Study Links EU Risks To Lower Venture Capital Investment

BY CCIA Staff
June 18, 2012

An new economic study analyzing changes in European copyright law has found a negative impact on venture capitalists’ investment in cloud computing companies following several French and German court rulings.

Harvard Business School Professor Josh Lerner, whose research often focuses on venture capital investment and innovation, examined the impact of a court ruling in France and several in Germany. He found that venture capitalists’ investment in France and Germany declined after these rulings relative to the rest of the EU.

Lerner’s study, “The Impact of Copyright Policy Changes in France and Germany on Venture Capital Investment in Cloud Computing Companies,” looks at key junctures in EU copyright policy including a November 2008 ruling by the Tribunal de Grande Instance de Paris in France. The economic analysis suggests that the rulings led to a $4.6 million dollar decline in venture capitalist investment in France per quarter and a $2.8 million reduction in VC investment in Germany per quarter. Lerner says this is significant because compared to corporate investment VC investment may be the equivalent of $113.5-156.2 million in traditional R&D investment.

The study relies on historical VC investment figures from the widely-used database VentureXpert.

“Venture funding appears to have both a strong positive impact on innovation and a strong relationship with job creation,” Lerner said. “Our findings suggest that decisions around copyright scope can have significant impacts on investment and innovation. We have tested a number of models and consistently find that the French and German rulings led to reduced investment in French and German cloud computing companies compared to the EU experience.”

“The litigation involving Shift.tv and Safe.tv are still unresolved, so uncertainty likely exists regarding the viability of certain cloud computing business models in Germany,” Lerner said.

CCIA President and CEO Ed Black said it’s understandable that venture capitalists look at the legal climate prior to investing to see whether profits can be eroded by lawsuits. “This research is useful as policymakers and trade negotiators consider measures that would increase copyright liability for innovative companies and services that allow user generated content and respond to consumer demand for more choice in delivery and device for online content.”

“Lerner’s analysis helps us better understand how much investment can flourish in a rapid growth area like cloud computing – when companies and their investors are not spooked by legal clouds.”

Lerner’s research is encompassed in the books “The Venture Capital Cycle,” “The Money of Invention” and the recent “Boulevard of Broken Dreams.” This EU study follows a similar US study CCIA commissioned in November “The Impact of Copyright Policy Changes on Venture Capital Investment in Cloud Computing Companies.”

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