Europe needs to embrace a fresh investment culture Guest contribution in Handelsblatt
Inventiveness has always been at the heart of Europe’s fortunes. The continent continues to feed off its people’s creativity and their technological and scientific prowess to this very day. But a greater willingness not just to embrace innovation, but to fund it, too, will be crucial if Europe is to enjoy lasting growth and prosperity going forward.
We only need to look further afield to see that other parts of the world commit more capital to funding tomorrow’s technologies and entrepreneurship. And venture capital is far more plentiful as a share of GDP in the United States and parts of Asia, where the ground is more fertile for ambitious entrepreneurs looking to get investors on board to fund their business ideas and help them expand internationally.
Let’s not forget, of course, that fewer than one in ten start-ups turns out to be a financial success. But still, genuinely groundbreaking innovation rarely comes about if you take a belt and braces approach to entrepreneurship. Excessive caution can sometimes mean missing out on opportunities. So what Europe needs to do is rethink its investment culture and forge stronger networks between its investor, real economy and academic communities. That way, Europe, too, can foster the champions of tomorrow.
What’s the state of play right now? Europe has a wealth of innovative and growth potential to tap into, not least in key technology fields like artificial intelligence (AI). Germany’s VDMA, an association representing the country’s mechanical engineering industry, recently found that roughly 42% of AI start-ups worldwide are based in Europe, around one-third are from North America, and 24% are from Asia. This is an opportunity that’s there for the taking.
Which regions emerge as hubs for the technology of the future will crucially depend on how the funding ecosystem is designed. Another question is whether traditional loans provide all the fuel that start-ups need to maximise their innovative potential – especially considering that regulators have put a lid on banks’ risk appetite, and rightly so. Equity funding appears to be more conducive to promoting the transition in areas such as climate protection. Indeed, an ECB study indicates that carbon footprints shrink faster in economies that receive more funding from equity markets than credit markets.
Not just that: the success stories of European vaccine manufacturers BioNTech and CureVac show that scaling up future-proof technologies and getting them market-ready calls for investors who are willing to provide growth financing and are committed for the long haul. Though venture capital finance is clearly on the increase in Europe, there is still plenty of upside potential.
Unlike in the United States and Asia, “patient” equity capital is often in short supply in Europe. Particularly in later growth stages, where the aim is to scale up innovative ideas to serve the market, European investors often lack investment firepower. This frequently gives non-EU investors the edge, partly because they are so much bigger than their European counterparts, and can often result in firms and with them, future-proof jobs, leaving the continent.
There’s another reason why other parts of the world are so successful. They embrace a different investment culture, one that prefers businesses with strong growth prospects over those of an inherently high value. It’s a mindset that particularly benefits up-and-coming businesses that are brimming with bright ideas but still lack financial robustness.
In terms of bolstering financing for start-ups, Berlin is now leading the way with its equity fund for technologies of the future (“future fund”) and Fund Location Act (Fondsstandortgesetz). The intention is to widen the pool of investors and achieve higher financing volumes – partly to ensure competitiveness with major US and Asian venture capital funds in later funding rounds. One thing to focus on in particular is attracting more institutional investors here in Germany, which can familiarise themselves with venture capital via funds of funds, say.
Despite these growing efforts, more needs to be done. First, future funds which drive innovation through public-private partnerships have to be expanded in stages. A better funding environment around initial public offerings (IPOs) would also set the necessary incentives for investment, seeing as the prospect of a successful IPO motivates investors to take part in funding rounds during the pre-IPO growth phase. In this connection, the EU is planning a publicly backed IPO fund to act as a catalyst for private investment flows.
More important still are decent conditions for European stock exchange segments, which would enable them to take on industry leaders such as the Nasdaq, the US exchange dedicated to new technologies. Vaccine manufacturers BioNTech and CureVac, for instance, opted to go with Nasdaq for their IPOs – not Frankfurt, Paris or Amsterdam.
Decent conditions include investors having adequate knowledge of the sector and analytical capabilities being available. In other words, it’s essential that financial intermediaries place their experts not just in London and New York but in their home market as well. The prevailing capital market culture holds equal sway over the success of a financial centre. Changes are afoot here: low interest rates and the ongoing digital transformation are currently inducing younger people, in particular, to increasingly save money in the form of stocks and shares. Altogether, around one million people under the age of 40 embarked on this kind of saving last year. Our task now is to give this target group the financial knowledge it needs and temper exaggerated hopes of turning a quick profit.
Establishing a funded occupational and private pension scheme would give the capital market an added boost. Not only could this build up the pension scheme here in Germany and place it on a broader footing, it would also allow people to share in the economic success of businesses. This is contingent on regulatory requirements for risk mitigation, in addition to cost structures and management skills at the financial intermediaries in question.
The agenda for digital and environmental transformation encompasses more than just the right funding ecosystem, however. Is the government setting clear signals, in the shape of an appropriate carbon tax, say? How can the required transfer of knowledge between researchers and established businesses be enhanced? Have appropriate incentives been set for business start-ups stemming from research? And does the public sector, a key source of demand, also have innovative products and services in its sights? We need to find answers to these, and other, questions. For this to happen, government, the real economy, the financial sector and the research world will have to pull together, allowing Europe’s inventiveness and creativity to blossom going forward.