Written by Clément Évroux and Issam Hallak with Jeanne Marullaz.
For its new mandate, the European Commission has put innovation and its commercial development at the heart of enhancing European Union competitiveness. The priority builds on the Draghi and Letta recommendations emphasising the need to boost the EU’s competitiveness to ensure its long-term sustainability and prosperity. For this purpose, the Commission also aims to revisit the EU’s innovation funding programmes to improve their effectiveness and attract additional private investment in innovation and development, which lags behind global partners such as the US, Japan and South Korea.
Private financing of young innovation companies is different to traditional businesses and relies typically on ‘business angels’ (who tend to be wealthy and successful entrepreneurs) and venture capital firms (closed-end funds specialised in high-risk business endeavours). Both types of financier constitute a major component of the ‘ecosystem’ surrounding innovation – a network connecting companies, research organisations, government bodies and individuals.
Innovation ecosystems in the EU are perceived as relatively under-developed and segmented. Young innovation companies typically grow their business fast – known as ‘scaling-up’ – thanks to business angels and venture capitalist firms, who in turn need ‘exit options’ – i.e. ways of selling a company to other investors once it is well established.
The lack of exit options is an issue, which the EU has been addressing with measures aimed at completing the capital markets union. The EU has also adopted a policy supporting private financing in innovation, either by providing grants to create new knowledge or by co-financing innovation firms through equity. Grants include the funding of state-of-the-art scientific and technological infrastructure to test and develop new technologies, while equity co-financing lowers the risk borne by private financiers (‘de-risking’).
Read the complete briefing on ‘Private financing of innovation in the EU‘ in the Think Tank pages of the European Parliament.
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