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Europe’s biggest venture capitalists are a long way from Sand Hill Road. While Silicon Valley’s artery of financiers pumps money into US start-ups, governments take up the slack across the ocean.
Last year, 37 per cent of European VC funding came from government agencies, excluding sovereign wealth funds. That is almost double the proportion that came from family offices and private individuals, the next biggest source of funding.
This state involvement reflects a lack of institutional money, at a time when policymakers are intent on bolstering homegrown technology. Europe offers fewer big university endowment cheques or funds keen to diversify into VC. Pension funds in the US contribute 70 per cent of VC investment, according to data from the British Business Bank, versus just a tenth in the UK.
The BBB takes up some of the slack through its commercial arm British Patient Capital, investing in both start-ups and via VC funds. By playing a catalytic role, it aims to crowd in more private investment, defraying risk and providing an anchor.
Last week’s record-breaking $1.3bn raise from Revolut backer Balderton Capital is a case in point. About $90mn of that, admittedly only 7 per cent, comes courtesy of BPC.
Just as governments stepped into the breach in the pandemic to save VC-funded companies, the public sector is needed to reignite Europe’s VC market after a lousy 2023. VC funding virtually halved year on year to levels, in real terms, last seen in 2016. Investors into funds of the past three or four years are waiting on returns to recycle back into new vehicles.
This year’s inflow may be saved by the hype around artificial intelligence. But that trend could falter, based on the experience of the big tech companies, which have spooked shareholders with hefty spending plans, and China’s AI start-ups, whose funding has already been through at least one AI winter.
Government funding should prove more stable in these ructions. But there are drawbacks: taxpayers may not reap the extraordinary returns on offer from success stories. BPC, which invests £5mn to £10mn into start-ups, has to bow out comfortably before financing Series C or even B. That means being diluted almost out of sight when start-ups hit the growth path.
Even so, the numbers point to a qualified success. BPC’s total £3bn investment — in both start-ups and funds — has crowded in £10bn of commitments from the private sector.
Europe clearly is not the US, with big and bountiful funds. Nor is it China which — at least in the past — has attracted both those US-based funds and state money. Government money is an imperfect long-term solution, but it is helping address that reality.
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