European VC isn’t dead — it’s just subsidized

GravestoneEvery few years, the Cassandras of the investment world get together and write the obituary for venture capital. Just recently, we heard how the amount of cash sloshing around America’s VC community is down again, even if the Instagram sale perked everyone up a little.

But there’s at least one group that seems to be betting firmly on the future health of venture: European governments.

The Economist last week published an interesting analysis that interrogated the source of Europe’s venture capital money. Based on figures from the industry association, it detailed the changes over the last few years in where venture money actually comes from.

No, I’m not talking about which VCs have money to invest. I’m talking about where their money actually comes from. Because, remember, it’s rarely the case that a venture investor puts their own cash into the startup funding rounds you constantly hear about (even if it sometimes seems that way). No, it’s somebody else’s money — a “limited partner” who contributes to a fund with the promise from the venture capitalist that they’ll put it into companies that can provide a serious return.

But here’s the thing. It’s not just somebody else’s money…

It turns out that increasingly, it’s yours.

As you can see from this Economist graphic, It turns out that European venture capitalists are being funded increasingly by the continent’s governments. Where once banks and rich individuals were wellsprings of money for ambitious VCs, it is politicians and bureaucrats who are now signing the checks.

It’s not just a small shift, either. In the past five years, the pendulum has swung massively toward government backing — whether directly, or through regional development funds or other avenues. In 2007 governments were responsible for just 9.9 percent of all money put into VC; by last year that had risen to a staggering 39 percent.

Now, part of that is the pie shrinking. The total amount of money raised by European VCs has fallen by around half in that period, and the global economy has also suffered just a little over in recent years, so perhaps as an absolute change it’s not quite as drastic. But it’s still dramatic.

And whatever the case, it’s food for thought. Next time you hear an entrepreneur whining about how government just gets in their way, or subsidizes some dying industry they want to disrupt, you may want to ask them where their funding comes from.