Can we rely on venture capital to fuel innovation in European tech?

For investors, fighting climate change or disease won’t have the immediate link to profitability that let’s say, urbanization had. When Western Europe needed to alleviate rural poverty, urbanization was a solution, and private capital was readily available to finance the industrial revolution. Society had a problem, privateers profited from fixing it.

But in today’s VC landscape, there is a disconnect between immediate profitability and societal needs (i.e. fighting climate change). As the urgency to shore up the food supply, or to combat droughts increases, private investors still flock toward larger rounds for later-stage, profitable businesses. This is understandable, it isn’t in a VC’s interests to back ultra high-risk ventures in the name of philanthropy. For the rest of us though, this needs addressing.

From my point of view, government-led funds, like ARPA and DARPA, will almost certainly be responsible for the next wave of innovation.

-      Government-led funds have financed some of the greatest advancements of the last century, from developing the internet and GPS, to putting man on the moon. Nokia, Qualcomm and Symantec all received early backing from public funds.

-      A ‘supergiant’ VC fund is typically around the $1bn mark. In contrast, the UK government spends ￡34.2 billion per year on R&D. The spend of smaller European nations on research dwarfs even the largest of Sandhill road funds. In the grand scheme of things, the cost of government intervention here could be minimal - re-appropriating public spending may ensure that ‘moonshot’ projects get the funds they need.  

This isn’t just about philanthropy and ‘innovation’, this is sound economic policy. In Germany the entire market capitalization of the DAX 30 is no way near the size of a single Big 6 US technology firm. What’s more, the majority of DAX firms were founded before 1950, and aren’t necessarily designed to be innovative, they’re designed to iterate and evolve - not to disrupt. This is essentially the same in the UK and France as well, and the opposite to what we’re seeing in the US and China.

If European nations are to maintain their status as major economies, they must find a way for the next Apple or Amazon to come from Europe, otherwise we’ll see further (relative) decline when compared to the US or Asia. If our governments can back the companies who might solve the energy crisis, cure cancer or shore up the food supply, we’ll not only fix the imbalance between VC funding and societal needs, but the commercial potential of these firms will be near infinite.

At one point, smartphones, ecommerce and social media were all ‘moonshot’ ideas. It’s not beyond the grasp of Europe to secure the next wave of innovation, but we need to reconsider how we’ll fund it.