countries  showcased  in  2013  that  may  be  explained  by  a  large  number  of  factors  of  which  the  maturity  of  their  home-­‐ecosystem  is  an  important  element.  

The   following   table   shows   the   Top   10   European   deals   in   2013   in   software,   mobile   tech   and  internet-­‐driven  companies.  

   

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EUROPEAN  TOP  10  DEALS  (2013)  

Company   Sector   Country  Capital  raised  (in  USD  million)  

Main  investors  

Spotify  Ltd  Media  and  entertainment  

Sweden   250   Technology  Crossover  Venture  

Supercell  Media  and  entertainment  

Finland   130  Institutional  Venture  Partners,  Index  Ventures,  Atomico  

Softonic  Systems,  Software,  curated  web  

Spain   109   Partners  Group  

Skyscanner   Software   UK   100   Sequoia  Capital  

Powa  Technologies  Retail  and  distribution  

UK   76   Wellington  Management  

Shazam  Media  and  entertainment  

UK   53   America  Movil  

Onlineprinters  GmbH  Business  products  and  software  

Germany   50   Ta  Associates  

Numberfour  Ag   Software   Germany   38  Allen&Company,  Index  Ventures,  T-­‐Venture  

Talend   Analytics   France   38  Bpi  France,  Iris  Capital,  Silver  Lake  Sumeru  

Funding  Circle  Financial  services  

UK   37   Accel  Partners,  Ribbit  Capital  

Source:  whogotfunded.com,  Clipperton  Finance,  France  Digitale  

As   demonstrated   above,   large   deals   in   Europe   are   funded   by   non-­‐European   venture   capital  institutions:  Technology  Crossover  Ventures  (US),  Institutional  Venture  Partners  (US),  Partners  Group  (CH),  Sequoia  Capital  (US),  America  Movil  (Latam),  Ta  Associates  (US),  Allen  &  Company  (US),  Silver  Lake  Sumeru  (US),  and  Ribbit  Capital  (US).  

European   venture   capital   funds   investing   in   top-­‐10   deals   in   2013   were:   Index   Ventures  (Europe),   Atomico   (United   Kingdom),   Wellington   (Global),   T-­‐Venture   (Germany),   BPI   France  (France),  Iris  Capital  (France)  and  Accel  Partners  (Global).  

Outlook  for  2014  According   to   Clipperton   Finance’s   latest   half-­‐year   report   for   2014,   Europe   shows   a   strong  momentum  for  Innovation  Financing,  with  a  record  Q2  at  $2  billion  (+29%  vs.  Q2  2013),  driven  by  increased  investment   levels  both  in   later  stage  and  early  stage  deals.  Europe  seems  to  have  finally  recovered  from  difficult  years  post  2007.  Activity  was  strongest   in  the  United  Kingdom,  where  companies  raised  28%  of  the  total  amount  in  the  second  quarter,  followed  by  France  with  19%  and  Germany  with  15%12.  As  of  June  201413:    

                                                                                                                         12 http://blogs.wsj.com/digits/2014/07/28/european-startups-raise-highest-quarterly-vc-financing-since-2001/

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- Internet  and  New  Media  accounted  for  a  record  46%  of  innovation  financing  in  H1  2014,  up  by  51%  vs.  last  year  

- The  United  Kingdom  keeps  leading  the  race:  about  30%  of  invested  capital  in  innovation  goes  to  UK-­‐based  companies.  

- Confirmed   trend:  US   growth   investors   are   back   in   Europe:   nearly   half   of   deals   >$15m  (47%)  were  led  by  US  investors  

Thus,  current  conditions  for  entrepreneurs  are  at  a  peak.  A  growing  number  of  entrepreneurs  in  the   more  mature   hubs   (London,   Paris,   Berlin,   Stockholm,   Helsinki)   manage   to   find   capital   to  finance  the  development  of  their  product  or  their  growth.  

But,  some  countries  are  still  developing  their  ecosystem  to  a  more  advanced  level,  in  Spain,  Italy  and  Portugal  but  also  eastern  parts  of  Europe.  

Nevertheless,   seven   software   and   internet-­‐driven   companies   have   made   it   to   the   USD   50+  million  funding  round  in  2013,  a  figure  that  should  be  higher  in  2014  according  to  Clipperton’s  forecasts.  

   

                                                                                                                                                                                                                                                                                                                                                                                           13 http://www.clipperton.net/clipperton-finance-releases-new-h1-2014-european-innovation-financing-newsletter/

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Current  status  of  the  European  VC  industry  The  venture  capital  profession  is  often  misunderstood.  Venture  capitalists,  or  General  Partners  (GPs)  work  on  a  pool  of  money  brought  by  investors  (LPs)  that  might  be  public  (EIF,  local  funds  of   funds,   sovereign   funds,   etc.)   and/or   private   institutions   (individuals,   pension   funds,   banks,  insurers,  corporates,  endowments,  etc.).  This  pool  allows  them  to  invest  in  a  portfolio  of  startup  companies  on  the  local  market  or  internationally  according  to  their  strategy.    

Venture  capitalists  not  only  bring  capital  to  finance  the  growth  of  startup  companies  but  above  all   high-­‐end   expertise   and   network   that   allow   them   to   really   add   value   to   their   investments.  There   is   no   typical   background   for   a   VC   team,   but   a   reasonable   number   of   them   are   former  entrepreneurs,  strategy  consultants  or  investment  bankers.  

The  European  VC  industry  compared  to  the  US  is  still  young  and  consists  in  its  core  of  venture  capitalists  that  survived  the  bubble  burst  of  the  early  2000s  and  kept  on  raising  new  funds.  The  EVCA   estimates   that   63%14   of   VC   managers   disappeared   between   1999   and   2011   due   to   a  challenging  fundraising  environment.  New  venture  capital  teams  are  now  emerging  to  form  the  next  generation  of  European  VCs  and  are  currently  managing  their  first  generation  of  funds.    

We  witnessed  a  very  different  situation  between  the  northern  and  central  parts  of  Europe  and  the  south.  Ecosystems  like  Sweden,  France,  the  United  Kingdom,  and  Germany  are  able  to  rely  on  a  fairly  mature  VC  industry  whereas  Spain,  Italy  and  Portugal  are  still  in  a  process  of  building  an  ecosystem  of  their  own  (although  Spain  has  proven  to  be  slightly  more  advanced).    

The   following   conclusions   support   the   above   analysis   with   key   insights   obtained   through  interviews  performed  with   44  partners   of   venture   capital   firms   among   the  most   active   in   the  digital  space  in  Europe.  These  interviews  were  conducted  and  validated  by  the  lessons  learned  during  the  workshop  organized  by  the  Web  Investors  Forum  and  France  Digitale  on  June  11th  in  Paris  during  the  France  Digitale  Day.  The  workshop  has  gathered  the  very  best  of  the  European  investment   industry   (VCs  and  business  angels)   for  high-­‐end  panel  discussions   (appendix   I)  on  the  future  of  funding  in  Europe.  

We  will  present  each  conclusions  supported  by   facts  and  conclude   the  document  with  a  set  of  recommendations  that  have  been  validated  during  the  workshop.  

   

                                                                                                                         14 Source: EVCA, Earlybird, Turning venture capital data into wisdom, p.16, http://fr.slideshare.net/earlybirdjason/earlybird-europe-venture-capital-report

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Post-­‐interviews  and  workshop  conclusions  

The  European  Exit  market  is  the  most  critical  issue  The  exit  environment  in  Europe  is  regarded  by  interviewed  venture  capitalists  (9.5  out  of  10)  as  the  most  critical  challenge  in  Europe.    

Exits  represent  a  liquidity  event  for  investors  or  entrepreneurs  that  allow  them  to  obtain  full  or  partial   returns   for   their   initial   investment.   There   are   three   different   types   of   exits   in   the   VC  world:  IPOs  (listing  the  company),  trade  sales  (selling  the  company  to  an  acquirer),  and  private  equity  buyouts   or   growth   capital   (selling   the   company   fully   or  partially   to   a   specialist   private  equity  fund).  

A  favorable  exit  market  creates  a  positive  feedback  loop  that  supports  a  virtuous  cycle:  

- They  allow  entrepreneurs   to   find   liquidity  and  create  new  companies  and/or   invest  as  business   angels   in   new   entrepreneurs.   Successful   entrepreneurs   usually   tend   to   give  back  to  the  ecosystem  through  personal  investments  in  new  startup  companies.  There  is  a  multiplier  effect  to  success  in  the  digital  world.  

- Exits  generate  performance  for  the  venture  capital  industry  and  foster  attractiveness  of  the  asset  class  for  private  institutional  investors.    

- Exits  create  success  stories  and  role  models  for  future  generations  of  entrepreneurs.    

