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TREND IN INNOVATION FINANCE IN THE EU Marc Schublin, Head of Division, European Investment Fund

TREND IN INNOVATION FINANCE IN THE EU Marc Schublin, Head of Division, European Investment Fund Coordination – General Affairs – Advisory Services Knowledge Economy Forum IV, Istanbul, 23 March 2005. Finance for innovation = the EU side. Summary. EIF as EU Fund of Funds

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TREND IN INNOVATION FINANCE IN THE EU Marc Schublin, Head of Division, European Investment Fund

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  1. TREND IN INNOVATION FINANCE IN THE EU Marc Schublin, Head of Division, European Investment Fund Coordination – General Affairs – Advisory Services Knowledge Economy Forum IV, Istanbul, 23 March 2005

  2. Finance for innovation = the EU side Summary • EIF as EU Fund of Funds • Venture Capital: a difficult market • The limits of Venture Capital in supporting innovation • New Initiatives throughout the EU • Towards new financial instruments and concepts

  3. EIF at a glance • Institutional set-up: • Shareholders: European Investment Bank (60%) – European Commission (30%) – 31 banks 10%) • Contribute to Community objectives (entrepreneurship, research and innovation, regional development, etc …) • Ensure an appropriate return on its own resources • Important role in the context of Lisbon Strategy / 3% target (Innovation – Employment) • EIF products – Venture capital / “Risk Capital Arm” of EIB SME Portfolio guarantees … and Advisory services / Technical assistance

  4. VC investments: EIF’s role • Biggest European early-stage Fund of Funds (EUR 3bn in 200 Funds) • Participates as a pari-passu cornerstone investor (always commercial terms) • Long-term committed and pro-active investor • Know-how helps in structuring a fund / best practice • Widespread network in European venture capital industry which may help to attract co-investors • Neutral, supranational investor • Investments based on own resources and mainly on behalf of EIB VC mandate, EC Seed Capital scheme and ERP Facility (early stage in Germany) • Investment activity only in EU and Acceding Countries

  5. The innovation cycle covered by EIF Future coverage « VENTURE CAPITAL » « PRIVATE EQUITY » Tech Transfer Incubators Pre-Seed Business Angels Seed Early Stage Expansion / Dev. Capital Later-stage Buy-out IPOs Future extended coverage * ADVISORY * Currently covered by EIF advisory services (Technology Transfer Accelerator)

  6. European VC Funds Raised 1990 to 2003: few investors stay on board Source: EVCA / Thomson Financial / PricewaterhouseCoopers

  7. VC is a Risky Business Pooled IRR - December 31, 2003: • Early stage : 1.9% (Top Quarter: 14.8%) • All Venture : 7.2% (Top Quarter: 23.9%) best performing funds are in the segment of €100-250m = 9.2% or 12.8% over a 10-year period • All Private Equity : 9.9% (Top Quarter: 24.3%) Source: European Venture Capital Association (EVCA)

  8. Constraints and limits of VC in supporting Innovation • High risk; very qualified management teams needed • Balance public/private investors? • Good VC funds governance (independence of managers vs investors, transparence, etc.) • Management costs, long maturity • Critical mass • Seed-early stage especially efficient near important “technological clusters” (Heidelberg, Cambridge, Finland, etc…) • In the EU, about 15 000 companies supported by VC (compared to a total SME population of 14 million)

  9. Constraints and limits of VC in support of Innovation: some lessons learnt • Mainly recent public initiatives through appropriate use of budget funding (Research, SME) • Critical mass, grouping of energies, system approach necessary (national vs regional?) • Legal, tax issues are key (No European patent!)

  10. How to support seed? Interesting initiatives (private, public, financial, political) • IP2IPO (UK) = example GBP 20m loan to Oxford Chemistry Department repaid through 50% of IPR during 15 years • KAROLINSKA (S) = pooling of spin-offs sold to VCs • France = merger of Public Innovation Agency ANVAR (managing grants) and SME Development Bank creation of “pôles technologiques” (super clusters) • + UK, B, NL, ITA, etc Appropriation of “Lisbon Strategy” by EU Member States

  11. EIF’s role in this context • Be proactive (EU summit 23 March 2005) on the investment side = 1. Side funds with Business Angels (BA) (if structured as BA networks) (Specific EU funding under the Competitiveness & Innovation Programme) 2. Common approach with EIB, generation of hybrid instruments (Loan – Equity – Mezzanine) • Develop Advisory Services and Technical Assistance

  12. Advisory Services • Complement the 2 main product lines, EIF as a “Multilateral Development Bank” committed to provide technical assistance and advisory services • Objective is to provide financial engineering to organisations active in the field of VC and SME Guarantees • Fee based activity Two domains of intervention • Creation, growth and development of SMEs • VC, seed capital, guarantee schemes, business angel networks, tech transfer, etc. for regional and national authorities / Agencies • Complex financial structures: for the European Commission

  13. Advisory Services • TTA : Avoid fragmentation, incentive Research Centres to work together, bridge the gap between Research and Market • CDTI project : public Innovation Fund of Funds, with targeted support to Tech SMEs (Spain)

  14. TTA 1 Cluster Size Cambridge UK Munich Boston Bay Area Researchers 9,200 6,300 23,550 N/A Publications 15,000 10,000 38,000 29,500 Number of public companies created >11 >4 >38 >44 Number of biotechcompanies located in cluster >110 >60 >200 >190 Large clusters necessary to build self-sustaining ecosystem Source: European Innovation Scoreboard, BCG Cluster Report 2001, EIF analysis and interviews

  15. TTA 1 Licensing Revenues2002 Europe US University Revenues [m€] University Revenues [m€] Pasteur 32.6 University of Edinburgh 4.5 Utrecht* 4.0 Cambridge 3.1 INRIA* 3.0 VIB* 2.7 LMU Munich 0.2 Licensing activity too small to create any noticeable effects Note: *Includes other forms of revenues Source: European Innovation Scoreboard, BCG Cluster Report 2001, EIF analysis and interviews

  16. TTA 2: Focus of TTA funding: Types of SPVs funded by the TTA Tech transfer / Proof-of-concept R&D Marketable product «Techno-logy» IP «Prototype » IP Potential exits for the SPV projects « Licensing » SPVs Licensing to corporation Sale to corporation Purchase / investment by other investors IPO « Spin off » SPVs LAB « Hybrid » SPVs Investment focus of TTA

  17. The CDTI/EIF Spanish Venture Capital Investment Programme EIF Programme Manager/Advisor Parallel supplementary vehicle Fund of Funds CDTI Programme technology partner Young Fund Window Foreign tech funds Generalist funds Tech / Innovation funds Co-invests 1:1 Tech SMEs Tech SMEs Tech SMEs Tech SMEs Generalist SMEs CDTI 1

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