Funding ICT innovation and the role of venture capital: the entrepreneur as the new European hero?

07 December 2011 Author: EIFonline

EIF’s debate on 7 December assessed both the obstacles and opportunities for risk investment in funding ICT Innovation. Europe is ‘doing’ less venture capital than 10 years ago, a worrying situation in an ever-increasing competitive market environment. This is mostly due to the diverse legislation in EU Member States in this area.

As it stands, the Commission is eager to reform venture capital laws and is striving to create a European venture capital passport that would allow companies to gather venture capital across the EU market. What proposals are on the table to make Europe more innovative and competitive?

Europe has 23 million SMEs, constituting 99% of all businesses and employing more than 90 million people. As such, SMEs are the key drivers of Europe’s growth, innovation, social cohesion and employment. The European Commission is trying hard to make it easier for these SMEs in ICT innovation to access finance. Since 2007 for example, there is the competitiveness and innovation framework programme. This programme is addressing the lack of financing for SMEs by providing debt and equity financing with over 5.6 billion Euros in guarantees and 1.6 billion Euros of venture capital for innovative SMEs. 60% of all funding with venture capital is currently going into the ICT sector because this is where innovation can thrive, in areas such as health, ageing population, energy efficiency, the multilingual web, as well as smart mobility. In addition, there is the 7th Framework Programme for Research that provides for an ICT finance market place.

Additionally, the European Commission adopted two recent proposals that are aimed at creating greater financing for startup companies. The first is a new programme for competitiveness and SMEs, with a value of 2.5 billion Euros, complemented by the Horizon 2020 programme with a value of 3.4 billion Euros. The latter is aimed at startups in areas such as ICT research and innovation, digital content and creativity. These proposals are now going to the European Parliament. And more concrete initiatives are in the pipeline. There is an e-Business initiative to stimulate SMEs to make smart use of ICT to help them integrate in the global digital value chain (with five demonstrating actions in the automobile, tourism, food supply, transport and fashion industry sectors). And finally there are initiatives such as ICT standardization, e-invoicing and e-skills to promote ICT professionalism.

Europe’s true mission however lies in empowering the new generation of venture capital people, those that will be able to really help new entrepreneurs to set up their new companies. What is lacking in Europe at the moment is the ability to combine capital with industry expertise. In Europe venture capital is more of a bankers business, whereas in the United States it normally centers around industry people. And then there is the question of the optimum ways to establish the funds. If you have to raise the funds in Italy, according to Italian law and in the Netherlands according to Dutch law you experience long delays because you have to comply with the law systems of each country. The same happens when you choose to partner with a financial institution as you have to prove your due diligence to people who often do not know your market.

The answer to the problem only partially lies in the need for a comprehensive legal framework. It is equally (or even more?) important to create a culture of risk taking and to foster that culture. In Europe, there seems to be no incentive for people to take such risks and to set up new companies. Schools could be of tremendous help in teaching people such (responsible) risk taking attitudes. This would foster more entrepreneurship. And finally, the European investment fund has played and is playing an important role by lowering the barriers to entrance and fostering a culture of innovation. Without such a fund it would be much more difficult to finance startups.

Perhaps what is needed is to view the new entrepreneur as the new superhero? If only we can foster the right climate for them, maybe they will emerge sooner than we expect.


 

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