Global Trends in Venture Capitalism: Europe

Part 1: Origin story and the Eurozone market

Fintech, martech, femtech, regtech: these are the new portmanteaus of the swashbuckling entrepreneurs riding the jet stream of the venture capitalism multiverse. Since the end of WWII, modern VCs have defined business development as an asset class all its own, and the modern tech landscape has skyrocketed current VC investment value to over $300 billion in the US and cleared €100 billion for the second consecutive year across the European continent.

Make no mistake: this is not JP Morgan railroad stuff. The modern VC scene is all about flotillas of private investors escorting brilliant startups through waters too deadly for the novice navigator. Tech is nothing if not the exulting of individual virtuosity. But be warned: as any artist can tell you, a catchy tune does not a record label make. You’re going to need help, and you’re going to need some capital.

So, let’s take an orbital view of the wild world of venture capitalism igniting the tech engines from Europe to the Yucatan with the delicate tinder of risk, reward, and oh yeah: a huge pile of liquid cash in the boosters.

The beginning of VC

Modern venture capitalism began somewhere between the end of WWII and the mid-1970s, depending on who you talk to. The first definitive example was when the American Research and Development Corporation (AR&D), headed by VC grandfather Georges Doriot, invested heavily in the growth and development of the Digital Equipment Corporation (DEC) in 1957.

If you’re a gamer, DEC’s PEP1 minicomputer is the engine that powered the hugely influential video game classic Spacewar! Coded in 1962, it was the first video game to harness the two most transformative creative impulses in the human experience: boredom and misuse of company property. By 1964, DEC was using Spacewar! as the fundamental test of their new product’s capabilities because it was the only software in the world that used every aspect of the available computer technology.

This innovative inferno was only possible because of the capital strength and guidance of VC backing. In 1960, DEC was a modest little firm with 117 employees and $1.3 million in sales. By the time the first boots hit the lunar surface in 1969, it was a 5,800 employee, $135 million industry behemoth that kickstarted the new age of computer tech we’re all enjoying today.

That’s the transformative power of venture capitalism, folks, and today it’s gone from a prop plane to a scramjet propelling the tech sectors of the East and West economic spheres.

The modern landscape

Venture capitalism has come into common parlance largely because of shows like Shark Tank, and like all reality TV, it’s an entertaining and wildly inaccurate picture of what VC is all about. Yes, it’s hilarious to watch the Mav’s owner argue with a Dancing with the Stars second-rounder over who should give a million bucks to the guy with an iPhone breathalyzer, but it is what it is.

There’s nothing casual about what’s going on in the VC scene today. Fintech (finance tech) startups like Robinhood and Coinbase have revolutionized securities trading and cryptocurrency markets. Swedish point-of-sale app developer Klarna offers universal instant financing, and a host of companies like CashApp make funds transferring an everyday event.

The martech (you guessed it: market tech) industry is reinventing how companies automate marketing processes and channel information to connect with consumers. Femtech is helping women entrepreneurs engage with the business world like never before. Regtech, HRtech, edtech — you name it and there’s an army of startups competing for territory. Each and every one of them is being propelled by ambitious venture capitalists looking to transform the world through free market incentives.

The European solution

This brings the conversation to the EU and its evolving relationship with the VC paradigm. While modern venture capitalism certainly existed in Europe since the 1980s, it’s impossible to compare pre-EU VC with post-EU VC. The EU is above all a centralized socioeconomic alliance that operates under a rules-based economic philosophy. And because of its methodology, the EU’s VC ecosystem is incredibly instructive regarding the forces that motivate VC activities.

As it turns out, venture capitalists don’t particularly like to partner with governments. Governments are full of bureaucratic processes and powerful people with their own ambitions and ideas, and it tends to be very disruptive when you’re trying to shepherd your investment through the difficult early stages of the startup life cycle.

The US has the largest VC ecosystem on earth, and this is mostly thanks to our government preferring to regulate only potential abuses of VC money and power relationships. China, on the other hand, has a gigantic economy but a relatively modest VC environment. This is because Beijing has its fingers in everything, which de-incentivizes private speculation.

The EU’s approach is in the middle. In a perfect world, the EU wants venture capitalism to look like Kermit the Frog: green and ethically unimpeachable. That’s perfectly fine, but in the free market there’s always a trade-off for your political values. The result is a VC portfolio twice the size of China’s, but only a third that of the US.

However, 2021 saw a huge breakthrough event for venture capitalism in the EU. Through a combination of favorable market conditions, Europe’s transition to a service sector economy, and a decade of policy improvement, VC activity from both European and US investors has increased dramatically. VC investment in Germany went from $6 billion in 2020 to nearly $17 billion in 2021. France jumped $5 billion to $10 billion over the same time period, and everywhere you look in the EU you find the same trend. Moreover, digital investments represent about 50% of the total VC investments in the EU, and wealthy US VC firms have more than septupled their EU startup footprint since late 2020.

There are several reasons why this is happening now. First — obviously — markets are recovering from COVID. Second, COVID revealed that remote working is a real thing, and this was a hugely beneficial revelation for keen investors in digital infrastructure. Throw in the benefits of digital automation and AI that helped us all weather the lockdown storm and you’ve got the makings of a major investment influx.

Most importantly, the EU has embraced reality: its rules-based approach and somewhat controlling policies that have helped create a wonderfully ethical and egalitarian European society don’t necessarily apply in the same way to venture capitalism. And don’t misinterpret that. It’s not that VC is inherently a less ethical circumstance, it’s just that highly risky and tenuous financial circumstances are not the best ingress point for social engineering strategies.

You can make a car with clean emissions and that’s very laudable, but not by pumping gas into the radiator. That’s simply not how cars work.

EU regulation easement

Since the middle of the last decade, the European Commission has prioritized VC incentives and focused on creating capital resources for small and medium-sized enterprises (SMEs). In conjunction with the European Investment Fund (EIF), the EC has made tens of billions of euros available to SMEs across the continent. The EIF also spearheaded the European Angels Fund, which is designed to incentivize “business angels”, or wealthy individuals who have the capital to get into the VC game and make a real difference.

The EC is also promoting European egalitarian values by creating initiatives specifically designed to encourage women in the VC marketplace, as well as assist women entrepreneurs with acquiring startup funding. This happens to be an excellent example of fiscal policy that’s balanced by ethical ideals — exactly how it should be done.

The EU has also undertaken some bold initiatives to get gas on the VC fire. Horizon2020 created new financing for SMEs to promote EU ethics and economic growth through the VC process, and it’s been succeeded by Horizon Europe which is providing nearly €100 billion over seven years to European startups.

Finally, the European Innovation Council is actively engaged in assisting startups that are working in digital and environmental fields to scale up companies working on transformative and disruptive technologies that are too risky for many private investors. At least 70% of the funding is targeting SMEs.

The Right Balance

Of course, all of these initiatives are conceptualized as being part of Europe’s vision of a green, clean, and free continent of moral and responsible citizens, and that’s fantastic. The trick was to get the mix right for the front-end stage of industry and tech development, and it looks like they’re well on their way.

No matter how you slice it, the most important thing inspired startups need is funding. That’s number one. The EU now seems to have that clearly in mind after a decade of experimenting, and it’s made all the difference for investors and startup firms alike.

The lesson for the world is that a healthy VC environment doesn’t mean sacrificing your values in exchange for growth. If you get the mix of fuels right, then that rocket and its payload of healthy, happy citizens is going to launch into the future, and they will carry those values with them as they go. And boy, is the European vehicle taking off.