Does (EIC) public money always lead to a messy CAP table?

Get in quick and invoke Betteridges Law with that title!

Sifted has an interesting article on the decision by the European Investment Committee (EIC) to put €4 billon into startups.

This causes consternation, like panicked hens, in the “traditional” investment community because of fears it will lead to, as Benedict Evans put it, “a fucked up cap table“.

Work the logic there.

People who aren’t investing in early stage startups think they’re being crowded out of early stage startup investment by a fund created to fix the problem that they’re not investing in early stage startups.

The EIC said they weren’t going to crowd out private money in investment and it’s true. Is it only a matter of days since I was reading how venture capitalists are reserving their investment for later stage startups and starving their own pipeline by not investing in early stage? Or by avoiding investments that take a much longer time to mature.

Coming from a region with decades of public (indeed, EU) money being pumped slowly into startups, I have to disagree…with just about everyone.

There’s no reason why public money leads to a problematic CAP table any more than any other investor. Public funds tend to be subordinate, they tend to follow an anchor investor, they tend not to be able to follow on (there are always exceptions). Working with public money does slow things down but public funds are less likely to be sharks…unless they choose a fund manager that’s a shark (we’ve had a lot of issues with piss-poor management of public-sourced venture funds in the past).

It’s not that there’s public money in the pot that causes issues with startups here; it’s the terrible management, the grasping of rights, double-dipping and everything else that shark-like investors can add in to the detriment of founder and startup. So, the problem is then that the misunderstanding of what the money is for bleeds into the natural risk aversion of the public sector; so you end up with a startup fund that only invests in a sure bet and, at the same time, greatly disadvantages and disincentivises founders. The origin of the cash isn’t the issue, it’s the lack of experience in selecting a private partner.

The issue I see with public money is less about whether it hurts the feelings of investors who aren’t investing and I’m happy to see that EU money will see some decent valuations of european companies; but it solves a problem created by the investors themselves. Maybe they’re right and public money should be withdrawn and then they can reap the whirlwind created when the pipeline for investment starts to dry up.

So, the point the EIC is making is that they wouldn’t need to do this if private investors and venture capitalists weren’t quite so shy at making long term or early stage investments. They only step in when there’s a market failure.

The article ends with:

“Last year 90.8% of VC money invested into European startups went to all-male teams, according to Atomico’s State of European Tech report. This was pretty much the same as in previous years, with little sign of improvement. For later-stage companies, the data is even worse. Not one deal over $50m was closed by a women-only team in 2020.”

So maybe the solution is to ringfence that cash for women-only teams. Plainly an area where venture capital has an issue, where the market is broken.

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