FinancialGuy Writes!

Next week in Brussels the Eureka Network is holding an event related to Venture Capital in Europe. As such, I thought it might be interesting to abuse my position of Moderator of the event and ask some questions of key speakers about the role that VC can play in innovation policy in the EU.

Therefore, I have conducted a telephone interview with Yigal Erlich, Chair of Financing Innovation for Israel whilst they hold the rotating Chairmanship of the Eureka Network. Israel, as you may or may not know, has proved itself to be a nation of superstars when it comes to new technology development. What can Europe learn I wonder?

Can innovation really help European economies as much as we need to remain competitive in the coming decades?

I think it is best to start with a clear definition of innovation. These days, it seems to be regarded in a broad sense, and I think that broad sense really is ‘anything that is not R&D’. It is a part of the wider package of actions that includes R&D.

But this can be a problem. Many people think of innovation and R&D separately and as more money flows into ‘innovation’ it seems to be having a slightly negative effect on R&D funding. This could make the results of R&D less interesting in time.

However, the combination of R&D and innovation makes a huge contribution to an economy and is key to future growth and employment. To answer your question, development and innovation are vital to every economy, including the EU.

Is the European venture capital industry up to the scale of challenge that it faces if the EU really delivers on an ‘Innovation Union’?

I think that here you mean to include private equity and business angels.

I think that governments are making mistakes, perhaps not all governments, but some for sure. They give money to companies to spend on specific projects but they never look at the other needs of companies. The companies only get help on the development part of the firm and not on other aspects that support development and make it possible. I understand why, but that does not make it ideal.

Venture capital funds are looking to minimise their risks and maximise their returns. This means that they are ideally looking for larger companies that are reasonably well developed. It takes a lot to get a firm to that stage.

Therefore, I think that the EU should look more to Public Private Partnerships. I do not think that government money will be enough to fund the ‘Innovation Union’ and Venture Capital cannot do it all either. The Innovation Union will require public and private money.

How can the process of funding via venture capital be streamlined to make it easier for entrepreneurs?

There is no real process right now. That is a problem.

Eureka is a network of government agencies and a network of companies. There are no investors. Our suggestion as Chair is that a network of investors needs to be created. This can add more knowledge, information and contacts to make finding funding easier. Once investors are added to Eureka we can produce tools and plug them in to Eureka to help everyone.

Can venture capital become more available by funds investing smaller amounts in smaller projects?

A venture capital fund cannot make 50 investments and still be a success. That would require a big fund, which needs more administration and therefore costs more to run. The amount of funds available within a fund is reliant on investment success and higher costs make that less likely.

More investments also makes follow on funding less likely. Such a large fund would end up investing only in companies that show certain characteristics, and not needing funding in the future (round 2 or 3) would be one of those features.

I like the idea of vertical funds. They are smaller, perhaps 50 to 100 million and specialised in a certain field. Most funds are general and are unwilling to take risks outside the areas they understand.

This is actually what Israel did in the early 1990s. Venture capital funds would invest in 10 to 15 companies and they were almost always ICT based. It worked for us.

Why has Israel proved to be so much more successful that European countries at bringing new ideas and products to market?

I think it is partly cultural, we have an attitude that is more like America. There is an acceptance of failure and an admiration of risk taking. There is also a realisation that economic growth must come from the development of new companies.

We have also worked hard to develop a whole ecosystem for growth. Companies can get up to 50% government funding. Venture capital is available. We have business incubators and angels with seed money. We focus a lot on universities which are much more developed than in the past. We keep developing them. And we have our defence institutions who are also developing talent to develop new ideas.

FG: Mr Erlich clearly believes in the role VC can play in development. I know that the Israeli Chairmanship of Eureka is trying to bring the European Investment Bank and the European Investment Fund into closer cooperation in the hope that they can find ways to combine public and private investing more successfully. It will be interesting to see how this develops.

My thoughts about the event can be found here: Can Venture Capital Finance The Innovation Union?

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