All participants agreed that support for venture capital (VC) and equity investment can, due to their targeted nature, be an effective and efficient means of achieving European policies on growth and innovation. VC-funded funded firms have, for example, been better job creators during both boom times and the recent recession.
However, the industry suffers from significant drawbacks too. These range from market fragmentation, low performance, the limited size of EU funds in comparison to Japan and USA, and the fact that equity investment is a risky business and median returns are negative. The industry has been shrinking consistently from 2000 onwards due to the lack of fundraising from private investors who left the market; in 2011 more than half of all VC investment (57%) was reliant on public funding, up from 10% in 2007. Only 1% of the European SMEs are acquiring funds by issuing shares on capital markets or by calling on investors. For external equity, the average SME is too small to be 'investable' - i.e. have the human capital required to attract equity investors - and to be of interest for most existing instruments. In addition, the socio-cultural factor should not be neglected: small companies, especially family businesses are rather reluctant to call on external capital and share decisional power.
Gerhard Huemer, Director of Economy Policy at UEAPME added: 'Equity is important for SMEs’ financial stability, both to survive the current crisis and to finance riskier-than-usual business activities. However, it remains more expensive and less attractive than loans to entrepreneurs. Accountants and advisers have therefore a key role to play to help companies to manage their financial resources and find the right balance between debt and equity. When it comes to external equity, the average SME is too small to be of interest for most existing instruments. That is why special instruments targeting the needs of SMEs are needed, and why the upcoming EU programmes for 2014-2020 such as COSME must support 'mezzanine finance'tools.
The roundtable also clearly highlighted the key role of 'trust' and 'networks', as well as the necessary early stage involvement of all actors. It was stressed that venture capital companies generally invest for the long-term and mainly in companies they have already known for a long time, usually via well established networks or advisers/sponsors or advice from trusted third party influencers.
Federico Diomeda, CEO of EFAA concluded: 'The roundtable showed that equity finance for SMEs is a very wide topic that also reflects the huge dimension of the market. We need to consider the financial needs of SMEs in the right way and avoid confusion between growth and recovery - although the latter may imply the first. The difficult categorisation of private equity operations in the SME market implies a sort of 'bottom up' approach when looking for SMEs needing access to private equity and then assisting them in actually getting this finance. The concrete examples offered during the debate of how intermediaries can help SMEs showed that this exercise may be done efficiently and at little cost: small practitioners know the territory. I invite all participants to meet again in one year's time to assess achievements towards a concrete and pragmatic approach to this complicated issue.'
- To read the full report of the event, click on the PDF in the 'Related Documents' section at the bottom of this article.