Trade  Sales  

The  European  ecosystem  is  still  young  and  lacks  sizeable  tech  companies  that  generate  enough  margins  to  acquire  startups  at  decent  multiples  and  valuations,  even  if  some  examples  exist  such  as  Axel  Springer,  Schibsted,  Telefonica,  or  Dassault  Systems.  As  a  result,  it  is  difficult  to  compare  the  US  and  European  ecosystems  as  they  operate  with  very  different  degrees  of  maturity.    

The   US   has   an   ecosystem   of   entrepreneurs,   funders,   and   buyers   that   is   mature   and   well  balanced.  Large  tech  companies  like  Google,  Facebook  and  others  acquire  startup  companies  and  allow   entrepreneurs   to   become   angels   and   invest   in   new   companies   and/or   build   a   new  company.   For   example,   as   of   April   2013,   the   total   market   value   of   the   7   largest   US  technology   companies   (Apple,  Microsoft,   IBM,   Google,   Facebook,   Amazon,   and   Yahoo)15  was  close  to  USD  1.7  trillion.  Whereas  in  Europe,  the  only  company  competing  in  terms  of  size  is  SAP  with  a  EUR  63  billion  valuation  (as  of  Q2  2014)16,  still  very  far  from  the  huge  acquisitive  potential  of  American  companies.  

Europe   is   still   a   young  ecosystem  and  does  not  yet  benefit   from   large-­‐scale   listed  digital  born  acquirers.  Some  smaller  corporations  have  begun   to  spring  up,   such  as  Criteo  or  King,  but   the  landscape   still   has   to   blossom.   Very   few  media   companies   in   Europe   have   proven   capable   of  buying  and  successfully  integrating  startup  companies  such  as  Schibsted,  Axel  Springer,  Hubert  Burda,   and   others.   However,   as   stated   by   the   entire   community   of   European   VCs,   at   present,  

                                                                                                                         15 http://www.statista.com/statistics/216657/market-capitalization-of-us-tech-and-internet-companies/ 16 SAP half-year report 2014

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potential   acquirers   are   almost   always   in   the  US,   and  most   of   them   turn   directly   to   the  US   for  their  acquisition  searches.    

Traditional   industry  players   in  Europe,  but  also   in   the  US   face  more  difficulties   in  successfully  integrating   startup   companies,   as   they  were  not  born  digital.  According   to  Schbisted  Growth’s  Managing  Director  Marc  Brandsma  “60%  of  post-­‐merger  integrations  are  going  to  be  failures”.  It  is  thus  challenging  for  traditional  players  to  efficiently  acquire  startup  companies.    

However,  90%  of   interviewed  VCs  believe   that  European  corporations  could  do  better.  Even   if  post-­‐merger   integration   can   be   challenging,   European   corporations,   with   the   exception   of   a  handful   of   companies,   are   subject   to   the   “Not   Invented   Here”   syndrome,   and  might   see   their  industry  disrupted  by  newcomers  if  they  do  not  begin  an  effort  to  integrate  external  innovation.  

As   a   result   of   this   situation,   9   out   of   10   startup   companies   financed   by  VCs   are   sold   to  foreign  acquirers  (US  and  Asia)  according  to  interviews.  

Corporate  Venturing  A   smart   approach   to   allow   corporations   to   operate   more   efficiently   in   the   realm   of   venture  capital  can  be  led  by  either  dedicated  in-­‐house  teams  of   investment  professionals  or  corporate  investments   in   external   venture   capital   funds.   Corporations   that   currently   account   for   only  6.5%17   of   investment   into   the   digital   startup   industry   could   take   further   interest   for  multiple  reasons:   early   targeting   of   potential   acquisition,   knowledge   acquisition   on   new   digital   trends  and  technologies,  and  pure  financial  objectives.  

As   mentioned   by   interviewed   Corporate   Venture   funds,   there   are   huge   opportunities   for  Corporates   to   invest   in  a  pure   financial  and  knowledge   transfer  purpose.  However,   if  done   for  strategic   purpose,   in-­‐house   strategic   corporate   venturing   initiatives   are   more   challenging   to  operate  as  they  run  under  conflicting  interest  between  Corporates  and  entrepreneurs.  Through  strategic  corporate  venture,  Corporates  are  looking  to  find  interesting  technologies  and  services  to  buy  at  the  lowest  possible  price.  On  the  other  hand,  an  entrepreneur  is  looking  for  a  partner  for  growth  and  to  sell   to  the  highest  bidder.  Even  if   there  are  some  successes   in  the  Corporate  Venture  space,  it  is  still  too  early  to  be  able  to  determine  whether  the  model  is  adapted.  

Therefore,   our   interviews   have   shown   that   it   is   preferable   for   the   industry   that  Corporates   invest   in   external   venture   capital   funds   and/or   acceleration   programs   that  would  act  as  “platforms”  for  knowledge  acquisition  and  early  partnerships/m&a  scouting  to  a  multitude  of  Corporates,  thus  minimizing  the  above  mentioned  potential  conflict18.  It  would   be   beneficial   for   Corporates,   as   they   would   be   able   to   get   their   eyes   on   cutting-­‐edge  disruptive  technologies,  as  well  as  for  the  whole  startup  industry,  which  would  beneficiate  from  increased  amounts  of  capital  inflows  from  a  segment  (Corporates)  that  has  been  shy  for  the  last  couple  of  years.  

                                                                                                                         17 EVCA Yearbook 2013 18 As an illustration, French Groups Orange and Publicis have pooled their resources to invest in a fund managed by Iris Capital : http://www.iriscapital.com/fr/content/france-telecom-orange-and-publicis-group-partner-iris-capital-management-create-leadind

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Even   if   corporate  venture,   co-­‐working,  or  acceleration  structures  are  booming   in  Europe,   they  often  come  as  a  result  of  a  communications  strategies  and  not  from  a  long-­‐term  strategic  vision  as   mentioned   by   one   of   the   Corporate   VCs   interviewed   during   the   workshop   panels.   In   the  beginning  of  the  2000s  Corporates  have  started  a  large  number  of  internal  VC  arms  that  did  not  survived  top  management  turnover  and  the  bubble  burst19.  

European   Corporates   should   think   twice   before   engaging   in   an   effort   to   build   an   in-­‐house  venture   structure.   However,   corporations’   involvement   in   external   accelerators   and   venture  funds  is  marginal.      

Therefore,  the  “platform”  approach  should  be  defended  in  Europe,  with  external  VC  funds  and  accelerators  acting  as  platforms  to  Corporates  that  are  willing  to  acquire  knowledge  and  scout  potential  targets  or  partner.    

The  case  of  the  German  High-­‐Tech  Gründerfonds  

The  High-­‐Tech  Gründerfonds  (HTGF)20  is  a  venture  capital  firm  focusing  on  early  stage  and  seed  investments  established  in  2005  to  finance  young  technology  companies.  The  Gründerfonds  is  a  public-­‐private   partnership   between   the   German   Federation   and   corporations   with   investors  such   as   the   Federal   Ministry   of   Economics   or   Bosch,   Bayer,   KFW   banking   group,   RWE,   SAP,  BASF,  DAIMLER,  or  Metro  Group  (and  more).  

This   public   initiative   has   allowed   corporations   to   take   part   in   financing   innovation   and   gain  knowledge  out  of   their   investments.  The   second  generation  of   fund  was   closed  at   a  EUR  304  million.  HTG  is  not  only  innovative  in  its  structure  but  also  invests  at  the  seed  level  according  to  interesting  terms.  

The  firm  “provides  up  to  EUR  500  K  in  the  form  of  a  subordinated  convertible  loan  and  acquires  a  15%  nominal  share”.  Additionally,  “interests  on  the  loan  are  deferred  for  4  years  to  preserve  the  company’s  liquidity”21.    

In  their  first  5  years  of  existence,  HTGF  invested  in  250  companies.  As  a  professional  investor,  HTGF  not  only  provides  capital,  but  also  strategic  expertise  and  networks  to  their  companies.  

This  initiative  has  been  instrumental  in  building  up  a  momentum  for  the  German  ecosystem  in  2005   and   further   on,   and   growing   awareness   of   German   industrial   investors   of   the   coming  digital  revolution.    

The  IPO  market  

With  regards  to  interviews  and  the  discussions  at  the  Paris  workshop,  listing  a  company  remains  a  very  rare  option.  Moreover,  the  venture  capital  community  is  quite  divided  on  the  subject,  and  

                                                                                                                         19 http://www.lesechos-etudes.fr/fr/catalogue/etudes/sectorielles/banque-assurance/corporate-venture.html 20 http://www.en.high-tech-gruenderfonds.de/ 21 http://www.en.high-tech-gruenderfonds.de/financing/financingterms/

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a   large   majority   would   recommend   boosting   the   trade   sales   before   creating   a   good   IPO  environment  in  Europe.  

