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Uncertainty for Venture Capital Firms: Europe’s Startups Under Fire

 4 min read / 

New data shows British and European startups had a banner year in 2017 and hope for more of the same in 2018, enjoying record funding levels thanks to capital from foreign investors. Chief among them is Japanese tech group SoftBank, which pumped €458 million into British VR start-up Improbable in one of 2017’s headline investments. SoftBank has already followed that up with €460 million for Germany’s AUTO1 used car platform this year. But while start-ups may be doing fine, for now, some of the venture capital (VC) firms that many of them rely on can’t say the same. Thanks in large part to the uncertainty surrounding Brexit, the total amount of capital raised by VC firms across the sector was just €7.4 billion (a 25 percent drop from 2016).

What does this mean for Europe’s budding entrepreneurs?

Not Just Brexit

While a struggling VC sector already spells trouble for the health of Europe’s startup ecosystem, there could soon be far more than just Brexit weighing on available capital. In France, Jean-David Chamboredon – one of the country’s best-known tech investors and co-president of the startup association France Digitale – offered a simple but stark warning to fellow investors last month. Ten years have now passed since the start of the 2008 financial crisis; the market is now due for a downturn within the next three years that would dry up available funding.

The next recession, whenever it comes, will make it far more difficult for most startups in the European ecosystem to count on overseas investors. As Chamboredon explains, international funding will respond to lean times by looking for opportunities closer to home. Institutional funding sources like France’s Public Investment Bank (BPI) and the European Investment Fund (EIF) will do their best to make up the shortfall, but there are limits on the extent to which the BPI and EFI can make up for private investment.

It’s the Strategy, Stupid

This explains why Chamboredon and other pioneering European VCs, like US-born Julie Meyer, the founder of networking forum First Tuesday and London-based Ariadne Capital, believe Europe needs to strategically leverage its own capital to promote and sustain entrepreneurship. Meyer, who helped find funding for
lastminute.comSkype and Espotting, argues that “We have the entrepreneurs, we have the wealth, and we have the market here in Europe with 508 million people.”

Why, then, do so many European entrepreneurs still see California as a Shangri-La tech investment destination? In her appraisal, the success of Silicon Valley comes down to “savvy marketing which has enabled the Americans to convince the world that they own the playbook for tech entrepreneurship.”

Part of the solution to that misperception lies therefore in transforming the diversity of European national markets into a strength as opposed to a weakness: rather than a single, dominant tech region, Europe boasts many thriving hubs which are comfortable using a variety of languages and currencies. According to the Global Innovation Index, eight of the world’s ten most innovative markets lie within Europe.

Another key component is developing the ability to broker partnerships between would-be disruptors and established companies who can bring their innovative ideas to scale. This is what Meyer has called a mutually productive “David and Goliath” relationship between companies that have the disruptive ideas and the tech giants that have the customer base to diffuse those ideas.

Ecosystem Economics

According to this model, called Ecosystem Economics, startups and VCs don’t need to aim for constantly breaking and reinventing the wheel. Instead, entrepreneurs and their SMEs should imagine the way an industry should be operating – and industry leaders should help them bring those ideas to scale. Meyer’s mantra is to go beyond identifying promising startup ideas and seek out the corporate actors for whom it makes sense to acquire and develop them.

That kind of synergy between entrepreneurs and established industry giants together requires a platform which countries like France find themselves lacking. Paris attracted more VC investment ($2.7 billion) than Germany ($2.1 billion) last year, growing faster than Sweden, Spain, and the Netherlands. But despite initiatives to support startups, established French corporations are not doing enough to acquire, invest in, or co-develop with up-and-comers. La French Tech, established to support start-ups, is publicly funded. Paris start-up superhub and incubator Station F, founded by telecommunications mogul Xavier Niel, is a personal project as opposed to a corporate initiative.

For startups and their VC partners to be ready for the next downturn, this needs to change. After all, very few entrepreneurs achieve scale. Predicting the winners of the future will have more to do with smart economics than just disruptive ideas. To quote Warren Buffet:

“You only find out who is swimming naked when the tide goes out.”

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