Why Venture Capitalism is Different in Europe vs the US

There’s a fine line between a FREAKY IDEA and a stroke of GENIUS. 

Venture capitalism holds that inherent risk. 

Having recently invested in PreciPoint, a German company which operates in the fields of light microscopy and micropositioning systems, I’ve been thinking a lot about innovation. 

Particularly the different approach to innovation we often have in Europe in comparison to the US. 

Venture capitalism looks very different in the US vs in Europe and I think we could learn a thing or two from the ‘American way’. 

VC in the US vs Europe 

Generally speaking, where VCs in the US might say: “That sounds cool. Tell me more”, Europeans are far more likely to say ‘There’s not enough proof of concept!’ or ‘The business case is just not strong enough’ and walk away - especially if the risk is higher. 

Where US investment culture is open-minded, European investment culture tends to be too cautious and conservative.

The industry is shifting though: venture capital funding in Europe grew 6x over the last decade, to nearly $24bn in 2020. Still short of the record $73.6bn the US ecosystem raised in 2020, but a big jump and 1.5 times the rate of growth than the US over the same period.

I think it’s down to culture: having a good perspective on history, gives a better understanding of the past and present, and thus a clear vision of the future (Carlos Slim Helu). Europe is older and founded on institutions. Americans, mostly immigrants, had to fight and ‘dig for gold’ and take risks to be where they are today. Huge cultural decisions like that will always be ingrained in society and when we’re talking about the economic mindset of a nation, it’s not surprising that they still have that fight in them. Especially considering their country is only a few hundred years old. They’re more open to new ideas, embrace failure more and they put their money where their mouth is.

They follow a similar pattern in terms of private investors and penetration in the stock market. So many private investors hold individual stocks in the US and we don’t really see that in Europe. European investors are more reserved on every level: banks, institutional investors, VCs, private equity companies, and angel investors.

Of course, a degree of caution is sensible and necessary when it comes to investment. By being cautious, we minimise our losses. However, with low risk comes low reward. 

"In investing, what is comfortable is rarely profitable." — Robert Arnott

American Unicorns

There’s a fine line between a freaky idea and a stroke of genius. 

Often, that ‘fine line’ is defined by the ability to make money. 

Innovation is just an idea that is applied in the right way with the right support, and suddenly makes a difference to society. Before we had touchscreens on our phones, nobody would have thought that one day you would be able to use your face to pay for goods – now it’s a given!

Ultimately, money turns ideation into innovation!

In America, they have more VCs (and more adventurous ones). More open-minded VCs means more innovation, more innovation means more capital to invest and it snowballs until a unicorn is created. 

Facebook, Google, Apple, Amazon... four of the most world-revolutionary innovations of recent decades have come out of America. That’s not a coincidence. 

The Americans understand that you need to take risks and bet on innovation. While a high percentage of risky investments might not take off, the ones that do will reap the benefits ten-fold because they’re going to change the world as we know it.

How can Europe catch up?

Europe is doing its best trying to catch America. Last year, European startups raised a record $21.4 billion through rounds with corporate venture capital participation– that’s a near 35% increase over the year before. Of these investments healthcare, IT and software startups reigned, with a 34% share of investment. 

However, there is still slow progress and A LONG way to go to reach the heights of the American VC space. In my mind, we need to be more open-minded. We need to listen to the crazy ideas and look at the world around us and think “Could this idea change the world?”.

We need to LISTEN to the founders of start-ups and their ideas, passions and reasoning rather than burying our heads in spreadsheets and charts. Those things can only predict trends based on what’s already happened and we only have to look back to know that the biggest changes to our society come with no warning.

We need to remember that funding offers an opportunity to turn a business around. Super successful brand Nespresso hemorrhaged millions and Marvel Comics stocks plummeted from $35.75 in 1993 to $2.375 in 1996, before finding the funds and positioning to push forward. With self-belief, determination and financial backing, they’ve made huge waves. You’d be hard pressed to find a household that doesn’t include a coffee drinker or a superhero fan.

We have the incredible minds, the educational resources, the global network that America has. The thing that VC culture in Europe is often lacking is fighting spirit.

From private investments all the way up to institutional investors, risk is a necessity.

While VC is now a global practice, it is first and foremost an American invention. When handling venture capital, think like an American. 

– Patricia Falco Beccalli