80%   of   interviewees   consider   the   European   IPO   market   as   currently   not   favorable   for  technology  companies  as  there  is  no  liquidity  provided  by  demand,  and  very  few  peers  listed  on  European  markets  (especially  for  those  companies  relying  on  deep  technology).  The  first  market  of  choice  for  an  IPO  is  usually  the  US  as  demand  is  higher  and  peers  more  numerous.  However,  IPOs   in   the  US   are   suited   for   a   very   limited   number   of   companies,   as   they   have   to   be   able   to  showcase  certain  minimum  value  criteria  (large  companies)  as  well  as  a  strong  operation  in  the  US.  

Eric  Forest,  CEO  of  Enternext,  one  of  the  premier  European  listing  market  for  SMEs  emphasizes  the  fact  that  the  European  demand  side  is  currently  thirsty  for  new  equity  stories.  Even  if  for  the  moment,  they  do  not  always  understand  digital  and  deep  technology  business  model,  investors  are   looking   for   new   kind   of   companies   to   invest   in.   Forest  mentions   that   as   at   June   2014,   10  companies  had  listed  themselves  since  the  beginning  of  the  year  with  a  total  of  EUR  1.7  billion  raised:  eDreams  Odigeo,  Just  Eat,  Bravofly  Rumbo  Group,  Awox,  Visiativ,  Anevia,  ao.com,  Expert  System,  Triboo,  and  Rosslyn  Analytics.    

It  should  also  be  noted  that  over  the  last  10  years,  only  7  European  tech  companies  went  public  in  the  US,  showing  signs  of  high  barriers  to  entry  in  this  market  in  terms  of  valuation  and  other  criteria.  

Nonetheless,  the  public  market  is  an  important  part  in  the  evolution  of  an  ecosystem  in  terms  of  later  stage  financing  or  exit  options.  It  also  provides  the  opportunity  for  future  global  leaders  to  be  able  to  remain  independent  and  one  day  become  the   large  tech  acquirers  that  Europe  lacks  today.  

Private  equity  

The  European  private  equity  landscape  is  currently  picking  up,  with  a  large  number  of  US  based  funds  now  targeting  European  companies,  and  offering   liquidity  options   for   founders  and  VCs.  There  are  however  very  few  European-­‐native  private  equity  funds  regarding  tech  as  a  potential  sector.  

   

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An  unbalanced  European  financing  value  chain  According   to   the   EVCA22,   the   number   of   active   European   venture   capital   managers   between  1999   and   2011   has   decreased   by   63%.   This   diminution   in   number   was   accompanied   by  diminution  in  capital  inflow  leading  to  the  current  situation  in  Europe.  According  to  Earlybird’s  estimates23,  Europe  has  today  the  highest  unbalance  in  venture  capital  availability  on  the  planet.  

VCs  do  not  only  invest  their  personal  wealth,  but  largely  depend  on  capital   inflows  from  third-­‐party  institutions  commonly  named  Limited  Partners  (LPs)  in  the  industry.  LPs  usually  consist  of   public   funds,   insurance   companies,   endowments,   banks,   high   net   worth   individuals,   and  pension  funds.  Without  LPs,  there  are  no  VCs.  And  without  VCs,  startup  companies  would  have  difficulty  finding  the  right  resources  for  their  growth.  

Startups   are   high-­‐growth   companies   with   long-­‐term   needs   for   financing.   Most   of   these  companies’   cycle   prevent   them   from   having   access   to   debt   funding   through   banks   or   even  venture  debt  funds,  which  finance  very  specific  types  of  companies.  Capital  is  the  only  source  of  financing  that   is  patient  enough  and  that  comes  with  non-­‐financial  expertise  and  network  that  allows  the  handling  of  hyper-­‐growth  companies.  

Promoting  Internet  and  mobile  tech  venture  capital  to  LPs  

Capital  invested  by  VCs  is  dependent  upon  the  ability  of  VC  managers  to  collect  funds  from  their  underlying   investors:   Limited   Partners   (LPs).   A   very   challenging   LP   environment   has   been  outlined  by  90%  of   interviewed  VCs.  This   is  one  of   the  main  challenges   faced  by  most  venture  capitalists  nowadays,  and  venture  capital  as  an  asset  class  needs  to  be  promoted  towards  money  managers  in  terms  of  performance,  future  potential  and  positive  social  welfare  creation.  

LPs   are   large   money   managers   such   as   banks,   pension   funds,   insurance   companies   and  corporations,  which  allocate  a  small  part  of  their  assets  to  specialist  ICT  venture  capitalists.  An  additional   layer   of   LPs   consists   of   publics   or   semi-­‐public   institutions   such   as   the   European  Investment  Fund  or  local  sovereign  funds.  

In   the   last   years,   the   financial   turmoil,   as   well   as   strong   prudential   regulation   on   banks   and  insurers  (namely  Basel  III  and  Solvency  II)  have  led  to  a  melting  in  private  LPs’  appetite  for  the  VC  asset  class,  collateral  to  a  decrease  in  capital  invested  in  the  internet  and  mobile  tech  space.  

                                                                                                                         22  http://fr.slideshare.net/earlybirdjason/earlybird-­‐europe-­‐venture-­‐capital-­‐report  23  http://fr.slideshare.net/earlybirdjason/earlybird-­‐europe-­‐venture-­‐capital-­‐report

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Source:  EVCA  yearbook  2013  

Today,  public  capital  accounts  for  over  35%  of  global  fund  closings  in  Europe,  almost  3.5  times  the  same  weight  in  2007,  a  figure  that  according  to  our  interviews  around  Europe  is  more  likely  to  be  around  40%.    

 

Source:  EVCA  Yearbook  2013  (unclassified  excluded)  

 

100%  of   interviewed  VCs  consider   that   the  quality  of   their   local  or  pan-­‐European  deal   flow   is  sufficient   to  manage  more   capital   following   their   strategy,   but   there   is   a   strong   reluctance   of  large-­‐scale  European  money  managers  to  allocate  to  this  asset  class.  

0% 5% 10% 15% 20% 25% 30% 35% 40%

0,0 1,0 2,0 3,0 4,0 5,0 6,0 7,0 8,0 9,0

2007 2008 2009 2010 2011 2012 2013

The weight of public funding in European Venture Capital

Public (in EUR billion)

Private (in EUR billion)

Public funding/Total fundraising

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011 2012 2013

European LP structure

Sovereign wealth funds

Private individuals

Pension funds

Other asset managers (including PE houses other than fund of funds) Insurance companies

Government agencies

Fund of funds

Family offices

Endowments and foundations

Corporate investors

Capital markets

Banks

Academic institutions

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Explanatory  elements  

Although   public   funding   has   increased   over   the   years,   the   boom   in   the   public   restraint   of  industry  capital   is   likely  due  to  an  important  decrease  in  private  money  inflow  since  2007  and  before.    

Basel  III  and  Solvency  II  The  Basel  III  regulation  is  a  series  of  initiatives  taken  to  reinforce  the  financial  system  following  the   turmoil   of   2007,   agreed   by   the   Financial   Stability   Board   and   the   G20.   The   objective   is   to  guarantee  a  minimum  level  of  equity   in  order   to  ensure   the   financial  solidity  of  banks.  Among  other  things,  this  regulation  has  led  to  a  number  of  prudential  ratios  in  relation  to  the  liquidity  risk  of  investments  made  by  banks.  As  non-­‐liquid  asset,  private  equity  was  strongly  impacted  by  this  regulation,  as  it  consumes  a  strong  amount  of  the  liquidity  risk  ratio  envelope  of  banks.  

This  directly  impacts  the  economy  and  financing  capacity  of  European  SMEs,  as  capital  starts  to  become  more   scarce   due   to   the   current   decrease   of   debt   financing   capacity.   According   to   the  International   Institute  of   Finance,   the  Basel   III   requirements  will   generate   an  overall   negative  impact  on  the  Eurozone’s  GDP  of  0.5%  per  annum  between  2011  and  2015,  a  cumulated  4.5%  according  to  their  predictions24.  

As   a   result   of   Basel   III,   a   number   of   banks   disengaged   from   private   equity   holdings   such   as  Barclays  and  Crédit  Agricole.  

This   observation   is   identical   for   European   insurers   under   the   Solvency   II   regulation  who   are  constrained  to  disengage  from  private  equity  such  as  Axa,   the  top  insurer   in  Europe  as  well  as  the  largest  private  equity  investor  prior  to  the  spin-­‐off  of  its  branch.  

As  a  result,  according  to  the  EVCA  in  2013,  Private  individuals  and  family  offices  amounted  for  20%   of   total   new   money   inflow   whereas   banks   and   insurance   companies   cumulatively  accounted  for  only  5.4%.  

Although  these  regulations  are  considered  by  40%  of  interviewees  to  be  one  of  the  reasons  for  an   increasingly   challenging   fundraising   situation   in   Europe,   the   entire   European   community  seems  to  think  that  the  problem  lies  elsewhere.  Potential  explanations  may  be  the  asset  class’s  size,  reputation  and  global  awareness  of  Internet  and  mobile  tech  startup  companies’  growth  or  welfare  potential.  

