Shortage of Risk Capital Hobbles Early Stage Companies in Europe

Early stage companies need funding to launch and grow. That is a fact. But early stage companies are the riskiest of firms and thus unable to attract debt or bank financing. The solution is to ask friends, families and, perhaps, angel investors to provide equity capital to finance a firm. While some countries, like the US, have a fairly vibrant equity culture – in Europe that’s not necessarily the case. Small businesses are the engines of economic growth. Cut off the fuel and the economy suffers.

A report published earlier this month by the Association for Financial Markets in Europe (AFME), entitled The Shortage of Risk Capital for Europe’s High Growth Businesses, seeks to define and identify solutions to this economic challenge.  Crafting policy to facilitate and incentivize investing in early to mid-stage companies is vital for all of Europe. The AFME points to the obvious:

Europe has a shortage of risk capital for small, early-stage growting businesses. This is holding back the development of high-growth sectors such as technology which are essential for economic competitiveness. While sources of capital such as crowdfunding and business angels are becoming more accessible, the EU is still at a significant disadvantage to the United States… The EU’s fragmented internal market is partially to blame..

While the European Union was supposed to bring a market of over 300 million people together, systemic hurdles remain deeply entrenched. National political proclivities and risk aversion has taken its toll.  While the US has minted 91 “unicorns” and Asia 44 – Europe trails with only 16.  In 2006, 17 of the worlds most valuable companies were based in Europe. Today that number is just 6.  The trend is depressing.

So what must be done?

AFME explains:

  • Educate entrepreneurs about risk capital and appropriate structure and governance
  • Empower angel investors, VCs and crowdfunding to fill the void
  • Provide tax benefits or credits to investors shouldering the risk (think EIS & SEIS in the UK)
  • Develop a venture debt market
  • Revive the primary equity market by incentivizing investors

AFME provides some valid, common-sense recommendations. The EU has pursued some encouraging policies to engender a more entrepreneurial economy but it has not been enough. The bigger question persists: is there sufficient EU leadership to answer the call to arms?

See the report embedded below.

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