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European Commissioner for Research, Innovation and Science
Venture Capital Round Table
Hyatt Regency Hotel,
Cambridge MA, 19 January 2012
Ladies and Gentlemen,
I am delighted to participate in this roundtable discussion on venture capital. There is much that we can learn from each other on this issue, so I look forward to a stimulating debate.
I would like to take the opportunity to give you some information on developments within Europe. Like the United States, we are keen to explore every avenue to boost the financing of our innovators, entrepreneurs and start-ups.
A little over one year ago, I launched Innovation Union. This is our action plan, supported by all 27 Member States of the European Union, to improve the basic conditions that will let entrepreneurs and companies in Europe flourish.
Our approach concentrates on creating the conditions that will smooth the path from lab to market, from excellent research to new products and services that people want to buy.
We need, for example, faster standard-setting in Europe, cheaper and easier patenting, more public procurement of innovative products and services, and we certainly need better access to venture capital.
Improving access to finance is essential to enhance the competitiveness and growth potential of innovative SMEs.
In the context of the current financial and economic crisis in the EU, marked by a fall in lending and the availability of venture capital, it is increasingly difficult for such firms to get the start-up and expansion funding they need.
Although banks finance 75% of the real economy in Europe, we all know how difficult it can be for companies, especially start-ups and other SMEs, to access funding in the current climate.
Venture capital offers an alternative source of finance that allows SMEs to invest and grow.
In order to support the most promising start-ups, venture capital funds must become bigger and more diversified in their investments.
Venture capital is much more developed in some countries than others: for example, only nine of the 27 European Union Member States have dedicated rules for venture capital funds. The other 18 countries apply general rules on company or corporate law.
As a result, there is limited cross-border fundraising. This needs to change.
Evidence shows that a company with long-term venture capital investors is more successful than a company that needs to rely on short-term finance from banks. This is commonly attributed to the rigorous screening that a venture capital fund undertakes prior to investing in a company. But the average European venture capital fund is small and far below the optimal size necessary to make a meaningful capital contribution to individual companies and thereby produce real impact.
While the average venture capital fund in the European Union contains approximately 60 million Euro, its American counterpart has a fund size of around 130 million Euro on average. Economic studies show that venture capital funds can make a real difference for the industries they invest in, once their size reaches about €280 million.
Furthermore, US venture capital funds typically invest around 4 million Euro on average in each company, while European funds can only muster investment volumes of 2 million Euro on average per firm.
Early-stage capital investments in the US are on average 2.2 million Euro compared to 400 000 Euro in the EU.
Bigger venture capital funds in Europe would mean more capital for individual companies and would give the funds the ability to specialise in particular sectors such as ICT, biotech or healthcare. This is turn would help EU SMEs develop a more competitive edge in the global marketplace.
We do have a scheme for so-called alternative investment fund managers where the aggregate assets managed exceed 500 million Euro. Authorised managers can market their funds across the EU. Those below the 500 million Euro threshold can certainly opt in, but full compliance can be onerous for the manager of a small venture capital fund.
So, last month the European Commission made a proposal for new European venture capital rules that will make it easier to raise funds across the European Union.
The approach is simple: once a set of requirements is met, qualifying fund managers can raise capital under a "European Venture Capital Fund" brand across the EU. They will no longer have to meet complex requirements that are different in each one of the 27 Member States.
By introducing a single rulebook, venture capital funds will have the potential to attract more capital commitments and become bigger.
We are also working at the European level to eliminate any tax treatment that penalises cross-border venture capital investments, and to reduce the administrative burden. These efforts are part of the wider Action Plan to Improve Access to Finance for SMEs, also presented on 7 December last.
If the EU is to reach its target of investing 3% of its GDP in research, it needs to boost private sector investment in R&D and innovation. An important pre-condition for achieving this is mobilising finance.
Financial markets and institutions, however, are often reluctant to back research- or innovation- intensive companies or projects due to the relatively high level of uncertainty inherent in their activities.
As a direct answer to this challenge, in 2007 the European Investment Bank and the European Commission jointly created a new lending instrument called the Risk-Sharing Finance Facility - or RSFF for short.
The RSFF improves access to debt financing for promoters of research and innovation investments by sharing the underlying risks between the European Union and the European Investment Bank. Together, they are providing up to 2 billion Euro for the period 2007-2013. We estimate that this could leverage investments worth over 20 times the contribution from the European Union budget.
The demand for loans has far exceeded expectations, and the cooperation between the EIB and the Commission has been immensely effective.
Just last month, President Maystadt of the EIB and I signed a new agreement that, among other things, will give the RSFF more leverage in terms of allocating the funding available, and through the European Investment Fund, will pilot a scheme for making loans to innovative SMEs.
As to the future, Horizon 2020 – our new European instrument for research and innovation, with a proposed budget of 80 billion Euro - will maximise the growth potential of our companies by providing them with adequate finance when they need it. The Debt Financing Instrument will provide loans and guarantees on a market-driven, first-come first served basis for investment in research and innovation. The equity instrument will provide venture capital to individual start-ups and growing enterprises.
We are very pleased that the RSFF and the financial instruments under the EU's Competitiveness and Innovation Programme have attracted a significant increase in private finance. They will be significantly expanded between 2014 and 2020 under Horizon 2020 - our planned research and innovation programme with a budget of 80 billion Euro - and COSME, the Programme for the Competitiveness of Enterprises and SMEs.
Ladies and gentlemen,
I hope that I have been able to give you an overview of some of challenges we face in the European Union and of some of the actions we are taking to boost the capacity of venture capital to provide much-need support to our innovators and entrepreneurs.
I am keen to hear about and learn from your concerns and experiences here in the US. For example, if we make a comparison with the obstacles between the 27 different Member States of the European Union, do you have problems raising venture capital across different States? What can be done at the federal level to improve the supply of venture capital in the United States? And, if you were in my shoes, what would you focus on in Europe in order to improve the supply of venture capital?
Thank you very much for listening, and thank you in advance for a good discussion!