| Cross Border Investment Report |
Innovative firms in Europe face significant problems in accessing the
funding they need to start, grow and compete on global markets since
there is an equity gap for small and medium-sized companies (SMEs) in
their seed, start-up and expansion stages. European SMEs indeed turn
mostly to banks to obtain external finance and only in limited cases to
alternative sources of financing - such as venture capital funds, but
the money they get is often not sufficient. In particular
venture-backed investments could fill in the equity gap.
While venture capital funds have become increasingly important, this
external source of funding still remains fragile. The venture capital
sector in Europe does not fully benefit from a single market and it is
also less efficient and profitable than in the United States. Markets
that are fragmented along national lines make cross-border investments
unnecessarily complicated for venture capital funds to invest outside
their home country and indirectly hinder innovative SMEs to reach
economies of scale and specialisation. The venture capital industry has
been urging the removal of the existing obstacles to cross-border
investments within Europe so that the sector could perform better and
also exploit the opportunities that are available within European SMEs.The Commission recognises the strong entrepreneurial and innovation impetus provided by equity funding, with a particular focus on venture capital funding. The Commission launched a debate with national experts and industry stakeholders to discuss the existing obstacles to cross-border investments and possible ways to remove them as well as to encourage the development of a truly European venture capital market for SMEs. This report describes some characteristics of national frameworks regulating local venture capital markets and summarises difficulties that practitioners reported on. It highlights that many European venture capital funds are small, operate locally and do not have resources to extend their operations outside home jurisdictions. Therefore, conditions especially for smaller funds need to be improved, since 80% of all venture capital deals represent investments into SMEs. Expert group members agreed that it is not only the size of venture capital funds that matters, it is also the size of their deals and markets in which they operate. In a diverse European Union with now 27 sets of operating conditions, the level of development of venture capital markets varies and so do the frameworks affecting them. The group discussed the national approaches on legal, regulatory and fiscal frameworks, the lacking common understanding and missing legal certainty. These widely varying frameworks are affecting both fundraising and investing, putting additional burden on crossborder operations. While the group recognised the importance of a dynamic venture capital industry, in particular the industry stakeholders stressed that the Member States need to assess all the possible supply and demand factors that may contribute to market failures. Download  HERE the full text of The Report
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