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The newsletter of the European Commission's Innovation Directorate





January 2003

Policy News



All those in favour...

    The Commission recently adopted a communication setting out how it will assess, under state aid rules, measures to promote the growth of risk capital markets. David Walburn of Greater London Enterprise examines the case for state aid for innovative SMEs and assesses the impact of these rules.

A n increase in the supply of risk capital is an objective the European Union has been pursuing particularly strongly since the Lisbon European Council of March 2000. The summit considered that the lack of venture capital for the small and medium-sized enterprise (SME) sector was inhibiting its competitiveness, and that the implementation of appropriate measures of state aid could improve matters.

The European Commission adopted a communication on state aid and risk capital( 1 ) in 2001, following a request by EU finance ministers for clarification of the rules by which risk capital measures will be assessed under the state aid rules.

Some public help is needed to reduce the equity gap.

Some public help is needed to reduce the equity gap.

David Walburn of Greater London Enterprises is an advisor on SME finance issues for the European Association of Development Agencies (Eurada). He says the principle of the Commission's initiative is simple: "Essentially what the public sector, with demands less onerous than those of commercial investors, is doing is making funds available to venture capital investors. It means that the state gives up some potential for return and passes this up-side to commercial investors as an incentive to participate."

Walburn is joint author of a paper( 2 ) examining the case for state aid to stimulate and increase the supply of equity finance for SMEs. Equity gap

He explains that within the private-sector market for venture capital funds the main problem is a shortage of finance for smaller deals, whereas there is much greater availability of cash for larger deals. This shortage is often described as the 'equity gap'. "If a venture capital fund has a large fund to invest it inevitably means that it is going to do larger venture capital deals," he says, adding: "This means that doing a deal of, say, €2 million, which is likely to give a good return, is much better than trying to do eight separate deals of €250,000. That is a very powerful driver for successful venture capital firms."

Walburn expresses his appreciation of the work carried out by the Commission to improve the provision of finance for smaller companies. But, while welcoming these efforts to clarify even relax the rules where aid helps equity funds targeting SMEs, he says the equity gap "will never disappear altogether. It is not a question of abolishing the equity gap, but of reducing its size bit by bit. I would say you have to link measures such as regional venture capital funds to other tools, such as the business angels networks, to make the gap smaller."

Finally, he says that although it is too soon to draw any real conclusions on the impact of the communication, "In the UK, since the communication's adoption, money has been raised to launch a number of new regional venture capital funds. So it has clearly helped." (1) Commission communication on state aid and risk capital, OJ C 235 of 21.8.2001, p. 3, is available at:
(2) 'State Aid and regional equity funds' by Christian Saublens and David Walburn, appeared in the March 2002 edition of
Entrepreneurial and Business Angel Financing .



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