Clearly more innovations are made in the United States than in Europe. Several attempts have been made to respond to this situation. A wide range of initiatives have been launched to encourage innovation. As it is, US technological giants lead the tech race, the venture capital market is stronger and tech IPOs take place in the United States. From the standpoint of an institutional investor, European innovations have not been as attractive investments as in the United States. Things could change. In the United States, most patents are registered by start-up companies. Hence, fostering a growth market for start-ups is one way of promoting innovation. Here is a five-point list of market infrastructure measures to boost European innovations.
Information and communications
For innovation and venture capital investments to be attractive, they must be profitable. According to the latest statistics, European venture capital funds have outperformed US funds over the past 10 years, returning over 20 percent per annum according to Invest Europe association. In the preceding period, it was the other way round. Sound profits attract investors. Information about healthy profits should be actively distributed and made readily available. The 2021 and 2022 venture funds are likely to prove disappointing, but if interest rates fall, the investment environment will offer improved opportunities for innovation and its financing.
Investment products readily available
Investing in venture capital funds is often a difficult decision. Newly established funds are initially small. For an institutional investor, analysing these funds is an arduous and time-consuming task. For this reason, it would be advisable to create funds of funds for this market, which will allow investors to be collectively involved in the start-up sector. In Finland, such a solution is offered by the Finnish Industry Investment's fund of growth funds. Its counterpart in European level is the European Investment Fund.
BlackRock bought Preqin in the summer. BlackRock has typically operated as an asset manager focused on the public equity and fixed income markets. Now it is making a foray into the illiquid markets where Preqin has been a leading information provider. Hopefully, the acquisition will generate easy and cost-efficient investment products for the unlisted market.
A single strong technology exchange
There are several stock exchanges in Europe. What Europe needs is a strong European ‘Nasdaq’ where growth companies can get listed. Alternatively, we could create a perception of a single exchange even if it were a combination of many. The important thing is to establish a highly visible and prominent marketplace whose star companies become the talk of the town. The challenge Europe is facing is where to set up this exchange. Pre-Brexit, London would have been the obvious choice. Now we can legitimately ask where is the European exchange? In a report published in June, the McKinsey consultancy highlighted the wide gap that exists between US and European exchanges. The stock exchanges differ both in terms of the number of technology companies going public and valuation levels.
A single strong technology index
A strong stock exchange creates a strong, easy-to-follow index that allows investors to make investment decisions based on that benchmark index. If there are too many indices, there will be no sufficiently strong benchmark that would generate sound investment products. A strong stock exchange equals a strong index. It is also possible to create a robust virtual index based on several technology exchanges and local ‘Nasdaq’ exchanges. This would be the second-best option if a single strong exchange fails to materialise.
Information marketing
Nasdaq is a household concept. So is Silicon Valley. Where are Europe’s innovations? It is hard to pinpoint the location, and there are many answers to this question, perhaps too many. European innovations should be marketed vigorously. Once the above-mentioned things have been accomplished with a sound track record to prove it, effective marketing should begin. The efforts to create a European Capital Markets Union (CMU) is a long-standing project. The problem is that the proposed solutions are limited and isolated without an overriding idea of how the European capital market should be put in place. One solution is the ‘innovation market” suggested here. Innovation market infrastructure is a chain of layers which consist of stock exchange, market, benchmark indices and investment products by which investors are attracted to invest. The good investment returns are the solid basis for interest.
In conclusion
Europe possesses huge potential in terms of knowledge and skills. However, the market for European innovations is under-developed compared to the United States. But now we have a springboard. Statistics show that Europe outperforms the United States when it comes to 10-year venture capital returns. This fact can be used to create a roadmap for the kind of progress outlined above to increase the attractiveness of European growth companies from institutional investor perspective at the various stages of development. When there is a good and functioning market for innovations, it will drive workers and researchers to innovate. A pre-condition for a sound market is a multi-tiered, highly functional capital market infrastructure.
Writer is VER's CEO Timo Löyttyniemi
