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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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2.5

3

3.5

4

4.5

5

5.5

2 2.5 3 3.5 4 4.5

Venture capital

Lo

an

s

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Venture capital landscapeVenture capital landscape

0.00

0.02

0.04

0.06

0.08

0.10

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Ita

ly

Po

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Au

stri

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Hu

nga

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Ro

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nia

Cze

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Po

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Ge

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Be

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Sw

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Sp

ain

De

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ark

Fin

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land

UK

Sw

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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

2

2.2

2.4

2.6

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

a

Cze

ch R

.

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

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Thank you!Thank you!

Jose.Palacin@unece.org

www.unece.org/ceci