Innovative and growth-oriented small businesses need to raise capital (equity investment) from external sources because they do not have their own resources or cannot access loans. Firms typically look for venture capital to provide them with the financing they need to expand, break into new markets, and grow faster. Although venture capital is only relevant for a small group of firms, it is essential for the growth of innovative firms.
Venture capital funds raise a large part of their funding from institutional investors and they usually invest large amounts into firms with the potential for rapid growth. However, many investors are reluctant to invest in start-ups and innovative firms because of high risks and transaction costs. They may also believe that the expected returns will not be worth the risk.
The European Commission works closely with EU countries to improve the efficiency of equity investment markets so that sound projects can find suitable investors.
This Expert Group, set up in 2012, stressed the need for policies that will boost the supply of investments to SMEs, particularly through European cross-border and early-stage venture capital investing.
In April 2011, the European Commission presented the Single Market Act - legislative proposals to relaunch the single market by the end of 2012. One key law under the Act made it easier for venture capital funds established in any EU country to raise capital in others without obstacles or additional requirements.
In October 2012, the Commission proposed the Single Market Act II to further develop the Single Market and exploit its untapped potential for growth. One key action was to boost long-term investment in the real economy by facilitating access to long-term investment funds.
As part of the Innovation Union, the Commission adopted new laws that ensure venture capital funds established in any EU country can invest freely across the EU. These laws also eliminated unfavourable tax treatment unfavourable for cross-border activities.
A well-functioning venture capital market can help mitigate the effects of economic crisis and tackle barriers to innovation. Venture capital funds are a valuable source of finance for innovative firms with a high potential for growth. This report summarises the policy work from 2005 to 2009 on removing obstacles to cross-border venture capital.
In December 2007, the Commission proposed a partnership with EU countries to work towards mutual recognition of national frameworks for venture capital funds. This was presented in the following Communication.