Boosting Digital Startup Financing in Europe by France Digitale

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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:

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.

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.

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

b. 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 sectors). For the same

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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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)

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

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

http://www.nvca.org/index.php?option=com_content&view=article&id=257&Itemid=103

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reputation within the European money management community. This creates an ever-higher

degree of public fundings 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.

9 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 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.

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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 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

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

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

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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

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

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

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

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Time to

impact

5 years

Comments

and how

to

implement

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

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.

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 ................................................................................................................. 16

Mapping the European funding landscape ................................................................ 18 Methodology ..................................................................................................................................................................... 18 2013 Analysis ................................................................................................................................................................... 19

Venture capital funding per industry .......................................................................................................................... 19 Investments distribution in European ICT ................................................................................................................ 20 Focus: Software, internet-driven and mobile tech companies......................................................................... 21

Outlook for 2014 ............................................................................................................................................................. 25

Current status of the European VC industry .............................................................. 27

Post-interviews and workshop conclusions .............................................................. 28 The European Exit market is the most critical issue ........................................................................................ 28

Trade Sales............................................................................................................................................................................... 28 The IPO market ...................................................................................................................................................................... 30 Private equity ......................................................................................................................................................................... 31

An unbalanced European financing value chain ................................................................................................ 32 Promoting Internet and mobile tech venture capital to LPs ............................................................................ 32 Explanatory elements ......................................................................................................................................................... 34 Present challenges ................................................................................................................................................................ 37 Difference between regions .............................................................................................................................................. 38

Insufficient coordination between European Tech Hubs ............................................................................... 41 Tax & legal environment needs to be improved (adapted) in certain geographies ............................ 42

Between entrepreneurs and employees ..................................................................................................................... 42 Between GPs and LPs .......................................................................................................................................................... 42 Attractiveness of the asset class ..................................................................................................................................... 43

Action plan recommendation ..................................................................................... 46

Conclusion .................................................................................................................... 52

Activities ....................................................................................................................... 54 Roadmap (Deliverable 1) ............................................................................................................................................. 54 Brand .................................................................................................................................................................................... 55 Modern VC info Kit (Deliverable 2) ......................................................................................................................... 55 Building knowledge on the European VC activity: the report (deliverable 3) ...................................... 56

Dataset selection: mapping the activity ..................................................................................................................... 56 Engaging with the European VC community........................................................................................................... 56

The workshop: Web Investors Forum in Paris (Deliverable 3) ................................................................... 57 The final report (deliverable 4) ................................................................................................................................ 58 Reporting activities ........................................................................................................................................................ 59

Appendix ...................................................................................................................... 60 Workshop attendees ...................................................................................................................................................... 60

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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.


396

1203

3651

583

136

583

Cleantech

Life Sciences

IT

Venture Capital funding in Europe (2013)

Number of deals Amount (in USD)

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


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.


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

21

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).


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.

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.

93

70

24

711

5

21

52

58

22

37

1

19

9

1917

02

0

6

03

1 0 1 02

0

10

20

30

40

50

60

70

80

90

100

France UK Germany Italy Spain Portugal Nordics

Number of deals per country

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

22

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

Am

ou

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bu

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ls (

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an

)

0

200

400

600

800

1000

France Germany Spain Nordics UK Portugal Italy

0

50

100

150

200


0

2

4

6

8

10

12


0

5

10

15

20


0

5000

10000

15000

20000

25000

30000


23

Nu

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0

1

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24

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.

25

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


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,

26

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:

- 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.

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

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

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

27

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

28

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

29

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

30

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/

31

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.

32

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

33

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 PEhouses other than fund of funds)

Insurance companies

Government agencies

Fund of funds

Family offices

Endowments and foundations

Corporate investors

Capital markets

Banks

Academic institutions

34

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

35

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.

36

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

37

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.

38

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

counterparts, which has slowed down the expansion process.

39

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).

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

40

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

41

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.

42

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

43

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

44

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

45

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.

http://www.hmrc.gov.uk/

46

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

48

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.