Performance  of  European  VCs  Even  if  constraints  are  high  for  the  entire  private  equity  industry,  the  risk/return  profile  of  the  VC  asset  class   is  reputed  as  not  worthy  by  European   institutional   investors.   Indeed,  returns  of  ICT  VC  funds  in  Europe  are  highly  unequal,  according  to  country,  and  even  on  local  markets.  As  venture  capital  funds’  performance  are  poorly  disclosed,  we  witness  a  very  low  visibility  of  high  performing   venture   capital   institutions.   These   institutions’   high   quality   startup   selection   and  support,  should  be  better  promoted.  

                                                                                                                         24  http://www.iisd.org/sites/default/files/pdf/2012/basell3.pdf  

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The   US   industry   seems   to   suffer   less   from   such   bad   reputation.   However,   key   facts   and  information   should   to   be   highlighted   in   order   to   demonstrate   the   difference   between   the  investment  landscape  in  Europe  and  the  US.  

The   bad   reputation   of   European   VCs   within   the   LP   community   is   partly   linked   to   lack   of  awareness   and   the   scarcity   of   available   data   on   the   industry’s   performance.   On   average,   the  performance  of  Europe-­‐based  funds  are  equivalent  to  that  of  the  US.  A  small  percentage  of  US  investors  (actually  drives  up  the  statistics  to  the  benefit  of  the  whole  American  industry.  In  Europe,  statistics  also  include  VC  managers  who  were  not  able  to  raise  new  funds  following  the   bubble   burst   from   (2003-­‐2006)   and   went   out   of   the   market   (probably   30%   to   40%  according   to   the   EVCA),   with   a   highly   negative   impact   on   the   performance   of   their   portfolio  constructed   between   1999   and   2003.   This   phenomenon   has   had   less   of   an   impact   on   North  American  statistics  and  so  the  comparison  between  the  US  and  Europe  should  be  regarded  with  much   care.   The   European   VC   performance   indicators   should   include   VCs   that   managed   to  continuously  raise  new  funds  over  the  years.  

The   European   market   would   benefit   from   a   reliable   benchmark   with   carefully   selected   VC  managers.  One  of  the  few  European  institutions  to  concentrate  a  sufficient  amount  of  top-­‐quality  data  would  be  the  European  Investment  Fund  (EIF).  As  the   largest  European  LP,  and  the  most  supportive  pan-­‐European  institution,  the  EIF  has  been  investing  in  venture  capital  long  enough  to   build   efficient   consolidated   performance   statistics   for   the   European   industry.   The   EIF   has  recently   engaged   in   an   effort   to   build   an   index   that   should   be   supported   by   the   European  Commission.  

Awareness  of  LPs  Money  managers  (LPs)  tend  to  invest  in  what  they  understand.  Today,  Internet  and  mobile  tech  business  models  seem  to  be  very  blurry   for   institutional   investors   in  comparison   to   their  high  quality   understanding   of   traditional   markets.   Institutional   investors   delegate   most   of   the  management  of   their   assets   to   third  party  asset  management   institutions,  but  usually  define  a  top-­‐down  strategic  allocation  by  asset  class.  Considering  Europe’s  ambition  for  our  future  digital  competitiveness,  capital  has  to  reconcile  with  the  internet-­‐driven  avant-­‐garde.  

 

   

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The  case  of  US  pension  funds  

CalPERS  is  an  American  pension  fund  managing  a  USD  260  billion  budget  for  public  employees’  retirement  in  California.  Listed  below  is  CalPERS’  current  asset  allocation  mix  by  market  value  and  policy  target  percentages  as  of  May  29,  201425.  

 

Source:  CalPERS  2014  

As  stated  by  CalPERS  its  target  allocation  to  private  equity  now  amounts  to  12%.  Previously  in  2012,  CalPERS  allocation  was  7%  of  its  allocation  to  private  equity.  With  a  budget  of  USD  290  billion   under  management,   CalPERS’   sole   commitments   to   venture   capital   was   equivalent   to  67%  of  the  capital  deployed  on  European  startups  in  2013.  

CalPERS   recently   stated   that   they   plan   to   shrink   that   allocation   to   1%   of   the   private   equity  assets26,  still  at  a  high  level  of  USD  390  million  that  finds  no  equivalent  in  Europe,  except  from  public  institutions.  According  to  the  US  pension  fund’s  statement  the  venture  capital  industry  is  “too   small   to   absorb   a   larger   percentage   of  money   from   an   investor   the   size   of   CalPERS”.   A  statement  that  finds  an  echo  in  Europe.  

 

Critical  mass  and  the  size  of  European  funds  Institutional  investors  invest  according  to  hard  guidelines  in  terms  of  minimal  investment  size  in  a   fund  and  maximum  control   ratio27  over  a   fund.  The   level  of   these  metrics  may  vary   from  an  

                                                                                                                         25  http://www.calpers.ca.gov/eip-­‐docs/investments/policies/asset-­‐allocation/asset-­‐alloc-­‐strgy.pdf  26  http://www.calpers.ca.gov/eip-­‐docs/investments/policies/asset-­‐allocation/asset-­‐alloc-­‐strgy.pdf 27  Control  ratio  :  investment  of  a  single  investor/total  size  of  the  fund  

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institutional  investor  to  another  but  typically  most  European  venture  capital  funds  are  too  small  in  size  to  be  able  to  receive  institutional  money.    

During  our  interviews,  we  have  witnessed  a  very  diverse  situation  between  countries  in  terms  of  average  size  of  funds.  

Country   Average  fund  size  (in  EUR  million)  

France     90  

United  Kingdom   165  

Germany   150  

Sweden   185  

Spain   68  

Italy     40  

Portugal   40  As  at  March  2014:  estimates  from  qualitative  interviews  

Three   countries   with   developed   industries   have   an   average   fund   size   passed   the   EUR   100  million  mark  (United  Kingdom,  Germany,  and  Sweden).  France  is  the  only  country  in  the  group  of  4   to  be  under   that  mark  and  seems   to  display  a   rather   fragmented  venture  capital   industry  with  a  large  number  of  funds  managing  less  capital  than  in  the  other  core  countries.  

Positive  externalities  Not  only  do  successful  startup  companies  generate  shareholder  value,  but  they  also  create  social  welfare   as   presented   in   France   through   the   France   Digitale   barometer28:   with   +22%   of   job  creation  in  2013  and  91%  of  permanent  contracts  and  32  years  old  of  average  employee  age.  

As  demonstrated  by  Prf.  Enrico  Moretti  (2013)29,  Professor  at  Stanford,  for  one  tech  job  created  in  a  hub,  five  additional  jobs  are  created  outside  high-­‐tech  in  the  same  city.  “A  tech  job  is  much  more   than   a   job”,   it   has   a   large-­‐scale   multiplier   effect.   “Take   Apple,   for   instance.   It  employs  13,000  workers  in  Cupertino,  but  it  generates  almost  70,000  additional  service  jobs   in   the   region.   This  means   that,   remarkably,   Apple’s  main   effect   is   not   among   high  tech  workers.  It  is  outside  high  tech”.  

LPs  like  insurance  companies  and  pension  funds  work  on  a  pool  of  capital  brought  together  by  the  labor  force.  Without  a  doubt,  this  particular  effect  on  innovative  industries  on  employment  is  representative  of  a   strong   long-­‐term  alignment  of   interest  between  LPs  and  VCs   that   could  be  promoted  by  the  Commission.  

Present  challenges  

It   should   be   noted   that   due   to   the   challenging   fundraising   (LPs)   situation   in   Europe,   the   VC  profession   faces  great   concentration   that  may  coincide  with  a   shortage  of   available   capital   for  startup  companies  and  Europe’s  innovative  potential.    

                                                                                                                         28 http://fr.slideshare.net/FranceDigitale 29 Moretti,  E.,  2013.  The  New  Geography  of  Jobs,  Reprint  edition.  ed.  Mariner  Books,  Boston,  Mass.  

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Venture  capitalists  have  developed  unparalleled  knowledge  and  expertise  in  web  businesses  and  investing  which  must  be  highly  valued.  The   right   investments   consist  of   capital   and  expertise:  capital   alone   will   not   lead   to   a   generation   of   value   for   companies   and   competitiveness   for  Europe.  

A  concentration  of   the  venture  capital   industry  would  mechanically   lead   to   fewer   investments  made,   if   it   is  not   supported  with  growth  of  private   capital   inflow.   In  order   to  do  so,  European  savings  should  nurture  the  venture  capital  industry:  even  an  insignificant  portion  would  make  a  great  difference.  Household  savings  are  higher  in  Europe  than  in  the  US,  and  this  sleeping  capital  if  directed  the  right  way,  could  help  Europe  build  on  its  competitiveness  in  the  digital  field.  

