IO

Italy, we have a problem and an opportunity: the late stage

Giuseppe Donvito, Partner at P101 | November 16th, 2021

In Italy we have excellent start-uppers who have already created companies with solid business models and with the power to disrupt consolidated sectors. We are beginning to have companies with unicorn potential, which are also attracting international capital. In P101 portfolio, for example, Casavo and Opyn have started a growth path that has led them to sizable estimates.

There is a growing venture capital ecosystem, excellent human capital, ideas, but we are at least five years behind France, not to mention the UK, in terms of market development. It’s statistics: despite the exponential growth that the Italian VC ecosystem has experienced since 2018, our market is valued around 1 billion euros (projections 2021), while the German one is 2.5 billion euros and the French one 4 billion euros. (Then again, a comparison with the British context would be merciless for the core European markets too.)

And if much has been done to push companies towards the stock market – for example with the institution of an alternative market for small, high-potential, businesses called “Aim” – the matter of venture capital is still very quiet. In a complete ecosystem, like the US one, all the phases of venture capital (from angel investment, to seed, up to early and late-stage investments) must coexist and culminate in an IPO or a generic M&A in order to allow venture capital to exit the investment. And this concept is even more compelling for fintech companies.

Each link in the value chain must be in its place to make sure that the start-up won’t slow down halfway across the path of growth and that in each individual investment phase investors will want to enter a specific segment of VC financing. If I am a late-stage investor, I need to find investment opportunities that have already been backed by early-stage investors, but I also need to know that there will be a possible realization of my investment at a later stage, including a receptive and liquid IPO market.

What is still missing in Italy?

Do we have everything we need to push innovation in Italy? Finance, alone, is not enough. There are dozens of other issues to be considered, related to bureaucracy, the administration of justice, regulations, cultural approach. It must be said that the Italian venture capital scene is young – it’s less than 10 years old – and this partly explains the difference with Germany and with France – where the VC market has also been sustained from the State with several targeted actions and a systemic policy. To fill the gap in the value chain, a lot can be done in terms of government involvement and a lot has already been done by the main market players, especially the ones investing in the seed stage of companies (but something is missing still). On the VC side, the real absentee is the late-stage phase: there are few players that can make equity deals that are higher than 6-7 million euros and almost none above 10-15 million (the ones who can are not Italian operators).

Obviously, there is no harm in being financed by non-Italian operators: it is a global, open, and free market. But, of course, we must also have Italian players.

Our forecast is that within two years’ time we will be able to bridge this gap. But we must act strongly now, as we are having important exits, with valuable cash generation.

How can we act? We can initiate multiple factors: simplify regulatory and fiscal processes; increase the flow of capital to VC management companies, for example from insurance or pension funds (France is a good example in this sense).

A lot can be done also on the start-up front (and, to tell the truth, a lot has already been done). Founders must be ambitious, think internationally, give life to companies that effectively solve real problems, in an innovative and different way than competitors. They must approach venture capital as an effective partner of growth and not an end in itself.

Moreover, there should be a more active domestic stock market in terms of IPOs and resulting stock liquidity with a greater understanding of fintech (and tech in general) workings by brokers and equity research.

We need to have a whole ecosystem revolving around private capital as well as also public capital. And the latter must have a proactive and non-invasive role.

Team, business model or market?

As for fintech start-ups, the key elements for a VC fund are their management teams and founders. Assuming that the business model/market matrix is valid, our experience tells us that if management has a series of characteristics such as the ability to react to unexpected events, resilience, listening and dialogue skills, “risk-adjusted” ambition, then we have the right elements for VC to invest and for the company to embark on a successful path towards an exit.