Jump to Content Jump to Main Navigation

Part III Financing Innovation, Start-Ups, Non-Listed Companies, and Infrastructure Projects, 9 Capital Markets Union: Why ‘Venture Capital’ is not the Answer to Europe’s Innovation Challenge

Erik PM Vermeulen

From: Capital Markets Union in Europe

Edited By: Danny Busch, Emilios Avgouleas, Guido Ferrarini

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2021. All Rights Reserved. Subscriber: null; date: 18 June 2021

Capital markets

(p. 193) Capital Markets Union

Why ‘Venture Capital’ is not the Answer to Europe’s Innovation Challenge

I.  Introduction

9.01  The Capital Markets Union (CMU) aims to strengthen capital markets and investments in the EU. The rationale behind such a union seems straightforward and clear. It is necessary to provide businesses, particularly start-up companies, with a greater choice of funding at lower cost. More generally, it is assumed that, in the long term, greater choice increases access to finance and fosters economic growth.

9.02  As such, the CMU has the potential to mitigate a number of systematic difficulties that have plagued the venture capital (VC) industry in Europe, namely (i) the VC industry fragmentation caused by national differences, (ii) the risk-averse approach of European investors and financial intermediaries, and (iii) the lack of capital for early stage start-up and scale-up companies.

9.03  Nevertheless, there are good reasons to be sceptical about this rationale. Can we be confident that a greater choice of funding is necessarily the answer? Will the CMU be able to solve the above issues with VC in Europe? Or, are other considerations more important in determining the long-term prospects of start-up companies?

9.04  In this chapter, we argue that although the CMU may be a necessary step, it has to be situated in a much broader discussion about how to create successful innovation ecosystems. Such an approach highlights the sector-specific needs of start-ups (and scale-ups) and the importance of mobilizing other players, particularly established corporations.

II.  Innovation Ecosystems

9.05  Research has consistently shown that over the last three decades Silicon Valley has been the place to go for anyone interested in setting up a new business. It has consistently ranked (p. 194) as the best location for launching a new business with global aspirations. Silicon Valley attracts the most funding; it is the most connected; and it offers the most opportunities for both innovators and entrepreneurs. Silicon Valley has represented the best bet for anyone with serious aspirations of creating a global business in high growth sectors of the economy.

9.06  As a result of this success, policymakers have been drawn to the idea of recreating the success of Silicon Valley in other parts of the world.1 Generally there have been two primary types of public intervention into the VC market, namely (1) by regulation or de-regulation, which has impact either on the supply side (eg on VC firms) or on the demand side (eg on start-ups) or by (2) direct public investment schemes.2

9.07  While the regulation or de-regulation aims at creating an enabling environment for private actors to develop their activities, the direct intervention in the form of investment schemes effectively enables governmental agencies to mimic investors’ behaviour.

9.08  Yet, more is needed. There is an enormous literature that aims to provide a better understanding about what is needed, in particular seeking to identify the ‘ingredients’ of a successful ecosystem such as Silicon Valley. The aim? To recreate such an environment elsewhere. Take Victor Hwang and Greg Horowitt’s metaphor of the ‘rainforest’.3 In identifying the factors necessary to replicate Silicon Valley, Hwang and Horowitt emphasize the importance of a culture in which uncontrolled interactions routinely occur between talent, capital ideas, and opportunities, that is the essential elements in any innovation ecosystem. In this type of account, innovation is an unplanned and spontaneous event—a feature of the ecology of a rainforest—that is contrasted with the planned production of an industrial economy.

9.09  But to really get a good idea about what’s needed it is important not to generalize the issue (ie a focus on replicating Silicon Valley in some general sense), but instead to take a different perspective that involves looking at how ecosystems might be developed in the context of certain specific industries or sectors of the economy.

9.10  Take the example of artificial intelligence (AI) or machine learning. There is no doubt that such technologies are transforming all aspects of everyday life. In a recent interview, US businessman and investor Mark Cuban , perhaps best known as one of the ‘shark’ investors in ABC’s reality show Shark Tank, says that if you don’t study artificial intelligence, you will be a ‘dinosaur’ facing extinction within three years.4

9.11  Building more, robust ‘AI ecosystems’ can shift the balance towards other regions like Europe. If there are more ecosystems focused on AI, then everyone will be better prepared for what researchers, the business community, analysts, and investors identify as the ‘next big thing’. It should also help policymakers better address the challenges, opportunities, and even the threats created by the implementation of AI.

