Part One of a Two Part Series
It’s been almost six years now since Arif Naqvi’s Abraaj Group provided £4 million to fund the first Master’s program in private equity in the world. It was a bold endeavor. In September 2010, when the MSc Finance & Private Equity program was launched at the London School of Economics and Political Science (LSE), Naqvi’s alma mater, the world was still in the grips of the Great Recession.
In a recent discussion Professor Ulf Axelson, the inaugural Chair of that MSc program, who is also Director of the LSE’s Financial Markets Group, mused on the state of the venture capital industry in Europe with four leading practitioners. The event was chaired by Felda Hardymon, a senior partner at Bessemer Venture Partners (BVP), the venerable VC firm founded in 1911 who, in his opening remarks, reminded the audience, consisting of practitioners, academics and students, of VC’s momentousness. “In the U.S., eleven percent of all private sector jobs are in venture-backed companies. That’s an astonishing number. What’s more astonishing is that twenty-one percent of U.S. GDP comes from venture-backed companies… So the only job creating machine in our economy that has been reliable over the last forty years is venture capital dollars… a thriving innovation economy financed by venture capitalists makes a difference.” Notably, some of BVP’s top exits include LinkedIn, Skype, Yelp, Veritas and Staples.
Prof Axelson followed up on Mr. Hardymon’s preamble, observing that the spillover effects of innovative firms is truly enormous. Every dollar that an innovative firm captures in profits results in five dollars to other firms. Groundbreaking enterprises must naturally spend to sustain their operations. In addition, other firms imitate the leader by either getting into the same business or applying the knowledge to another line of business. And most amplifying of all, is the economic ecosystem that develops around innovative firms as they become bigger.
There are three levels to a successful VC industry, opined Prof Axelson. There is, firstly, a need for entrepreneurs with good ideas who dare to act on those ideas and ‘start companies and actually know how to grow those companies’. Secondly, there is a need for VCs with expertise in measuring risk; that is, VCs who can pick winners and who can, in addition, provide effective monitoring to ensure fledgling companies get the nurturing to develop. Thirdly, there must be exit opportunities, either through the capital markets or by a trade sale to a larger company.
At all three levels, the European VC industry has been indicted. The first charge is an old and imputed one. By singling out the spirit of enterprise exhibited by Northeastern Americans in the 19th century, Alexis de Tocqueville in his seminal On Democracy in America was suggesting Europe’s dearth thereof. The reproach persists today. It has been suggested that the entrepreneurial spirit is lacking in Europe, that Europeans are more risk-averse than Americans, that in Europe there is more stigma attached to failure and, therefore, less tolerance for it.
However, part of this perception may stem from the tendency of European entrepreneurs to hold on to their businesses. They are less likely to sell and start again. Therefore, the ‘serial entrepreneur’ as a class has not emerged in Europe as it has in the Silicon Valley. This community of serial, or experienced entrepreneurs, in America forms a valuable resource into which VCs can tap for expertise and contacts. Just as importantly, serial entrepreneurs become heroes, role models and mentors to others. And as expected, any community of successful people emanates an aura of elitism which attracts aspirants and causes the community to multiply.
The battery of allegations is rounded out by the claim that European VCs are staffed by banking and finance types who lack the entrepreneurial mindset and are therefore unable to assess either the risks or the entrepreneurs.
…to be continued…
A podcast and video of the discussion is available here.
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