Brussels, 05 Oct 2005
A joint EU-US working group on venture capital has published its final report, calling for government initiatives to increase the availability of investment capital for innovative early-stage firms.
According to the report, which was produced by experts from the Commission's Enterprise and Industry DG and the US Department of Commerce, there is currently a fundamental market failure in the provision of early-stage financing in both the US and the EU. In particular, venture capital funds are being channelled towards larger and larger deals, leaving little financing available for more risky, early-stage ventures.
'This can become a self-reinforcing cycle,' warns the report: 'because few venture capital funds are active in the seed and early stage area, they don't have any longer the necessary knowledge to operate there. The few remaining seed funds and the business angel investors cannot by themselves cover the demand for equity investments.'
Given this state of affairs, the joint working group believes that public sector measures to stimulate investments are justified, provided they contribute to the efficiency and long-term sustainability of the venture capital sector. 'The best results are achieved when the public sector invests in well-managed venture capital funds, where only part of the funds raised come from public sources. To provide equal access and promote quality, such funds are best selected competitively, based on quality criteria.'
Alongside direct government intervention, the report identifies a number of other issues that if addressed could improve the health of the global venture capital market. Discussions between the expert group and advisors within industry and academia confirmed that common definitions, classifications and valuations would be helpful in reliably assessing the industry's performance. As such, the report recommends the global adoption of industry standards on asset valuation put forward by the European private equity and venture capital association (EVCA).
Further recommendations include a call for increased international policy coordination between governments. '[It is] essential that policy-makers recognise impediments, like administrative regulations about establishment and taxation rules, to venture investment and take steps to facilitate cross-border investments. This policy process should take place in a global context, learning from best practices irrespective of their provenance,' argues the report.
In order to facilitate such policy exchanges and spread information concerning investment conditions, the EU and US have discussed the possibility of producing a handbook on venture capital for policy makers, as well as creating an Internet-based resource centre where the public and private sectors can find information on the prevailing venture capital rules and regulations on a country-by-country basis. 'The aim would be to gradually develop this resource centre into a global one, and the parties will review ways to achieve these goals,' the report concludes. To download a PDF version of the report (in English), please: click here