(p. 195) 9.12  But this will only work when we build the ‘right kind’ of ecosystem. To understand what this means, it is worth revisiting some of the basic criteria needed to make innovation ecosystems work. Section III will focus on traditional finance-oriented policy measures. Sections IV and V will suggest that although important, these measures alone are not enough. An alternative strategy built around established corporations will instead be proposed.

III.  Stimulating Venture Capital

9.13  National and local governments often see start-up ecosystems as an essential part of their growth strategy. Creating infrastructure to stimulate the creation, growth, and scaling of new and innovative business is now seen as an important and legitimate policy objective at all levels of government.5 So, what can governments do to build an effective innovation ecosystem, whether it is AI-focused or focuses on another sector?

9.14  Traditionally, the main strategy adopted by policymakers has been on making more risk capital available for start-up and scale-up companies.6 This is in response to the genuine complaint by start-ups that many parts of the world are risk averse. So, it is cause for concern that in Europe, we see a decline in VC activity at all the stages of a start-up’s development (according to data provider and analyst PitchBook). In fact, in 2016 the activity in first-time venture investments has dropped to its lowest level in seven years (see Figure 9.1).

(p. 196)

Figure 9.1  VC Activity and first-time venture financing in Europe

Source: author’s representation based on data from PitchBook, <http:/www.pitchbook.com>, accessed on 5 April 2017.

9.15  To stimulate VC investments, governments have tried several strategies. The results in a European context of such a strategy can be summarized as follows.

1.  Government investment

9.16  There is plenty of evidence that government support has played a vital role in stimulating entrepreneurship and the launch of start-up companies. In their efforts to establish a sustainable ecosystem, governments have become the main ‘post-financial crisis’ investor in Europe’s start-up scene.

9.17  According to Invest Europe data, governmental support of the VC market fluctuated over the years, starting at 7.9 per cent of the overall market value in 2007, reaching its peak of 30 per cent post-crisis in 2010, and settling at 20 per cent in 2015.7 Even more noticeable is the comparison with other types of investors, which shows that governmental investors are by far dominating the European VC landscape.8

9.18  Just like national governments, European policymakers noticed the rather slow development of European VC industry and decided to intervene in rather a comprehensive manner. The intervention of the European Commission into the VC industry began in the 1990s and has been intensifying ever since, especially in the past five years.

9.19  One of the crucial institutions in this respect has been the European Investment Fund (EIF). Established in 1996, EIF started its VC operations in 1997 to subsequently become an extended arm of the European Investment Bank for risk capital in 2000.9 Being funded predominantly by the European Commission, the European Investment Bank, and governments of Member States, the EIF invests primarily into various private VC funds in Europe and around the world.10 While using public money, EIF invests alongside private investors on the same terms and conditions and thus strictly speaking can generate profit.

9.20  Moreover, EIF uses co-investing to spur the activity of private investors by de-risking their investment. Such stimulation of the private investment sector, colloquially known as a crowding-in effect, is one of the main reasons for the implementation of direct investment schemes.11 According to the recent study, EIF provides for 10 per cent of the VC investments and through its extended catalytic effect, it participates in deals covering approximately 45 per cent of overall invested VC in the EU.12 Besides co-investing in VC funds, EIF also supports non-institutional investors.

9.21  Take for instance the European Angels Fund (EAF), which co-invests with carefully selected seasoned business angels. Rather than selecting eligible deals one by one, EAF (p. 197) chooses successful business angels, with whom the fund then syndicates in all investment deals.13 The most recent development in investment schemes is the so-called Pan-European VC Fund of Funds Program. Under this program, the EIF aims to co-invest in one or more qualifying funds of funds committing total amount of EUR 300 million.14 One may argue that various activities and programs of EIF already provide substantial support for the European VC industry. However, EU policymakers were not quite done yet.

9.22  In the beginning of 2014, the European Commission commenced the implementation of Horizon 2020, so far, the most ambitious research and innovation program worth nearly EUR 80 billion.15 In the context of innovative SMEs financing, Horizon 2020 includes several tools addressing restricted access to finance for small and medium-sized enterprises. For instance, Competitiveness of Enterprises and Small and Medium-sized Enterprises program (COSME) will dedicate part of its EUR 2.3 billion budget to investments in risk-capital funds that provide VC and mezzanine finance to expansion and growth-stage SMEs, in particular those operating across borders.16

9.23  Finally, in 2014, the Commission launched the ‘SME instrument’, its flagship grant/investment program, providing early-stage financing for innovative SMEs. Essentially, through the SME instrument, companies may apply for grant support reaching up to EUR 2.5 million per company or per project.17 In contrast to other investment initiatives, the SME instrument scheme does not necessarily involve private co-investors and thus extends financial support directly to selected start-ups. The selection of best candidates is outsourced to a large pool of industry and finance experts, who evaluate SME proposals against a pre-determined set of criteria.18