49

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.

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

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

50

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

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

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

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

51

Comments

and how

to

implement

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

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.

52

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 made by the

53

Commission in implicating ecosystem players to bring European entrepreneurs to the next level,

and the Web Investors Forum will continue to serve this purpose.

54

Activities

France Digitale was contracted by the European Commission to lead the Startup Europe Web

Investors Forum initiative. We have been working since May 2013 to launch this program with

the following main missions:

- Bringing together the European VC community and work together on unveiling current challenges faced in startup investing throughout the continent

- Mapping investments in internet and mobile tech companies - Gathering European success stories to promote internet and mobile tech as investments - Creating the basis for the creation of a long-term European partner structure:

o The web investment forum will be a prime interlocutor for matters related to startup investing

o Action and success stories will be promoted through a web platform.

Roadmap (Deliverable 1)

The first task executed by France Digitale was to set a roadmap which was approved by the

European Commission and updated along the way.

This roadmap served as basis of reporting during the whole duration of our contract with the

European Commission.

55

Brand

The second step was to build an identity for the Web Investors Forum. This was done through a

logo created by Davy Peter Braun36 a French freelance designer.

The short name for the Web Investors Forum is WIF. The letters are slightly directed upwards

which relate to the growth seeked by startup companies and their investors and the color blue

was used to remind that it is a program initiated by the European Commission.

Modern VC info Kit (Deliverable 2)

One of our key deliverables was the creation of a modern VC info-kit in the form of a website. The

website was launched in September 2013 with the following URL: www.webinvestorsforum.eu

and contains:

- A presentation of the WIF’s activities and stakeholders - A sound database containing details on European success stories - Some relevant research and publications - Links to future events

36 http://blog.davybraun.com/

http://www.webinvestorsforum.eu/

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Building knowledge on the European VC activity: the report (deliverable 3)

Dataset selection: mapping the activity

The first step of building our report was completed through an assessment of various types of deal

data throughout Europe:

- EVCA - Local venture capital association - Traditional databases - Data obtained through crowdsourcing and crawling

The first three databases have shown to be insufficient as they all rely on the “goodwill” of venture

capitalists to fill in their information.

For deal tracking and data homogeneity purposes, we have selected Digimind’s

whogotfunded.com database paired with Crunchbase.

Whogotfunded.com is Digimind text-mining solution for worldwide

monitoring of funding activities. Whogotfunded.com obtains data

by crawling methods out of public data obtained on various

websites such as the American SEC, social networks (Facebook,

Twitter, etc.), and media, and works under the hypothesis that

whenever a company gets funded, the information is generally communicated.

Digimind was founded in 1998 and is a leading solution provider for SocialMedia Monitoring, e-

reputation and strategic watch. Digimind is present on 4 continents and benefits from 15 years of

experience operating in a variety of industry.

Whogotfunded.com will not trace 100% of deals throughout Europe as a very small proportion

are never made public, but has however demonstrated to be the most comprehensive source of

data for funding, as deal numbers are always higher then for the other databases (EVCA and local

venture capital association). Whogotfunded.com publishes data in USD.

The dataset obtained with the agreement of Digimind was analysed,

validated and completed by Clipperton Finance, a European investment

banking firm specializing in technology.

In addition to whogotfunded.com’s dataset, we have used Crunchbase.com, a US-based

crowdsourcing platform for information about startup companies.

Engaging with the European VC community

For the purpose of this report, our approach was to include the European VC community and

obtain their specialist insights on their local ecosystem in France, the United Kingdom, Germany,

Sweden, Italy, Spain and Portugal.

We have worked together with the European Investment Fund (EIF) to determine a list of

European active Venture Capital firms in the digital fields that we estimate at 100 firms.