Difference  between  regions  

Southern  and  Eastern  Europe:  a  need  for  momentum  creation  The  south  and  east  of  Europe  suffer  from  a  lack  of  capital  on  a  very  early  part  of  the  value  chain  at  the  seed  and  pre-­‐seed  levels  (any  investment  ranging  between  100K  and  1m  euros).  Portugal  and   Italy   are   countries  where   entrepreneurs   have   a   hard   time   finding   enough   capital   to   start  developing  their  product  even  in  the  early  stage.  .  

Core  countries:  still  more  to  go  For  other  countries  (core)  where  the  industry  is  further  developed,  equity  shortage  starts  to  be  felt  from  series  A  to  B  and  above  all  at  the  later  stages.  

 

Supporting  seed  investments:  how  the  European  Investment  Fund  empowers  business  angels  

The  EIF  has   launched  a  pilot  project   in  Germany  which  has  then  been  replicated   in  Spain  and  Austria   that   aims   at   co-­‐investing  with   a   small   number   of   carefully   selected   top-­‐tier   business  angels.    

The  EIF  considers  working  with  angel  networks  and  association  to  be  more  difficult  within  the  frame  of   this  program  and  has  decided   to   focus  on   individuals  who  can  prove   their  ability   to  add  true  value  to  their  portfolio  companies.  Business  angels  go  through  a  due  diligence  process  led  by  the  EIF,  and  once  granted  the  green  light  in  terms  of  expertise  and  investment  capacity,  the   EIF   allocates   to   the   “super-­‐angel”   a   pocket   of   capital   ranging   from   EUR   250   K   to   EUR   5  million  on  a  1  for  1  matching  basis.  

If  an  angel  invests  1  euro  on  a  company,  the  EIF  will  invest  1  euro  in  the  same  company  with  the  same   terms,   thus   giving   to   the   angel   a   higher   investment   capacity   and   more   capital   to   the  entrepreneur  in  order  to  prove  his/her  point.  

This  program  does  not  pay  any  management  fee  to  the  selected  angel,  but  if  the  investment  is  successful,   the   business   angel   earns   a   carried   interest   on   a   deal   by   deal   basis   in   order   to  incentivize  performance.  

This   program   has   been   acclaimed   by   the   investment   community   and   could   be   replicated   in  more  member  states.  However,  in  order  to  grow  its  program  the  EIF  needs  the  support  of  local  

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counterparts,  which  has  slowed  down  the  expansion  process.    

A  pan-­‐European  equity  shortage:  creating  global  leaders  Later  stage  funding  demonstrates  a  true  equity  shortage  in  Europe  as  only  4  to  6  funds  are  able  to   support   these   types  of   deals   in   the  digital   space.   Later   stage   financing   rounds   are   essential  when  the  ambition  of  a  founding  team  is  to  become  a  global  leader  in  their  field.  

The  consequence  of  this  lack  of  capital  for  more  mature  startups  is  an  important  number  of   premature   sell   offs   for   companies   that   could   have   the   potential   to   continue   to   grow  independently.  

All  over  Europe,  public   fund  of   funds  have  proven   themselves   to  be   instrumental   in  providing  the   right   amount   of   capital   to   develop   a   local   or   pan-­‐European   VC   industry   under   great  economic  pressure.  It  is  a  policy  tool  that  is  essential  to  consider  at  when  it  comes  to  creating  a  good   funding   environment   for   startup   companies,   especially   in   less   developed   regions   like  Southern  and  Eastern  Europe.  

Local  public  fund  of  funds  and  direct  co-­‐investments:  the  case  of  Bpi  France  

Bpi   France   is   the   French   Public   Investment   Bank   designed   to   bring   finance   solutions   to  companies   from   the   seed   level   to  maturity.   Bpi   France   has   developed   a   large-­‐scale   program  spanning  the  entire  financing  lifecycle  of   innovative  SMEs  through  15  dedicated  fund  of   funds  designed  to  boost  the  French  investment  activity  in  venture  capital  and  more.    

As   an   example,   the   Fonds   National   d’Amroçage   (FNA)   is   now   endowed   EUR   600   million   to  invest   in   20   to   30   funds   dedicated   to   seed   investments   in   innovative   companies.   The  intervention   regime   was   validated   by   the   European   Commission   in   2011,   and   has   served   a  crucial   purpose:   bringing   a   solution   to   equity   shortage   at   the   seed   level   that   France   was  witnessing  at  the  time.  

Funds  are  allocated  directly  by  Bpi  France  and  its  specialist  teams  to  venture  capital  teams  that  can  prove  able  to  bring  value  to  their  companies.  As  of  March  2014,  the  FNA  has  invested  EUR  308  million  in  16  funds  and  has  further  investment  capabilities.  

In   2013,   Bpi   France   identified   the   lack   of   financing   for   later   stage   companies   and   created   in  January  2014,  a  large  venture  fund.  With  EUR  500  million  in  management,  Bpi  France  now  co-­‐invests   directly   in   funding   rounds   starting   from   EUR   10  million   on   companies   seeking   large  amounts  of  capital  to  finance  their  growth  and  expansion.  As  of  June  2014,  Large  Venture  has  invested  in  13  companies  in  the  ICT,  medtech  and  cleantech  fields.  

This   case   is   not   isolated   in   Europe.   But   this   type   of   public   initiative   and   best   practice   is   not  generalized   to   every   country.   It   should   be   repeated   at   the   local   level   wherever   possible,  especially   in   those   countries   with   a   newly   developing   ecosystem     (Southern   and   Eastern  Europe).    

At  the  local  level,  other  public  initiatives  could  be  pinpointed  such  as  Portugal  Ventures  (direct  investments  in  Portugal)  or  the  High-­‐Tech  Gründerfonds  (public/private  direct  investments  in  Germany).  

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On   the  pan-­‐European   level,   the  EIF   is   the  main  player   in  providing  public   capital   to  VC   funds  and   helping   them   raise   additional   capital.   The   EIF   has   been   instrumental   in   supporting   the  industry  for  over  the  past  two  decades  and  its  teams  have  among  the  most  advanced  levels  of  expertise  in  the  European  VC  field.      

 Public  grants:  Tekes  

In   Nordic   countries,   the   digital   startup   scene   has   rapidly   evolved   thanks   to   a   number   of  aggressive  government  initiatives  dedicated  to  building  global  and  innovative  companies.  

Tekes   in  Finland  was   created   in  1983  and  has  backed  a  number  of   companies   such  as  Rovio,  Nokia,  and  Supercell  via  financial  assistance  in  excess  of  EUR  135  million  per  year  (2012)30  

Tekes   finances   rapid  growth  companies  with  a   strong  potential   to   expand   internationally.     In  European   public   policy   this   practice   is   unique,   in   that  most   initiatives   focus   on   a  more   local  scope.      

Tekes  finances  small  innovative  companies  that  are  less  than  six  years  old  with  a  maximum  of  EUR  1  million.  Generally  starting  with  a  EUR  250  K  subsidy  or   loan  with  75%  of   the  project’s  cost  eligible  to  the  grant.  

This   program   is   acclaimed   by   Nordic   venture   capitalists   as   it   has   helped   Finland   to   create  momentum  for  early  stage  investors.    

   

   

                                                                                                                         30 http://www.businessinsider.com.au/running-a-startup-in-finland-2013-11

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Insufficient  coordination  between  European  Tech  Hubs  Thanks   to  policy  programs   like  EIS/SEIS  scheme  and  London  tech  city   in   the  United  Kingdom,  BPI  France  and    La  French  Tech  in  France,  the  Gründerfonds  in  Germany  and  Tekes  in  Finland,  the  development  of  a  certain  number  of  tech  hubs  such  as  Paris,  Berlin,  London,  Stockholm  and  Helsinki  has  begun  to  improve  the  overall  quality  of  the  deal  flow  for  investors.  These  hubs  are  contributing  to  developing  the  overall  European  entrepreneurial  startup  culture  and  landscape.  

However,  due  to  the  fierce  competition  between  nations  for  entrepreneurial  supremacy,  there  is  a   lack   of   sufficient   cooperation   between   hubs   that   could   help   companies   in   expanding   into  different  markets.  

As  key  players  in  the  ecosystem,  venture  capitalists  could  be  the  key  facilitators  of  these  hubs   if   they   invested   more   freely   in   different   markets   beyond   their   local   ecosystems.  However,  we  have   seen   very   few  players   that   are   truly   able   to   achieve   a  pan-­‐European  investment  activity.  

Indeed,   discussions   during   the   Web   Investors   Forum   workshop   highlighted   that   investing   in  multiple  countries  is  a  rather  complicated  activity,  as  often,  on-­‐the  ground  presence  is  required,  This   makes   the   creation   of   efficient   investment   teams   even   more   challenging.   If   it   is   not  established  as  pan-­‐European,  a  venture  capital   firm  will  always  be  more  comfortable   investing  on  a  local  basis,  with  few  investments  made.  

