Brussels Bureaucrats Love Tech, Honest

(Bloomberg Opinion) -- Silicon Valley veterans rarely have a kind word to say about the European Union, whose bureaucrats they see as opponents of their free-market, libertarian world view.

Former Facebook product manager Antonio Garcia Martinez, author of the warts-and-all tech memoir “Chaos Monkeys,” branded the European Commission “absurd” after it hit Google with one of several antitrust fines. For its part, the search giant complains it has spent “hundreds of years” in human time complying with the EU’s latest data-privacy laws. Google has also attacked the controversial EU Copyright Directive, which will make big tech directly responsible for stopping copyrighted material from being uploaded by their users without a license.

EU officials are understandably keen to shake off this image, especially given their efforts to promote startups on home soil. They argue that regulation helps new firms to compete on a level playing field dominated by big players. And they also point to their efforts not just in consumer protection but in providing financial support, too.

The EU-backed European Investment Fund, for example, has become an increasingly important source of cash: It directly accounted for 12 percent of the total amassed by the region’s venture capital funds in 2014, up from 5 percent in 2007. European VC spending has also been rising, hitting a record $23 billion last year, according to PitchBook data, although that was still only a fraction of the $131 billion in the U.S.

While you could certainly accuse bureaucrats of being reluctant to let the market decide, they are increasingly keen to bring more tech entrepreneurs and investors into their tent. Last year, the EU announced plans to commit 410 million euros to six funds being raised by firms including Aberdeen Standard Investments and Lombard Odier. The idea is to help these money managers raise a total of 2.1 billion euros which would then take stakes in smaller VC funds across Europe. And now the EU is also setting up its own Innovation Council, appointing experts and investors from outside to help promising startups grow, and backing them with 2 billion euros of funding from the European Commission.

The goal is for Europe to have a more “bottom-up” approach to help develop the kind of ecosystem that has long existed in the U.S., according to banker-turned-politician Carlos Moedas, Commissioner for Research, Science and Innovation.

By increasing the supply of venture funds, while also increasing the supply of promising companies to invest in, the greater the shared knowledge might be. One big advantage Silicon Valley has is its 30 years’ experience of boom-and-bust cycles, which have produced serial backers and repeat entrepreneurs.

A 2015 paper by Ulf Axelson and Milan Martinovic of the London School of Economics found the experience gap helps to explain the stark difference in performance between U.S. and European VC funds. At end of 2013, 10-year returns for VC funds were 5.03 percent in the U.S. compared with just 0.84 percent in Europe, according to the Invest Europe association.

The challenge, though, will be to convince the VCs themselves. A survey by venture firm Atomico found that the industry was least keen on deepening ties between European startups and governments, with less than half those polled backing the idea, compared with 51 percent of the startup community and 63 percent of public-sector workers. VCs tend to want tax or regulatory incentives for institutional funds to invest in startups, rather than more public money. Hussein Kanji, of Hoxton Ventures, one of the industry’s more outspoken critics of EU cash, says he would rather see less red tape than more potential “overreach.”

Brussels deserves credit for trying to promote homegrown tech, but the skepticism among VCs is worth heeding. Perhaps the most productive area to focus on would be ensuring Europe’s capital markets are deep and unified enough to help startups grow and sell themselves without heading across the Atlantic. Of the five biggest VC-backed exits in Europe last year, two – Spotify and Farfetch – went public in the U.S., while one – iZettle – was bought by a U.S. company.  Something, perhaps, worth putting to the Innovation Council?

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering Brussels. He previously worked at Reuters and Forbes.

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