The Commission’s initiative includes measures to generate more risk capital investments, to develop bank finance for innovation and to make existing financing systems more SME friendly. The Commission has set the objective to work towards tripling the annual early-stage investment in the EU from €2 billion to €6 billion by 2013. The initiative foresees an increased EU financial contribution to early-stage investments in innovative firms, the promotion of an internal market for venture capital and encouraging traditional bank funding for innovation. The lack of an equity investment culture, informational problems and market fragmentation are among the main reasons for the market not satisfactorily playing its role in the EU. The Commission also invites the Member States to assume their responsibilities. For more information, see MEMO/06/259.
Commission Vice-President Günter Verheugen said: “With today’s initiative we want to tackle a persistent problem which puts a brake on small enterprises to grow. People with smart business ideas, companies which would like to expand have persistent difficulties to get loans from their banks or equity capital from the market.” Niklas Zennstrom, CEO of Skype added: “One of the key challenges facing the European entrepreneur is how to stimulate and manage fast growth in a new company. To do this effectively, s/he needs to be able to take swift action on a variety of factors anywhere from sourcing financing, to the incorporation of the new company, to hiring employees. I am encouraged by the Commission’s efforts to begin to address the dual problems of local access to capital and the regulatory rigidities present in many national markets in Europe. The reduction of regulatory red tape, in particular, will help stimulate innovation and success in Europe’s SME sector.”
Financing innovative SMEs is considered by many finance providers as a risky activity due to high transaction costs and low returns, especially at the early-stage. As a result it is more difficult to access risk capital in Europe than in the United States.
The Commission is proposing the following measures:
1. More money for financing SMEs.
The new Competitiveness and Innovation Framework Programme (CIP) will provide €1 billion through its financial instruments from 2007 to 2013, which are expected to leverage €30 billion of finance for SMEs.
Managed by the European Investment Fund and other international financial institutions some 400,000 SMEs will benefit from EU investment support.
€ 140 million
~€ 500 million
SME Loan guarantees
€ 340 million
~€ 500 million
€ 60 million
~€ 100 million
€ 540 million
€ 1.1 billion
As an example, in its early days, the internet communications company Skype received EU support. The success of Skype is a striking example of the importance of risk capital investment for innovation companies (for more success stories see MEMO/06/259.
2. Boosting risk capital funds.
The Commission will actively work together with the Member States towards removing obstacles for EU wide presence of venture capital funds, enhancing investors’ interest in seed investment. This will favour the emergence of more professional and more successful venture capital funds. The Commission is also reviewing state aid rules for risk capital funds in particular in favour of young innovative companies.
3. More bank finance for innovation.
The Commission will organise a Round Table between banks and SMEs on how to improve the chances for long-term banking relationships, use the new CIP financial instruments, promote micro credit and mezzanine financing (a combination of equity and debt), and evaluate the advantages of tax relief systems for young innovative companies.
4. Member States have to act, too.
While the Commission is playing its part for the EU level, it is mainly the responsibility of Member States to ensure that the regulatory and fiscal environment encourages entrepreneurs to develop good ideas into new services and products and for the financial markets to finance these. Therefore, the Commission invites Member States to:
* Implement investment readiness programmes;
* Promote cooperation among fragmented local support organizations;
* Use good practices in implementing risk capital policies at all levels;
* Aspire to stability and long-term view in public policies on risk capital;
* Study the advantages of introducing a Young Innovative Company Scheme;
* Consider the advantages of expanding the market for hybrid instruments in SME finance;
* Efficiently use the JEREMIE process to obtain a set of financial products specifically engineered for SMEs;
* Consider the possibilities for a more neutral taxation of the different forms of enterprise financing.
Such as the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), the Council of Europe Development Bank (CEB) or KfW Bankengruppe