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Are European tech companies handicapped by a lack of later stage investment?

The amount of funding available to technology start ups has been a discussion point for many years. Basically, the argument says that Europe doesn’t have the same appetite for funding start ups that exists in the US.

Of course, it depends on how you define ‘technology’ – the word is being applied more liberally nowadays. But let’s look at electronics. Venture capitalists (VCs) fuelled the growth of the electronics industry into the 1990s. By this time, VCs were fighting to put money into dot com companies and those targeting web based communications. All manner of crazy ideas were being pitched to the VC community, which responded by writing large cheques without too much ‘due diligence’.

But as leading edge devices became hugely expensive to get to market, the returns declined and the appetite of VCs for electronics companies abated.

According to a report from investment company Magister Advisors, lack of funding in Europe is holding back the growth of tech companies, particularly those further into their development.

At the Series A level – where companies receive their first significant investment – three times as many US companies were funded in 2016 as there were in Europe. But at Series C, more than 10 times as many US companies were funded than similar companies in Europe. Magister says this is because later stage funding in Europe ‘barely exists’.

Partly, this can be explained by cultural differences; Europe’s technology sector was dominated by large companies which conducted and funded innovation internally. Only lately have start ups become more common.

Magister also wonders whether European investors may ‘take the money’ earlier, implying there is little need for anything beyond early stage funding.

Funding from VCs, whilst significant, isn’t the only source of investment. In the UK, as part of the Government’s industrial strategy, the National Productivity Investment Fund is looking to put £4.7billion into commercialisation of research, whilst forthcoming UK Research and Innovation will, as its name suggests, integrate research with innovation, with the aim of boosting the UK’s economy.

Broadly, however, just as Europe is developing a meaningful start up culture, the lack of funding means the ability of start ups with good ideas to flourish may be handicapped.

Author
Graham Pitcher

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