Lessons of the past, limits of the present and opportunities for the future: The Italian VC Ecosystem

1st August 2017  

by U-Start Team


In times of flourishing European tech, rapidly increasing corporate participation and emergence of new hubs, the Italian ecosystem has stalled behind. To our belief, the current situation renders incongruous with the rich history of entrepreneurship and innovative company-building the country has endured. The scope of this article is not only to give an overview of the current Italian VC ecosystem but also to highlight how it has developed over time and what areas Italy should improve to compete with its best in class western European peers.



The conventional birthdate of modern Venture Capital can be traced back to 1978, when the US government adopted several policies to foster the growth of the newly-born industry. In 1978, it has updated the Revenue Act, notably decreasing the capital gain tax (hence increasing the appeal of the asset class), while adopting the “prudent man rule” in 1979 that allowed institutional investors to carry out VC-type investments. The result was beyond all expectation, as VC investments jumped from $ 68M in 1977 to $ 978M in 1978, reaching $ 5Bn in 1983. Out of numerous examples, the firm that probably triggered the realization of the upcoming industry and that fostered the popularity of the Silicon Valley was Davis & Rock. Born in 1961, the firm turned $5M into $100M by investing into Scientific Data Systems (raised $ 280K and sold in 1969 for $ 990M), and by funding a young team of scientists to start their own semiconductor firm: Intel,that today is worth $ 161Bn. Hence, the birth of modern VC underscores two vital components of an ecosystem: financial appeal (brought by the Revenue act) and decreasing regulatory barriers (the “prudent man rule”).



In the early 1980s, while VC was taking off in the US, Italy’s private wealth was driven towards industrial private equity deals (optimizing existing assets of the industry) In the late 1980s and early 1990s, in fact, the absence of innovation driven high-risk capital pushed a some industrial players to take it upon themselves to foster innovation by founding ventures out of new business ideas. Among these Italian stories in the digital space are the rise of Telecoms in the 90s. This is the case of Omnitel Sistemi Radiocellulari founded in 1990 by Carlo de Benedetti, President and CEO at Olivetti, and its revolutionary right hand Elserino Piol. Piol was in charge for the development of Omnitel, and after bringing onboard Lehman Brothers and three other telecommunication companies (Cellular Communications International Inc., Bell Atlantic International, and Telia International), he was able to grow the company and sell it in 1999 to Mannesmann and Vodafone.

Piol can be considered the father of VC in Italy. After Omnitel’s success, he founded Italy’s first VC fund in 1998, Kiwi I. The fund invested € 46M in 40 ventures (30 in Italy, 9 across Europe and US, and 1 in Israel). The most notorious example could be the late stage investment in Tiscali, that was IPO’d soon after Kiwi’s investment and registered a 25x shares price increase. Piol continued investing in Italian companies such as Venere.com, Italy’s first hotel booking platform acquired by Expedia (for c.ca € 200M ), and Yoox that IPO’d in 2009 at a € 217M valuation. What succeeded these positive developments was the infamous dot com bubble, which hit Italy alike other European countries, exhausting the fundraising market while debilitating the exit opportunities for newly founded internet ventures.



After the .com crisis, together with many start-ups, the euphoria of the 90s faded. But while other countries have been able to restart a proper, more conscious, VC activity it seems like Italy never managed to rebuild a solid and developed VC ecosystem. Let’s fast forward into today: how does today’s Italian ecosystem fare against that of other major European economies? Will the modern Italian ecosystem be defined by its past, or will it break free from the chains of history to define its own future? In this section, the article will analyze the important macro structural components that make up a vibrant VC ecosystem.

According to the IESE Global Venture Capital & Private Equity Attractiveness Index, Italy takes the 34th place trailing behind its western European peers (France, UK, Spain, Poland, Netherlands) as well as many developing economies of the world, such as Chile, Thailand, Turkey and China. The index compares 125 countries and takes in account of six main categories. Below, Italy’s ranking in the IESE PE&VC Index (figure 1) and some details about (figure 2 and 3).


