The Italian VC ecosystem: lost in an inch of water

25th July 2017  

By Gregorio Marini Clarelli



If you take a look at the numerous sources that give recommendations for the development of VC in Italy, they all apply insights based on the empirical study of factors at the core of other successful national ecosystems, hoping we might achieve similar outcomes. In fact, recommendations often refer to government intervention, as if it were both cause and solution to the status of VC in Italy. To such extent, these sources can consider their intervention partially successful. The Italian government bodies responded to the exhaustive call-for-action by: passing the “innovative startup act”, a new proactive economic policy towards VC to be carried out by the Fondo Italiano di Investimento, offering tax breaks for individuals and corporates that invest in VC, and also new financial instruments to provide liquidity to Italian capital markets.

Still, unsatisfied, we all ask for further decreases in bureaucracy and red tape for both investor structures and startups, further decrease in capital gain tax for VC investments and on personal annual income tax, incentives for corporates to revive the national trade sale market and so on. As we believe what has been done until now simply renders insufficient to stay competitive in the fast-evolving global VC industry.

Other recommendations have been directed towards the micro management of our economy: asserting that the state grants provided for startups by local legislations are counterproductive, as they do not allow for the creation of a central VC hub in the country. On the other hand, the open debate on the location of such hub is still cause of ten-year long quarrels. Therefore, individual local initiatives for the regional development of VC have been scattered around the country, at times with pride, and at times with a little bit of arrogance.

Our individualism, with a profound conviction of doing the greatest good has pushed us all these past ten years to act in solitude; strong of our collective agreement on macro and micro initiatives required for our ecosystem to thrive; achieving some ephemeral improvements; and fueling that sense of hope that one-day Italy will reach its objective of becoming part of the G8 in the VC realm. To sum it up, we have been pro-active in strengthening our national stereotype.

The insufficient results we have achieved until now are evidence that our country is too slow in understanding the challenges that our ecosystem is facing, and that we also are not united in the face of the latter. If we continue down this road I am skeptical that our objective will ever see the light of the day.

The reasons for my skepticism are embedded in the fact that we are talking about the development of an ecosystem. The number of variables we need to consider are infinite, and there is no way that our national regulator can ever create enough comprehensive policies to kickstart and balance them all. The VC ecosystem is not only made of capital and great entrepreneurs, but also of specialized individuals (lawyers, advisors, accountants, managers, including us) and knowhow, an infinite set of micro variables that take time to develop. Just as Rome was not built in a day, neither will our ecosystem. To make things worse, the size and stage of development of competing ecosystems is due to attract more and more resources from other countries, including ours, therefore destined to increase the gap with us.

So, does this mean it’s too late now?

Some might believe so, but I certainly do not! We always looked at our ecosystem at a national level, what if perhaps we looked at the VC ecosystem at a European level?

In the US we notice that VC is not only present in the Silicon Valley / San Francisco area, but also in other areas such as Boston, which is considered to be the hub for life sciences. This doesn’t mean that San Francisco necessarily invests less in life sciences in absolute terms, but as long as it invests less resources in percentage terms than Boston in this area it is able to allocate more resources to other sectors (Figure 1). As such, the whole national VC ecosystem gains in momentum in total terms. This is a perfect example for the application of the law of comparative advantage: as long as different local VC ecosystems concentrate the majority of their resources in what they are better at, the whole national VC ecosystem gains as a whole.

 

 

The same concept can be applied in Europe (Figure 2): where London is definitely the FinTech hub of the continent, as Berlin is for food, Tel Aviv is for security, and so on. If Italy concentrates in developing a hub for specific sectors, even if the total amount of invested is lower than in other ecosystems, we would participate in the value creation process for the ecosystem on a continental level. The result would allow us to retaliate our space and gain a comparative advantage versus other ecosystems in Europe and allow us to prosper nationally. 

 

 

What does Italy have that could make it unique within Europe’s VC ecosystem?

We are known perhaps for our expertise in life sciences thanks to the Centro di Riferimento Oncologico di Aviano, and in other sectors that could involve digital innovation. Just to state a few I refer to Fashion Tech in Milan, Food-Tech in Parma or Interior Design in The Lissone District. If we concentrate our resources in building a comparative advantage for these sectors in regard to the rest of Europe, our own ecosystem would be able to thrive.

Let's say you’re right, how do we do this?

The US is the perfect example that a national ecosystem is able to thrive due to the presence of sub-ecosystems that gauge their comparative advantages, therefore the attention for the development of our ecosystem should be looked at European level rather than just at national level.

Do you remember Russel Crowe and the scene in the Pub of the movie A Beautiful Mind? If European countries act as cooperative players to reach a common result, therefore adopting strategic national policies to foster their ecosystems to pursue their own comparative advantages – according to Game Theory – the European picture would reach a point of equilibrium, where each national ecosystem would be able to prosper.

Let me formulate a quick example: Italy could invite international VC funds to incubate Food Tech startups in its hub in Parma, while London would do the same for Fintech, and Tel Aviv for Cyber Security services. National VC operators would end up developing sound vertical expertise in such sectors, which would increase the quality of the startups and provide higher returns to all investors.

Do you seriously believe you can solve the issues of VC in Italy just like this?

No, but God save me if I’m right! My point is that by tackling complex issues from original perspectives we might be able to finally identify rather elegant solutions. My chain of thought explores the feasibility of having an original European perspective regarding a national issue, the Italian VC ecosystem. By trying to solve any problem at micro level we suddenly find ourselves overwhelmed. Instead, we must look through the current status of VC, understand where the future might lead, and act collectively to reach new goals. Only then our national VC ecosystem will be able to differentiate and become competitive globally.

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