European Commissioner responsible for Research, Innovation and Science
"The European perspective on innovation / Improving the landscape for venture capital"
Global Venture Capital Congress 2012 / Dublin
5 October 2012
Ladies and Gentlemen,
I am delighted to be at the third Global Venture Capital Congress. After the first and second meetings of the congress in New York and Jerusalem, it is a real honour for Dublin to host this prestigious event.
The 2012 Innovation Union Scoreboard, released in February this year, showed that although almost all EU Member States had improved their innovation performance, the upward trend has slowed, and the EU is not closing the persistent gap with the world's innovation leaders, namely the US, Japan and South Korea.
Stimulating firms' innovation activities is a key factor in boosting Europe's standing.
To make this happen national research and innovation systems must provide an even more innovation-friendly environment for business.
Innovation Union is the EU's policy for improving the conditions for research and innovation in Europe.
Its objective is to ensure that innovative ideas and breakthroughs can be turned into new products and services that create competitiveness, growth and jobs.
To do this, we need, amongst other things, a functioning knowledge market in Europe; better access to finance; affordable patents; faster standard-setting, and a more strategic use of public procurement.
Horizon 2020, currently under discussion by the Member States and by the European Parliament, will enact many Innovation Union commitments. Horizon 2020 is a radical departure from the previous Framework Programmes for Research because it will bring together, in a single programme, all EU funding for research and innovation, providing seamless support from ideas to markets, from research to product. It will run from 2014 to 2020.
The programme will provide more EU support than hitherto for innovation and activities closer to the market. And Horizon 2020 will not be limited by a narrow definition of innovation.
It will address both technological and non-technological innovation, and it will cover innovation in both its incremental and disruptive forms. It will also tackle social innovation, design innovation, eco-innovation, and innovation in the public sector.
Overall, Horizon 2020 will mesh research and technological development with innovation in products, services, processes and systems.
Concretely, it will give stronger support to the market uptake of innovation via funding for closer-to-market activities such as prototyping, testing, demonstrating, piloting and standard-setting.
Horizon 2020 will work together with COSME, the programme for the competitiveness of enterprises and SMEs, so as to properly implement financial instruments that will provide debt and equity facilities, including venture capital.
We have had a very productive experience so far with such instruments, and evaluations show they have had a significant impact on improving access to finance.
For instance, between 2007 and 2011 the High-Growth & Innovative SMEs Facility, which is part of the Competitiveness & Innovation Programme, or CIP, mobilised nearly 2 billion Euro in Venture Capital funding.
In the same period, and sticking with SMEs, the CIP's SME Guarantee Facility mobilised nearly 9.5 billion Euro in lending to over 315,000 SMEs.
Furthermore, on the side of large firms and mid-caps, the Risk-Sharing Finance Facility, known as the RSFF and part of the Seventh Framework Programme for Research, has so far mobilised over 8 billion Euro in EIB loans.
With Horizon 2020 and COSME, we propose to strongly reinforce loan guarantee and venture capital facilities for innovative SMEs and firms and organisations of all shapes and sizes.
This reinforcement is much needed. The economic crisis has clearly taken its toll on the venture capital market in Europe.
Venture capital fundraising has decreased; investments have been postponed; investors are pulling out of the market; there are fewer exits; returns are lagging behind those possible in other asset classes; and overall, the European venture market is not proving attractive enough at an international level.
Early-stage venture capital funds, in particular, are shunning new investments in favour of tending to their current portfolio of firms.
And many venture capital funds in Europe are too small to support the growth of innovative companies.
Furthermore, venture capital markets have become increasingly dependent on public sector institutions such as the European Investment Fund (EIF).
We need to expand and diversify the investor base in Europe. And we need more venture capital in Europe in absolute terms. Venture capital funds must become bigger and more diversified in their investments in order to support the most promising start-ups.
Against this background, the Commission is following a two-pronged strategy of improving the regulatory environment for the venture capital market, and developing new financial instruments to attract private and institutional investors.
On the regulatory side, it is clear that venture capital regimes are much more developed in some countries than in others. Only a third of Member States have put in place dedicated rules for venture capital funds, with the rest applying general rules on company or corporate law. As a result, the extent of cross-border fundraising has been limited.
It is true that we have rules for investment fund managers where the aggregate assets managed exceed 500 million Euro. This is the Alternative Investment Fund Managers Directive, the AIFMD. Managers authorised under the AIFMD scheme can market their funds across the EU. Those below the 500 million Euro threshold can certainly opt in, but full compliance has proved to be onerous for managers of small Venture Capital funds.
So we've done something to tackle the problem.
Last December, the Commission made a proposal for a new European Venture Capital Regulation that will make it easier for venture capitalists to raise funds across the EU.
