Growth

Venture capital

Venture capital

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.

Actions in this field

  • With the goal of moving towards a pan-European venture capital market, in 2013 the EU adopted a Regulation on European Venture Capital Funds. It sets out a new ‘European Venture Capital Fund’ label and includes new measures to allow venture capitalists to market their funds across the EU under a single set of rules.
  • The programme for the Competitiveness of Enterprises and Small and Medium-sized Enterprises (COSME) will improve access to equity for SMEs through the Equity Facility for Growth where market gaps have been identified. The programme is expected to leverage up to EUR 4 billion in equity finance and runs from 2014 – 2020.
  • The Competitiveness and Innovation Framework Programme (CIP)  – the predecessor of COSME – has been considerably successful. Although the programme officially ran until 2013, financing is still available through financial intermediaries that have been recently selected and approved.

Other initiatives in this field

The Expert Group on the Cross-border Matching of Innovative Firms with 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.

The Single Market Acts

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.

Innovation Union

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.

Cross-border venture capital in the EU – a report

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.

Mutual recognition of venture capital frameworks

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.

Further reading

  • Report of the Venture Capital Tax Expert Group (April 2010) – the Group examined the possibility of removing cross-border obstacles to direct taxation and double taxation of venture capital funds and investors.
  • Europe 2020 - an economic strategy was proposed by the Commission in March 2010 to prepare EU economy for the next decade. Proposed actions included the development of innovative financing solutions for ‘making an efficient European venture capital market a reality, thereby greatly facilitating direct business access to capital markets and exploring incentives for private sector funds that make financing available for start-up companies, and for innovative SMEs’.
  • In November 2008, the Commission launched a series of workshops on cross-border venture capital involving national experts, industry representatives, and researchers. The aim was to assist EU countries in the process of mutual recognition.