27 March 2007

 

Venture Capital and Innovative Business Development in Italy

Columbia University Italian Alumni Club

Conference Room, Villa Malta

Rome , March 27, 2007

 

Remarks by U.S. Ambassador Ronald P. Spogli

 

Thank you Pietro and thank you Columbia University Alumni. I would also like to thank Minister Giovanna Melandri and the Honorable Maria Ida Germontani for coming tonight as well as our panel members, especially Alberto Sangiovanni Vincentelli, Woody Marshall, John Moragne, Frances Carpenter, and Maurizio Caio who have traveled to be with us tonight.

Eleven months ago we launched the Partnership for Growth initiative in an effort to stimulate economic dynamism in Italy and help bring the level of our bilateral economic relationship up to that of our cultural and political relationships. If I were to summarize the goal of Partnership for Growth, it would be to foster the development of a new venture and private equity ecosystem that makes Italy an attractive place to start high-growth potential businesses and to grow existing businesses to their full, global potential.

First let me state the obvious. Venture capital investment in Italy is below its potential. In 2005, the European Private Equity and Venture Capital Association recorded only 30 million euro in seed and start-up investment in Italy, while Spain invested 183 million, the Netherlands 210 million, Germany 500 million, and France 1.1 billion. If all the elements of the new venture ecosystem were in place in Italy, venture capital investments would be higher. But remember, growth of the venture capital market in Silicon Valley was an evolutionary process and we see the current low-level of VC in Italy as a huge opportunity.

I am bullish on the prospects for venture capital in Italy. Most of the pieces are in place. Perhaps the biggest change needed is not administrative or regulatory, but cultural. Venture capital requires embracing risk. Venture capital means accepting failure, not just as a possibility, but even a probability.

Our challenge is to address the poignant data revealed in a 2004 Pew Research Center poll, which asked Americans and Italians if they agreed or not with the following statement: “Success depends on things outside of my control.” Two-thirds of Americans answered, “No,” while two-thirds of Italians said, “yes,” agreeing that success depends on things outside of their control. Part of our Partnership initiative aims precisely at changing this Italian attitude.

To encourage young Italians to risk starting high-growth potential companies and Italian investors to invest in these entrepreneurs, there must be a variety of ways for both groups to cash out of the venture in the future. The most frequent “exits” from a venture by early investors and founder/entrepreneurs are taking the company public, or acquisition by another company. Both exit strategies depend on a vibrant stock market with an important number of listed companies. Market capitalization as a portion of GDP in Italy is well below the United States, Germany, the UK or France. In addition to a penchant for family ownership, Italy’s relatively low market capitalization reflects a low level of investor education and investor confidence in regulatory environments. These are, in my view, the reasons that investor portfolios are so differently weighted in Italy. Little is held in equities, for example, while bank deposits and real estate investment continue to be favorite choices for investors to place their capital. However, we see this as a huge opportunity for Italy, in which relatively small, incremental changes can help change investor behavior and unleash Italy’s inherent entrepreneurial talent and innovative excellence.

As far as access to risk capital, Italy offers great unrealized potential. Italy is famous for having one of the world’s highest private savings rates. The tough nut to crack is how to encourage investment of a very small fraction of Italy’s huge private savings into alternative investments, such as venture capital and private equity. This is a complex issue, because it hinges on both institutional and individual investor confidence. Again, remember that in the United States, investment in alternative assets, like venture capital, jumped with the 1978 Employee Retirement Income Security Act – ERISA. ERISA opened the doors to institutional investors, like insurance company’s and pension funds, to put money in private equity and venture capital. Likewise, relatively modest administrative or regulatory acts could be part of the tipping point for unleashing venture capital in Italy.

Investor confidence can be bolstered in a variety of ways. The first is through investor education. The Partnership for Growth has and will continue to bring high level experts and practitioners to Italy to discuss the role of alternative assets in a balanced portfolio as well as the benefits that these asset classes can have on the economy. Investor confidence can also be bolstered when investors trust the oversight of regulatory authorities. As the United States has seen in the evolving implementation of the Sarbanes Oxley Act, calibrating oversight to balance investor protection and the burden of compliance is a challenge.

