New EU rules could kill off European VC and screw startups – Let's stop them

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The Open Sausage Foundation

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 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.

  • SR

    It’s like living in hell if you live in Europe and have some great ideas and want to create a startup. Just try to imagine. I’m disgraced of living in Europe.

    ASAP emigrating to the US.

    Where being creative and entrepreneurial is encouraged instead of discouraged!

    • Indiana Gividen

      Less money invested in Europe means more money invested elsewhere? That’s good for the rest of us is it not?

      I am not going to sign any petition.

      • Soren

        I don’t think you read the article — the money is not going to “elsewhere” the European VC will have the same reporting and financial obligations even if the money is invested outside EU — hence the money is just going off the table and into some other speculation — for example the stock market or more traditional investments.

      • Indiana Gividen

        You do not know what you are talking about. Venture capitalists are not obligated to keep funds within the jurisdiction of EU laws and regulations. The funds will simply move off shore. Point in fact most already have.

    • marc

      Seems like this post’s “outrage” is rather contradictory to the earlier post providing evidence that VCs don’t really drive innovation; other than giving geeks illusions of grandeur. I have a feeling that all the “I am leaving Europe” and “going to the land of milk and honey ASAP” blow-hard is just that, as they would not last in the US start-up ecosystem.

      As Arrington has pointed out on numerous occasions, it is the different mentality in Europe, not the VC that is stifling innovation; if you consider all the useless apps and services amongst the few productive ones as innovation.

  • Steve

    Absolute disgrace. First the Digital Economy Bill/Act and now this, it’s like the EU wishes to start a brain-drain to the US.

    If the startup visa from the US gains much more traction, we’ll see almost all tech talent hopping over the pond due to insane legislation like this.

  • aleron

    “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.”

    What makes you say that it would likely cost this much to disclose information?

    • Mike Butcher

      Those are the EVCA’s estimates.

      • EU

        “Those surveyed represented an estimated €560 billion under management and over €14 billion committed to venture and growth capital in recent years.”

        14 bln out of 560 bln – or 2.5% tells you all you need to know – VC capital is non-existant in Europe in the first place. Problem with hedge funds is so serious that something needs to be done and nobody on top would give a monkey about 2.5% part of the problem.

        Bottom line is that whether people who invest 14 bln euros not afford extra 100k each (if that’s the true amount) in reporting what they do? If it’s too much for them then they should not be investing in the first place.

      • Indiana Gividen

        You think a fund manager is going to toss away 100k because he manages a massive fund? I would fire any money manager who would needlessly wasted that much money.

      • Thomas

        So the piece is basicly PR for EVCA?

      • Ron

        Well, it says 100K Euros per investee company. Even if it’s half that, it’s quite a lot for many seed rounds of 100K-300K Euros. YEs on big deals it may not be an issue but on some deals it’s big.

      • EU

        100k euros can buy one very good full-time person working for a year, do you really think this is how much it is going to cost per investee company? That can’t possibly be true.

        Those guys manage 560 bln euros, of which only a small fraction goes into VC – they are just (in my view) use it as means of watering down EU regulations that would hopefully prevent hedge funds from screwing up everybody.

      • Fred Destin

        It’s very, very easy to design rules that exclude people who invest money without leverage (long only) in private companies. The rules add red tape and costs that are fine for large managers but heavy and disproportionate for smaller funds. Venture is predicated on small funds. QED. We need to get this under control.

    • Soren

      Even if it was less — say 10% then that is still a sizeable increase in cost on what could be an angle investment of 250k?

      So who will do that, versus just waiting for a Round B or C investment — hold on, there wont be round B or C, as the angel investment or round A were never there…..

      • Mike Butcher

        Exactly right Soren. It’s just more red tape and costs on a sector of the industry that doesn’t need it. If LPs get put off then how can we expect VCs to get anywhere?

  • John P

    “The AIDM Directive is part of wider moves by the European Commission to regulate the ‘riskier’ end of the financial system.”

    Then I’m for it! You apparently haven’t been paying attention to the last few years of history, have you?

    • Mike Butcher

      There’s nothing wrong with looking at arts of the system which impose risk on public markets, but this will catch private funds which don’t impact the wider economy.

    • Indiana Gividen

      Maybe if you dug deeper you would see that free markets generate more wealth; the larger risk is proportionally smaller.

    • Fred Destin

      Venture firms take money from large institutional investors and channel it to small startups who create jobs an wealth. The disclosures provided to our investors are extensive. We have zero leverage. I do not see how we could ever pose any form of systemic risk. In fact, the opposite, since we channel money to entrepreneurs. The fact that our companies are risky is irrelevant (we can only ever lose what we invested).

  • Ed

    I am an American, I like this, can we get China to sign on too?

  • jb

    Sounds like this anti-startup pinhead virus has gone airborne.

