In terms of venture capital funding Europe stands on a par with the United States. However, the Old Continent suffers from a serious shortage of growth capital, which amounts to only a seventh of what is available in the US.

In conversation with Henri de Bodinat, President of Time Equity Partners, one of the few growth capital funds investing in European digital sector companies.

L’Atelier: How do you explain this gap between Europe and the United States?

Henri de Bodinat: First of all, growth capital investment in the digital sector is a very recent activity in Europe. It’s only been with us for around four years. Early in the 2000s, venture capitalists were investing in small companies which were often making losses. But what people were slow to realise was that from 2007-2008 on a number of these companies had by now reached the size where they fitted with the growth capital market better than the venture capital market – having passed the €2 million annual turnover milestone. They were making a profit, but needed further investment to support their growth plans.  Moreover, given the sums required, the venture capitalists could no longer keep up. It was only then that growth capital funds started to be set up.  Basically US-based companies reached the growth capital stage sooner than firms here in Europe. On top of that, the US venture capital providers have deeper pockets than we do here and so they morphed into growth capital funds more easily.

L’Atelier: How does this lack of growth capital impact the digital sector and the economy in general?

When companies don’t have the resources to move on to the next stage, there are two things they can do: they can slow their growth down or else sell out to a foreign – more often than not a US-based – company, as DailyMotion tried to do. In either case growth comes to a halt in companies which have the potential to be world leaders in their niche sector. In addition, jobs are lost. We shouldn’t forget that it’s often companies that need growth capital which create jobs. That’s also true at the venture capital stage, but those jobs are much less stable. In short, the absence of growth capital is a crucial competitive disadvantage when it comes to economic growth and job creation.

L’Atelier: So what can be done to bridge the gap, especially for the digital sector?

Personally I think we need some real resolve on the part of the authorities in order to boost the supply of growth capital. We need them to create favourable conditions for the development of these funds in Europe and to enable them to hire expert staff. At the same time, we need to arouse the interest of major private investors, insurance companies for instance, and make them aware of the fact that there is real potential for growth capital, especially in digital. Because it’s a fact that the growth capital segment delivers higher profitability than venture capital, coupled with lower investment risk.

By Ruolin Yang