 ccess to appropriate sources of development capital has been identified by numerous academic studies as a key factor in SME growth. It was highlighted in the First Action Plan for Innovation in Europe(1) and, more recently, in the conclusions of the First European Forum for Innovative Companies(2). Last April, the European Commission launched a wide-ranging initiative to promote risk-capital markets with the communication Risk capital: a key for job creation in the European Union(3).
Different types of external equity financing - from formal and informal venture capital to stock market listing - are needed at different stages of company growth, but efficient and liquid risk capital stock markets play a crucial role. They not only provide a source of finance for companies themselves, but also encourage the development of venture capital funds by offering an exit route for investors.
In the United States the Nasdaq market has, in 25 years, become the preferred means of raising capital for fast growing enterprises. Today, its 5,500 quoted companies employ around 9 million people. By comparison, the new European stock markets dedicated to the financing of SMEs are still dwarfs.
In November last year, as part of the action plan outlined in the communication, around 200 representatives from the world of business and finance came together for a one day conference, to formulate proposals for the creation of a true European market on the eve of the euro.
In the United States, the 5,500 companies quoted on the Nasdaq market employ around 9 million people. The European stock markets dedicated to the financing of high growth SMEs are still tiny by comparison.
Pan-European
Opening the conference, Commission President Jacques Santer stressed how vital it is - for Europe's future economic success, job creation and innovation - to identify and focus on the priorities for the promotion of a widespread, integrated, freely available, pan-European risk capital market.
Among the key issues identified during the one-day event, delegates agreed that:
- The euro will assist the realisation of a truly pan-European financial market, reducing aversion to risk in both equity and debt markets.
- Cultural factors constitute a key barrier - despite recent improvement in the availability of both private and public equity, Europe still lacks an entrepreneurial, risk-taking culture.
- Lack of information and expertise are also obstacles - high growth SMEs need to become more transparent, while investors should make greater use of qualified technical advice in assessing investment opportunities.
- The harmonisation of regulation and taxation systems is badly needed if pan-European markets are to attract international investors.
The conference put forward a number of proposals for actions to be undertaken by European institutions or national authorities:
- to ensure the fiscal transparency of venture capital funds
- to remove remaining tax barriers which prevent companies from offering stock options to their managers and employees
- to modify bankruptcy rules so that an entrepreneur who has failed once can start a company again
- to create tax incentives for investment in equities
(1) See Special Edition of December 1996. The Action Plan can also be downloaded from http://cordis.europa.eu/innovation/src/action.htm
(2) See Special Edition of December 1998, and `Role Models for an Innovative Europe', edition 1/99.
(3) SEC 552; the document can be downloaded from http://www.europa.eu/comm/off/com/riskkal/risk_en.pdf
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January 1999
FINANCING INNOVATION