The approach is quite simple: once a set of requirements is met, qualifying fund managers can raise capital under a "European Venture Capital Fund" brand or passport across the EU. No longer will they have to meet complicated requirements that are different in every Member State. By introducing a single rulebook, venture capital funds will have the potential to attract more capital commitments and increase in size.
In June this year the Danish Presidency of the European Council reached an agreement on the text with the European Commission and the European Parliament.
Negotiations are still progressing on one remaining issue - whether to exclude from the "passport" funds that are domiciled in tax havens or that invest in companies based in tax havens - and this issue could well be resolved by the end of this year.
To be eligible for the European Venture Capital “passport”, a Venture Capital fund must have three key features:
- At least 70% of its assets are invested in eligible target companies;
- Companies targeted for investment are unlisted SMEs in early or expansion phases;
- And third, eligible investors comprise professional investors plus high net worth individuals, business angels, and family offices.
The aim of our approach is to strike a balance that will fulfil three goals: to maximise capital flows to innovative SMEs; to minimise flows to transactions that do not foster growth and competitiveness; and to free fund managers to put together attractive investment propositions.
An important barrier remains, however, in the form of tax obstacles to cross-border venture capital investments. The European Commission intends to make a proposal to eliminate these obstacles, while at the same time preventing tax avoidance and evasion, as part of a forthcoming second "Single Market" regulatory package.
These policy initiatives at the European level will be complemented in a very practical way by our programmes for research and innovation and for SMEs.
The Commission's proposals for venture capital facilities under COSME and Horizon 2020 foresee two types of EU-level support mechanisms under an integrated equity instrument: venture capital investments through funds, and fund-of-fund investments.
Investments in venture capital funds will aim to provide venture capital and mezzanine finance to SMEs and mid-caps. A continuum of funding support will target funds — including multistage funds — that address companies at various stages of development, ranging from seed, start-up and early-stage to expansion and growth phases.
The two programmes could also support funds-of-funds with a broad investor base, including private institutional investors as well as public and public-private financial institutions. Here the main policy goal will be to catalyse greater private-sector involvement over the longer term.
The Commission is currently analysing the costs and benefits of implementing a range of potential fund-of-fund structures.
As regards other possible ways for a firm to secure equity funding, it is too early to say, given the current financial and economic uncertainties, whether the emerging alternatives are temporary phenomena or will have long-term staying power. I am thinking in particular of angel financing and crowdfunding.
We are certainly looking, with great interest, at their potential to support innovative firms.
And we are soliciting the views of experts and stakeholders about what might be done at a European level to give them an opportunity to gain more traction. It is difficult to generalise, however: different alternatives may well turn out to better suit different industrial or research and innovation sectors. And firms of varying sizes and at different stages of the company life-cycle may find one or more alternatives more or less attractive.
The investment activity stemming from complementary sources of financing is very difficult to monitor, and reliable, published data is very scarce. Clearly, however, many European firms have accessed various forms of alternative finance.
At the moment, we are looking with particular interest at the potential for Business Angel finance for innovative SMEs at the seed, start-up and early stages. The European Business Angel Network, EBAN, estimates that the total sum invested by Business Angels each year in Europe's SMEs is around 3 billion Euro.
The number of organised Angel networks and groups in Europe has grown from around 50 at the beginning of the century to at least 350 today involving some 20,000 Angels. This is surely only the tip of the iceberg, as there is a large, less structured Angel market as well.
Another trend is the growing interest from Business Angels in one country looking for investment opportunities in other parts of Europe.
Also, in recent years several Member States have taken action in their domestic markets to try to stimulate more Angel investing. These initiatives include tax breaks on initial investments or gains; publicly-financed funds to co-invest with Angel syndicates; and angel awareness-raising and investment training schemes.
Another interesting development for seed, start-up and early-stage funding is the emergence of Public-Private Co-investment VC funds managed by private-sector fund managers.
Here I will just mention, as worthy of possibly wider emulation, Germany's High-tech Grunderfonds and the UK's Enterprise Capital Funds.
Let me turn briefly to Crowdfunding, where the financial support can be loans, equity or a combination of both.
Crowdfunding now appears to be emerging as a source of funding, aggregated from small or micro investments, for seed, start-up and early-stage SMEs. There are a growing number of crowdfunding internet-based platforms throughout Europe.
We are monitoring developments and also keeping an eye on the implementation and impact of the US's Crowdfund Act, adopted in March this year.
All of these new and emerging sources of finance show that investors on the one hand, and innovators and SMEs on the other, are being extremely creative in finding new ways to fund innovation and entrepreneurship.
In the current economic climate, that is to be welcomed. The European Commission is keeping a close eye on these trends, to see how our policies at the European level can help these new sources of funding flourish.
In the meantime, we are working hard to ensure that our funding initiatives in under Horizon 2020 and COSME get off to a running start in 2014. I hope that we, in the European Commission, can count on your valuable support. There is much to be done, and we can do it better and more quickly, for the benefit of companies and investors alike, when we act together.