Europe needs to create a new sovereign wealth fund to help it create big, global tech companies at the same rate as the US.
This is the conclusion of the World Economic Forum’s Innovate Europe Report, an annual exercise in analysing how to boost the European tech economy which came out this week.
Their idea is that this fund should be focused on supporting scaleup companies, where there is a dearth of funding compared to what there is in the US.
European scaleups had $22bn of new capital invested in them in 2017, which was a shocking eight times less than the US, according to Mind the Bridge’s Tech Scaleup Europe report.
Of course, the EU already has various investment funds, including plans for a new €100bn innovation fund, part of the Horizon Europe project. This would follow on from the Horizon 2020 programme, which has channelled some €78bn to European scientists and projects between 2014 and 2020. The European Investment Fund also provides funding by acting as a limited partner in some 179 European VCs.
European scaleups had $22bn of new capital invested in them in 2017, which was a shocking eight times less than the US
But much of this kind of money goes to early stage projects.
A scaleup fund like this might be particularly helpful if it could channel VC investment to neglected parts of the continent. At the moment some 90% of VC investment is concentrated in just eight EU member states.
The label “sovereign wealth fund” might be a something of a misnomer. Sovereign wealth funds are traditionally fund created to channel the oil or gas wealth of a commodity rich nation - like Norway or Saudi Arabia - into other industries. It helps diversify these countries’ economies and hedge against commodity price fluctuations. This is not strictly speaking what the EU would do - unless there are some secret EU oil reserves we don’t know about. Best, perhaps, to call it long-term investment fund. Whatever it is called, it would borrow the best feature of sovereign wealth funds, which is their ability to act as “patient capital”.
Rather than tap oil wealth the WEF report suggests that a European scaleup fund could channel the rich resources of institutional investors such as pensions and insurance fund. They currently invest very little in European VC, although in some regions, such as the Nordics this has begun to change. Pension funds now account for 16% of total VC funds raised in the Nordic region since 2013.
This chart from Atomico’s 2018 State of European Tech report shows in more detail how much that pension fund involvement differs across the region.