The European Commission’s Innovation agenda: Is it like déjà vu all over again?

Looking at the Commission’s Innovation agenda, there are some good reasons to ‘steal’ from the American baseball-player and philosopher Yogi Berra and raise the question in light of a recycling of ideas seen many times before. 

But given various crises seen over recent years, geopolitics has become a much larger consideration for both businesses and major trading blocs.  Meaning, the ever-growing globalised world is now moving in a vastly different direction.  

As such, ensuring Europe’s innovative engine – European start-ups and scale-ups – is provided with what it needs to thrive and drive has never been so significant. This is why we at Invest Europe, the association representing the European private equity and venture capital industry, support the New European Innovation Agenda.

So, as the world’s largest association of private capital providers, we can forgive the recycling of good ideas, because the Commission’s new agenda is highly relevant.

We agree with the Commission on the need to address the persistent gap in scale-up financing, which has prevented European SMEs from getting to the next level. This is not a new concern and without a concerted approach to support innovation and achieve a strong Single Market, the European Union will continue to lose out to the U.S. in key sectors such as tech, energy, and healthcare.

The European Investment Fund (EIF)’s 2021 Venture Capital Survey, which was put together in collaboration with Invest Europe, has shown that, among other areas, the underdeveloped IPO market is an important factor explaining the European scale-up gap compared to the U.S.

Thanks to their active involvement in the running of the businesses they support, private equity and venture capital managers have been shown to boost innovation, productivity and competitiveness in the firms they invest in. Of the €20bn invested in EU venture funds in 2021, of which 98% went to SMEs, the ICT sector received almost half, with biotech and healthcare taking a fifth. Improving operating performance of firms, internationalising businesses and increasing patent citations and R&D spending have all been seen to improve with the involvement of our industry. Private equity is a natural partner for innovation, R&D, and technology, as it allows firms to get to market and to expand more rapidly.

Of the 24,663 private equity backed firms in Europe in 2020, 17,781 were SMEs.

For European SMEs to achieve their potential, private equity and venture capital must remain able to continue making their contribution. The PE/VC business model is an essential link in the innovation financing chain, as it allows them to act as a bridge between, on one hand, savers and pensioners investing in pension and insurance products and, on the other, businesses presenting innovative solutions.

The reality on the ground in Europe is that, despite many budding innovators, European venture capital markets have yet to realise their full potential. Thankfully, there are several ways for EU law to allow this, some already part of existing strategies such as the Capital Markets Union. For example, EU insolvency rules should better reflect the fact that entrepreneurs need to fail several times before setting up the businesses of tomorrow. Protectionist forces in the competition and foreign investment spaces could also impact the ability of entrepreneurs to innovate. Finally, patents play a big role in protecting innovation. Last year, Invest Europe partnered with the EU Intellectual Property Office (EUIPO) to boost investment into innovative SMEs, while highlighting how IP can boost business growth.

The Commission’s intention to improve the attractiveness of the EU market for investment into innovation is welcome, especially by making it easier and cheaper for companies to go public. Improving the ease with which firms can list on European markets will prevent firms from looking to other jurisdictions to IPO, which is the imperfect situation at present as identified by the EIF. The burdensome requirements in place at present for European SMEs to go public impacts their potential for early-stage financing, as investors will not foresee the firm going public in the near-term. By allowing firms to IPO sooner and at lower cost within the EU, investors would be incentivised to back them.

Moreover, we fully support the Commission’s focus on boosting public/private funding. Anne Fossemalle, Director at the European Bank for Reconstruction and Development, and Past-Chair of Invest Europe, recently opined on this topic, noting that public intervention is most effective when it crowds-in private operators and when it complements private expertise, for example through demonstrating the viability of more risky investments.

Private capital will remain an important, long-term source of funding to Europe’s innovative start-ups, as was the case with Skyscanner, Skype, and Spotify. Helping private equity reach the many start-ups and scale-ups will be a piece of the puzzle to allow Europe to lead globally in creating innovative solutions for the future.