1 Financing Innovative SMEs in Europe José Palacín Economic Cooperation and Integration Division United Nations Economic Commission for Europe Dubai International Conference on Innovative Sources to Finance Small and Medium-Sized Enterprises

2 Structure presentation Policy context: innovation and SMEs Modalities of support to risk capital Demand-side interventions Good practices

3 Financing challenges Innovative SMEs: uncertainty, high risks, no collateral Financing gap SMEs critical for economic dynamism: Source of radical, disruptive innovation

4 European competitiveness Context 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

5 Innovation 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”

6 European diversity Source: WEF

7 Venture capital landscape Source: EVCA

8 Equity investors Formal venture capital- raising financing from institutional investors Informal venture capital – business angels investing their own money

9 Intervention focus Gradual shift in Europe Lending Formal venture capital Business angels The extent and pace of the shift depends on national circumstances

10 Limitations venture capital  Scarce presence in early-stage financing (high risk, small deal size)  Poor investment record of European VC funds in early-stage

11 Investment by stage of development Source: EVCA As percentage total PE

12 Internal rate of return Source: EVCA Cumulative Fund Type Performance (end 2008)

13 Government 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

14 Hybrid 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

15 Types 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

16 EIF: a major VC player in Europe  Entrepreneurship and Innovation Programme  High Growth and Innovative SME Facility  SME 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

17 EIF investments

18 Tax and legal environment Source: EVCA

19 Business 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

20 BA financing: an EU-US comparison Source: OECD

21 Policy tools to foster BA financing  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.

22 Corporate 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

23 Demand 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

24 Investment 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.

25 Europe’s diversity: good practices  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

26 Some UNECE publications

27 Thank you!