Q: Venture investment has fallen sharply in Europe. Are you worried about the impact on innovation?
A: If you look only at the numbers, you might feel concerned. But I'm not. The peak was due in large part to things the venture-capital industry shouldn't have done. We were funding companies in the consumer area, in mass markets, and that's not what venture capital is about. We know nothing about consumer markets. It's not our world. The way I see it today, we're now back to where we belong, back to funding startups in information technology and life science.
Q: The percentage of private equity going into startups has also fallen for two years. Is that worrisome?
A: A number of venture firms are more preoccupied by the current economy or by the state of the stock market. But true venture capitalists should be basically concerned with technology and funding seed startups. Technologies also have cycles, and today we're in a down-cycle in technology, while life sciences continues strong in terms of new developments. What matters is that there's still activity in Europe -- a real venture-capital industry focused on early-stage technologies. That makes me quite confident in the future. I'm comfortable we'll continue to have innovation and startups in Europe. What really drives venture capital shouldn't be today's stock market or economy. It's development of technologies for the long term.
Q: Historically, there has been less venture capital in Europe as a percentage of gross domestic product. Even now, it's only one-third as much [as in the U.S.] Why, and is the situation improving?
A: The difference in levels is a reflection of the past. There's much more history of venture-capital funding in the U.S. In Europe, it's still quite recent -- just 10 to 15 years in an organized fashion -- but now catching up fast. To me, that tends to show that there's still room for venture capital to grow in Europe, and there's no reason it shouldn't eventually reach the same percentage of GDP. Private equity is also not yet at the level of the U.S, which is also an indication that there's room to grow.
Q: New investment into venture funds has also dropped. Have investors lost faith in venture as an asset class?
A: Some investors have definitely been disappointed. The latecomers who came in 1999 and 2000 and invested in Internet-only situations lost a lot. If they were first-timers, they're certainly discouraged. But there's still capital available from more experienced investors. I don't expect them to leave the asset class. Private equity overall continues to provide quite adequate returns, significantly above the stock market. Another reason there's less fundraising is that VCs are still spending the money they raised two or three years ago.
Q: A common criticism of the venture-capital community in Europe is that too many of the players have come out of investment banking and lack real-world operating experience in startups. In turn, that makes them more inclined to do safer, later-stage deals, which means not enough money goes to early-stage stuff.
A: It's a valid criticism. Most of the VC industry in Europe is still young. It grew up in the late 90s, in a period of strong economies and booming markets, and many people came in to take advantage of that. The idea was to invest in high-tech companies that you could take public rapidly, and hence a lot of people from the investment banking or financial area came in. But now, a sizeable number of firms have a high degree of specialization and operating experience, whether in the pharmaceutical industry or coming from an operating company in the IT side.
Q: On the flip side, European entrepreneurs are generally seen as being very strong technically, but not as strong in marketing. In particular, some people say, they have trouble making the leap from innovation to commercialization. Should VCs be doing more here to help?
A: Again, it's a fair criticism. It's especially apparent in today's environment, when things are more difficult. Good times can hide many weaknesses, and some people who looked liked good managers in the good times are finding it harder now. As a result, execution on the ground is more critical today than it was a few years ago. Even so, you still have to make a split between the role of the venture capitalist and the role of the team. It's the responsibility of the VC to make sure the right team is in place, but it's the entrepreneur's responsibility to execute.
Q: How have entrepreneurs changed since the tech crash? I hear there are a lot more serial entrepreneurs -- that is, experienced people coming back for another try.
A: This is exactly what we're seeing. In the Internet era, grey hair was doomed. The new generation was at the pinnacle. Everything had to be new: New markets, new approaches, new managers. Typically, they came from consulting or investment banking, they were in their late 20s or early 30s, and they were the way to go. Now that things are much more difficult, we're seeing the return of the grey-hairs -- people who have done this already, two or three times, and know how to deal with engineers, build a team, and design a marketing strategy.
This is a key human-resource ingredient that the U.S. has had for many years -- [America has had] time to build this reservoir of repeat entrepreneurs. Now we're starting to have it in Europe. At Sofinnova, we're currently funding four repeat entrepreneurs.
Q: Europe tends to give a larger role to government than the U.S. does. For instance, the EU's Research Directorate is pouring $15 billion into basic research over five years. And there's the European Investment Bank, which channeled $1.7 billion last year into venture funds. Are you supportive of these efforts?
A: I think it's the right approach. European culture is definitely more geared toward public incentives, although in the U.S., you have more than people sometimes realize. The Defense Dept. and the National Institutes of Health help a lot with fundamental research. In Europe, we have a culture of having the government come in, either to put money directly into the system or to help create a better environment for startups. That means putting together the tax and regulatory environment to promote entrepreneurship.
The European Investment Fund has played an important role here, especially in the formation of new venture groups. It only invests in funds, not directly in startups, and that helps them build credibility and raise additional funds from private sources. It's a very useful and efficient method.
Q: What's the biggest impediment, in general, to creating a more entrepreneurial environment in Europe?
A: The European Private Equity & Venture Capital Assn. (EVCA) just did a benchmarking study comparing different European countries according to their tax and legal environments. Britain comes out first. France is somewhere in the middle, and Denmark and Austria are at the bottom.
There are initiatives under way that could improve things a lot. One I should mention here in France is the new Young Innovative Companies law, which has been announced by the Research & Development Minister and Industry Minister. [The proposed law would exempt companies younger than 12 years old that spend 25% or more of their budgets on R&D from France's steep "social charges," or taxes to pay for government social programs. It would also eliminate some wealth taxes, make granting stock options easier, and exempt qualifying companies from all taxes on profits for three years.] I expect it will pass into law in June. And it's a model we will try to promote throughout Europe, to make the EU the best environment for technology startups anywhere.
Q: What's the biggest difference you see in building new companies in Europe vs. in the U.S.?
A: [European startups] have to think more internationally. The small size of their domestic markets is always a problem, but Europe as a single market is coming up. A few years ago, the way for a high-tech company in any country in Europe to grow was to enter the U.S. market. Today, that's no longer the case. They can start in one European country and grow very rapidly to other countries in Europe. Management teams here are increasingly international, and venture syndicates are more and more pan-European. High-tech Europe is well under way.
In terms of funding, there used to be big differences in the amount of funding a startup could get in the U.S. and in Europe. Now, you find quite sizeable rounds of financing here -- from $5 million to $10 million in the first round and going to $20 million in later rounds. That matches up well to U.S. levels.
The U.S. still has a couple of very important advantages. One is the Nasdaq, a very powerful tool for companies to go public. We don't have that. Another is a deeper pool of experienced managers and lots of people very good at devising marketing strategies, positioning, and selling. That's one of the major areas Europe still has to work on. But from a technology standpoint, the two regions compete well.