A Snapshot of the Early Stage Scene in Italy (2019)
A recent event sponsored by Italian bank Unicredit sparked my interest in analyzing what is the current VC state of the art in the Bel Paese. Italy has been dragging behind other major EU countries when it comes to early-stage investing and VC. In general, entrepreneurship is very much engrained in the culture — many great entrepreneurs have been building incredible businesses and the number of people launching new ideas is staggering. However, this often happens “off the grid” which is disconnected from the angel investor ecosystem and the VC industry. I am going to focus on several key elements that emerged during the forum, some of them drawn directly from the great insights of Alessandra Gritti from StarTIP. My goal is to focus on some of the less obvious elements that emerged as I was meeting and working along with some business angels and VC firms from Italy.
Positive Signals
Funders with a high level of commitment and expertise
Founders are very much committed and ready to go through the effort of launching and developing businesses and try new ideas in the local market. Mrs. Gritti mentioned that while reviewing her deal flow, she has been impressed by the competence of funders that are people capable of “going to bed with a problem and wake up with a solution”
Small but very competent angel investors
Angel groups are still at their infancy but they are extremely competent and very flexible. Organizations like IAG or Club degli Investitori are impressively well connected and capable when dealing with entrepreneurs. Professionalism and a helpful attitude are common traits that I have personally observed when working alongside other angels. Not to mention the capital commitments that is easily comparable with some of the best angel investors that I have met in the US: it is common for Italian angels to write cheques starting at 10 to 20k, much like what I have been observing with US-based angel groups and syndicates.
Negative Signals
Strong Risk Aversion (Still)
As a culture, Italians have been overall some of the most risk-averse population in the EU. A common misconception that is still the Italian DNA is the fact that the best investment is always in Real Estate. Family Offices feel this tendency are the ones that push low-risk low-returns investment products such as mutual funds and funds of funds. I can see that this tendency is changing as more and more Millennial investors are interested in the world of early-stage but the progress is still very slow.
Small VC market
If we look at the broad VC industry, the market of early-stage capital does not look too active: just in 2016, only about $120M have been committed to Italy-based startup — versus $360M in Spain and $4.5B in the UK. Active Italian VC firms can literally be counted on two hands and their AUM does not compare with what is happening in the US.
Valuations are too optimistic
A big problem that has been infesting the early stage environment is how valuations are conducted. Italy is not immune and it is a victim of very optimistic valuations. National VC are discouraged to work with funders claiming an unrealistic company valuation and they are reluctant to help. My guess is that the education of entrepreneurs needs to evolve in such a way that investors can feel more comfortable in working with financially sophisticated funders.
Funders need to think bigger
As a consequence of a lack of “VC sensitivity”, funders have the tendency to structure their companies thinking about it as a small business. Even thou the fact of being as down-to-earth as possible is a valuable trait, Angels and VCs are turned off when they see that a company does not have the premises to be structured at least as a medium business. This can involve a number of aspect of the company such as the choice of the legal entity, the interest to build a corporate culture and the openness to mechanism to accept capital from investors.
Crowded Cap Tables
To get a bit more technical, a common mistake that I have seen is to build a crowded and opaque cap table. In the past years, Italy has been very enthusiastic about equity crowdfunding and other forms of micro-financing. Cap tables have been all over the place and it is often the case that conducting full diligence on the equity history is definitely not the easiest task. Cap Table hygiene is essential especially when approaching firms and potential investors — a messy shareholding structure is considered a big red flag for the new investor.
Loss of Momentum in 2019?
A recent article from Mr. Fausto Boni of 360 Capital Partners and President of VC HUB, has underlined how the strong momentum for VC investing in Italy is dangerously losing its energy. The new government has been very active in pushing two major initiatives that could have changed the face of startup investing in Italy: (1) the creation of a national innovation fund (Fondo Nazionale Innovazione and (2) major tax deductions for individuals and asset managers investing in qualified startups. In the past months, however, this energy dissipated and it is not clear what is the action plan that the government is planning to activate.
