Europe's Mr. Entrepreneurialism
Philippe Pouletty is a man on a mission to boost entrepreneurialism in Europe. A 49-year-old French medical doctor, he launched two successful biotech companies in North America in the 1990s before returning to France in 2000 to launch three more biotechs and to co-found a $385 million Paris venture fund, called Truffle Capital.
Yet for all of his own success as a serial entrepreneur, Pouletty worries that the Old World still isn't producing enough enduring high-fliers in the mold of Genentech (DNA), Cisco Systems (CSCO), or Google (GOOG). He has an interesting take on the problem: It's not a shortage of good ideas or a lack of entrepreneurs willing to leap into the void. Rather, Pouletty says, European venture capital firms and startups don't have enough money to work with because risk-averse institutional investors in Europe aren't placing their bets on entrepreneurialism.
Following the U.S. Example
Pouletty figures American pension funds invest anywhere from 7% to 15% of their portfolios in venture capital and young public companies. That compares to between 4% and 7% in Britain and less than 2% across Europe. "That is the major explanation for the difference in economic growth between the U.S., Britain, and Continental Europe," Pouletty says.
Other numbers bear him out. According to the Brussels (Belgium)-based European Private Equity & Venture Capital Assn. (EVCA), European startups received $26 billion in seed, startup, or expansion funding last year, while European venture capital funds managed to raise $25 billion from sources including wealthy individuals, banks, insurance companies, and pension funds. In the U.S., by comparison, startups got $34.6 billion, while venture capital funds raised $31.7 billion, according to Thomson Financial (TOC).
One reason for Europe's shortfall is a continued bias in favor of the financial Old Guard. New venture funds barely stand a chance of attracting institutional investors, and even some well-established players, such as Munich (Germany)-based Wellington Partners, have had trouble selling recent funds. Institutional investors also tend to look at new stocks askance. Jean-Bernard Schmidt, managing partner at Paris-based Sofinnova Partners and former chairman of the EVCA, says many people persist in seeing leveraged buyouts and hedge funds as safer than initial public offerings by startups. "We need them to wake up and look again at technology stocks and divert a bit of their focus away from other parts of the private equity business," Schmidt says.
Putting Pension Funds to Work
Pouletty thinks Europe can do better. But given the more conservative nature of the Continent's investors and a stronger tradition of government intervention, he knows the private sector may not budge without a push from the top. So he is lobbying governments all over Europe, as well as the European Commission in Brussels, to redirect more money—especially retirement funds—into younger, riskier investments.
"What is needed is an increase in the volume of venture capital by mobilizing and investing the high rate of European savings into venture capital, very much like pension funds do in the U.S.," says Pouletty, who also serves as the current chairman of France Biotech, an industry association.
Mind you, he's not advocating the creation of cumbersome new "frameworks" and other Brussels programs that channel billions of euros into vaguely defined research projects. Rather, he wants to see existing monies used better.
Take the giant European Investment Fund, which already has poured €4.2 billion ($6 billion) into venture capital funds. Turns out, most of its investments are in very safe targets—funds that "mainly make late-stage investments" or that "don't need the money," Pouletty says. He'd rather see 90% of the European Investment Fund's investments channeled into younger, more innovative—and riskier—startups.
Incentives for YICs
At an October meeting in Brussels attended by European Commission President José Manuel Barroso, Pouletty floated this and other ideas to a receptive audience. Pouletty proposes that the European Union and member states consider radical measures to help so-called young, innovative companies, or YICs, which are less than 15 years old (or 20 years old for biotech firms) and which expend 15% or more of their top line on research and development.
To aid companies, Pouletty suggests temporary exemptions from local and corporate taxes and the heavy social charges that can add 60% to the cost of every employee. To encourage investors, he proposes exemptions from capital-gains and inheritance taxes on investments made in YICs. And he's got a host of other ideas—from a $1.4 billion "brain-hunting" fund to attract top talent from around the world to Europe, to special tax assistance programs that would treat relocated senior tech executives almost like diplomats.
Pouletty has a good reason for latching onto this formula. He was one of the main drivers behind a program in France known as the "Young Entrepreneurs Law," enacted in 2004. It offers similar provisions, such as tax breaks for companies below a certain size and age that invest a lot in R&D. To date, 1,700 small French firms have taken advantage of the new rules to lower their costs. More important, the law has boosted France's standing in innovation. In a recent study conducted by Ernst & Young, the country has jumped from last place to first in Europe in terms of how much of every euro invested into young companies ends up going to R&D.
R&D that Works
While serving as vice-chairman of pan-European biotech industry association Europabio, Pouletty spread the word about France's new law. Now Belgium, Spain, Portugal, and Sweden have enacted similar measures, and Pouletty would like these and other ideas he pitched to Barroso to spread across the Continent. "If it works, one day France and Europe could indeed become the best place on earth to start and grow companies," Pouletty says.
In the end, Pouletty considers the opportunities for small companies to grow into giants far more important than grand government pronouncements about innovation. He points to the Lisbon Agenda, the economic development plan that aims to make the EU the world's leading information society in part by encouraging European countries and companies to boost their overall R&D spending. "What truly matters," Pouletty asserts, "is not whether Europe spends 2% or 3% of gross domestic product on R&D, but how many innovative companies exist and what their contribution is to economic growth and job creation."