European VC may be on the rise, but it still lacks the big ideas, writes Joseph Mariathasan
Venture capital (VC) should be a key driving force in revitalising the European economies, and, to some extent, that is happening. Exit activity, globally and in Europe, has been good, which gives investors confidence that VC works.
Performance has been good, Adveq’s Nils Rode tells me, but he also raises an issue worth exploring. While venture activity in Europe may be increasing dramatically, Europe appears to be falling behind in one key area – investing in big ideas, the breakthrough innovations and highly disruptive companies that are the areas most talked about in the media, and rightly so. That part of VC is mostly taking place in the US.
As Rode explains, in new areas such as machine learning or artificial intelligence, the US is clearly in the lead. On the life sciences side, about 40% of investments are about treating and curing cancer, and there have been some recent breakthroughs in fully curing cancers. A large part of that is taking place in the US, with some in Europe. Quantum computing, where Google announced a recent breakthrough in December showing it works, is all taking place in the US. Advances in robotics are all taking place in the US. Investments in space technology such as Space X is all US, along with electric cars such as Tesla.
For innovation and big ideas, the US is clearly leading, but it is Asia – particularly China – that is coming second, not Europe. China has many things going for it. For VC, it is very helpful to have a market that is huge and easy to scale. That has always been one big advantage of the US over Europe, and it remains so. It is much easier to scale a company in the US, which is one homogeneous market, than in Europe.
China has the largest market in terms of people and economic potential, and that is a big plus. If you look at technologies like mobile phones – the number of users, for example – China is leading and will always be leading. The US only has 400m people and won’t be able to catch up, Rode feels.
What is coming out of China so far is predominantly on the hardware side. Most of the smart devices and some of the e-players come out of China. In future, we will see much more activity on the software side and in other areas such as life sciences. What is required is strong government support with government-funded research and strong educational institutions. All of these things are in place in China, plus it is a big market and already very strong in technology.
The other Asian giant, India, is at a different stage of development, still 10 years behind China. Yet India also has many things that are very positive. Rode also sees huge long-term potential for India. It is currently the fastest-growing large economy, with great demographics and many well-educated, English-speaking people. Its strength in software shows India will play a huge role in VC in 10-20 years.
Where does that leave Europe? It certainly has the potential to produce disruptive technologies, but it hasn’t converted them into many large-scale businesses as yet. The culture within universities has certainly changed from my days doing research in physics at Oxford 30 years ago, when trying to generate commercial applications from research was actually frowned upon. But what has not developed is the risk-taking culture present in the US, where it is seen as acceptable to start something, fail and start again.
If you look at Europe, says Rode, there are some things that work – all types of locally focused companies, e-commerce and services including fintech. Life sciences are also strong. One area that is niche but works well in Europe is medical devices. This is helped by the regulatory environment, as it is easier to get approval for medical devices in Europe than in the US.
Venture funds are driven by the biggest hits. Historically, 7% of VC deals represent 50% of exits. Being in the biggest hits is very important, and, in the US, the biggest hits are much bigger companies than elsewhere – a $1bn or more.
In Europe, exit values tend to be lower. That is related to the fact there are more breakthrough technologies in the US that have the potential to create mega companies in the multi-billion valuation range. But European companies also tend to be exited earlier than US ones, Rode finds. That, he says, has to do with attitudes, ambitions and cultural elements. European founders and investors are happy with smaller outcomes, so the bar of what is considered to be a big success is higher in the US than Europe.
There is a lot of support in helping VC funds in Europe. The EIF is an active investor in many funds, and that is a factor that has increased the number of funds in Europe. But, as Rode argues, the area where the biggest change is necessary and difficult to achieve (it may take 20 years) is with regard to breakthrough innovation.
It’s a pity Europe is lagging so much. Any improvement in venture activity in any region will take a long time to put into place. Any measure from a government and regulatory point of view requires a 10-20 year time horizon. You cannot change the ecosystem, the cultural set-up, the educational system and the government funding of research in a few years. Indeed, any changes that shift things radically in just a few years may be unsustainable. For Europe’s long-term future, it needs to find a sustainable solution.
Joseph Mariathasan is a contributing editor at IPE