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We have travelled in each of the countries of focus (and more) and interviewed partners of the

following 44 venture capital institutions:

France

Elaia Partners

Sweden

Creandum

360 Capital Partners Northzone

Partech Ventures MOOR Capital

ISAI

Spain

Caixa Capital Risc

Alven Capital Nauta Capital

Idinvest Adara

Ventech Active Venture

Partners

United

Kingdom

DN Capital Inveready

Balderton Kibo Ventures

Accel Partners Cabiedes Partners

Connect Ventures Inspirit

Profounders Capital

Italy

United Ventures

Index Capital H-Farm

Dawn Capital 360 Capital Partners

Highland Capital Partners Innogest

Seedcamp dPixel

Germany

Acton Capital Programma 101

BDMI

Portugal

Portugal Ventures

Holtzbrinck Ventures Pathena

Point Nine Capital Faber Ventures

Caixa

Wellington Partners Eastern

Europe

LAUNCHub

Earlybird RSG Capital

Interviews were conducted for two main purposes:

- To obtain the best quality insight on the local VC and startup ecosystem scene - To connect with VC partners to evangelize on the Web Investors Forum’s mission and

future events.

The collection of these 44 interviews has allowed us to provide the Commission with the best

possible information on local as well as pan-European activity and challenges, and prioritize

recommendations for an action plan discussed with the entire industry during a workshop session

in June 2014.

The workshop: Web Investors Forum in Paris (Deliverable 3)

With the approval of the European Commission (DG CNECT) and after the validation of the pre-

workshop report (deliverable 2), we have organized a high-end workshop in the heart of Paris on

June 11th 2014 during our main event the France Digitale Day.

The main event gathered over 1200 participants including press (France TV, BFM TV, Canal+, Les

Echoes, Challenge, l’Express).

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The program of the main event is available under the following URL:

www.francedigitale.org/day2/program

The workshop was recognized by participants as “one of the best panels of speakers we’ve seen

in the VC industry for quite awhile” with a total of 28 speakers on 7 round tables spanning all the

major issues pinpointed in our report: investors, corporates, business angels, IPOs, public funds,

European Commission representatives.

All conclusions and recommendations were validated during the workshop by our panelists,

noting the quality and pertinence of our selected methodology.

The list and details of the attendees is available in annex I of the present document. Via the Web

Investors’ Forum we have been able to build a relationship of trust with European VCs that we

would like to see kept on the long run.

The workshop was closed by a high-end dinner cocktail at the Elysée (French Presidential palace)

with the presence of the French President of the Republic Mr. François Hollande and 200 selected

guests among which all the invited venture capitalists and business angels, as well as corporates

and French ecosystem representatives such as Xavier Niel.

The workshop’s content and organization have been very well received by the European investors

community. The content is available on the following link:

www.francedigitale.org/day2/workshopEIF.

Links to the workshop videos:

Channel: https://www.youtube.com/channel/UCJR0IZ23AuRTXQsvWID7Jsw

Panel 1: https://www.youtube.com/watch?v=wZhPnefCyVE

Panel 2: https://www.youtube.com/watch?v=KyrHi_qFN-E

Panel 3: https://www.youtube.com/watch?v=EQVhF8xrkWQ

Panel 4: https://www.youtube.com/watch?v=vBwcOd5lnmc

Panel 5: https://www.youtube.com/watch?v=5Sm9HhclV1E

Panel 6: https://www.youtube.com/watch?v=9m63N9LaZpg

Panel 7: https://www.youtube.com/watch?v=rNc20Npkx9g

The final report (deliverable 4)

The present final report gathers the entire effort throughout the duration of the contract to create

awareness on the current venture capital activity and challenges across Europe. The content and

recommendations are the result of conclusions drawn upon quantitative analysis of deal data and

qualitative interviews with 44 European VCs validated by the June 11th workshop.

http://www.francedigitale.org/day2/program

http://www.francedigitale.org/day2/workshopEIF

https://www.youtube.com/watch?v=wZhPnefCyVE

https://www.youtube.com/watch?v=KyrHi_qFN-E

https://www.youtube.com/watch?v=EQVhF8xrkWQ

https://www.youtube.com/watch?v=vBwcOd5lnmc

https://www.youtube.com/watch?v=5Sm9HhclV1E

https://www.youtube.com/watch?v=9m63N9LaZpg

https://www.youtube.com/watch?v=rNc20Npkx9g

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Reporting activities

A bi-weekly reporting call during the entire duration of the contract has been set with the

European Commission DG CNECT unit responsible for our mandate. This reporting call has

allowed for continuous improvements and discussions to align the interests of the European

Commission with the approach and activities led by France Digitale for the Web Investors Forum.