Figure 1. Italy’s ranking in the IESE PE&VC Index: main categories

Souce: IESE Global Venture Capital & Private Equity Attractiveness Index


Figure 2: Italy’s ranking in the IESE PE&VC Index: main categories - comments

Source: IESE Global VC&PE Attractiveness Index


Figure 3: Italy’s ranking in the IESE PE&VC Index: details

Source: IESE Global VC&PE Attractiveness Index


Another useful source to compare ecosystems in terms of innovation is the European Innovation Scoreboard. The report compares ecosystems to their performance in 2010 highlighting how innovation and the VC ecosystem is evolving in each European country. The chart below (figure 4) shows how Italy position itself way behind the European average and it did not present significant improvements since 2010.


Figure 4. Performance of EU Membet States’ innovation systems

Source: European Innovation Scoreboard


Aforementioned report underlines some important structural differences of Italian economy versus its European peers. Italy has in fact a larger share of micro-enterprises (<9 employees) than the EU average. Another important structural difference is how Italian enterprises distribute their R&D spend. Although the average R&D spending bypasses the EU average, the number of top R&D spenders (the largest companies) per 10 million inhabitants is below the EU average. This paradoxical situation can be explained by the fragmentation of enterprise R&D as well as lack of joint R&D spend initiatives. Italian companies tend to be smaller and therefore the R&D spending is not coordinated and centralized: companies are not talking to each other and end up spending resources on overlapping R&D. The graph below (figure 5) presents such findings and relative performance of the ecosystem. Both the innovation employment and sales impacts are below the EU’s average, with the section ‘linkages’ (relationships between private and public stakeholders) exhibiting lowest performance.


Figure 5. Performance of Italian innovation system in select categories.

Source: European Innovation Scoreboard


So what has changed in the Italian innovation ecosystem since 2010?

  1. The attractiveness of Italian research systems has improved greatly, in addition to Italy up keeping the already-high levels of intellectual assets within its economy;

  2. Employment in knowledge-intensive activities, coupled with exports of medium and high-tech products have shown gradual improvements;

  3. Greatest growth seen in lifelong learning, trademark applications as well as in collaboration between innovative SMEs.


Notwithstanding the current macro perspective on the Italian entrepreneurial and innovation ecosystem, in order to gain a general understanding of the performance of Italian VC in the last three years the most representative performance indicator to be considered are the number of exits.

According to the last Italia Startup’s Osservatorio High Tech Report Italy registered 23 exits in 2016 down 9% from 2015. The most notable exits are summarized in figure 6. In comparison, according to Tech.eu Germany the UK and France registered 60, 49 and 36 exits, respectively in 2016. According to DealRoom’s the latest statistics, the EU VC-backed exits in H1 2014 amounted to € 4,6Bn for Germany (Delivery Hero’s IPO accounted for € 4,4Bn), France € 827M and UK € 676M, Italy was not even included into the classification due to its insignificance.


Figure 6: 2016 Major Exits in Italy

Source: Osservatorio High Tech Report Italy


The insignificant number of exits in Italy point out the existence of structural issues underlying the hindered ecosystem. The causes could be attributable to the combination of two factors consisting in: the inability to generally exit an illiquid investment, thus the lack of corporate acquirers in terms of trade sales or the general illiquidity of the Italian capital markets that make IPO perspectives unattractive; and simply the lack of sufficiently attractive ventures. Therefore, it could be deducted that the structural issues of the Italian VC ecosystem are both demand and supply based.

