European tech investors need to raise their ambitions

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The author is the founder of FilteredAn FT-backed site about European start-ups

Call it the problem of missing zeros. At the very least, that is how French financier Philippe Tibi defines the scale of Europe’s challenge when it comes to protecting the region’s technological sovereignty.

As the US and China are pouring huge amounts of money into their tech sectors, Europe is at risk of faltering in the global geotech race. Tibi told me in a video interview, “There is a gradual understanding in Europe that the order of magnitude of everything lacks zero.” “When it comes to investing in batteries or semiconductors, you don’t talk about billions, you talk about billions.”

Rather than simply analyzing the challenge, Tibi is attempting to rise to it. They aim to raise growth capital across Europe and add additional zeros to investment rounds in key industries. In 2019, with the support of the French government, he helped persuade 23 of France’s leading institutional investors to commit €6bn of late-stage funding over three years in the tech sector. He didn’t offer any carrot or stick but appealed to the self-interest of the investment community. The government later set a target of raising €30bn, including additional third-party investors.

People are so enthusiastic about the scheme Tibi 2 Just launched, it aims to attract an additional €7 billion of institutional funding into the tech sector over the next four years, with a greater focus on early stage, deeptech and cleantech investments. “Our aspiration is to have 10 VC funds managing €1 billion each,” he says. Currently, there are three.

The Tibi initiative has attracted attention across Europe, especially the UK, which is also suffering from a lack of development capital. In its recent Start-Up, Scale-Up report, Britain’s opposition Labor Party said it wanted to copy the Tibi initiative. In his Mansion House speech on Monday, UK Chancellor Jeremy Hunt may be the first to jump in. He is expected to announce measures to encourage pension funds to allocate more money to raise capital. The BVCA industry association reports that foreign pension funds currently invest 16 times more in UK venture capital and private equity funds than their British counterparts.

One thing Europe does not lack is capital. What is absent is intention. According to the European Fund and Asset Management AssociationTotal assets under management in the sector stood at a whopping €28.4tn in the third quarter of 2022. The problem is that only a tiny fraction of that total is allocated to growth capital. When it comes to institutional investing, Europe remains a region of mostly risk-averse renters.

There are several reasons for this reluctance to invest in growth capital. Private market investments are riskier, less liquid and take longer to pay. It is also difficult to commit enough capital to make a difference in overall portfolio performance. Many fund managers lack the expertise to assess emerging technology trends or choose among relatively unproven European VC funds. The absence of a tech-friendly, pan-European stock market that allows investors to cash out also limits the sector’s appeal. Often, if a fund manager wants to invest in technology, it is safer, easier, and cheaper to buy publicly traded companies on the Nasdaq market in New York.

Nevertheless, according to William Barrett, managing partner at advisory fundraising firm, Reach Capital, TiB1 created something of a “snowball effect” among French fund managers. The early TiBi initiative attracted many first-time investors into the late-stage technology sector. But the tech recession of 2021, which saw a steep drop in private market valuations, resulted in VC funds writing off many of the investments they made this decade. “Institutional funds want additional investment. But if you only look at what happened with the 2020 vintage, it’s very difficult to make a case right now,” says Barrett.

Over the last decade, Europe has developed a vibrant early stage start-up ecosystem. The arrival of top US VC funds, such as Sequoia Capital, Bessemer Venture Partners, Lightspeed and now Andreessen Horowitz, reflects the growing global interest in Europe. “The set up opportunities in Europe have grown massively. And valuations in Europe are more attractive than in the US,” says Nathalie Kornhoff-Brules, managing director of EurAzio’s development team. “This should provide a huge incentive for these European capital groups to invest.”

It is absurd that foreign investors are more active supporters of Europe’s tech future than the region’s own fund managers. Now is the time to commit to European institutions.