European Venture Capital Woes
Each year, hundreds of promising entrepreneurs set up their booths at the European Investment Fund (EIF) in Luxembourg in hopes to attract a venture capitalist that will give them enough money to start the new Facebook. The EIF is a body funded by the European Union. Europe has struggled over the years in gaining the quality and quantity of venture capital that we see in Silicon Valley. This is very frustrating to European policy makers because they see venture capital as a great way for job creation; however, investors tend to focus their capital in safer entities like pension funds, banks and billionaires. Europe’s business environment is considered very hostile, and thus a riskier investment for venture capitalists when looking at a European startup company. To combat this hostile business environment, the European Union has leaned towards replacing venture capitalists with state funded bureaucrats. Almost 40% of venture capital funds came from state-backed sources, which is a 25% increase from 2007.
This generous bump in European’s taxpayers money going towards venture capital is still thought to not have a chance to attract the vast sums of capital know by American venture capitalists. Venture capital in the United States is seen to have a 13% return, where Europe’s venture capital industry has been seeing an average of 2.1% every year since 1990.
Private investors are not fans of investing into companies that have government ties. They worry that they are political goals at hand when investing alongside government entities, when all that private investors care about is turning a profit. Studies show that for every dollar put into companies by the government, a private investor takes out one dollar.
European companies are said to sell too early because of government conservatism. Governments would rather gain what they put in plus a little more so as to make a “good deal” and use that money for other government activities. Private investors like keeping their investment in for a possible long run gain and roll the dice after returning on their investment.
Various European startups have had successful launches with their initial public offerings (IPO). King.com, the makers of Cnady Crush Saga, and Criteo, and advertising technology firm and two examples; however, these companies are backed by both American and European VC. Spotify is the European VC poster child, but still many early European entrepreneurs don’t even consider starting their business in the EU and are flocking to Silicon Valley.