One of the reasons behind Italian corporations being adverse to acquiring technology is simply because they rather develop it internally. According to Marco Trombetti , a serial entrepreneur and prominent Italian venture capitalist, founder of Translated, Memopal and Pi Campus interviewed in June edition of our monthly magazine, the Italian cultural norm of identifying oneself as ‘creator’, plays a determinant role in defining the cultural adversity of Italian corporates in acquiring technology versus developing it internally. On top if this, the Italian Government ignited such cultural predisposition historically by providing tax incentives for corporate R&D investments. Since 2007, in order to keep up with R&D carried out by other developed economies, the Italian government allowed corporates to deduct the annual growth in R&D expenditures from their tax scheme without proposing any policies to incentivize VC until 2012. The result of such unbalance in incentives was that corporates were in fact only incentivized to carry out R&D entirely internally; and therefore hindered growth opportunities for the underdeveloped trade sale market with regards to technology and knowhow acquisition.

In addition to the underdeveloped national trade sale market, there have been only a very limited number of ventures that in the last two years reached a Series C stage (Figure 7). A deep dive into the micro economic trends of the Italian VC industry is required to understand the reasons behind Italy’s insufficient supply of venture capital backed companies for potential trade sales. In the last three years, according to CB Insights, investors funded Italian startups with € 300M through 196 transactions. Figure 7 shows the number of transactions in different stages vs. the range of funding for Italy and Germany. The chart clearly outlines the lack of transactions in the Italian VC ecosystem post Series A of values above € 5M. This underlines the difficulty of Italian startups in raising funds after their Series A therefore impeding their growth or pushing them to relocate into more liquid VC ecosystems.


Figure 7: 2015 and 2016 Deals in Germany and Italy by stage and round size

Source: CB Insights


The Italian VC ecosystem counts a limited number of VC funds that are too small in terms of funding to make a difference for the national ecosystem, as they are unable to provide enough funding to their investments to sustain them to any potential exit. The table below (figure 8) shows the top ten most active players in Italy in the last year and their size in terms of total funding if the player is a VC fund, or in terms of total investments to date.


Figure 8: top ten most active players in Italy

Source: CB Insight, Crunchbase, Company Documentation


The inability of the Italian VC ecosystem to guide startups to their potential exit opportunities can therefore be found in the lack of capital dedicated to venture capital investments. The average VC investment rate per GDP for the period between 2007 and 2015 in Italy amounted to 0,005%, versus a EU average of 0,028% (figure 9).


Figure 9: VC investments in per cent of GDP, average 2007 - 2015

Source: Building Momentum in Venture Capital across Europe, CDP & BPI

What allows the other European countries to invest a larger share of their GDP is the presence of institutional investors, which allocate part of their funds to VC in order to proactively foster economic growth. Institutional investors provide liquidity to the ecosystem and allow VC funds, private investors and corporate operators to find co-investors that will bear part of the risk of the investment, and therefore help prosper the VC industry as a whole. In Europe between 2007 and 2015, 22% of funds came directly from government operators while banks and pensions funds accounted for 12% of the total capital raised by VC funds (figure 10). 


Figure 10: EU sources of VC fundraising, average 2007 - 2015

Source: Building Momentum in Venture Capital across Europe, CDP & BPI France

The structural limits of the Italian VC ecosystem can therefore be traced to the lack of policies aimed at incentivizing institutional investors to invest. Looking back at the introductory part of the article the American VC history underlines how the entry of institutional investors kick started the exponential growth of the VC ecosystem, something that in Italy is just happening at the moment.



In 2012 the Italian government decided to take action and has passed the Growth Decree 2.0, also known as Italy’s Startup Act, which aimed to simplify and decrease the costs of setting up a startup, while eliminating the red tape and bureaucracy that come with starting a new business in Italy. The government defines a “innovative startup” as a company that was founded within last 5 years, with headquarters in Europe and a branch in Italy, has an annual turnover of <€ 5M, does not distribute profits, provides some sort of technological innovation, and is not the result of a merger or split-up. On top of the exhaustive criteria list, the “innovative startup” must comply with at least two of the following: it must have at least 15% of annual costs dedicated to R&D, one third of workforce must hold a PhD or two thirds must hold a master degree, or it must hold a patent or a registered software. However well-intentioned the reform package purported to be, burdening young companies with inflexible criteria to meet can have the opposite of the desired effects. As we have mentioned in the introductory part of the article, both decreasing regulatory barriers and increasing financial appeal are necessary to kickstart VC investments. Unfortunately, the Startup Act does neither of the two, all while adding additional burden on startups to meet inflexible and far-fetched criteria for increased financial appeal.