We are grateful to the Columbia Alumni Association for putting together the first Partnership event dedicated solely to venture capital. At last September’s AIFI International Institutional Investors Meeting, I laid out a Silicon Valley Venture Capital Model for Italy. I have just highlighted some of our findings since September. Now I would like to touch on some recent and upcoming Partnership for growth activities. I would like to draw parallels between the early days of Silicon Valley and the current state of play in developing the new venture ecosystem in Italy. Then, together with Myrta Merlino, I will ask our distinguished panel some focused questions about what achievable incremental changes could help move the nascent Italian venture capital market to a point where we see robust growth.

In the technology development and technology transfer arena, we have benefited over the last three months from the services of an experienced U.S. National Science Foundation official, Sue Kemnitzer. Sue has visited a dozen Universities, research centers, and business incubators. Her preliminary analysis is that plenty of top notch research, much of it with commercial potential, is being done in Italy and that universities are strongly engaged in the technology transfer process. This part of the ecosystem appears promising.

Another question to consider is the role of public funds in developing a venture capital market in Italy. Frances Carpenter will discuss the role of the European Investment Fund later. While there may be a role for the government to prime the venture capital pump, a successful government role in growing venture capital should place few caveats on VCs’ investment decisions. A more appropriate role for government is to create the administrative and regulatory conditions that make investing in new ventures more attractive. Here, Italy’s EU neighbors have been active. The European Private Equity and Venture Capital Association’s 2006 analysis of EU member states’ tax and legal environment for private equity and venture capital showed France and Spain making important improvements. Now it is Italy’s turn to meet those conditions and improve on them to create a pro-venture capital tax and legal regime. This June the Embassy will hold a video conference panel discussion between U.S. and Italian legal, tax, and business experts to explore which administrative and regulatory changes would be most likely to spur venture capital in Italy. Again, we will look at those administrative and regulatory changes in the United States, especially California. So, stay tuned.

In many conversations with young Italians, I’ve been struck by the lack of optimism and fire in the belly so prevalent among many American youth. Young Italians don’t seem to perceive many entrepreneurial role models. When I was growing up, American parents were fond of telling their children, “Anyone can become President of the United States.” Today, parents tell their children they could be the next Bill Gates, Steve Jobs, Larry Page or Sergey Brin.

On March 14, we launched a video web chat - Capturing Creativity: Incontrare I Nuovi Imprenditori. This bimonthly web chat lets young Italians ask questions live to successful first generation entrepreneurs. One of this evening’s panelists, Michele Appendino, will be the next guest on the program tomorrow afternoon at 4 PM. We hope by sharing Michele’s experiences and those of dozens of Italians like him, we will help light a fire in the belly of Italian youth.

In the United States, we celebrate entrepreneurial achievement. For instance, in early February of this year, Entrepreneurship Week USA attracted participation in 350 Universities, including a kick-off at Stanford University (sorry Columbia, better luck next year). More than 400 teams, with more than 2,000 individuals, competed in the Entrepreneurship Week USA Challenge. Governors from all 50 states endorsed the week’s activities. We would like to see Italian institutions organize such an event next year. We would like to see more, young Italians believe their success depends on themselves.

To help fan the flames of entrepreneurship among young Italians, the Partnership for Growth launched several months ago the Fulbright-BEST (Business Exchange and Student Training) Silicon Valley Immersion Program. The BEST program is designed to encourage entrepreneurship in Italy by allowing students, young managers and regional/municipal officials to learn first-hand how entrepreneurship in the U.S. works. The first group of five BEST participants from Naples, Milan, Ancona, and Sardinia are based at Santa Clara University in California, where they are attending classes in business and entrepreneurship, and working in an internship in a Silicon Valley high-growth company. The group is also participating in seminars and conferences at Stanford University, University of California-Berkley, the Silicon Valley Start-Up Association and the Churchill Club forum for high-tech businesses.

Again, I am bullish on the prospects for venture capital in Italy. Most of the pieces are in place. We are very close to the seeing this effort take off.

Now Myrta and I would like to invite the first panel to join us on the dais.