Europe VC scene lacks liquidity, active exit market

Marcos Battisti joined Intel Capital in 1998 and became one of the firm’s founding members in Europe. The corporate VC focuses on mid- to late-stage venture deals, investing $300 million globally in 2013 in technology companies. About $60 million of that sum was deployed in Battisti’s region.

He recently sat down with VCJ to discuss the evolution of the European VC market and question the intervention of local governments in private markets.

Q: What  tech trends in Europe excite you?

A: There are plenty of opportunities coming out of Israel and Europe in wearables. Not the devices themselves, but the technology around them. The belief is that there will be opportunities if you invest in good companies with the right IP for trade sales in about two years time.

After that timeframe, we will have a better idea of what the sector will look like.

We also believe the Internet of Things is an important segment in Europe in terms of smart cities and smart homes. Historically, Western Europe has been very strong on mobility with tablets and phones and the services around those devices.

In perceptual computing, most of the investments of weight have been done in Israel and Western Europe and it still shows promise. Europe is definitely behind the U.S. in big data but it’s still an active segment, as is security, though the real core strength there is in Israel.

As for consumer internet, Europe is seriously behind the U.S. no matter what the buzz we keep hearing from places like Berlin.

Q: Do European VCs deserve the reputation of being more risk-averse than their U.S. counterparts?

A: This is a myth. In the U.S., lots of people buy into a trend and many companies within that trend get funded. In Europe there is less money available, so people have been more selective.

As an entrepreneur who didn’t get funding, it’s easy to blame the VCs, but in the last 15 years there has been less funding in Europe for VC. Lots of firms have gone bust or they are zombie funds, and if you’re pitching to those funds you’re never going to get the money.

The real issue is the size of the VC segment in Europe relative to the opportunities available.

Q: How important is the creation of a deep exit market within Europe to the long-term viability of its VC sector?

A: Tech IPOs in Europe suffer because a lot of the exchanges don’t have critical mass. The second problem is a lack of sophisticated investors and research in Europe’s public markets in relation to technology, which creates liquidity issues. People will take on a position, but then it’s very difficult to sell it on.

Over the last five years we’ve seen more of the big U.S. players — the guys who are willing to pay up — doing deals here, and if you get a better price by selling to a U.S. company, that’s exactly what should happen. It puts money into the system so VCs can invest more. It also gives the entrepreneur a track record, so he or she will eventually come back to their home turf to do it again. This drives an ecosystem and it drives employment.

It would be great if there was an active European exit market with buyers paying what the Americans would pay but unfortunately it’s not there.

Q: What changes have you seen in the quality of European entrepreneurs over the past 15 years?

A: If you’d asked me that in 2005, I would have been very negative and questioned why I was doing this job.

If you go back 15 years, people from the U.K. always wanted to expand, whereas in France and Germany they only wanted to be the biggest company in their country. This has changed drastically.

We’re seeing a different caliber of people who have positive track records and who are internationally minded. This sector got hit by a baseball bat, but the people who are still around – actually there are still some knuckleheads – but most know what it takes and they are holding management to account.

VCs understand what they can contribute and what they can manage, and they are letting management drive development while making them aware that there are checks and balances, so overall it’s a positive evolution.

Q: What’s your biggest headache as a European VC?

A: You always end up having other investors and everyone has different priorities. One of the big problems with other GPs is their viability. You can suddenly have a situation where a co-investor doesn’t want to fund.

We tend to be the biggest investors in our deals, but that doesn’t mean we have all the power; management has some and other investors have a little. If they don’t want to fund when funding is needed, or they are desperate for an exit when an exit isn’t appropriate, it causes problems.

The other headache is governments in Europe. We see a lot of intervention and not in the areas that need it. If people receive incentives that are based on tax breaks instead of returns, you are competing for deals with people who are valuation-insensitive. There should be some leadership that drives discussion within the European Union to change the type of government action, which has historically been used here for short-term gap-plugging, to action that makes the eco-system more viable in the long term.

Q: What about the high levels of public investment in European venture funds?

A: I want governments to step away. If you’re not viable and you can’t get money otherwise, you should not be in this business.

Having said that, in the short term, something had to be done. Perhaps we need a regulation forcing LPs that work with governments to invest 10% to 15% of their private equity allocations into Europe-based GPs. The LPs should do their due diligence and that should eliminate their prejudices and show them that there are opportunities in Europe.

Anything else means that you’re not providing the checks and balances that are needed to make this sector viable, and governments are not capable of doing that. It’s not their job.

Q: What about the European Venture Capital Association’s idea of a public-private fund-of-funds for venture capital?

A: I don’t think the EVCA knows what it is doing. We don’t need more public money here. We need incentives for LPs to put private money into play, which at this stage probably means forcing them.

But a public-private partnership is not appropriate, because it entails that governments can intervene yet again, and the viable funds don’t need that.