Innovation in Europe – From public investment programmes to private capital markets – EURACTIV.com

It is a self-evident truth that no modern economy can survive without a sufficient level of innovation. But the challenges our continent faces, from climate transition to the war on Ukraine, have made the solutions offered by technological advances more necessary than ever.

Anne Fossemalle is Director at the European Bank for Reconstruction and Development (EBRD)  and the Chair of Invest Europe.

We need to support entrepreneurs across Europe, from Dublin to Erevan and from Helsinki to Valetta. For many of these entrepreneurs, such support will be primarily financial. Without capital one cannot turn a great idea into a great project, and much less a great project into a great venture.

Capital can of course come from public sources – it is the role of national promotional banks, of the European Investment Fund (EIF) and of the European Bank for Reconstruction and Development (EBRD), which I represent.

In my experience, public intervention is most efficient when it displays two key characteristics. First, it should seek to crowd-in, never crowd-out private operators. Second, it should operate under market-like standards. In other words, public financing is most helpful where it complements private expertise or demonstrates the viability of more risky investments. As the EIF data shows, the €11bn of resources coming from the InvestEU Fund will ultimately be turned into €145 billion of investments that benefit SMEs, mid-caps and infrastructure projects.

While the role of public financing to crowd-in private capital is paramount, actions must also be taken to ensure that the private sector has the sheer capacity to expand on the public’s initial efforts. Venture capital is a key aspect of this as its business model is about more than financing. Venture managers’ role is indeed not only to pick the right businesses, but to support them actively, adding value to these and to their management.

During the pandemic, venture capital has shown the resilience that its long-term model offers and the ability it has to continue support companies through brutal economic shocks. At a time when the spectre of inflation again threatens to darken the economic outlook for European citizens and businesses, venture capital is a solid, durable solution for financing new projects…and a strong investment opportunity to investors in search of returns.

The good news is that the EU venture capital industry has never been in such a good shape. The number of venture funds that have reached closing in Europe has increased every year from 171 funds in 2016 to 288 in 2020, the first year of the COVID-19 pandemic. But more can still be done if the EU wants to play at the same level as top VC destinations, including the U.S.

The capital that will ultimately be channelled into start-ups and scale-ups through these funds comes from a wide range of private sources. The largest slice will come sizable, often global institutional investors wishing to invest over the long term and to benefit from the yield the asset class can offer. The rest will come from a few high-net-worth individuals, whether entrepreneurs or family offices, which are always keen to support innovation.

From this perspective, there are several ways to make the asset class more accessible and more attractive to private investors. They all ultimately lead back to a fundamental tenet: you cannot assess the benefits and the risks of long-term, diversified fund investments in the same manner as volatile, traded instruments.

These imbalances can be solved through changes to EU law. In fact, many initiatives have already been launched by the European Commission as part of the Capital Markets Union agenda to better acknowledge the specificities of long-term and diversified investments such as venture capital. These include the ongoing reviews of the EU prudential frameworks, including Solvency II, and the improvements made to the European Long Term Investment Fund (ELTIF) passport.

Other initiatives part of the Capital Markets Union project could make a difference for the EU innovation landscape. The upcoming review of insolvency rules for example offers an opportunity to better reflect that entrepreneurs need to fail several times before setting up businesses of tomorrow. At national level, tax incentives – such as the Madelin model in France – could also be used to incentivise private individuals to commit capital into equity funds.

We can be hopeful that Member States and Members of the European Parliament will share the European Commission’s sense of priority.

Innovation is the engine of present and future growth. And it is only by combining the positive forces of public and private finance that we will shift to the next gear, enabling all innovators to move forward, from small seed projects to the largest scale-ups ready to become European champions. This clearly comes at a price. But if the onslaught of crises over the last decade, financial and non-financial, has taught us one thing, it is that staying still will be far costlier.