Design and development of a tool to support and improve the decision making process of investors for financing high-growth potential innovative SMES

A core solution to improve access to risk finance for innovative enterprises should target these informational asymmetries at their source to help investors decision making by signalling positively technologically rigorous and promising projects, and avoiding a mixed equilibrium between non-viable and viable projects leading to higher interest rate and to the migration of very promising projects outside the EU. Hence, such a solution would lower the risk premium as well as the administrative cost for technological assessment that are ultimately paid by innovative project managers, and therefore should reduce the cost of financing for innovative project managers. Such tool could help improving EU Access to Finance conditions for innovators by better selecting projects, making a better allocation of resources, and a better use of EU private existing fundings by channelling them to companies in position to succeed in their projects, therefore participating to the creation of growth and jobs. Such tool could also help improving the reputation of investing in EU and AC innovative companies by increasing the success probability of such investments which could ultimately lead to attract new investors in the field.

The action will therefore consist of:

• The design and development of (a) methodolog(y)(ies) and relating tool(s) providing (a) technological assessment(s) / rating(s) of technologies (being) developed / carried out by EU and AC [[EU Member States and Horizon 2020 Associated Countries.]] innovative SMEs seeking for investments for their growth, the methodology should account of the diversity of the strengthes and weaknesses of EU and AC SMEs (supply chain, collaterals, IP, sectorial positioning...);
• The testing of the above-mentioned technological assessment / rating methodolog(y)(ies) and relating tools with different group of investors (e.g. business angels, VC, banks (including promotional banks); …). The testing must also target different type of EU and AC innovative SMEs;
• The development of a deployment plan of the above-mentioned methodolog(y)(ies) / tool(s).

The action, of an expected length of 3 years, could involve, if relevant, participants from third countries.

The Commission considers that proposals requesting a contribution from the EU of up to EUR 3 million would allow this specific challenge to be addressed appropriately. Nonetheless, this does not preclude submission and selection of proposals requesting other amounts.

The Long Term Investment Working Group set up by DG Research and Innovation of the European Commission during the Greek Presidency of the Council Conference that took place in Athens on 12 and 13 June 2014 has shown that the lack or dispersion of available data on innovation, of existing analysis of their market potential, as well as the expensive costs to access to both of them, are strong obstacles to assess the technological and financial viability of innovative projects and enterprises for investors.

The Horizon 2020 InnovFin Advisory report on ""Access-to-finance conditions for KETs companies""[[http://www.eib.org/infocentre/publications/all/access-to-finance-conditions-for-kets-companies.htm]] published and discussed on 31 March 2016 in Den Haag during the ""Innovative Enterprise – Financing Ideas from Europe"" conference of the Dutch Presidency of the Council, confirmed this outcome and allowed to understand more in depth the difficulties faced by innovative SME while attempting to access finance. The report shows the difficulty of the decision making for investors when confronted to high growth potential innovative companies, especially those led by disruptive market-creating innovation. Indeed, enhanced technology and market expertise is needed but not always available to assess the technological viability of projects. Complex technology and ""asymmetric knowledge"" between the companies and lenders/investors worsen the general risk aversion of the latters. Indeed as shown by Nobel Price Akerloff, asymmetries leading to a single price equilibrium mixing different qualities dynamically converge to a market collapse. The transaction cost related to the technological assessment is relatively higher for smaller funding needs. As a consequence Innovative SMEs, and in particular those providing/driving breakthrough/disruptive market-creating innovation, struggle to access to finance.

• Reduction of the financial risks perception and higher confidence/trust for investors supporting EU and AC innovative SMEs;
• Easier access to finance for EU and AC innovative SMEs, in particular those providing / driving breakthrough/disruptive market-creating innovation;
• Increased investments in EU and AC innovative SMEs, in particular those providing / driving breakthrough/disruptive market-creating innovation;
• Increased uptake of innovative solutions, including breakthrough/disruptive market-creating innovation, by EU and AC SMEs;
• Development of a recognised EU technological assessment / rating tool(s) for the benefit of EU and AC innovative SMEs.