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Financing Innovative SMEs in Europe
José PalacínEconomic Cooperation and Integration
DivisionUnited Nations Economic Commission for
Europe
Dubai International Conference onInnovative Sources to Finance Small and Medium-Sized Enterprises
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Structure presentationStructure presentation
Policy context: innovation and
SMEs Modalities of support to risk
capital Demand-side interventions Good practices
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Financing challengesFinancing challenges
Innovative SMEs: uncertainty, high risks, no collateral
Financing gap
SMEs critical for economic dynamism:Source of radical, disruptive
innovation
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European competitivenessEuropean competitivenessContext for SMEs policies
Concerns: global pressures, ageing
EU: Lisbon Strategy – “Europe to become the most competitive knowledge based economy in the world by 2010”
Non- EU; (Russia): economic diversification and valorisation of technological base
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Innovation policiesInnovation policies
Target: increasing the availability of financing to innovative SMEs Development of specialised financial
intermediaries – Venture capital industry Mutiple programmes of public support
Awareness: Europe needs to address this financing challenge, for effective commercialization of ideas and to overcome the “European paradox”
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European diversityEuropean diversity
Source: WEF
Ukraine
UK
Switzerland
Sweden
Spain
Slovenia
Slovak Republic
Russian Federation
RomaniaPortugal
Poland
Norway
Netherlands
Luxemburg
Lithuania
Latvia
Italy
IrelandIceland
Greece
Germany
France
Finland
Estonia
Denmark
Czech Republic
Croatia
Bulgaria
Belgium
Austria
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4.5
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2 2.5 3 3.5 4 4.5
Venture capital
Lo
an
s
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Venture capital landscapeVenture capital landscape
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Early development and expansion
Seed and start up
Source: EVCA
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Equity investorsEquity investors
Formal venture capital- raising financing from institutional investors
Informal venture capital – business angels investing their own money
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Intervention focusIntervention focus
Gradual shift in Europe
Lending
Formal venture capital
Business angels
The extent and pace of the shift depends on national circumstances
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Limitations venture capitalLimitations venture capital
Scarce presence in early-stage financing
(high risk, small deal size)
Poor investment record of European VC funds in early-stage
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Investment by stage of Investment by stage of developmentdevelopment
Source: EVCA
As percentage total PE
2007 2008Seed 0.2 0.6Start-up 3.2 4.6Later stage venture 7.5 7.9Total Venture 10.9 13.1
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Internal rate of returnInternal rate of return
Source: EVCA
Sample size Pooled averageEarly-stage VC 351 -1.3Development stage VC 219 7.4Balanced VC 204 3.0All Venture 774 3.0All Buyout 431 13.0Generalist 126 9.0All Private Equity 1,331 9.5
Cumulative Fund Type Performance (end Cumulative Fund Type Performance (end 2008)2008)
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Government interventionGovernment intervention
Direct – Public resources invested by public servants.
Examples: Finish Investment Industry Programme, Danish Business Development Finance
Indirect- Harnessing private expertise in the investment process
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Hybrid fundsHybrid funds
Public private-partnerships are the dominant form of intervention:
Pari passu – benefits for private sector: certification effect, building a track record, lower due diligence and setting up costs
Asymmetric sharing of risk and rewards
Fund –of-funds structures are popular
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Types of hybrid fundsTypes of hybrid funds
Co-investment private-public – European Investment Fund
Capped returns for public investors Buy-option for private investors Fund operating costs Timing of cash flows Downside protection
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EIF: a major VC player in EIF: a major VC player in EuropeEurope
Entrepreneurship and Innovation ProgrammeHigh Growth and Innovative SME
FacilitySME Guarantee Facility
JEREMIE- allows use of structural funds of European Regional Fund for a “holding fund” for various types of financial products
Resources from the EIB- Risk Capital Mandate
Resources from a number of national schemes
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EIF investmentsEIF investments
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Tax and legal environmentTax and legal environment
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1.2
1.4
1.6
1.8
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Irela
nd
Fra
nce
Belg
ium
UK
Gre
ece
Spain
Neth
erlands
Port
ug
al
Luxe
mb
urg
Sw
itze
rland
Denm
ark
Hungary
Aust
ria
Fin
land
Pola
nd
Italy
Sw
eden
Norw
ay
Germ
an
y
Slo
vaki
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Cze
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2004 2008
Source: EVCA
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Business angelsBusiness angels
Realisation: VC, even with public support, is not
a solution for early-stage financing problems
Business angels are an effective way to explore new ideas
Europe lags behind the US
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BA financing: an EU-US BA financing: an EU-US comparisoncomparison
Source: OECD
European Union United States
Number of networks 297 245Number of business angels 75,000 250,000
Investment per round EUR 165,000 EUR 210,000
Total amount invested EUR 3-5 billion EUR 20 billion
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Policy tools to foster BA Policy tools to foster BA financingfinancing
Fiscal incentives: UK, France
Facilitate creation of BA networks and training: widespread support EU/national
Cooperation between BA and other investors, including co-investment with the public sector: more recent but supported with EU instruments.
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Corporate venturingCorporate venturing
An alternative source of SME financing, driven by both strategic and financial considerations
Important for countries with economies in transition, with little BA/VC tradition
Use of policy instruments in Europe: UK Corporate Venturing Scheme, German High-Tech Start-Up Fund
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Demand side interventionsDemand side interventions
Financing may not be the key constraint
Complementary focus on creating opportunities – an important factor in the development of VC financing
Coordinated use of demand and supply policies
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Investment readinessInvestment readiness
Beyond general factors influencing entrepreneurial activity
Focus on making firms more attractive to potential investors
Bridging the “information gap” “Investment readiness”
programmes have proliferated - but tailored advice is costly.
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Europe’s diversity: good Europe’s diversity: good practicespractices
Different national context, variety of targets
Comprehensiveness of interventions – addressing both supply and demand factors
Coordinated programmes that build on previous achievements
Mapping the provision of finance to identify bottlenecks
Strengthen links between players
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Some UNECE publicationsSome UNECE publications