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Brussels, 25th October 2001

Risk Capital: Commission calls for timely implementation of Action Plan

The European Commission has called for sustained effort to meet the 2003 deadline set by the European Council in Lisbon for completing the Risk Capital Action Plan (RCAP) action plan. In a mid-term review of the Action Plan it has just adopted, the Commission notes that despite some progress in removing obstacles more needs to be done. In particular, the Commission calls for its proposals to be adopted and implemented rapidly concerning securities markets legislation (including implementation of the recommendations of the Lamfalussy group), removing tax obstacles, promoting innovative projects and agreeing on an affordable single Community Patent system. The report is issued at a difficult moment for the venture capitalist industry. After spectacular growth in the nineties, markets have become sluggish in 2000 setting the stage for a possibly lengthy period of uncertainty. Since the adoption of the Action Plan in 1998, overall venture capital investment in Europe has increased three times over and investment in "early stage" venture capital has increased four times over. In spite of this growth, European risk capital markets remain fragmented and the gap with the US is still widening. The US venture capital industry is not only much bigger but their larger investments have been growing at a faster rate.

Commenting on the industry's prospects, Internal Market Commissioner Frits Bolkestein said: "The establishment of an integrated risk capital market in Europe remains a key commitment. I am confident that the European venture capital industry will emerge stronger and more competitive from the current cyclical downturn. Member States should, without further delay, press ahead with implementing the Action Plan to facilitate investment and stimulate risk capital especially now that the industry is suffering a downturn and faces uncertainty". Commissioner for Economic Affairs Pedro Solbes, added: "The good performance of European risk capital markets in recent years should be sustained by further structural reforms. The elimination of the remaining barriers to integrated markets, which will become more visible with the physical introduction of the euro on 1 January 2002, should continue to be a top political priority, given the vital role of risk capital for growth and jobs in Europe".

Market trends

The year 2000 has been an uneven period which started with an overheated market and ended in a sluggish fashion. Overall venture capital investment in Europe has shown rapid growth, amounting to over €19.6 billion (0.23 % of GDP). Growth in seed and start-up investments was even more striking amounting to €6.4 billion. In relative terms, since the adoption of the Action Plan in 1998, overall venture capital investment in Europe has increased three times over and investment in "early stage" venture capital has increased four times over. Growth was shared by all Member States even though important differences persist, reflecting the presence of a still fragmented European market.

On the funding side, capital raised nearly doubled in 2000 (€20 billion was raised in 2000 for future investments, compared with around €11.5 billion in 1999). On the sources of funds, there has been in 2000 a growing involvement of institutional investors. In particular pension funds more than doubled their contribution.

Despite its growth, the European market is still small compared with that of the US and, moreover, the gap seems to be widening. In 1998 investment by the US venture capital industry was approximately twice that of Europe, in 1999 triple, and in 2000 four times bigger.

The stock markets for high-growth companies suffered in 2000 a strong market correction which continued in 2001, opening a possibly lengthy period of uncertainty. Most initial public offers (IPOs) were completed in the first half of 2000 and since then exit possibilities for venture capitalist have become much more limited.

Policy developments

The Stockholm European Council reconfirmed its commitment to meet the 2003 deadline for risk capital markets including an integrated securities market. To this end, implementation of the Financial Services Action Plan is key (see IP/00/1269). Good progress has been made in 2000/1. The Commission has tabled most of its proposals for achieving the 2003 target. The aim is to facilitate cross-border activity, to make easier and cheaper to raise capital, to strengthen prudential regulation and standards, to improve transparency and provide for faster and more effective financial legislation. In respect to the later, on 6 June 2001 the Commission adopted two decisions to create the European Securities Committee and a Committee of European Securities Regulators in response to the Stockholm European Council Resolution and the Lamfalussy proposals (see IP/01/792 and MEMO/01/213).

Responsibility for implementation has already shifted from the Commission to the EU's Council of Ministers and the European Parliament. Slow progress in agreeing on a Community Patent and the stalemate on the Commission proposal on supplementary pension funds remain important concerns.

In 2000/1 progress has been registered in the adoption of non-financial measures relevant for risk capital. The Commission has recently completed a comprehensive study on "Company Taxation in the Internal Market", on the basis of which a strategy for action has been developed (IP/01/1468). It will shortly launch a study to identify best practices in the use of fiscal incentives to promote investment in research and development and has launched a review of corporate governance practices in Europe in order to identify the best course of action.

The Commission plans a more wide-ranging review next year of other aspects of progress at the level of the Member States in relation to the RCAP. The necessary data will be collected in the framework of the Broad Economic Policy Guidelines exercise. This will be particularly important as we approach next year the 2003 deadline for completion of the RCAP.


The Risk Capital Action Plan is also about entrepreneurship. There are still too few innovative projects in Europe with a profile liable to attract risk capital providers (i.e. the demand side of risk capital is still weak). The Action Plan will not be a success unless Europe becomes much more entrepreneurial with many more innovative fast-growing firms finding their way to the market.

The promotion and development of European entrepreneurship has been the object of conferences, workshops, training schemes and exchange of best practices in 2000/2001. In spite of some positive signs, programmes will need to be pursued longer to overcome the long lasting cultural barriers thwarting entrepreneurial drive in Europe. The R&D sector could prove the most cost effective for promoting entrepreneurship by helping and encouraging researchers to market their innovative ideas and applications. The adoption of the New (the 6th) Framework Programme for R&D, proposed by the Commission in February 2001, should be an immediate priority.

Business Angels networks have increased to around 130 spread over almost all EU countries. The Commission has supported the setting up of such networks. 20 new networks received support from Community Budget since the Risk Capital Action Plan was launched. Corporate venturing is becoming an increasingly important source of financing for entrepreneurs. It is estimated that about € 1.2 billion is invested each year. However, the level of investment for both categories is still low compared to the US where investment is 4/5 times higher.

Public funding

In the area of public funding important steps have been taken in the last 12 months to improve the overall efficiency of Community risk capital markets:

  • the Commission has clarified its policy towards state aid. A Communication on "State Aid and Risk Capital" was published on 23 May 2001

  • the European Investment Fund (EIF) has strengthened and fully defined its role as the risk capital arm of the European Investment Bank (EIB) Group

  • the Innovation 2000 Initiative ("i2i") launched in 2000 by the EIB is well underway

  • the EIB Group and the Commission have signed a joint memorandum to co-finance R&D activities

  • risk capital is becoming more available at the regional level and

  • some Community instruments have been redirected toward early stage finance.

The Communication is available on the Commission's Europa website: (click on What's New)

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