When Governments Act As Early & Responsible Investors

Governments in Europe not only stepped in early and were ‘lenders of first resort’ to spearhead the European technology sector, but they also set the tone for responsible behavior.

Sara Daniel

We believe in expanding outreach. Find out how you can use our work.

The public sector is often perceived as a slow and reactive institution – a force that intervenes to correct market discrepancies. The 2008 financial crisis re-enforced this perception when governments around the world stepped in as ‘lenders of last resort’ to rescue the banks that were dubbed ‘too big to fail’. Through my work, I have noticed a different face to government in the European technology industry. In Europe, the public sector acted as a ‘lender of first resort’ to early-stage innovative technology companies. In addition to backing innovative businesses early on, government agencies’ involvement as investors helped promote responsible behavior within the new generation of technology companies emerging out of Europe.


Venture Capital (VC) is the main source of capital for entrepreneurship, particularly for technology businesses. 

Seven out of the ten most valuable companies in the world are technology businesses.1The 10 most valuable companies by market cap (as of Jan. 2020): Saudi Aramco, Apple, Microsoft, Alphabet (Google’s parent company), Amazon, Facebook, Alibaba Group, Berkshire Hathaway Inc, Tencent, and Visa Inc. These companies were financed by VCs in their early days. Venture Capital firms (VCs) are funds that invest in startups with high-growth potential. They intervene early in a business’ life cycle– as early as the product’s development phase– and provide their support until the company enters the Initial Public Offering (IPO) phase, the process of listing a company’s shares on a stock exchange. VC is without a doubt an enormous contributor to innovation and value creation.


How do VCs work?

A VC fund is managed by General Partners (GPs) – in most cases the founders of the fund. The GP raises capital from investors, the Limited Partners (LPs)2In the fund’s legal structure, the GP and the LP are different entities.. There are different types of LPs: high-net-worth individuals, family offices, pension funds, government agencies, etc. The fund has a term of 7 years (on average) with the possibility to extend for 1-3 years. At the end of the term, the GPs distribute the returns made from their investments to the LPs. GPs are remunerated in two ways: 1) a yearly management fee, a percentage of the total size of the fund, typically 2%; and 2) a carried interest, a portion of the profits of the fund typically 20%.


In Europe, Government agencies are the largest LP type: since 2014 they have contributed a total of US$ 9B to European VCs.3[1] “The State of European Technology”, 2019 Report, Atomico https://2019.stateofeuropeantech.com/chapter/key-findings/

Recognizing the importance of high-growth entrepreneurship and identifying the knowledge economy as one of the most effective ways to curb unemployment, governments have taken a central role in supporting the European tech scene. Government agencies are the largest LP types. Since 2014 they have contributed a total of US$ 9B to European VCs.4“The State of European Technology”, 2019 Report, Atomico https://2019.stateofeuropeantech.com/chapter/key-findings/ The European Investment Fund (EIF) alone has committed EUR 1.7B to European VCs.5“Le capital-risque de l’UE en faveur des PME: des financements conséquents qu’il conviendrait de canaliser davantage”, Communiqué de Presse 24.10.2019, Cour des Comptes Européenne https://www.eca.europa.eu/Lists/News/NEWS1910_24/INSR_Venture_capital_FR.pdf Furthermore, the EIF has done it in a smart way by opting to invest through independent VCs. As opposed to investing directly in startups or launching their own funds, they are letting the experts do their jobs. The best performing VCs do not just inject capital… they inject knowledge, networks, and connections – key in propelling companies forward. Many of these funds are managed by ex-founders turned funders that have relevant operational know-how. Because of that, such funds attract the best entrepreneurs early on before any of the other VCs.


The type of LPs that make up a fund effects how the fund is run & ultimately its impact.

When a fund has an LP that is not solely driven by financial and profit-making objectives, it forces the management to report other performance indicators such as: number of jobs created, number of women in management positions, and Environment Social and Governance (ESG) developments. At Leap Ventures, for the Lebanon fund, we tracked how much export revenues the portfolio companies were generating, and how many new hires were returning from abroad – in a shy attempt to reverse the country’s massive brain drain. This double bottom line approach trickled down to the companies we had invested in. If we, as a fund, need to monitor such indicators, then so do the benefiting companies. Having to disclose something, even if it does not have direct repercussions (i.e. tax benefits or penalties), it changes behaviors and eventually mentalities.


It is therefore not surprising to see that the European technology sector stands out in making sustainability a priority.

US$ 4.4B was invested in purpose-driven companies in 2019 up from US$ 1.9B in 2018. Moreover, “80% of VCs affirm that they consider the long-term societal and/or environmental impact of an investment either pre or post the investment timeframe”, more than half of which make it a factor they consider before investing.6“The State of European Technology”, 2019 Report, Atomico – https://2019.stateofeuropeantech.com/chapter/key-findings/ Another example of how European tech firms are embracing their responsibility not only to shareholders but to the environment and society as a whole is in France. The newly selected ‘Next 40’ (a list of the 40 most promising technology champions – making reference to the renown CAC 407France’s benchmark of the 40 most valuable companies on its Stock Exchange.), recently published an open letter pledging their commitment to sustainability and calling for the emergence of a new type of capitalism – one that answers to the challenges of our time8“Inventons l’entreprise dont notre société a besoin”, Opinion 21.01.2020, Les Echos.
The government’s share of total funds raised by European VCs is starting to drop as other LP types emerge and grow. European technology companies are performing above expectations, and appetite from investors continues to grow. In 2018, European VCs raised a record of US$ 13B, and by 2019 the number had already reached US$ 7.5B.9“The State of European Technology”, 2019 Report, Atomico – https://2019.stateofeuropeantech.com/chapter/key-findings/ 2018 also marks the first year where government’s share of total funds raised shows a notable drop. The most drastic increase comes from pension funds who are finally waking up to the European VC opportunity. Emerging entrepreneurial hubs such as in Central and Eastern Europe have less LP type diversity and still rely mostly on government funding. This is a prime example of how states can be ‘lenders of first resort’ paving the way, building credibility in the asset class, establishing responsible behavior, and then making way for more conventional investors.

Sara Daniel

Startup and technology specialist, Sara’s expertise lies in private company transactions and growth strategies. Sara is currently advising family-offices and financial institutions on private technology investments. Previously, as investment manager at Leap Ventures (a venture capital firm investing in Europe and the Middle East), she oversaw the entire investment process of two funds and worked directly on 16 investment transactions from deal sourcing to portfolio management. Prior to that, Sara worked as associate director at Endeavor, where she handled the selection and services program for high-impact businesses, and managed a portfolio of 11 companies with aggregate revenues of US$ 65M. Sara started her career in financial and economic consultancy for both private as well as public institutions. Sara holds a BS in Economics from the American University of Beirut, a Master of International Affairs from SciencesPo Paris (Institut d’Etudes Poliques de Paris), and a Master of Science in International Political Economy from the London School of Economics and Political Science.