Among the famous artists said to have used Moleskine-style notebooks in Paris over the past two centuries are Oscar Wilde, Ernest Hemingway and Pablo Picasso. These small black pads were cheap and unremarkable; a tool of necessity rather than of fashion. In reality, they were not really Moleskine at all. The name did not exist until 1997, when a small Italian company saw their potential and registered the name.
Countless such examples exist throughout Europe. Innovation is not just about technology. The seeds of all sorts of ideas in industries as diverse as healthcare and fashion are sown all the time. Many of them go on to make money and create employment and support the economy. Many do not, but that is all part of the process.
However, ideas need money if they are truly to succeed. For Moleskine the idea and the initial small-scale success were not enough. There was potential to expand. Syntegra Capital, a firm with offices in Frankfurt, Paris, Milan and London, bought a controlling stake in 2006 when Moleskine had 20 employees. Since then the brand has expanded to more than 90 countries, employs 136 staff and the humble notebook has been complemented with the addition of pens, smart book bags and reading stands. Its profits have soared.
It is an example of how venture capital can transform a type of investment that is vital if innovation is to thrive. According to a report for the European Venture Capital Association (EVCA) published last autumn, private equity involvement in a company results in patent citations going up by a quarter.
But in Europe the picture is not bright. Indeed, it is almost a cliché that venture capital in Europe lags behind the US. European countries as a whole see investment of €15 billion less a year in venture capital than does the US. Venture investments in the US represent 0.66% of gross domestic product (GDP) compared to the EU’s biggest investors – Sweden, at 0.06%, Denmark at 0.05%, and the UK at 0.04%. “We file as many patents in Europe as in the US,” says James Burnham of the EVCA. “It’s not a problem of innovation; the challenge is financing it.”
Venture capital was hit hard by the financial crisis. Before the downturn, prospects were bright. In 2004-07 private equity and venture capital funds raised grew at 110%, according to EVCA figures.
Over the same period the number of investments went up by a quarter. But investments and the level of new funds raised both fell by more than 50% in 2009. They have started to increase again but both remain below 2005 levels.
Ideas in Europe are not in short supply, but the challenge for politicians – and it has increasingly become an EU rather than a national challenge – is to create the type of regulatory environment that encourages private-sector institutional investors such as insurance companies and pension funds to put capital into venture capital funds. Encouragement is one thing; first policymakers have to make sure that existing or new legislation does not deter investment. Joey Mason, who specialises in healthcare technology innovation at Delta Partners, a venture capital firm investing primarily in Ireland and the UK, said that legislation such as Solvency II, which aims to make the insurance sector more secure, had frightened off investment. “The tide has to turn,” he says. “We have to give the private sector a reason to invest. It’s been tough over the past few years. The private sector needs to look again because there are huge opportunities.”
Financial market participants agree. “Although insurance companies should be well placed to invest, given they generate approximately €1 trillion each year in investable cash flow, uncertainty over impending Solvency II and Institutions for Occupational Retirement Provision (IORP) pension-fund regulation is holding back investment in long term asset classes,” the Association for Financial Markets in Europe said in a statement accompanying its ‘Funding for growth’ report, which was released on 14 June.
It is something that the European Commission seems to understand. “Better funding for smaller companies is key for Europe’s economy,” Michel Barnier, the European commissioner for the internal market, said in a speech in March. He said it was “up to enterprising fund managers” to seize the opportunities of new European funds for venture capital “as a matter of urgency”.
Barnier was speaking as rules were agreed by the European Parliament and Council of Ministers that will enable fund managers to register with an authority in their home country and then market their venture capital or social entrepreneurship funds throughout the whole of the EU.
But for venture capital to thrive in Europe, legislative change must go further. Among the further measures in the pipeline, the EVCA is particularly enthusiastic about the ‘fund-of-funds’ initiative (see below).
“Venture capital in Europe is a story of untapped potential,” says Burnham. “Everything is in place. Now it just needs to take off.”
Innovation needs investment and, as Mason says, “capital begets capital”. Venture capital funds provide money and expertise but their ability to be successful relies heavily on getting the private sector to invest again. That will ensure that there are many more Moleskins for years to come.
A recent history of venture capital and the EU
EU competitiveness ministers say that member states should make progress towards a “mutual recognition of national frameworks” for venture capital funds.
MEPs vote in favour of a resolution calling for a harmonised framework for venture capital.
European Commission publishes a communication saying that there is consensus among member states to work towards harmonisation of national frameworks, but little progress has been made.
Commission’s ‘innovation union’ pledges that by 2012 all national venture capital funds should be able to operate and invest in any EU country.
EU leaders commit themselves to removing barriers to cross-border venture capital.
The ‘single market act’ action plan from the Commission promises to remove obstacles to venture capital funds raising money in any member state.
Commission publishes proposal to “make it easier for venture capitalists to raise funds across Europe for the benefit of start-ups”.
Council of Ministers and Parliament agree to adopt legislation which establishes a European venture capital fund label.
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