Is Europe going to emasculate venture with misguided regulation ?
I recently received a document from Simon Walker at BVCA highlighting some of the regulatory efforts driven by European politicians and in particular Poul Nyrop Rasmussen, the leader of the Party of European Socialists.
Basically Mr Rasmussen feels like we need to be transparent and seems to think that we pose a systemic risk to the economy. He echoes the “locusts” comments and the general distaste for private equity and hedge funds found in the press. They seem to think everyone involved in private capital is a Gordon Gekko figure intent on dismembering companies and shifting all jobs to Asia ! Rasumssen has since agreed to get some form of consultation going, but apparently with the pre-agreed conclusion that the directive should really be tightened further…
Let’s first take a look at some of the key proposals (from Simon’s summarisation of the mammoth document found here):
- The proposed legislation affects all managers with funds under management of over €500M (most of us in venture fall firmly in that camp)
- The transparency requirements will require you to publish a detailed annual report about your fund, disclosing financial statements and other sensitive information. You will also have to publish an annual report for each portfolio company, including financial information and the development strategy for the company (oh really ??).
- There is also the cost of implementation: A ball-park figure would be around £10,000-£15,000 per quarter.
- Capital requirements will oblige you to have at least €125,000 set aside and also additional capital equal to 0.02% where funds exceed €250m.
- Firms would be required to appoint an independent valuer, which could result in someone who understands your business and its value being replaced by someone who doesn’t. Early indications are that valuation fees could be £40k per annum per portfolio company (sounds high to me).
- Applies to non-domestic funds too, so rest assured the Americans would be coming near our shores again (we finally won ! through regulation !)
What’s wrong with this picture ?
- We build companies: My job is to raise money from institutional investors in the world and to channel it to promising tech startups — I have no clue how I would be contributing to any form of systemic risk. We hardly ever use leverage (although even that is a moot point, nothing wrong with leverage per se), we create jobs, we build value (sometimes).
- My investors do not need protection: we only raise money from sophisticated institutionals who have access to all the information they need and ask for. They don’t need or want to be nannied.
- Our companies simply cannot survive without confidentiality. Gosh, it’s hard enough to build our startups and help them strive against better funded competition without some disconnected professional politician at the European Commission declaring that we need to publish our numbers !! We rely on discretion when we acquire new customers (so we can make ourselves sound bigger than we are and get their business !), when we acquire companies (I don’t want to overpay for targets) , quite simply whenever we compete. Imagine you are a small startup from the south of France posing a threat to IBM on one of its product lines but currently bridge financed by your investors …. do you really want to give IBM the sweet relief of brandishing your accounts in front of every potential customer to scare them off ?
- People outside the industry frankly cannot process the information. Transparency is great for MP’s Expenses but has no place in early-stage venture. Imagine company X goes through a downround with full-ratchet anti-dilution which drives the price per share down by 75%. Is this a dead company or simply a promising business going through a recap ? How can you communicate stuff like that to the outside world through simple reporting ? The answer is clear: you can’t.
- Cost: an estimate of $2.8 billion in year one has been put forward
So please, Mr Rasmussen, take the time to understand what we do. And don’t force us to take our business elsewhere — if this gets passed into law, I will surely be taking myself and the cash I invest out of Europe and probably into the US. Simple. It’s hard enough as it is to make European venture work without these added competitive disadvantages.
But hey, maybe I am missing the point here — maybe this is a coy attempt at protectionism, maybe the plan is for EIF Mark II to run all venture money in Europe. Go figure. From down in the trenches, it certainly makes no sense at all !
PS I wrote this rant a couple of months back and never published, you can read more about it in Martin Arnold’s great FT article on the topic: “Venture Capitalists Caught in Crossfire“.
<— A new direction for Europe. Self-Serving Populism. Hardly new…