The State Of VC Funding In Luxembourg

Yannick Oswald, Partner at Mangrove Capital (Photo © Anna Katina / Silicon Luxembourg)

VC funding in Europe has seen a boom over the last decade, becoming the leading funding mechanism for entrepreneurs. And, as the region firmly positions itself as a global tech player it’s attracting more and more investment. A similar story emerges in Luxembourg, albeit it on a much smaller scale, where the number of local VC funds is slowly increasing along with interest from foreign investors.

2021 was a record year for VCs in Europe

2021 in particular saw an unprecedented level of VC activity in Europe as the pandemic drove investors towards the tech sector. In fact, European VC now beats US VC and European PE, which is creating more competition for investment (especially at seed stage) and is forcing VCs to innovate.

Late stage venture capital in Europe has also seen real growth over the last decade, and in 2021 this drove a glut of outsized rounds and new unicorns as large funding rounds have become the norm. This now accounts for 70% of overall deal value.

Source: https://pitchbook.com/news/articles/2021-europe-israel-vc-charts

When it comes to funds raised, VCs are seeing their second best year (beaten only by 2017). Fund sizes have grown, largely due to increased investment in the tech sector, however capital is held in fewer hands. The fund count has dropped to its lowest level since 2013.

Source: https://pitchbook.com/news/articles/2021-europe-israel-vc-charts

This increase in fundraising has led to a rapid growth in the amount of dry powder – that is, the amount of capital available for further deployment. European VCs are currently sitting on around $47bn of dry powder, the majority of which (60%) is in the UK & Ireland, and France & Benelux. This gives a good indication of the amount of liquidity held by local investors and shows positive signs for future investment opportunities.

Luxembourg VC landscape is also growing

Luxembourg follows a similar trend to the rest of Europe, with the number of VCs increasing and funds invested in the region growing. Ten or so years ago, there were only a few VC funds active in Luxembourg, however that number is slowly growing. This is just one trend that Yannick Oswald, Partner at Mangrove Capital Partners, is seeing. “You also see the way the angel investor community is developing and that Luxembourgish startups are raising from international VCs – French, Dutch, German etc.” This blend of investment activity is a sign of a healthy VC ecosystem in Luxembourg.

There are a number of reasons why the region is becoming more interesting to venture capitalists. According to Stephane Pesch, CEO of LPEA, “one of the advantages of Luxembourg is that there are many important investors, including also the family offices.” Another reason is the Luxembourg toolbox and facilitated administration of such vehicles and investments. “It’s really the limited partnership structures, which are attractive to those players used to venture capital investments in places such as the UK or the US, that have helped the ecosystem grow really fast. ” Pesch explains.

Luxembourg ready to compete with its neighbours

When you compare the Luxembourg VC landscape to its neighbours, it still has a way to go to compete. According to Pascal Bouvier, Managing Partner of MiddleGame Ventures, “the VC landscape is still in its early years. It’s small, and in need of structuring and further growth.”

Having said that, there are certainly signs that Luxembourg is ready to compete. As Pesch points out, “Size matters, for sure. We can really play to our strengths, which brings us back to the flexible structuring capacities and expertise. We’re also friendly to international business – you can nearly do everything in English, and you can access the right people quite quickly. You will easily find all the help and contacts you need.”

One of the biggest challenges that Luxembourg faces when it comes to being able to compete, is attracting talent. Entrepreneurship is a risky business, so it can be hard to convince people to give up a healthy salary, especially somewhere like Luxembourg, to take on this risk. This is something Oswald sees, “I think Luxembourg has two main challenges. One is talent – the cost of the talent is relatively high…and secondly, the mentality towards risk taking. And I think it’s a luxury problem for relatively wealthy countries. But that’s changing and takes time.”

A factor that is influencing this change is the increase of large global tech companies who have chosen Luxembourg as their European headquarters. According to Pesch, “Amazon, Microsoft…they bring a first-class state-of-the-art experience, which is also attracting experts here to Luxembourg who are quite forward thinking. This is really benefiting the entire ecosystem.” Oswald agrees. “Contrary to most other countries, in Luxembourg, I think it helps because it brings more talent from abroad.”

