Access to appropriate sources of finance constitutes one of the most significant constraints on promoting innovation and the competitiveness of European small businesses and start-ups. Market deficiencies lead to a lack of financial support for young growth-oriented European companies and for entrepreneurship in general. This necessitates public actions to overcome these hindrances and to leverage the limited amounts of private finance available to close this investment gap. The most important weaknesses are the following:
- Lack of private investment in start-up businesses: Research has consistently shown that the most prominent and permanent market deficiencies are in the seed and start-up stages of firm development.
- Fragmented venture capital markets hinder business growth: A single European venture capital market is needed to overcome the fragmentation and small scale that currently characterise the sector. The necessary scale and the strong participation of private investors that are the hallmarks of a self-sustaining venture capital market can only be achieved at European level. The goal of EU involvement is to promote the development of a self-sustaining, strong venture capital sector.
- Gaps in the availability of loans: A discernible gap exists in the lending to small and medium-sized enterprises with European and global ambitions. Bank lend less to smaller firms where the risk is higher because this is more expensive due to higher administrative costs and higher capital requirements. Overall, this leads to loan pricing that in many cases makes lending unattractive for SMEs.
To overcome these market deficiencies, the Commission proposes a set of financial instruments for financing firms with growth potential. The following instruments are proposed for the next programming period 2014-2020 using the EU Equity and Debt Platforms:
- The facility for start-up investment is designed to promote early-stage venture capital investment and the emergence of new venture capital funds, stimulate knowledge transfer, and support the creation of a European market in intellectual property.
- The facility for growth investment has the goal of providing a boost to the European venture capital market by investing in venture capital funds-of-funds, increasing considerably the volume of investment in the growth of enterprises across borders.
- The loan facility aims to facilitate access to lending of firms that have higher risk, but aim to grow and internationalise their activities.
Success by 2014: The EU has in place a set of instruments that provide public and private investors new opportunities to invest in European firms, overcoming market deficiencies and improving the availability of loan and equity finance.
Success by 2020: A large number of growth-oriented SMEs find it easier to attract equity investors and can find financing for their expansion. New practices of knowledge transfer facilitate setting up new firms. The European venture capital industry can attract institutional investors and is less dependent on public investment.
The facility for start-up investment will be implemented by the European Investment Fund (EIF) and will provide commercially-oriented reimbursable financing, primarily in the form of equity. It targets firms in their seed and start-up phases.
The facility for growth investment aims to invest using funds-of-funds that would invest in venture capital funds with a pan-European focus. The funds-of-funds will be required to raise at least 50% of their funds from private investors, and should aim for 80% private funding. All investors in the funds-of-funds share risks and returns on an equal basis. The facility is open to cooperation with national promotional financing institutions.
The loan facility will be implemented by EIB or EIF, using financial intermediaries. This facility complements other instruments, targeting loan portfolios with riskier, growth-oriented SMEs.