The public cash slushing around VC-land may in fact be repelling private money.
Investors turn to VC hoping to attain vast riches by nurturing the next Google or
WhatsApp; they are loth to invest alongside governments whose interests lie only
partly in turning a profit. State money comes with strings attached, be it an
encouragement for venture capitalists (or the companies they finance) to create
jobs in particular countries or to focus on certain favoured sectors. This is
anathema to private investors, who fear their money would be used to pursue
political goals. “I understand why governments invest in venture capital, but they
are spoiling it for the rest of us,” says an endowment-fund boss.
Several studies of public VC schemes have found that for every dollar the public
sector puts in, the private sector pulls one out. The EIF says it worries about this, so
it only matches funds that VC firms attract from private backers. “We are driven by
a need and a wish to address market gaps,” says John Holloway, a high-up there.
Some think that the handouts from taxpayers are also impairing the quality of
European venture capitalists’ investments. The EIF alone has sunk more than €3.8
billion into 260 venture funds, but provides no data on how its investments have
fared. Ho-hum entrepreneurs whose firms only launch because of government
backing (and dud firms that would have folded long ago without it) drive down
average returns. Meanwhile, funds relying on private capital have to pay more to
outbid government-backed rivals.
European funds have poor returns in part because they sell companies too early,
missing out on bumper returns that come from placing longer-lasting bets.
Government money spurs such conservatism: it is better for a fund to “bank” a good
deal and guarantee access to later dollops of government cash than to roll the dice
again. Such thinking horrifies private investors.
Several European startups have successfully launched initial public offerings
recently, including King.com, which makes an addictive game called Candy Crush
Saga, and Criteo, an advertising-technology firm. But both had been backed by
American as well as European money, and have listed their shares in America. They
may soon be joined by Spotify, a trendy music service that has been European VC’s
poster child. Many bright Europeans continue to flock to California before they
even start their businesses.
It is not that Europe has no need for innovative startups and the jobs they bring—
just the opposite. But entrepreneurs say there are better ways of boosting their
chances than dollops of taxpayers’ cash. “We have labour laws designed for workers