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Venture Capital: Investing in the European Marketplace

By Steve McLaughlin
Posted August 9, 2006

As anyone who has ever tried it knows, venture capital investing is not a game for the weak of heart. While it is certainly true that some venture capitalists have accumulated massive fortunes and reaped mega profits on their investments, it is also true that billions of dollars are lost every year on bad investments. The formula, of course, is quite simple: the same element of risk that allows the venture capitalist to expect an increased return on their investment when successful can also prove disastrous. As one quite successful venture capitalist told me recently: “There are really only three things you need to do when you are looking for a company to invest in successfully: research, research, research.” In other words – know what you are getting into before committing your resources. 

This principle is particularly true for those investors seeking to increase their profits by taking advantage of both the overall boom of the economies and the generally favorable exchange rates on the currencies in the European marketplace. Increasingly since the advent of the European Union, American venture capitalists are finding extraordinary opportunities for profit investing in both EU and non-EU companies. Whether searching for established companies seeking a capital boost for funding expansion or start-up companies in search of seed money, the market for American investment dollars throughout Europe has never been healthier. However, as stated above, the investor needs to know what they are getting into – and needs to understand that venture capital investing in Europe can be quite different from what it is in the United States. 

Unless you or your company has years of experience transacting business within Europe you will in all likelihood need help in both identifying good, solid companies to invest in and in circumventing some of the challenges presented by doing business in a foreign land. Some of these challenges include: 

  • Cross-border Investment Restrictions – Unlike the completely open market which exists within the United States for investors, it is necessary to keep in mind that when investing in “Europe” you are actually dealing with dozens of different nations – each with its own culture, laws and regulations. These laws can make it extremely difficult to invest in companies based in particular countries. Even if you establish a company in one European country for the purposes of European investing you can still run into trouble getting money across borders due to cultural, religious, ethnic or political differences and rivalries that may exist – some of them going back many centuries. It is crucial that the investor either know or have a qualified adviser available who knows – and can help circumvent – these restrictions.

  • Resistance to American investment – While political relationships between the United States and most European nations are quite good (and have been for years), a certain amount of cultural resistance towards doing business with American venture capitalists exists within the European business community – and within the European banking community specifically which has been a source of venture capital funds. Rightly or wrongly, some European business people view American investors as predatory in nature, and distrust many generally accepted American business and investment practices. While this doesn’t necessarily mean that they won’t do business with you, it can negatively impact both the deal the company you are interested in will make with you and the amount of control they are willing to give you regarding how your investment capital is used. In most cases, using a third party trusted by the company you are looking to invest in as a go-between to broker your deal will save you time and energy, and in many cases increase your bottom line return on investment.

  • Lack of accessible information – In the United States, a few clicks of your computer’s mouse and a couple of phone calls can get you essentially all the information you need to be able start the process of making an informed decision about whether or not to invest in an established company. The same holds true when checking the backgrounds of the principles of any start-up company you might be looking to invest in. This is not the case with European companies and citizens. Privacy laws through out Europe are usually much stricter then they are in the United States and as a consequence the access to information is limited – often times quite severely. It isn’t a question of the information you need not existing: it does. However, in many European nations the channels through which you need to go to actually get the information are quite convoluted and complicated. In most cases, having a firm familiar with getting information in these countries by your side will save you time, effort, and help you make a more informed decision as to where your investment dollars go.

  • Identifying companies to invest in – Always a challenge even when investing at home, finding exactly the right company or companies in Europe for investment purposes can be perhaps the most daunting task any American investor will face. It is true that you can follow the trends of successful European investors (investors from the Scandinavian countries currently have been the most aggressive and successful), however these investors tend to be rather conservative in choosing companies to invest in, and as a consequence many top markets are currently being almost totally ignored. Identifying these ignored markets can reap huge profits but can also be extremely difficult given the information constrictions cited above, as well as them being half a world away and, in many cases, speaking a different language!  When searching for the best investments in the European marketplace, it is usually prudent and most of the time cost effective to get expert advice and counsel from someone who knows the territory.

There is a notion – and not a totally undeserved one – of the American venture capitalist being a kind of a financial gunslinger going it alone, pitting his or her skill against the marketplace and trying to out draw the competition. While the same willingness to take risk, courage and entrepreneurial spirit that is crucial for successful venture investment in the United States is certainly needed for investing overseas, the idea of going it alone is usually not as practical as it can be in the United States. The markets for investment are certainly there in Europe – and the potential for profit as great as or even greater than what can be found in the US – but the terrain will be unfamiliar to most American investors. To successfully compete in a foreign marketplace, it is crucial that you have someone with you to guide you along unfamiliar paths, and help you avoid the pitfalls. By doing this, you level the playing field, and increase both your chances of success and your profits!

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