European venture capital | Venturecrats

Apr 19th 2012

Government money is propping up the industry.

EUROPEAN governments like venture capital: it smacks of innovation, entrepreneurship and growth. And venture capitalists have every reason to like European governments. Of the €4 billion ($5.3 billion) that firms from continental Europe and Britain managed to raise last year—half the 2007 total—around 40% came from government agencies (see chart). That is a big jump from pre-crisis days, when government funds provided 10% of new capital; and a lot more than European private-equity firms, which drew 8% of their funding from public sources in 2011.

Apart from tax incentives, governments support venture capital in two ways. One is to invest directly in nascent businesses through state-backed organisations such as Germany's High-Tech Gründerfonds, which funds technology start-ups. The other is to inject capital into privately managed funds. In the European Union that is accomplished mainly via the European Investment Fund (EIF), a development-finance body funded mostly by member states. This pumped about €1 billion into venture and growth capital in 2011, a record.

“The private sector is very sceptical of venture capital in Europe,” says Jimmy Nielsen of Sunstone Capital, a Danish outfit whose latest funds relied on anchor investments from the EIF. No wonder: Europe's VC sector has offered negative returns for much of the past decade.

The amount of money going into VC has also plummeted in America, from $40 billion in 2007 to $12 billion in 2010, according to Dow Jones VentureSource, a data provider. But VC firms there are less dependent on government largesse. Public agencies (not including pension funds and sovereign-wealth funds) are thought to have accounted for no more than 3% of the 2010 total.

It helps that American funds tend to be much larger than European ones, so institutional investors can better justify the resources necessary to monitor and invest in them. Different rules also make it easier for American pension funds to own risky assets. One solution, the European Venture Capital Association reckons, is for banks and pension funds to invest alongside European states in large public-private funds of funds. These would spread risk by investing in many individual VC funds; profit would be weighted towards private investors.