Europeans are facing the arrival of American investment funds with mixed feelings.
Of course it’s exciting seeing the world's leading venture capitalists come in with their financial strength and professionalism. Many Europeans are fascinated by the American investment legends who have funded the greatest success stories of the past 20 years, kind of the same way some Americans are thrilled when football teams Manchester United or Real Madrid go on a US tour of friendly matches.
But this is not about mere exhibition games: European investors will actually have to compete with the world champions, albeit on their home turf, and along with the excitement comes apprehension.
The pressure induced by the arrival of American funds must not result in Europeans leaving the stage. Instead this wave of US investments should be seen as a unique opportunity for the European venture capital community to open up and up its game.
US money is definitely coming
It’s now a tangible reality that US funds are coming to Europe. We’ve calculated that 61% of French start-ups that raised €40m or more in the last three years have got some money from US venture capital funds. There’s more US-based investment in European startups overall and Americans are increasingly willing to step in as early as Series A rounds.
Like many others, Newfund Capital is experiencing this new wave first hand. In September, Flourish Ventures, Pierre Omidyar’s venture capital fund, made its first French investment in FairMoney, together with Newfund (we’d already invested in an earlier round).
Admittedly, this isn’t the first time that a surge of US venture capital investments has poured into Europe. US venture capitalists made a first entry in the mid-2000s — with, for instance, Tiger Global’s acquisition of Allociné in 2007 for over €100m — but that was abruptly brought to an end with the onset of the economic crisis and the pressure for liquidity at home.
This time the dynamics are different. American funds are drowning in cash and must search for new targets abroad. While China and Russia are difficult hunting grounds, because of geopolitical and legal hurdles, Europe is perceived as a land of opportunity; it’s similar in many ways to the US, but viewed as lagging 10 or 20 years behind, and blessed with a pool of unharvested talent.
A challenge all round
Still, the arrival of US venture capitalists is a challenge for both Americans and Europeans.
Americans must learn to navigate cultural and economic differences that strongly influence work habits. There’s no dominant cluster like Silicon Valley in Europe, but rather multiple hubs including Paris, Berlin, Frankfurt and London (which will probably soon no longer even be in the European Union). The specific political, legal and tax characteristics of each country introduce complexities that, combined with multiple languages and traditionally more limited funding, hinders startups’ ability to scale.
Europeans will also have to adapt.
Collectively they cannot afford to miss the opportunity that US venture capitalists bring. But for it to happen public policymakers must be clear about priorities and the game is clearly no longer about which governments provide the most public funding for startups. Instead of wasting scarce taxpayers’ money in direct equity investment or co-investment, the priority should be to forge a technological ecosystem that is capable of giving rise to world-leading high-growth companies.
There is a need for more EU integration and targeted changes to national legislations, such as support for academic and private research and a suitable tax and regulatory status for retail investment into corporate equity.
As for Europe’s incumbent venture funds, they need an upgrade to successfully be on par with their American colleagues. The new competition will be both humbling and stimulating.
Smaller funds are obviously pleased with the prospect of higher exits, but European heavyweights are typically less enthusiastic. How will they maintain their position against star investors who will aim to attract the best entrepreneurs?
For many funds this will probably require more sector-based specialisation in order to preserve a comparative advantage. Others will go global and set up a team in the United States, to learn from the best and offer entrepreneurs as good a deal as their American counterparts. That’s what Newfund has chosen to do.