Coordination   between   hubs   could   benefit   countries   with   a   less   mature   environment   seeking  expertise   and   knowledge   transfer   from   more   advanced   hubs.   Spain,   Italy,   or   Portugal   could  develop  themselves  much  more  rapidly  via  exchanges  with  epicenters  such  as  London  and  Paris.    

In   some   cases,   local   public   policy   instruments   slow   down   this   coordination.   In   fact,   in   some  countries,  public  money  inflow  comes  along  with  a  certain  number  of  constraints.  In  Portugal  for  example,  publicly  funded  companies  face  problems  when  expanding  their  operations  in  foreign  countries   and   are   sometimes   forced   to   reimburse   the   public   portion   of   their   capital   before  expanding  to  other  countries.  

These   types   of   constraints   may   also   have   a   negative   impact   on   investments   made   by   VCs   in  foreign  countries,  although  investments  made  outside  their  own  boarders  would  also  benefit  the  local   portion   of   their   portfolio.  When   a   VC   invests   abroad,   it   grows   its   network   as  well   as   its  insight  on  this  foreign  ecosystem.  In  terms  of  networks,  and  other  non-­‐financial  value  added,  a  local  entrepreneur  would  benefit   from  this   type  of   investment.  Startup  companies  work  under  economies  of  scale  and  will  always  need  to  scale  internationally  at  some  point,  and  not  always  from   their   place   of   creation.   However   public   investments   in   VC   funds   tend   to   impose   a   high  degree   of   constraints   in   terms   of   investment   geography,   which   in   the   end,   do   not   help  coordination  between  ecosystems.  

 

 

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Tax  &  legal  environment  needs  to  be  improved  (adapted)  in  certain  geographies  In  some  regions,  the  tax  and  legal  environments  can  negatively  impact  the  effective  alignment  of  interest  at  all  levels.  

Between  entrepreneurs  and  employees  

Stock   option   plans   and  more   generally   employees’   shared-­‐ownership   plans   are   an   important  part  of   industry  standards  set   in  the  startup  world.  Startup  companies  need  to  attract  the  best  talent  available  and  incentivize  them  to  deliver  the  best.  They  often  pay  a  premium,  which  takes  the  form  of  a  shared-­‐interest  in  the  company.  This  practice  is  very  common  and  has  been  proven  to   have   a   positive   impact.   Employees   are   interested   in   the   potential   future   success   of   the  company.  If  the  company  succeeds,  employees  get  rewarded  for  their  work.  

In   certain  parts  of   Europe   like   Spain  and   Italy,   stock  options  are   regarded  as   a  way   for  large   organizations   to   pay   high   compensation   to   their   top   managers   and   are   taxed  accordingly.  However,   this  policy  has  a  negative   impact   for   startups.   Stock  option  plans  serve  a  rather  different  and  more  labor-­‐friendly  purpose  for  this  ecosystem.  

 

Case  Study:  French  BSPCE  program  

BSPCE   (Bons   de   souscription   de   parts   de   créateur   d’entpreprise)   are   subscription   warrants  usually  cost-­‐free  for  employees  in  the  startup  standards.  These  warrants  give  the  possibility  to  the  employee  to  subscribe  during  a  pre-­‐determined  period  to  stocks  of  which  the  price  is  set  at  the  time  of  BSPCE  attribution.    

They  provide  more  favorable  tax  treatment  then  traditional  stock  options  both  for  the  company  and  the  employee.  

This  tool  has  been  met  with  great  success  in  the  entrepreneurial  community  and  according  to  the  2014  France  Digitale  Barometer31,  90%  of  startups  now  use  equity  instruments  with  30%  of  employees  owning  equity  

Between  GPs  and  LPs    

In  some  regions,  capital  gain  taxes  are  not  favorable  for  alignment  of  interests  between  VCs  and  their  investors.  In  Spain,  the  capital  gain  tax  scheme  can  discourage  potential  future  investment  teams  to  form,  as  a  fairly  high  proportion  of  their  gains  will  be  captured  by  the  state.    

When  they   invest   in  a   fund,  LPs  must  be  sure  that  venture  capitalists  will  be  rewarded  if   their  portfolio   companies   are   successful.   This   incentivizes   VCs   to   maintain   a   high   quality   level   of  advisory   to   their   companies.   If   potential   VCs   anticipate   that   a   very   large   part   of   their   value  creation   is  going   to  be  captured  by  public  agencies,   they  might  simply  choose  not   to  enter   the  market.                                                                                                                              31 http://fr.slideshare.net/FranceDigitale

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In   southern   and   Eastern   European   countries   where   the   investment   industry   is   still   in  early  development  and  in  need  of  momentum,  talented  investors  should  be  incentivized  to  gather  into  teams  and  invest  in  startups.  

Attractiveness  of  the  asset  class  

A   number   of   countries   in   Europe   have   engaged   in   creating   specific   tax   schemes   to   attract  individual  investors  to  invest  directly  or  through  funds  in  innovative  startup  companies.  

Case  Study:  French  FCPI  

Created   in   1997,   the   FCPI   (Fonds   Commun   de   Placement   dans   l’Innovation)   is   a   French  regulated   investment   vehicle   allowing   private   individuals   to   invest   in   venture   capital   with   a  fiscal   incentive   attached   to   it.   The   fiscal   incentives   are  designed   to   relieve  part   of   the  wealth  taxation  in  France.  

In   order   to   benefit   from   this   fiscal   relief,   the   FCPI   has   to   be   invested   for   at   least   60%  of   the  portfolio  in  innovative  SMEs  which  are  defined  as  follows:  

- either   granted   an   innovation   label   by  Bpi   France   (public   French   investment  bank)   following   a  certain  number  of  criteria  

- or  spending  a  significant  amount  in  R&D  

In  2012,  the  FCPIs  and  FCPI-­‐like  funds  have  collected  in  excess  of  EUR  638  million,  accounting  for   approximately   half   of   the   amount   raised   by   the   venture   capital   industry   that   year32   in  France.   Traditionally,   these   funds   are   distributed   by   Individual   Financial   Advisors   (IFAs),  private   banks,   and   other  wealth  management   institutions.   Below   are   key   figures   per   vintage  from  2008  to  2012.  

  Vintage  2008   Vintage  2009   Vintage  2010   Vintage  2011   Vintage  2012  

Number  of  VCs   33   38   38   39   34  

Number  of  subscriptions  

145’000   135’000   124’000   91’000   83’000  

Average  subscription  

7’780   6’650   6’700   8’100   7’560  

Total  raised   1’129   898   835   736   628  

Total  vehicules  launched  

87   102   90   109   83  

Source:  AFIC,  AFG,  2013  

 

                                                                                                                         32 Source : EVCA

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Even   if   they   are   beneficial   to   French   investments   in   tech   startups,   FCPI   may   present   some  weaknesses   regarding   the   structural   impact   on   the   digital   economy   in   terms   of   investment  timing  constraint  and  shorter  duration  of  FCPI  vehicles.  

The  main  liability  of  an  FCPI  fund  is  materialized  by  its  constraint  to  invest  100%  of  the  capital  collected  within  two  years  after  closing,  regardless  of  the  available  deal  flow.  The  result  of  this  constraint  is  that  it  forces  VC  managers  to  invest  rapidly  even  if  there  is  not  sufficient  quality  in  the   deal   flow.   Two   years   might   be   too   short   to   manage   a   quality   deal   flow   and   to   identify  enough  high  potential  startups  for  the  portfolio.  There  is  not  enough  time  for  the  VC  manager  to  diversify  in  an  optimal  way,  therefore  leading  to  higher  risk  in  the  portfolio.  

Management   fees   on   such   vehicles   are   calculated   on   assets   under   management   and   not  commitments  in  the  fund,  which  have  led  in  some  cases  to  “zombies”,  companies  that  are  kept  alive   even   if   they   should   be   liquidated.   Conversely,   industry   standards   (ex-­‐FCPI)   have   set  management   fees   at   a   percentage   of   commitments   under   management   in   order   to   align  interests  between  VC  managers  and  investors.  

Benoit   Grossman,   General   Partner   at   Idinvest,   one   of   the   highest   performing   and   most  acclaimed  FCPI  managers,  believes  that  the  industry  has  adapted  and  investments  are  now  run  smoothly  with  FCPIs  as  with  any  other  investment  vehicle.  

Despite   its  weaknesses,   the  main  objective  behind  FCPIs  of  pouring  private  savings   to   supply  innovative   SMEs  with   capital   is   a   step   in   the   right   direction   to   improve   the   VC   landscape   in  France.     This   effort   is   well   regarded   across   Europe   according   to   our   interviews,   even   if   the  specifics  of  the  policy  can  still  be  improved.  

 Case  Study:  Enterprise  Investment  Scheme  in  the  United  Kingdom  

The  British  Enterprise  Investment  Scheme  (EIS)  was  launched  in  1994  and  is  designed  to  help  small   high-­‐risk   companies   raise   funds   by   offering   a   range   of   tax   reliefs   to   investors   who  purchase  new  shares  in  those  companies.  