Pascal Bouvier, Managing Partner & Co-Founder of MiddleGame Ventures (Photo Stéphane Pesch, CEO of the Luxembourg Private Equity & Venture Capital Association (Photo © Kaori Anne Jolliffe / Silicon Luxembourg)

Investment opportunities with local startups are growing

And this growth in talent is being seen by the increase of local startups in recent years. Despite Luxembourg being a small country, there is still innovation happening here. As Oswald points out, “​​for the size of the population, I see a lot of opportunities compared to other regions and I think it’s developing quite well.”

This growth of quality startups is thanks, in part, to the benefits mentioned above, but the introduction of state-led programmes has also helped. As Pesch points out, “programmes like Luxinnovation’s Fit 4 Start provide a really great springboard, allowing startups to get acquainted with the right pitching skills and professional expectations.” And there are plenty of reasons why Luxembourg could be a great place to launch a new business. As Bouvier highlights, “Luxembourg has high quality services: free public transportation, health care, high-speed internet, ease of incorporating, central location within Europe and a modern airport, among other things.”

Yet there are a couple factors that prevent Luxembourg from reaching its full potential as a hub for startups. Firstly, the cost of living – in particular housing – in the country. “The price of housing is a serious obstacle, specifically for young talents. It’s certainly on the agenda of our government, but it’s really important for entrepreneurs, developers and innovators,” explains Pesch. Another area that Bouvier highlights as needing improvement is the tax framework for entrepreneurs and employees of startups. He believes what’s needed is “a tax framework for stock options plans which would rival those of other countries such as France and the UK.”

New sectors to look out for in Luxembourg

Whilst Fintech has been the industry dominating innovation within Luxembourg, we are seeing exciting developments within other sectors too. As the pandemic forced people and businesses online, the chance to digitise many traditional systems and processes was created. Oswald also sees the move to online working opening up new opportunities for Luxembourg. “Now, any company can be launched in Luxembourg…I see companies going completely remote. They’re digital only.”

Other sectors that are seeing growing interest in Luxembourg are Logistics, Biotech and Space. As Pesch points out, “we are enthusiastic about the space economy. Luxembourg is forging a pioneering position, which is something that could be very interesting in the future.” Organisations, such as the European Space Resources Innovation Centre (ESRIC), seem to confirm this idea. It has just launched the world’s first startup support programme dedicated to Space Resources in Luxembourg. The first edition, hosted by Technoport, will take place in March 2022.

Stéphane Pesch, CEO of the Luxembourg Private Equity & Venture Capital Association (Photo © LPEA)

A positive future for VC in Luxembourg?

There are many reasons to be optimistic about the future of VC and innovation within Luxembourg – groundwork is being laid, and there are certainly more VCs opening up offices in the country. But there is still more that needs to happen for the landscape to fully mature. As Pesch explains, “to have the perfect ecosystem you need a vision, the adequate infrastructure, the will to do it, money and a bunch of successful pioneers who will show the right example.” At the moment, more needs to be done to encourage new funds to set up shop in Luxembourg and invest locally and internationally but, according to Pesch, “if we nurture the startups and the ecosystem, more VCs will come”

Bouvier also sees the potential, “there are signs there is the political will to seed and attract a few more VC funds. I believe if we had a few more VC funds based in Luxembourg, plus a more structured angel investor network, the ecosystem would be well on its way to be more productive.” And, according to Oswald, “I think we also need to support our local champions to attract more international follow-on investors and help to drive great exits. We are putting a lot of effort into this at Mangrove. Once the acquisition system reaches the next level of maturity, more cash gets back into the system, and the flywheel will spin even faster.”

Overall though, it’s undeniable that the VC landscape in Luxembourg has been on a positive trajectory over the last decade and, it could be argued, the hardest part of laying the foundations is already well underway. From here, it’s about keeping momentum.

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