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07 December 2011

Commission proposes rules on venture capital

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The new regulation will make it easier for venture capitalists to raise funds across Europe for the benefit of start-ups. The approach is simple: once a set of requirements is met, all qualifying fund managers can raise capital under the designation "European Venture Capital Fund" across the EU.

No longer will they have to meet complicated requirements which are different in every Member State. By introducing a single rulebook, venture capital funds will have the potential to attract more capital commitments and become bigger.

In addition to the measures presented last week, including €1.4 billion of new financial guarantees under the Programme for the Competitiveness of Enterprises and SMEs, the European Investment Bank will keep its SME loan activity at a sustained pace, close to the 2011 level of €10 billion.

European Commission Vice President, Antonio Tajani, responsible for Industry and Entrepreneurship, said: “Easing access to finance for SMEs is priority number one to get out of the crisis. Our Action Plan underlines that Europe is doing its utmost to improve SMEs' access to finance. We aim to strengthen our EU financial instruments for SMEs and to improve their access to finance markets.”

Internal Market Commissioner Michel Barnier said: "We need more venture capital in Europe. By helping companies become more innovative and competitive, venture capital will create Europe's companies of the future. In order to support the most promising start-ups, venture capital funds must become bigger and more diversified in their investments. Today's proposals will help develop this emerging market."

Venture capital, which provides early finance to start-ups, forms an important source of long-term investment to young and innovative small- and medium-sized enterprises (SMEs). However, small fund sizes and only being able to provide low levels of capital have prevented them from playing a more important role in start-up financing. As a result, SMEs continue to depend on short-term bank loans. But in the context of the current crisis, marked by a fall in lending to the real economy, it can be very difficult for such companies to access this type of loan.

Evidence examined by the Commission shows that a company with long-term venture capital investors is more successful than a company that needs to rely on short-term finance from banks. This is commonly attributed to the rigorous screening that a venture capital fund undertakes prior to investing in a company. But the average European venture capital fund is small and far beneath the optimal size necessary for a diversified investment strategy to make a meaningful capital contribution to individual companies and thereby produce real impact. While the average venture capital fund in the European Union contains approximately €60 million, a US counterpart has a fund size of €130 million on average.1 Economic studies show that venture capital funds can make a real difference for the industries they invest in once their size reaches approximately €280 million. Furthermore, US venture capital funds invested around €4 million on average in each company; whereas European funds could only muster investment volumes of €2 million on average per company. Early-stage capital investments in the US were on average €2.2 million per company, while early-stage capital contributions in the EU were on average €400,000 per company.  

Bigger venture capital funds mean more capital for individual companies and will give the funds the ability to specialise in particular sectors such as information technology, biotechnology or health care. This is turn should help SMEs have a more competitive edge in the global marketplace.

© European Commission

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