Certain   rules   have   to   be   followed   in   order   for   this   tax   relief   to   apply,   not   only   at   the   time  of  investment  but  also  three  years  afterwards.  

When   investing   in   private   equity   companies   under   this   policy,   individuals   can   expect   the  following  benefits:  

- Income  tax  relief  - Capital  gains  tax  exemption:  investors  who  have  received  income  tax  relief  (which  has  

not   subsequently   been   withdrawn)   on   the   cost   of   the   shares,   and   the   shares   are  disposed   of   after   they   have   been   held   for   a   qualifying   period,   any   gain   is   free   from  capital  gains  tax  

- Share   loss   relief:   if   the   shares   are   disposed   of   at   a   loss,   investors   can   elect   that   the  amount  of  the  loss,  less  any  income  tax  relief  given,  can  be  set  against  income  of  the  year  in  which   the   shares  were   disposed   of,   or   any   income   of   the   previous   year,   instead   of  being  set  off  against  any  capital  gains.  

- Capital   gains   tax   deferral:   available   to   individuals   and   trustees   of   certain   trusts.   The  payment  of  tax  on  a  capital  gain  can  be  deferred  where  the  gain  is  invested  in  shares  of  

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an  EIS  qualifying  company.  The  gain  can  arise  from  the  disposal  of  any  kind  of  asset,  but  the  investment  must  be  made  within  the  period  one  year  before  or  three  years  after  the  gain  arose.  

According   to  Her  Majesty’s   revenue   and   custom  department,   since  EIS   tax   relief   scheme  was  launched   in   1994,   over   18’500   companies   have   benefited   from   the   scheme   and   over   £   8.6  billion  have  been  raised  (as  of  2012).  

 

Source:  www.hmrc.gov.uk,  2012  

In  2012,  the  government  launched  a  new  sub-­‐program  named  the  Seed  Enterprise  Investment  Schemes  (SEIS)  designed  for  companies  at  a  lower  stage  of  maturity  seeking  seed  investments.  The  SEIS  aims  to  help  small,  early-­‐stage  companies  to  raise  equity  finance  by  offering  a  range  of  tax  reliefs  to  individual  investors  who  purchase  new  shares  in  those  companies.  It  complements  the  existing  Enterprise  Investment  Scheme  (EIS).  

As   a   result   of   these   successful   policies,   the   United   Kingdom   has   now   the   highest   number   of  business  angels  in  Europe.  However,  one  of  the  drawbacks  of  massive  new  money  inflow  is  the  large  proportion  of  “dumb  money”  it  pours  into  the  startup  scene.  In  some  cases  capital  without  the  expertise   that  a   “super  angel”  or  a  professional   investor   could  bring  may  have  a  negative  impact  in  future  funding  rounds  and  the  future  growth  of  the  company.  However,  coupled  with  crowdfunding  platforms  which  offer  the  right  level  of  legal  and  investment  handrails,  this  type  of  program  spread  to  the  rest  of  Europe  could  strongly  be  beneficial  to  other  ecosystems.    

As   another   positive   effect   of   the   policy   program,   EIS/SEIS   is   a   driver   for   successful  entrepreneurs   to   remain   on   land   once   they   have   exited   their   companies   to  make   new   angel  investments.  

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Action  plan  recommendation  

With   regards   to   the   stated   conclusions   of   the   report,   the   Web   Investors   Forum   has   set   the  following  recommendations  in  a  4-­‐step  action  plan  to  develop  the  European  financing  scene  and  allow  better  financing  of  European  quality  entrepreneurs.  

Policy  1:  Boost  the  European  exit  market  

Purpose   The   European   exit   market   is   the   most   challenging   obstacle   faced   by   venture  capitalists  in  Europe.  European  Corporations  should  be  incentivized  to  make  more  acquisitions  and  increase  their  willingness  to  innovate  through  external  means.  

This   is  a   crucial  point  because  exits  generate  a  huge  amount  of  positive   feedback  within   the  European  startup  ecosystem.  They  allow  entrepreneurs   to  cash-­‐in  and  become   angels   or   repeat   the   entrepreneurial   process   and   build   new   startups.  Moreover,   they  allow  VCs   to  gain   substantial   success  and  keep  raising  new   funds  towards  private  institutions  and  individuals.  

9  out  of  10  European  startups  are  acquired  by  foreign  buyers,  among  which  a  large  proportion  comes  from  the  US.  

Examples  (how?)  

The  exit  environment  is  a  crucial  part  of  any  startup  ecosystem  and  must  be  supported.    

• Incentivize   European   corporations   to   invest   in   startups   and   acquire  knowledge   through   external   VCs   or   accelerators   by   replicating   and  tweaking  initiatives  such  as  the  French  “Corporate  Venture  Plan33”.  

• More   favorable   conditions   for   tech   IPOs   could   be   developed   throughout  Europe  as  a  secondary  target.    The  best  means  would  be  to  create  demand  incentives   (i.e.   tax   efficient   investment   vehicles   dedicated   to   listed   tech  companies).   The   objective   of   better   conditions   for   IPOs  would   be   to   give  more  financing  options  for  later  stage  companies,  and  more  exit  options  for  VCs  and  entrepreneurs.    

Time   to  impact  

Without  action,  we  estimate  the  time  for  a  virtuous  acquisition  ecosystem  to  build  itself  in  10  years.  

With   high   impact   incentives   programs,   we   estimate   this   period   to   be   radically  shorter,  showing  improvements  in  to  5  years  to  8  years.  

Comments  and   how  to  implement  

This  could  be   implemented  through  dedicated  policy  programs  with   the   initiative  of  the  European  Commission  under  directives  to  unlock  the  European  exit  market  with  huge  positive  impact  potential.  

 

   

                                                                                                                         33 http://www.economie.gouv.fr/corporate-venture-financer-innovation

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Policy  2:  Reduce  equity  shortage  

Purpose   Everywhere   in  Europe,   equity   shortages   appear   at   various   stages   of   a   company’s  lifecycle.    

The   pan-­‐European   ecosystem   and   more   specifically   developed   industries   from  North  and  Central  Europe  are  witnessing  a  shortage  of  capital   for  companies  that  have   the   potential   of   becoming   large-­‐scale   Global   leaders.   Very   few   companies  make  it  to  the  EUR  10-­‐50  million  funding  landmark  as  only  a  handful  of  European  funds   are   able   to   provide   this   level   of   capital.   The   consequence   of   this   lack   of  capital  for  more  mature  startups  is  an  important  number  of  premature  sell  offs  for  companies  that  could  have  had  the  potential  to  grow  further  before  an  acquisition.  In  Southern  and  Eastern  Europe,  equity  shortages  appears  at  an  earlier  stage,  with  a  low  number  of  funding  rounds  in  the  EUR  1-­‐10  million  range.    

The  following  recommendations  aim  at  reducing  this  equity  shortage.  

Examples  (how?)  

• Redirect   European   household   savings   towards   innovative   companies  financing  through  adjustments   in  Basel   III  and  Solvency  II  regulations  and  tax  efficient  investment  vehicles.  

• Support   the   creation   or   expansion   of   public   driven   fund   or   funds   in  Southern   and   Eastern   Europe.   Public   funds   are   not   a   tool   traditionally  employed   by   local   governments.   However,   it   has   been   proven   to   be   an  efficient   means   of   creating   momentum   for   young   industries   or  reestablishing   balance   in   local   financing   chains,   as   was   the   case   in  Barcelona.    

• Support  the  creation  of  pan-­‐European  later-­‐stage  capital  funds  dedicated  to  internet-­‐driven   and   software   companies   which   are   crucial   for   creating  global  leaders.    

• Empower  smart  business  angels   through   further   support  of   the  European  Investment   Fund   (EIF),   angel   co-­‐investment   program   in   terms   of   capital  and   closing   of   agreements  with   local   counterparts.   Smart   business   angels  who   are   capable   of   adding   a   significant   amount   of   non-­‐financial   value   to  their  portfolio  companies  should  also  be  empowered.  

• Support   the  creation  of  a  small  number  of   later  stage  capital   funds  with  a  pan-­‐European  focus.  

• Support   the  organization  of   a   large-­‐scale  pan-­‐European  event  with   strong  involvement  of  top-­‐tier  public  representatives  such  as  Vice  President  Neelie  Kroes,   aiming   at   promoting   the   potential   of   internet   and   mobile   tech  companies   to   potential   limited   partners   (pension   funds,   Corporates,  insurance  companies,  banks,  family  offices,  etc.)  and  connecting  them  with  general  partners.  

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Time   to  impact  

Gradual  raise  in  investments  from  year  1,  up  to  5  years.  

Comments  and   how  to  implement  

For  each  countries,  the  Web  Investors  Forum  could  engage  local  VC  communities  in  order  to  measure  the   local  equity  shortage  and  drive  the  creation  of  either  public  fund  of  funds,  and/or  later  stage  direct  investment  funds.  

