This article was first published in the Luxembourg Private Equity Association’s magazine Insight/Out # 27 featuring a multifaceted cover dossier on the European Investment Fund (EIF) and the in-depth interview below with Uli Grabenwarter, Director of Equity Investments & Guarantees.
The European venture capital market has made a quantum leap over the past two decades to establish itself as an attractive market segment for investors in alternative assets. Not only have European VCs closed the performance gap with their American peers, but Europe also continues to offer best-in-class technology in many previously US-dominated industry verticals.
With the acceleration of technology innovation in Asia and the maturing of the European tech start-ups ecosystem, competition for category leadership in technology verticals has become a global game. Europe has put itself on the map with many unicorn companies (€1bn+ plus valuations) created over the past decade.
The challenge of retaining tech champions
But has the European VC market fully graduated? Not quite. Showcasing world class technology made in Europe is one thing, retaining, with an appealing business environment, Europe’s technology champions within Europe is another. The track record of Europe in attracting and retaining global technology leaders is poor.
Too big is the temptation to follow the blueprint traced by technology giants to move to the US, list on NASDAQ and become part of one of the many vibrant technology clusters on the East or West Coast. Other promising start-ups cannot resist the temptation of strategic buyers from the Asian geographies looking for next generation technology breakthroughs made in Europe.
Often, this pattern starts with the choice of a tech company’s VC investor in their late-stage financing rounds: American growth VCs have every reason to replicate their patterns of success, acquiring tech companies anywhere in the world, partnering them up with their domestic business network, making them relocate to the US and listing them on NASDAQ or have them merge into a US tech giant at exit. But why are we not doing the same in Europe?
Europe, to date, doesn’t have the means for this. Leading financing rounds of several hundred million euros or dol- lars requires VC funds that can digest such funding rounds within the diversification strategy of their portfolio. This requires funds of a size of €1bn and above. Whilst the US record close to 60 such players, Europe has just a handful of funds playing in that league.
This is where the European Tech Champions Initiative (ETCI), founded under the leadership of EU Member States (including France, Germany, Spain, Belgium, and Italy) and the EIB Group comes in.
ETCI - Investing where the scarcity is the greatest
Within the next three years, ETCI, managed by the EIF, has the ambition of putting onto the map 15 to 20 growth VC funds with €1bn plus in size and a Europe–focused investment strategy. Its goal is to offer European tech champions a true alternative to US-led late-stage funding rounds and exit strategies directed to the US and Asian markets.
ETCI backed funds will invest in pre- and post-IPO rounds where the scarcity of European capital is greatest. At the same time, these funds will create a new value proposition for large scale investors seeking to invest in Europe. While investors seeking to deploy €150m and more in one investment, so far, had little choice to invest without dominating the investor base of funds, ETCI-backed funds will allow them to build a diversified European portfolio with tech exposure.
It is a long-awaited link in the value chain for European VC and a further step towards emancipation at global scale. The first closing of the ETCI was at a magnitude of €3.75bn with a subscription period that is still open for other EU Member States to join. Of course, the ultimate test for European technology businesses will be to attract investors also in the public markets.
Here, Europe still has significant road to cover to overcome its market fragmentation that puts off analysts and investors alike. Maybe the next European project to tackle?