Notwithstanding such innovative policies, the government has recently realized that the national supply of successful startups was still not proliferating as expected, potentially due to the lack of capital dedicated to the ecosystem. Only in 2016 Cassa Depositi e Prestiti (CDP), the financial institution controlled by the Italian Ministry of Economy & Finance, has revised its business plan where it plans to ramp up investments into the national VC ecosystem through its controlled Fondo Italiano di Investimento (FII). The FII with the capital provided by CPD and the European Investment Fund has been given a mandate to co-invest in Italian startups, matching private investments 1:1, and provide capital under form of fund-of-funds to the most prominent Italian VC firms: 360 Capital Partners, Innogest, United Ventures, P101 and Primoglio SGR.

In addition to the commitment of the FII, the government, through the Legge di Bilancio of 2016, actuated further tax reliefs for individual investors and corporates that invest in “innovative start-ups”. Individual investors can detract up to 30% of the capital invested in startups each year from their annual income tax, for a maximum of three years and capped at € 1M; incentives for corporate taxes are the same but the cap for corporates is extended to € 1,8M. Other initiatives include the creation of un-taxed financial products, called PIR (Piano Individuale di Risparmio), which allow investors to invest a total of € 150K locked for five years into Italian SMEs without being taxed on the product’s final capital gain. PIRs were engineered in order to provide liquidity to the Italian AIM (Alternative Investment Market), STAR (Segmento Titoli con Alti Requisiti) and MidCap segments of the Milan Stock Exchange in order to provide liquidity to the national stock market, and therefore ultimately increasing the attractiveness of IPOs in the country.



The recent government measures are a first step in closing the gap with other leading European ecosystems. However, due to Italy’s underdeveloped ecosystem, further measures are required in order to accelerate the development of VC.

The deployment of the funds by CDP up to 2020 will hopefully attract national institutions to invest into Italian startups. However, no steps have been taken to proactively incentivize foreign direct investments from international operators, which would bring expertise and further capital (under form of co-investors) into the national VC system. A plausible solution would be to allow the FII to invest directly in international VC funds specifying the obligation that they must invest it back into the country. A top tier VC fund operating directly in Italy would also import its knowhow and benefit the ecosystem as a whole.

The tax reliefs provided to individual investors and corporates are not sufficiently attractive for HNWI or large corporates due to their cap, as it does not allow them to compete with other tax reliefs offered in other countries. Perhaps, allowing VC like investments to enjoy a very low capital gain tax would definitely foster HNWI and large corporates to invest into the ecosystem.

The same can be argued regarding the new regulations for PIRs, such financial instruments have been designed to attract small savers, which most of the time are unable to lock their investments for at least five years. Extending the maximum cap per individual would also push HNWI to allocate part of their resources and generate further liquidity on the Milan Stock Exchange, therefore participating in the development of the national IPO market.

Last, in order to foster the development of the trade sale market, the R&D incentives offered to corporations must be matched by incentives that foster the acquisition of technology and knowhow . A possible solution would be to offer a tax relief related to the amount of capital invested by a corporate in acquiring a start-up valued under € 10M. Such incentive would promote early exits, therefore increasing the average valuations of start-ups due to the new demand effect, and allow entrepreneurs to quickly gain knowhow and expertise that could be reinvested into new ventures.

Such propositions are only a few potential solutions that the Italian government can adopt in order to develop the Italian ecosystem both on the demand and supply side. The ultimate objective should be to transform the vicious circle that our ecosystem has been enduring until now into a virtuous circle, where demand for startups feeds supply and vice versa, so that our VC ecosystem will finally be able to recount a completely different history in the years to come.