The European Union’s proposed Alternative Investment Fund Managers Directive sounds relatively innocuous. But its impact could have far reaching consequences for Europe’s emerging startup tech scene, imposing higher costs, red tape and put off most institutional investors from investing in VC funds. The Directive could – to be blunt – completely shaft VC, and thus venture backed startups in Europe. Here’s how, and here’s what you can do about it.
The AIDM Directive is part of wider moves by the European Commission to regulate the ‘riskier’ end of the financial system. But in seeking to impose greater transparency and accountability on hedge funds and private equity firms, like a cod trawler killing dophins, this drag net could destroy the early stage investment scene in Europe.
This “catch-all” regulation stretches across hedge funds to venture firms, with very little consideration of how these vehicles operate. The trouble is that VC has been lumped in with things which pose a “systemic risk” to the financial system, when that’s not the case at all.
Under the proposed Directive, VCs will be required to disclose a lot more information, which is likely to cost as much as €100,000 annually per investee company, according to the EVCA. The Directive also imposes much greater capital requirements on venture firms, even as funds are shrinking to reflect the ease of creating startups now. VCs will also have to use outside depositaries (i.e. custodians) and independent valuation agents, again, adding cost and complexity.
The result is that successful start-ups from Europe like Skype, MySQL and Playfish would be less inclined to take VC money from European investors, because it will cost more.
And bizarrely, the directive directly undermines current EU policy initiatives to promote new technologies.
The BVCA – The British Private Equity and Venture Capital Association estimates that two million Europeans are employed by venture-backed start-ups. In the last ten years €100bn has gone into 62,000 businesses, but the last 20 years of the European venture ecosystem is at risk from this EU directive. It will make it much easier for large, established US venture capital companies to basically start owning the EU startup scene.
But as we all know, US VCs don’t invest that much on the ground in Europe. The requirements of regular board contact make it relatively rare. At least European VCs are “on the ground.”
Last month the EVCA surveyed the world’s most active institutional investors in venture and growth capital funds [PDF]. Those surveyed represented an estimated €560 billion under management and over €14 billion committed to venture and growth capital in recent years.
The survey found that that 67% would either withdraw from venture and growth investment completely or substantially reduce their allocations (by over 30%) if the proposed AIFM Directive was implemented in its current form.
But, wait, there’s more.
The current Directive would also prevent EU based investors in venture from investing outside of
the EU 27 states. That’s basically a disaster for European venture, and by association, technology startups.
Right now over 90% of European venture capital is invested in small to medium sized enterprises.
So, what can you do?
The European Venture Capital Association is calling on European entrepreneurs to lobby the EU and sign a petition it has drawn up against the Directive.
The idea is to email them and thus become a co-signatory to a letter they are sending to the EU.
To do this you can send a mail to firstname.lastname@example.org stating name, company name, HQ location. Use the subject line “Entrepreneur Petition against AIFM Directive”
So far 483 VCs and startups have signed the letter.
Tonight (Sunday night, April 25) is the deadline.
Atlas Ventures partner Fred Destin has also blogged about the directive.