    There’s a provision (Section 926) in the US Finance Reform bill that is described below:

    “Tucked away in a few pages in the comprehensive financial reform bill outlined by Senate Banking Committee Chairman Senator Dodd (D-Conn.) are provisions that would raise the costs of angel investments in startup ventures. These provisions are both unnecessary and unhelpful at a time when policymakers should be looking for ways to make it easier to finance new businesses, especially the potentially high-growth, job-creating companies capable of attracting outside investors. ”

    There’s rumored to a compromise in the works, but one has to question how did Section 926 get in there?

  • kris

    @Mike I was sort of encouraged reading your article about what the French did to boost investments in startup companies, thinking other countries might do the same, but honestly, who was I kidding? Europe’s sick.

    @SR About the brain drain & emigrating to the US.
    You should try it!

    @aleron Even € 1000 is too much.
    No-one should be required to disclose information about funding start ups.
    We aren’t talking about billions of euros here.
    Nor are we talking about the risks associated with derivates, like credit default swaps.
    When I say “we” , I’m not sure I’m referring to the EVCA.
    Are they for real or are they simply looking for bambi to pull their wagon?

    @John P Remember what happened the day The Patriot Act was signed?
    It stopped all $ transactions. The money moved somewhere else because the PA gave insight into all $ bank accounts.
    A click of a button, that’s all it took.
    The rest is history in the making.

    And Mike (part2), when we have to rely on a petition …

    • kris


  • AT

    JB – thanks for pointing that out. We need to make some noise on this. I had sent a tip to TC about it, surprised to not see any press on it here.

  • Damien Hoffman

    A similar threat to VCs and Private Equity is within the new Dodd Bill:

  • Ouriel Ohayon

    it is pretty obvious that those who have created that rule have never ever created or been involved in the creation of a startup. this is at the opposite of what any startup should need.

    As an entrepreneur and investor this is the last thing we need to foster competitiveness within europe

    thanks mike for amplifying the matter

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  • sud

    ok so im fed up with all this talk of this talk of that when is the real action going to happen

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  • Moritz

    this is hilarious – and another proof for the obvious need to get engaged in politics at least a little bit. guys, this is a democracy!

  • Ajay

    I think it is good idea. Anyways these VC funds are white only club from the same investment bankers who wrecked our economy.

  • jimmy

    it is good news.thank you.I know it now.

  • will

    referendum please.

    and lets pray its not called by the lib dems.

  • Dude

    You know, people complain about this, but my startup is pitching to the government for 500k in subsidies and non-personal interest free loans.

    So… even without VC, Europe rocks.

    Still, with subsidies and VC, Europe would be better.

    • Dude

      Oh and remember a story ran the other day about how few startups actually get VC funding.

      • Dude

        Socialism rocks. I love taking money from people who earn it to give it to those of us who don’t. It’s so much easier than trying to prove to some stupid VC that you need it. :D

      • JB

        Someone gleeful about being a thieving socialist whore. I hope you fail.

  • JA

    This is happening to the financial community globally. Its due to the new restrictions being placed on banking practices post recession. Each country has its own flavour of restrictions. To accommodate potential problems additional government legislation will be created to allow for tax breaks, grants etc., to aid those who would lose traditional routes to funding. My take on this is, except for the piles of additional paperwork and red tape, it could lead to a easier way of gaining some funding and support for a small startup. But, don’t expect any large scale funding to be made available.

  • JvB

    new restriction are necessary but shouldn’t be at the expense of small new innovative start-ups and it is already hard enough for them to get some capital in the first place.
    don’t think it will pass just as proposed though..

  • josh

    They are probably sick of new startups coming along and eating their lunch, probably just the work of lobbyists for big companies trying to stomp on the seeds of new growth. I don’t care though, I’m in the US, so it’s good news for me.

  • Alz

    It just shows that there are (what I call) Modern Liberals/Progressives everywhere. They don’t like success because it moves people away from being “equal”. The same thinking is in the Democrat’s so-called “Financial Reform” bill (which institutionalizes bailouts too).

  • JB

    Progressives are truly sick people whose religion is based on complete and utter denial of biological reality. They are willing to destroy progress in the name of their delusional ideals.

  • Ivan Radmore

    One can only chuckle at these posts “Aggression” to “Stop & Think” to “Maybe” then finally “Surrender”.

    Take a leaf out of the ASP’ book (, unify under an association and make representation. Wild emotive soapbox lobbying serves only to frustrate and provide amusement to the opposition.

  • broadstuff

    Throwing the startup baby out with the Hedge Fund bathwater…

    Your local friendly Eurocrat, in trying to nail Hedge Fund buccaneers looks like they have accidently nailed the EU VC industry – TechCrunch: The AIDM Directive is part of wider moves by the European Commission to regulate the ‘riskier’ end of the…

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