EIF hosted their annual Ugly Duck conference in Luxembourg on the 25th of September and Standout Capital attended together with other VC and Growth Capital funds from all over Europe. EIF is an engine for the European VC ecosystem, supporting entrepreneurship and innovation by empowering the European Venture and Growth Capital Funds, with unique insight into the market. We wanted to share our findings and reflections with you in this blog post.
The European Investment Fund (EIF) is the largest European investor in venture and growth capital funds. Since 1994, the EIF has committed more than €17 billion in close to 700 venture and growth capital funds. EIF currently has some 600 VC and growth partnerships and €13 billion invested. As EIF always invest together with other investors in the market, that €13 billion has resulted in a total of €53 billion currently catalyzed for investment in European small and medium-sized enterprises (SMEs). For 2020, the EIF will commit an additional €3.5 billion to VC and growth capital funds, to invest further into growing businesses. More than 1 million SMEs have benefited from access to financing through the EIF. In short, EIF supports Europe’s SMEs by providing access to financing through their partners.
EIF’s purpose is to promote innovation, growth and jobs, while generating an appropriate return for its stakeholders. To this end, EIF invests in venture capital funds from the very earliest stages, and also backing growth capital funds, like Standout Capital, that support established, profitable and growing businesses that need more capital to take advantage of new opportunities. At the annual Ugly Duck conference, EIF brought together VC and Growth Capital funds from across Europe. These are some of the insights.
During the coming years EIF wants to put Europe at the forefront of transformative changes of our time, and have made a number of funding priorities for 2020 and onwards. The major themes are digitisation (artificial intelligence, machine learning, quantum computing and cyber security), societal challenges (impact investing, life sciences, healthcare) and green deals (climate, environment and sustainability). The overall mission is the long term competitiveness of Europe and the two main strategic sectors are information technology and life sciences. The new Invest EU initiative will provide some €48 billion in funding during the coming years. Main ingredients in building the capital ecosystem includes adapting to market environment and connecting policy-makers with market forces, create public private synergies with corporate investors and also favour the market development and IPOs and exits.
EIF’s investment approach in a new funding era is to support three categories of funds. First, to be a market developer by supporting new emerging fund managers that can fill strategic market gaps (12.5% of EIF’s funding); secondly, be a market catalyst by supporting established funds with mostly unrealised track record (70% of funding); and thirdly, provide market access to the best funds with proven track-record to external investors (17,5% of funding), in essence becoming a fund-of-funds offering the market to invest in its ecosystem.
With a 25 years track record of providing funding, EIF probably has the best data in the world for understanding and analyzing European VC and Growth Capital, and is now gradually opening up this wealth of data and is launching The Bench, a searchable database.
So how is European VC and Growth Capital doing? At the Ugly Duck conference, we got a glimpse of the EIF data and these are our key insights. There are healthy IRR returns in the EIF portfolio of 600+ funds and the range of the top 50 VC funds is 20-371% in the first quarter 2019, compared to 14-111% in 2018 and 10-66% in 2017, and life sciences marginally outperforms IT as a sector. The average MOC (multiple on capital) is 1.59 for IT and 1.86 for life sciences. In VC, especially, the value distribution across the portfolio companies is quite extreme. On average in all funds, 8% of the portfolio companies represent 39% of the value, and in the top performing VC funds 6% of the portfolio companies represent 79% of the value.
There is also a tendency that European companies are more capital efficient than in the US, shown by the increase in MOC at the time of exit. This is probably due to the fact that there is almost “unlimited” capital ready for investments in the US, and that US companies generally get more funding before exits, driving up valuations. For example, when a European tech unicorn reaches a value of $1 billion, the MOC is on average 4.8 and 5.5 at exit. While the US tech unicorn is the opposite, the MOC at the time of becoming a unicorn is 5.5 MOC, but only 4.7 at the time of exit.
Uli Grabenwarter, deputy director of equity investments at EIF, made his own personal predictions for the future. First, there will likely be some public market crash in the short term. For example, the Nasdaq index is quickly outgrowing US GDP, signalling that valuations are skyrocketing. There are unpredictable global trade patterns, most notably the trade war between the US and China. In addition, the pulled WeWork IPO shows that investors no longer buying whatever.
Second, VC is the counter-intuitive hedge. Before, digitisation was mainly complementary diversification, for example when retail expanded into e-commerce. Now, it’s more about antagonistic disruption challenging old business models, creating a need to expose to new business models and hedge against the disruption.
Third, there are new concepts of profitability. Personalized subscription based availability replaces ownership, as you get paid for selling less. We will see monetization of social values and ethical business, also resulting in more impact-weighted accounting.
We also got an interesting insight into the new world of quantum computing, a technology that will revolutionize processing power. Quantum computing is today the most powerful computing that the laws of physics allow, and most of the new tech still just exits in theory or in limited experiments. While traditional computer computers are based on the classic bit that can be one or zero, the quantum bits, or qubits are superpositions that can be anything in-between 1-0. The technology probably needs another 20 years to be commercially available, but the race is on to reach so called quantum supremacy. For example, Google recently demonstrated a quantum computer that could a calculation in 3 minutes that it would take a traditional computer 10 000 years to perform. But that’s a topic for another blog.
Finally, closing the Ugly Duck 2019 was an inspiring and thought provoking talk by Arlan Hamilton, founder and managing partner of Backstage Capital, not least as the audience was largely white males. Backstage, a west coast VC focuses on the opportunity to invest in the very best of “underestimated” founders identified by Backstage, for example backing women and entrepreneurs of colour. Arlan and her crew, as she calls her team, have backed more than 120 founders since Arlan started the fund from scratch in 2015. Hats off Arlan!
Who owns the EIF? The EIF is part of the EIB Group (the European Investment Bank), owned 60% by the EIB, 28% by the European Union through the European Commission (EC), and 12% by 30 public and private financial institutions.