ELIAN D. ALVAREZ

- VENTURE CAPITAL - ANGEL INVESTMENT -
- ENTREPRENEURSHIP - LATAM - INNOVATION -
- INVESTMENTS - PRIVATE EQUITY - FINANCE -

European Startups Seeking Assistance of Family Office Investors

Apr
06

There have been a number of stories about the connection between family offices and startups. Family offices are basically private wealth management instruments that are formed by rich families. There are a lot of venture capital companies that established their worth through family offices, including Greylock Partners, Bessemer Venture Partners, Atomico, and Frog Capital.

There are so many well-off families that have built their empires via entrepreneurship or by making seed stage investment.

 

Rising Trend of Family Offices in Venture Capital

It has been estimated that family offices around the world have $4 trillion worth of capital available for investment purposes. Moreover, there has been a rising trend of family offices in the world of venture capital.

An increased appetite for venture capital has been found among these investors. Interviews with 300 family offices around the globe, revealed that 70% of them were either actively investing in the startups or assessing the investment exposure to technology VC. However, there is another group of investors who had mixed reviews. They were still in the process of either recovering from a sudden shock or were still unsure of how to go about investing in startups effectively.

 

Consequences for Europe’s Tech World

Venture capital firms in Europe have experienced a huge funding gap with the United States. There are more technology companies in Europe as compared to the United States with high production of developers, yet, startups in the European region only receive a small percentage of investment in relation to their United States counterparts. Unless there is an improvement in this section, Europe will always lag behind in the production of tech unicorns and famous brands like Google or Apple.

Apart from large companies, family offices that currently have $759 million in asset under management should also contribute in bridging this gap.

 

Higher Returns

If you look at it from a startup or venture capitalist’s perspective, the involvement of family offices is not a big deal. Having relatively relaxed procedures, family office investors have created a stronger network as compared to institutional investors with an ability to open more avenues effectively.

It is totally understandable if you look at it from another angle. For example, family offices always look for those investment opportunities that offer a higher return. They are moving toward riskier products that offer high yield, such as a venture capital opportunity to grab prospective profitable investments.

Moreover, there was a research where it was pointed out that those who are taking control of family offices have a natural inclination and a better understanding of small scale businesses in the technology industry with ground breaking and innovative business models.

 

Changing Perception

It is true that family offices alone cannot bridge the funding gap of Europe as it requires an alliance between city or national level governments, institutional investors, angel investors, and corporate sector alongside the richest families in the world. However, it is not easily possible as it calls for a shift in perception toward venture capital, especially in Europe because it is still far behind the United States in terms of progress.

On the opposite side of the Atlantic, there is a high inclination toward taking huge risks. It is beneficial in the long run, because venture capital generates value much higher than the basic investment. In America, everyone knows that talented entrepreneurs who couldn’t make it in the first attempt are actually winners in the making, who will definitely make it big next time. Unlike America where failure is considered a stepping stone, Europe takes it as a stigma, which eventually influences their decision of capital allocation.

With the rise of technology startups in Europe, risk attitude is gradually changing among private as well as institutional investors. It is highly likely that family offices will be investing in the next wave of European innovation and research and development. This leads to increase in the number of startups that will get to the point of escape velocity and will also thrive at growth stage and beyond.

 

If the tech momentum in the European market does not die down, family offices should make a heavy investment into venture capital or else it will be left behind from other regions as well, such as Asia.

Lithuania Government and Venture Capital

Feb
16

The past research shows that the role of governments to activate the VC market is a result of direct or indirect public policy measures. They choose the optimal measures that focus on timely economic issues and also encourage private investors to fund the sector where there is insufficient capital. Different governments around the globe are making efforts to increase the development of innovative SMEs (Small and Medium Enterprises). Although, VC market is normally talked about in the context of developed countries, such as the U.S., UK, Japan, Canada, France, Australia, etc., but in 2007, a joint initiative, called the Joint European Resources for Micro to Medium Enterprises or JEREMIE, happened to take place in Lithuania and other European states.

 

What is JEREMIE and its Purpose?

The JEREMIE initiative was an effort made by the European Commission and European Investment Fund (EIF) in collaboration with the European Investment Bank Group and other financial intermediaries to have a coherence among the EU. It was formed to distribute a portion of the EU Structural Funds through new risk finance initiatives for innovative SMEs.

In 2009, Lithuania experienced a dramatic emergence of VC funds as the agreement was signed with the EIF to implement the JEREMIE initiative in the region. Moreover, VC association was also established in the country. Lithuania is known as one of the leading countries in terms of the JEREMIE holding fund agreement – a fund managed by EIF and includes pre-seed and VC fund, co-investment fund, portfolio guarantees, and credits.

 

Emergence of Financial Intermediaries in Lithuania

In 2010, three financial institutions, a consortium of MES Invest and STRATA, LitCapital, and BaltCap were chosen for equity instruments. The last two have been established to manage VC funds, whereas, the first one is for the management of Business Angels co-investment fund.

 

Launch of Seed and VC Fund

A year after the emergence of financial intermediaries, Seed and Venture Capital Fund was launched in Lithuania under the JEREMIE initiative and a team of professionals titled CEE Capital was appointed by the EIF to manage it. The purpose of this fund was to enable the establishment of seed fund in Lithuania that is supported by the State. According to the newsletter published on the website of Ministry of Economy of Lithuania Republic, the size of this fund was approximately EUR 20.7 million and its aim was to extend financial support to Lithuanian firms that have a high growth potential. It was fueled by the Structural funds that were allocated to the JEREMIE holding fund under the management of EIF. It primarily provides capital to companies that are at seed stage of the development and also help in the further expansion of new enterprises.

Although, implementation of the JEREMIE initiative increased the amount of risk capital for SMEs in the country, yet, only a few investments were made in the innovative enterprises.

 

Baltic Innovation Fund

The Baltic Innovation fund, also known as the fund of fund initiative, was formed in 2012 by the EIF in collaboration with the government of Estonia, Latvia, and Lithuania. It was created to boost the equity investment into Baltic SMEs having a great growth potential. The fund represented the investment of 52 million euros by EIF, along with the 26 million euros from each Baltic government. The aim of this fund was to focus on the Baltic States during the period of four years between 2013 and 2017 through a funds-of-funds process in order to bring more private capital and also to introduce the best market standards for equity investment in enterprises. This opportunity can definitely improve the competitiveness and employment situation in the region.

 

Progress in the VC Sector

  • The number of firms that got VC capital increased from 5 in 2011 to 16 in 2012. In 2014, the number eventually rose to 23.
  • According to Enterprise Lithuania (government agency), 63 startups were funded during the period of eight years with a capital of 101.5 trillion euros.
  • There were about 320 tech startups in the country by 2016 according to the statistics provided by The Lithuanian Private Equity and Venture Capital Association, Startup Lithuania, and Practica Capital.

Last year, Cabinet of Ministers in Lithuania approved legislation that would make the process of permanent residency easier for non EU/EEA citizens who want to do innovative businesses in the country. The VC market in Lithuania is not yet developed and its progress is really slow. However, the public initiatives would give a boost to national VC market in the country.