The “Ugly Duck” Conference: Not So Ugly After All

What were you doing on Tuesday? We were at the European Investment Fund’s (EIF) annual conference — an impressive event that brought together ~250 of EIF’s fund managers to reflect on 20 years of investment in European venture capital. Our co-founder Sofia Hmich was asked to make a keynote speech to close the day (following both the Midas-list investor Antoine Papiernik and Dr. Omar Hatamleh, the Chief Innovation Officer of Engineering at NASA). The data and insights shared by EIF in what they called the “Ugly Duck” Conference showed how European venture is growing into a beautiful swan, while at the same time recognising the funding gaps and future opportunities that we also see in Europe.

Ecosystem and community builder: 20 years of leadership

Uli Grabenwarter’s opening talk showed an often hidden and increasingly rosy picture of the performance of EIF’s European venture portfolio. Ponies have become unicorns aplenty, despite Europe’s naming approach perhaps suggesting otherwise (I’m thinking Improbable and Farfetch). Beyond the usual suspects, the list includes a number of companies that are driving progress and which set a bright example for European entrepreneurs, such as Mindmaze, Oxford Nanopore, and Benevolent AI. Performance across the EIF portfolio reflects this: the decade from 2006 to 2015 contained 8 vintage years for which even the third quartile of EIF-backed funds were in the money (total value to paid in capital being above one), and indeed 2017 was a landmark year, with EIF’s top 10 performing funds reaching a record combined IRR of more than 38%.

Two key growth drivers were the performance of emerging managers and the performance of the life sciences sector. Given common preconceived ideas from investors on those two themes, we thought it would be worth providing a few more details:

• Emerging managers. Two of EIF’s top five performing funds were managed by first-timers. This data point is consistent with other market studies, which show that first-time funds typically outperform non-first-time funds. Indeed, first-time managers achieved higher median net IRRs than non-first-time funds across 13 of the 16 vintage years going back to 2000; and 32% of first-time funds achieved top-quartile performance (all vintages combined), compared with 24% for all other funds.
• Tech v. Life Sciences. Despite a portfolio that is weighted towards technology funds (80%), 2 of EIF’s top 5 performing funds were in the life sciences. Additionally, life sciences funds in their portfolio’s top and second quartile outperformed technology funds. We see this as representative of a market trend that is relevant for Future Positive’s focus areas. As traditional/historical life science technologies (namely synthetic biology and genetics) converge with other technologies (such as robotics and machine/deep learning) to tackle market opportunities that are not in medical fields, we see increasing scenarios where preconceived ideas about biotech investments no longer apply — namely that it is no longer true that biotech underperforms compared to other VC sectors, that losses are more frequent and larger, and that investment timelines are too long for venture funds.

We see increasing scenarios where preconceived ideas about biotech investments no longer apply — namely that it is no longer true that biotech underperforms compared to other VC sectors, that losses are more frequent and larger, and that investment timelines are too long for venture funds.

Finally, Europe is getting bolder. European VCs have started to shift their mindset to optimize for portfolio performance instead of managing downside risk, increasingly cutting losses and focusing their capital on winning deals. This performance-oriented behavior has existed in the US for a while: as early as 2008, 68% of the cases where an investment returned more than 10x resulted in a home run for the fund (i.e. returned the entire fund), indicating increased concentration of capital from that fund into that portfolio company. In Europe at that same date, the number stood at 32%. Recently, however, it has started to increase, to reach 48% today.

What should be the Swann’s Way?

While the data is encouraging, there remain a couple of important open questions. Firstly, in relation to realizing value, and as highlighted by Antoine Papiernik, there are definitely funding gaps which prevent our European ecosystem from reaching full velocity. We remain a figurative as well as literal ocean apart from the US when it comes to taking companies public. Since Europe does not have the same financial infrastructure as Wall Street to take technology companies public and manage them post IPO, Antoine is working hand in hand with Nasdaq investors to prepare European companies for US markets — ensuring they have the right teams and boards in place as well as the right infrastructure and marketing to attract large public investors — and to float them on US exchanges.

Secondly, and as Sofia took to the stage to highlight, despite Europe’s strong performance, European capital is not spread properly across what you might call the spectrum of opportunity. It is concentrated in some areas but ignores others where Europe has natural ecosystem advantages. To highlight just how big this missed opportunity is for VCs, 75% of tech exits in 2016 were — unbelievably — not VC backed (up from 34% in 2014). When we look at the companies coming out of European university research labs, and the increasingly widely-accepted fact that a new wave of advanced technologies are combining to transform every sector in the global economy, it is surprising that 84% of European venture capital is still invested in web and mobile. Furthermore, while 88% of today’s best talent and tomorrow’s leaders (Millennials) want to take on big global challenges and work for purpose-driven companies, VC capital remains blinded by certain (admittedly large) sectors like Enterprise Software or Fintech, forgetting other trillion dollar opportunities (see chart) that are solving the world’s largest challenges.

At Future Positive, our investments in new healthcare solutions for modern pathologies like workplace stress, and in stem cell technologies tackling the global protein and agriculture problem through clean meat, are the first steps in our journey to build a new venture capital firm that Europe will be proud of.