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Appendix

Workshop attendees

(Please refer to the WIF coordinator for communications).

Company Name Position Country E-mail

LAUNCHub Stephane Gantchev Partner Bulgaria [email protected]

European Investment

Fund

Pier Luigi Gilibert CEO Europe [email protected]

European Investment

Fund

David Dana Investment Manager Europe [email protected]

European Investment

Fund

Patric Gresko Head of Unit venture capital Europe [email protected]

European Investment

Fund

Praveenjothi

Paranjothi

Investment manager Europe [email protected]

BDMI Jan Borgstadt General Partner Germany [email protected]

Acton Capital Partners Jan Gisbert Schultze Managing Partner Germany [email protected]

Holtzbrinck Ventures Christian Saller Partner Germany [email protected]

BDMI Tobias Schirmer Principal Germany [email protected]

Point Nine Rodrigo Martinez Investor Germany [email protected]

Innogest Claudio Giuliano Partner Italy [email protected]

360 Capital Partners Fausto boni General Partner Italy [email protected]

dPixel Gianluca Dettori General Partner Italy [email protected]

United Ventures Paolo Gesess Managing Partner Italy [email protected]

P101 Andrea Di Camillo General Partner Italy [email protected]

H-Farm Ventures Timothy O'Connell Partner Italy [email protected]

Mind the bridge Alberto Onetti Head Italy [email protected]

Portugal ventures José Da Franca Chairman and CEO Portugal [email protected]

Pathena Antonio Murta Managing Partner Portugal [email protected]

RSG Capital Tatjana Zabasu Partner Slovenia [email protected]

Nauta Capital Carles Ferrer General Partner Spain [email protected]

Cabiedes Partners Luis Martin Cabiedes Partner Spain [email protected]

Active Venture Partners Ricard Soderberg Partner Spain [email protected]

Inspirit Roque Velasco Partner Spain [email protected]

Lakestar Klaus Hommels Managing Partner Switzerlan

d

[email protected]

Index Dominique Vidal Partner UK [email protected]

Advent Venture

Partners

Frederic Court General Partner UK [email protected]

Dawn Capital Haakon Overli Partner UK [email protected]

Index Martin Mignot Principal UK [email protected]

DN Capital Nenad Marovac Managing Partner UK [email protected]

mailto:[email protected]






























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Accel Partners Philippe Botteri Partner UK [email protected]

Connect ventures Sitar Teli Partner UK [email protected]

DN Capital Thomas Rubens Principal UK [email protected]

Seedcamp Carlos Espinal Partner UK [email protected]

Accel Partners Philippe Botteri Partner UK [email protected]

Adara Venture Partners Nico Goulet Managing Partner Spain [email protected]

Gemalto Martin Mccourt Executive Vice President M&A and

Strategy

France [email protected]

Orange Nathalie Boulanger Head of Orange Startup Ecosystem France [email protected]

Telefonica Simon Devonshire Director Waya Europe Europe [email protected]

Bpi France Paul-François

Fournier

Head of Innovation France [email protected]

Bpi France Nicolas Dufourq CEO France [email protected]

COADEC Guy Levin Executive Director UK [email protected]

Enternext Eric Forest CEO UK [email protected]

ISAI Jean-David

Chamboredon

Partner France [email protected]

Elaia Partners Marie Ekeland Partner France [email protected]

Alven Nicolas Celier Partner France [email protected]

Beta-I Pedro Rocha Vieira Founder and President Portugal [email protected]














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

Boosting Digital Startup Financing in Europe by France Digitale

Investor Relations

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