Archive for April, 2010

Is the AIFM Directive bad for entrepreneurs?

There has been a call lately to entrepreneurs by people like Fred Destin or Seedcamp to meet tomorow’s deadline and bring their support against the AIFM Directive. Many prestigious entrepreneurs have already signed the petition and my attention was called to all this by my good friend Louis van Proosdij, who is a co-founder of and founder and CEO of FairPlay Interactive.

At, we try to promote commons that are favoring the all ecosystem. Which means we try neither to be on entrepreneurs’ or investors’ side, but try to promote what we think we’ll be good for the all community.

I must confess I’m like anyone else and tend to be very wary when I hear that the European Union’s technocrats will try to regulate something. But I’m also very deeply concerned, like everyone, by what went wrong with the financial system. I must also confess that reading the Directive, it seems very difficult to understand all the details (it took EVCA almost a year to produce several counter points). But I fail to understand why entrepreneurs are taking side with Venture Capital so rapidly.

So let me react to a couple of points to try seeing if things are so clear for entrepreneurs going against this Diretive.

Does the AIFM make sense?

I think there has been a quick parallel between what went wrong with Lehman Borthers and regulating funds. Lehman Brothers was a bank and was acting as a lender and borrower on many transactions. The fall of Lehman created the seed of what is called a systemic risk – a potential complete subside of the financial system through a domino effect.

Is the regulation of alternative investment funds addressing the same exact issue? I don’t think so, but let’s give credit to the EU that probably not everything is working as it should be in this part of the financial system and that anticipating problems could be a good change from what happened before.

Should Venture Capital be included in the AIFM?

When I first heard a couple of months ago that VC will be included in the regulation concerning hedge funds, I thought this did not make sense. Hege funds can be short (taking positions backed by a money they don’t have), VC funds are never short. Then, I rationalized that VC funds are such a tiny part of the financial system that including them or not would not make any difference for the purpose of the directive.

Is this bad for Venture funds?

I believe this is bad for Venture funds to be included in the Directive. But then, they also suffer from being part of Private Equity – which they are a small portion of. The most substantial part of Private Equity is made of  growth, distressed, mezzanine, secondaries,.. and there are issues there that, even though quite different from hedge funds for several aspects, is very similar concerning the use of leverage and the inherent risks that were poorly addressed prior to the crisis.

So Venture funds are caught in a regulation that is targeted at a much broader category, but for their own detriment, they are clearly currently assimilated to this category

Is this bad for entrepreneurs?

Here, I’m a bit puzzled why entrepreneurs accepted so readily the arguments of the EVCA.

  • Discriminatory disclosure requirements and administrative burden affecting startups backed by venture capital
    There is a clear bias against VC here in favor of familly offices and sovereign funds. Is this bad for the entrepreneurs? I’m not sure. Money could find alternative routes to come support young startups, but it is sure that VCs will be at a disadvantage
  • Cost of compliance estimated at €30,000 per year for your companies
    This cost was estimated by the EVCA. I don’t have the details of the computation, but I’d like to know what is the cost supported by companies for the reporting to venture funds, and I’m just wondering if there is no compensation in the reporting done that would lower this figure
  • Absurd capital requirements imposed on venture firms
    Here, I don’t really see this as a negative for entrepreneurs. The Directive says that funds below €100M will be exempt from the corresponding regulation and that fund management firms handling less than €500M will be exempt as well. EVCA would like to see the threshold raised to €1B for funds, but haven’t big funds – with the associated power -been a problem entrepreneurs have been complaining a lot. Funds entrepreneurs love – like Seedcamp – will not affected by the Directive. If we see more of these funds – as we do right now for other reasons (because big funds are fleeing Europe) – won’t the situation be better for entrepreneurs?
  • Requirement to use outside depositaries (i.e. custodians) and independent valuation agents, adding cost and complexity
    Having custodians and independent valuation agents will bring a cost, but is it as bad for entrepreneurs than for VCs. I’m not sure. Custodians will bring a much easier world for Limited Partners and bring transparency into the system (with some much needed industrialization of the VC backoffice). And independent valuation may bring quite a different setting: Is it really bad for entrepreneurs to have a third party valuating their company, when the EVCA argues that fund managers do that already very well. Anyone involved in a down round (subsequent round based on a lower valuation than the previous one) may have a different opinion on this.

So, all in all, the outcome of this Directive seems to me less clear for entrepreneurs than for the VC industry. We may even see some strong benefits because of the transparency it will bring to the financing of startups.