The tragic war in Ukraine – and the many direct consequences it has on the whole European continent – naturally puts any other political priority into perspective. Nonetheless, the shockwave of the ongoing humanitarian, geopolitical and economic crisis reinforces rather than lessens the importance of completing the agenda put forward by the European Commission at the beginning of its mandate.
This of course includes climate change which rightly was, until the horror of war returned to the continent, the top concern of EU citizens. But climate change is not the only transition that has been at the heart of the European institutions’ agenda. The double need for the continent to be at the forefront of technological developments and to strengthen its digital sovereignty has led the European Commission to promote a Digital Union. And rightly so.
The next decade, dubbed by the Commission “Europe’s Digital Decade”, will see our continent face many challenges on this front. Europe will have to develop appropriate and efficient digital infrastructures – increasing connectivity between its half of a billion citizens. To improve the – basic and enhanced – skills of ordinary people and future IT experts. To foster its industrial production of tech material, such as semiconductors. And to seek technological breakthroughs on areas such as quantum computing or artificial intelligence.
Glancing at this non-exhaustive list, one may notice that the term “digital” encompasses a wide range of potential initiatives distributed around a wide range of sectors. Yet, all of these necessitate two of the same ingredients: a great deal of innovation (no tech without ideas) and a great deal of capital (no tech without funding).
At the intersection of both, you’ll find the venture and growth capital industry.
Descriptions of venture capital always insist on the key role it plays in promoting the rise of innovative companies. Along with growth funds, venture funds are key components of the financing chain for companies which, growing from a garage or a university lab, provide the technologies of the future.
There is no doubt that the digital transition will be the one of start-ups and scale-ups that either offer new services – or offer old services more efficiently. And these start-ups, especially after the Covid pandemic, need the equity that can be offered by these funds.
This is clearly seen in the data we collect at Invest Europe, through our European Data Cooperative (EDC). Last year ICT businesses represented half (49.6%) of venture investments in terms of amount of capital invested and 45.5% in number of companies. As can be seen in the graph below, these numbers have been increasing slightly over the past decade – showing that ICT start-ups and scale-ups are more and more at the heart of the EU venture strategy. And this is without counting the many venture investments that, despite being made in other sectors such as consumer or business good and services, are also shaping this transition.
The best example of this are the commitments venture and growth funds make in entities active in financial technology. Better known as “fintechs”, these businesses are a crucial part of the digital transition. By allowing consumers to have an easier access to finance, they can improve their daily lives by giving them a better access to the financial products they need. From an investment standpoint, their development can help improve everyone’s financial literacy, by providing applications that are easier to understand and to use. As such, they can both contribute to Digital Union objectives – by improving the EU citizens’ skillset – and the Capital Markets Union – by fostering retail customers access to new markets.
There are many stories of successful venture capital investments into fintech companies that have now the size to compete at a global level. These are the stories that Europe wants to see repeated. Not only for the sake of EU customers – but also from a global perspective. Nearly twenty years after the Internet revolution, the European Union must give itself the capacities to incubate tomorrow’s international champions. As one Swedish group once said, this is an area where the winner takes it all and Europe is still trailing behind its competitors
All must therefore be done to ensure that venture and growth funds support EU fintechs. And yet opportunities offered by recent reviews are not always seized as they ought to. The latest example of this is the revision of the European Long Term Investment Fund framework (“ELTIFs”), a voluntary label that allows AIFMD-authorised fund managers to market to retail clients. ELTIFs are still not allowed to invest in any “financial undertakings” when these operate under one of the many EU financial licenses. This in turn makes it particularly challenging for venture, growth and larger private equity funds to support these businesses.
Fintechs are only one of the many examples where more can be done to support investments into the ideas, people and ultimately businesses that could put the European Union at the head of the pack. There are many more actions that can be taken to unlock the ability of equity funds to give innovative businesses the push they need.
So, what are we waiting for?