Smart   business   angels   should   be   empowered   everywhere.   The   European  Commission  could  grant  a  mandate  to  the  EIF  to  invest  with  smart  angels  according  to  the  existing  guidelines  of  their  program  under  trial.  This  mandate  should  come  along  with  support  to  find  local  counterparts  to  the  EIF.  The  Web  Investors  Forum  is  ready  to  help  in  the  primary  identification  of  potential  local  smart  angels.  

Later  stage  capital  funds  creation  could  be  supported  by  the  European  Commission  through  dedicated  envelopes  in  addition  of  private  and  other  public  capital  inflow  in  new  funds.  

 

Policy  3:  Strengthen  the  integration  and  coordination  of  European  tech  hubs  

Purpose   Currently  in  Europe,  tax  treatment  and  the  marketability  of  investment  vehicles  are  very  heterogeneous  across  countries.  

A   pan-­‐European   tax   transparent   investment   vehicle,   marketable   internationally,  would  be  considered  by  the  Venture  Capital  community  as  a  major  achievement.  If  an   effort   were   put   in   to   place   to   create   such   vehicle,   the   Web   Investors   Forum  would  be  ready  to  engage  with  the  entire  community  in  consultations  and  support  of  the  European  Commission  with  expertise  in  the  field.  

A   VC   that   invests   internationally   is   always   of   good   value   to   an   entrepreneur.  However,   only   a   very   limited   number   of   investors   work   outside   their   local  environment.  In  order  to  support  coordination  between  ecosystems,  the  European  Commission  should  support  the  creation  of  pan-­‐European  GPs  with  enough  critical  mass  to  be  able  to  invest  globally.  

Examples  (how?)  

Create  simpler,  uniform  tax34  and  legal  environments  between  hubs  through  the   European   Commission’s   dedicated   startup   directives   by   leveling   up   the  frameworks  according  to  European  best  practices  in  terms  of:  

• Attractiveness   of   the   VC   profession:   In   southern   and   eastern   countries  where   the   investment   industry   is   still   in   development   and   in   need   of  momentum,  talented  investors  should  be  incentivized  to  gather  into  teams  and  invest  in  startup  companies.  

• Alignment   of   interest   between   VCs,   founders,   and   employees   (dedicated  

                                                                                                                         34 http://startupmanifesto.eu/files/manifesto.pdf

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startup   stock   option   plans   and   more   generally   employee-­‐ownership  taxation)  

• Attractiveness   of   the   asset   class   for   institutional   and   individual   investors  (tax   incentives   on   investments   in   VC   by   individuals,   corporates,   banks,  insurance  companies,  pension  funds,  etc.)    

• Attractiveness   to   invest   in   startups   as   seed   investors:   EIS/SEIS-­‐like  programs  

Time   to  impact  

Gradual  raise  in  investments  from  year  1  up  to  5  years.  

Comments  and   how  to  implement  

If  these  issues  were  addressed  (and  above  all  for  the  pan-­‐European  tax  transparent  investment  vehicle),  the  venture  capital  community  in  Europe  would  consider  it  a  huge  achievement.  

The   Web   Investors   Forum   is   ready   to   gather   the   VC   community   to   work   on  consultations  with  the  European  Commission  to  work  on  these  specific  issues  and  deliver  top-­‐tier  solutions.  

 

Policy  4:  Grow  public  and  private  involvement  in  the  industry  

Purpose   The  interviews  and  workshop  have  demonstrated  a  lack  of  dialogue  between  large  Corporations   and   the   startup   world.   A   pathway   to   further   involvement   of  corporations  and  the  public  sector  in  digital  startups  across  Europe.      

Corporations  could  be  the  engine  to  power  a  faster  evolution  of  the  European  ecosystem.  

Examples  (how?)  

• Incentivize  European  Corporates  to  invest  in  external  accelerators,  venture  funds,   or   co-­‐working   spaces   in   order   to   foster   platforms   pooling   several  Corporates   rather   than   internal   structures   that  usually  do  not   result   from  long-­‐term   Corporate   strategy.   For   example,   this   could   be   done   through  Private  Public  Partnership  such  as  the  High  Tech  Gründerfonds  in  Germany  that  could  be  generalized  to  every  country  and  supported  by  the  European  Commission  or  dedicated  tax  relief  schemes.  

• Push   the   “Small   business   act   for   Europe35”   further   by   integrating  procurement  measures  

• Work   towards  a  Small  Business  Act-­‐like  agreement  between  Corporations  and  startup  representatives  

Time   to  impact  

5  years  

Comments   Local   replicates   of   the  High  Tech  Gründerfonds  would   also  bring  high   value:   this  

                                                                                                                         35 http://ec.europa.eu/enterprise/policies/sme/small-business-act/index_en.htm

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and   how  to  implement  

could   be   implemented   through   envelopes   of   capital   unlocked  by   the  Commission  for   this   purpose   with   selection   of   local   public   counterparts   to   manage   these  envelopes  and  engage  with  local  Corporates  community.  

 

 

   

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Conclusion    

Since  May  2013,  France  Digitale  has  been  working  on  this  report,  as  a  final  step  in  the  mandate  entrusted   upon   us   by   the   European   Commission.   After  meeting   44   investors   among   the  most  active   in  seven  countries  and  engaging   the  entire  community  of  European   investors  and  other  stakeholders  during  an  exclusive  workshop  in  Paris,  we  have  been  able  to  pinpoint  the  current  most   significant   challenges   met   by   the   venture   capital   industry.   If   these   challenges   are  addressed   correctly,   it   could   significantly   boost   European   investments   in   digital   startups   and  structurally  feed  a  virtuous  cycle.  

After   a   number   of   difficult   years   following   the   financial   turmoil   of   2008,   European   VC   is  recovering  and  beginning  to  rebuild.  The  community  agrees  that  now  is  the  ideal  time  to  invest  and   build   companies.  More   success   stories   are   emerging,  more   role  models   are   being   created  and  more  quality  companies  are  getting  the  funds  they  need  to  succeed.      

However,   in   order   to   create   global   leaders,   the   young   European   industry   needs   to   focus   on  maturing   through   the   formation   of   a   truly   Pan-­‐European   comprehensive   ecosystem   that   will  structurally  feed  itself.      

The   effort   to   create   a   better   funding   environment   in   Europe   must   start   at   the   end   of   the  financing  lifecycle.  The  exit  environment  in  Europe  is  currently  not  working  in  startups’  favor.  A  better  exit  environment  would  create  more  success  stories,  and  substantial  new  money  inflows  into  innovative  European  startups  with  the  potential  to  be  global  leaders.      

The  European  financing  landscape  is  currently  unbalanced.  Later  stage  capital  we  need  to  create  Global   leaders   is  missing.  Governments  should  put  substantial  effort   in  to  building  up  a  strong  venture  capital  industry  capable  of  growing  world-­‐class  companies.  

Coordination  between  ecosystems  of  varying  maturities  should  also  be  strengthened,  as   it  will  create  the  first  step  to  a  true  European  startup  ecosystem.  Less  mature  ecosystems  will  benefit  from   their   more   developed   neighbors,   and   mature   hubs   will   benefit   from   better   exchanges  amongst  one  another.    

Finally,   European   corporations   should   play   a   real   role   in   the   startup   ecosystem.   A   number   of  stakeholders   in   the   startup   world   have   an   unfortunately   pessimistic   view   of   the   European  Corporations  from  traditional   industries.  A   large  number  are  now  turning  to  the  US  to  explore  exit  options  or  to  SMEs  to  sell  their  services  outside  of  Europe.  We  need  corporations  to  play  a  bigger  part  in  fostering  our  innovative  startups  via  investment,  incubators  and  shared  expertise.    Better   awareness   and   coordinator   of   startups   and   corporations   within   our   community   will  positively  impact  the  entire  ecosystem.  

Entrepreneurship  provides  a  pathway   for  our   talented  and  bright  Europeans   to  build   the  next  leading  global  organization.  As   the  European  startup  ecosystem  continues   to  grow,   the   time   is  now   to   foster   these   entrepreneurs   via   the   capital   they   need   in   order   to   succeed.   As   a   pan-­‐European   institution,   the   European   Commission   could   be   instrumental   in   designing   the   best  environment   to   challenge   the   World’s   leading   ecosystems.   We   appreciate   the   current   efforts  

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made  by  the  Commission  in  implicating  ecosystem  players  to  bring  European  entrepreneurs  to  the  next  level,  and  the  Web  Investors  Forum  will  continue  to  serve  this  purpose.  

 

   

 

 

 

 

 

 

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European  Commission      Web  Investors  Forum  Luxembourg,  Publications  Office  of  the  European  Union    2014  –  49  pages        978-­‐92-­‐79-­‐39285-­‐6  10.2759/64203  

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         10.2759/64203                                              978-­‐92-­‐79-­‐39285-­‐6