RUDY AERNOUDT ISME Seminar Kanton - 3 july 2008 Funding SMEs in Europe: Challenges and policy answers

Structure 1. Five evidences 2. EU facts and figures 3. Governments’ role  Supply side:  Demand side  Meeting supply and demand 4. Conclusion

I. Five evidences 1. Not all markets are the same 2. Not all the money is the same 3. The market does not function at the lower end 4. Negative risk premium 5. There is a natural tendency for big deals

Evidence I: NOT ALL THE MARKETS ARE THE SAME

Not all the money is the same ProsCons Friends, family & fools - easy to get - patient - limited added value - no deep pockets Public sources- free - patient - bureaucratic - slow, hard to locate Banks- potentially cheap - relatively fast - unpredictable - require security, impatient Business angels- fast, unbureaucratic - business understanding - no deep pockets - often unsystematised Private equity- deep pockets - value added easy to ascertain, clear agenda - potentially unpredictable agenda, potentially slow - high expectations - difficult to get Evidence II

Evidence III: Financing needs are not the same CF bank venture capitalist business angel entrepreneur time sweat equitye x p a n s i o nstart-upseed money concept product introduction marketing product support regional expansion sales prototype know how time research engineering prototype 1st marketing plan proof of concept product development business plan production prototype marketing plan working capital 1st personnel start marketing management team market studies

Evidence IV : Market does not function at the lower end Supply/demand and return for risk capital by development stage source: R. Aernoudt, European Enterprise Policy

Evidence IVbis: Negative risk premium Source: EVCA 12,91719,1-4,5 Total private equity 15,316,320,81,3Buyouts 12,020,216,7-5,4 Venture total 12,417,716,79,8Expansion 9,6 12,411,8-13,3Early stage Cumulated IRR 5yr3 yr1 yrDevelopment- phase

The market does not function at the lower end Demand issue Entrepreneurs prefer control over growth Only 7% accept to open their capital for external money Information asymmetry Supply issue Risk/return: example of market imperfection Lack of professionalism Inverse risk premium

Evidence V Natural tendency for big deals Need high fees High volume Prove good return Larger Volume To pay expensive fund managers Big deal

EU Facts and figures (1) 1,6 million enterprises created a year (Bannock) are:  Growth oriented  Offers a sufficient, but not extra-ordinary return 3000 get venture capital 2 out of 1000 starters get VC in EU

EU Facts and figures (2) good technology business ideas 1000 get created 100 get VC 10 go public 2 become market leaders Go for the market leaders!! Policy or vc wisdom?

Desired government actions for financing Source: « Bank financing and small firms », Prof.dr. Eddy Laveren & Johan Bortier. III. Government role (1)

Government role - Supply side One of the characteristics of an entrepreneurial region is the offer of a wide variety of financial instruments All instruments integrated within one organisation = One-stop shop for SME financing Integrated finance approach

FEDER (new financial instruments such as BA, Venture capital, Mezzanine, Guarantee) EIF (guarantee, venture capital, JEREMIE)  GIF: High Growth initiative  Fund of funds principle for VC  Side car fund for BA  Start-up or expansion phase  Co- or counterguarantee system 7th PCRD (risk sharing) PIC  Venture capital: initial investments, expansion  Guarantee: loan, microcredit, own funds, titrization Supply side – European initiatives

Government role: a country example: Belgium Low risk BUSINESS ANGEL NETWORK And BA Euro INNOVATION CAPITAL FUND Euro ARKIMEDES > Euro High Risk FRIENDS LOAN < Euro PRE-SEEDSEEDSTART-UP EXPANSION EARLY-GROW

Demand side Investor readiness Integrated finance approach (fit 4 finance) Stimulate entrepreneurship Casebook of VC backed companies Government role

Government role Demand meeting supply Mutual Understanding between bankers and SME’s:  Round tables  Code of conduct (Basle II) Business angels academy Creating platforms

IV. Conclusion Need for more entrepreneurial finance Need for more real entrepreneurs Need for stimulating government measures Only then will more venture capital backed companies grow, leading to economic growth and employment.

IV. Conclusion (2) Rudy Aernoudt Added value of public sector is in seed & early stage  not in later stage (except for high growers) Preseed and seed : act as trigger Subsidize pre-incubation (due diligence on seed)

IV. Conclusion (3) Rudy Aernoudt Low risk Business Angel networks Seed funds Late early stage High Risk FFFF PRE-SEEDSEEDSTART-UP EXPANSION EARLY-STAGE Leave it to The market PPP New Public Role

Leverage principle: Archimedes “ Give me a lever long enough and a fulcrum on which to place it, and I shall move the world ”

R. Aernoudt, European Enterprise Policy, Intersentia, New- York - Antwerp, 2003 ( R. Aernoudt, Policy towards risk capital, in Venture Capital, 1/1999. R. Aernoudt, Business angels: a policy issue? From perverted pecking order to perverted risk-return, Venture capital, 1/2005 R. Aernoudt, Business Angel Academy, Venture Capital, 1/2007 More: Read more about it!