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A Landscape of Deep-Tech and Venture Capital in Europe

Written by Alexa Edström, Alexander Klinger

Paper category

Master Thesis


Business Administration>Entrepreneurship




Master Thesis: Innovation and Entrepreneurship Theory The analysis in this paper is based on two basic technical and economic theories. First, according to Schumpeter (Schumpeter, 1934), it is based on the basic principles of creative destruction and the logic of value creation. Schumpeter laid the foundation for innovative research, and historical theory describes how reorganizing resources can lead to better products or services, which in turn leads to higher efficiency and higher output. From the point of view of the purpose of creating new value, this principle also applies to the creation of new enterprises and their business models. In this case, Schumpeter’s logic is the basis for understanding why new companies innovate to create substitutes for existing products on the market. This is achieved by enabling companies to identify customer problems and find out what “work to be done” needs to be solved (Christensen et al., 2016). Venture capital can achieve this by using their resources in their business model. They can identify opportunities in the market and use these opportunities to gain market share (Chesbrough and Rosenbloom, 2002). This adds to the theory of disruptive technologies that have revolutionized the industry and created new opportunities (Christensen and Overdorf, 2000). Christensen and Overdorf (2000) introduced this concept as a result of how companies respond to technological innovation and change. Therefore, technological and industrial changes are frequent, and advanced products or product substitutes have been created. This disruptive process is often overlooked by established companies and is characterized by a business model that is quite different from that of established companies (Christensen, Raynor, and McDonald, 2015). Emerging technologies provide particularly great opportunities for companies to establish new products and business models. Without capital-intensive investments, venture capital cannot always implement these opportunities quickly and competitively. Therefore, venture capital funds can help young companies turn their ideas into reality as soon as possible and create value. The history and concepts of venture capital will be discussed in more depth in the following sections. 3.2 The history and concept of venture capital Venture capital emerged in 1947 when the first venture capital company in the United States was established, but it was not until the mid-1970s that the venture capital industry began to expand due to the beginning of the development of ICT and integrated circuits and the creation of Nasdaq. American development (Avnimelech and Teubal, 2006). Teubal believes that VC itself is an industry, an industry that develops together with high-tech clusters. However, most VC literature emphasizes capital market structures and regulations, as well as limited partner (LP) structures and contracts, which are considered to be the core drivers of VC development (Avnimelech and Teubal, 2006). 3.3 European Venture Capital The European venture capital industry is younger than its American counterparts and prospered for the first time in the late 1990s (Bottazzi, Da Rin, and Hellmann, 2004). In order to collect a survey of the European venture capital landscape, Bottazziet al. (2004) conducted the most extensive academic research at the time, collecting data from more than 1,300 investment companies, more than 400 venture capital partners, and more than 150 venture capital funds. They aim to generate facts about the scene in order to push the public debate out of perspective. They found that European VCs are increasingly imitating American investment practices, but they also have many unique European characteristics, such as the prominent position of banks and companies as investors and the reduction of cross-border investment barriers. They found that 27% of venture capital companies have secondary offices abroad, 25% of their partners are from abroad, and 24% of investments are made in foreign companies. In addition, they found that human capital is unique in terms of the background of the partners. The data shows that compared with USVC, European VCs are not so conservative, and new entrants tend to be more risky early investments and tend to participate more in portfolio companies. Felix et al. analyzed the determinants of European venture capital by examining evidence from 23 European countries from 1998 to 2003 (Félix, Pires and Gulamhussen, 2013). They found that apart from IPOs, mergers and acquisitions also proved to have nothing to do with explaining venture capital investment. In addition, their results show that both the unemployment rate and the total entrepreneurial activity (TEA) index have a negative impact on the venture capital market. However, they pointed out that it is important to consider that venture capital is geared towards more innovative projects, rather than entrepreneurial projects in the general sense. This negative correlation may be due to more entrepreneurial activities taking place and more time spent reviewing and selecting projects instead of monitoring and managing existing investments. Outside of academia, Atomico (a London-based venture capital firm) released an annual report called "The State of Technology in Europe" (Wehmeier, 2017, 2018, 2019). They worked with partners Slush and Orrick on their own. release. Atomico has released a complete report for the past three years, from 2017 to 2019 (Wehmeier, 2017, 2018, 2019). Atomico just raised the V Fund (Atomico, 2020) on February 18th with USD 820 million in Series B and Series C investments. The report collects data from, European Investment Fund (EIF), European Business Angel Network (EBAN), Invest Europe, Indeed, Stack Overflow, etc. to build their report. The scope of how much data was retrieved from each partner is unclear, but for the graphs that will be analyzed in this report, the data comes from Dealroom. Read Less