9.24  One may argue that innovative SMEs, especially in the early stage of their existence, need more than just initial funding. Strategic advice, mentorship, and connection to networks of potential co-investors, collaborators, and customers is equally, if not even more essential than money. Therefore, the SME instrument integrates a coaching program, offering start-ups a pool of business mentors, which can guide them throughout the duration of the program.19 Moreover, as this is a grant rather than an investment scheme, the SME instrument by design is not supposed to generate any profit. Only within the past two years, the SME instrument was granted to 2116 start-ups in total amount of EUR 694 million.20 Although it has been awarded since 2014, it is too early to evaluate its long-term impact on the European start-up ecosystems. However, considering the maximum amount that can (p. 198) be granted in the scope of the SME instrument, one may conclude that such direct investment schemes may to a large extent supplement the role of early stage investors.

2.  Making VC more accessible

9.25  A second complementary approach is to implement regulatory measures to make VC more accessible to investors. The proposed amendments to the European Venture Capital Fund (EuVECA) and the European Social Entrepreneurship Funds (EuSEF) are intended to give a boost to the VC industry in Europe. In addition, investors are encouraged to make VC investments through fiscal incentives and tax breaks.

9.26  Following the Horizon 2020 initiative, the Commission adopted an Action Plan on building a CMU (Action Plan) in 2015.21 The CMU aims to create a ‘true single market for capital’, which is currently, as mentioned before, quite underdeveloped and fragmented.22 In contrast with Horizon 2020, which focuses on research and innovation projects, the Action Plan sets out thirty actions to boost European financial markets. Once again, innovative SMEs lie at the centre of attention. One of the key objectives of the Action Plan is to provide more funding alternatives for European businesses and SMEs.23

9.27  As correctly identified by policymakers, European businesses are overly dependent on bank financing, which arguably hampers economic growth.24 In the Action Plan, the Commission commits inter alia to (i) minimize regulatory barriers that prevent SMEs from raising funds in regulated markets by for instance updating the Prospectus Directive, including catalysing private investment using EU resources through pan-European funds of-funds, regulatory reform, and the promotion of best practice on tax incentives; (ii) implement a set of measures to support venture capital and equity financing in the EU; (iii) facilitate and promote alternative sources of funding such as crowdfunding, private placement, and loan-originating funds; and (iv) explore new ways to build a pan-European approach to better connect SMEs with a range of funding sources.25 Some of the action points listed above are already materializing, while others are still waiting to take shape.

9.28  One of the currently ongoing efforts is the update work on EU VC regulations. VC-facilitating regulation can take two basic forms: (i) VC exemptions from certain requirements applicable to financial intermediaries and (ii) initiatives that directly address fundamental problems of VC investors.

9.29  Firstly, the Alternative Investment Fund Managers Directive26 (AIFMD) in the EU and Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)27 in (p. 199) the US offer suitable examples of regulations that include ‘venture capital exemptions’. In 2011, AIFMD introduced quite stringent and costly rules designed to increase transparency, extend the disclosure, and improve risk management policies of AIF managers. As a trade-off, managers who comply with such regulation obtain the ‘passport’, which enables them to manage or market funds to professional investors throughout the EU.28

9.30  Venture capital funds can however use one of the tailor-made exemptions and thus avoid the most cumbersome rules of the Directive.29 The Dodd-Frank Act has initially broadened the scope of registration and disclosure obligations also to private funds, such as hedge funds but at the same time implemented an exemption, which is in essence similar to the one contained in AIFMD. These exemptions well document the somewhat privileged position of VC funds in the spectrum of various investment vehicles. Such an approach is not irrational as the VC industry arguably fuels economic growth and job creation and simultaneously does not pose systemic risk to capital markets due to its relatively small size.30

9.31  While exemptions allow VC funds to escape costly financial regulations, special VC legislation is designed to facilitate and boost the volume of VC activity. One of the major problems of the European VC market is its fragmented nature and regulatory differences among Member States, which hamper more intensive cross-border investment activity.31 Given these structural obstacles in the VC industry, it came as no surprise that EU policymakers intervened by enacting the EuVECA and EuSEF Regulations.32

9.32  These pieces of legislation introduced a pan-European VC passport for regular and social entrepreneurship funds, which enable their fund managers to market investments in all Member States under the same conditions. Simultaneously, these funds have to comply with a uniform rulebook. By offering minimum standards of disclosure and transparency, the rulebook intends to promote confidence in the VC market which in turn may lead to more VC being available to emerging companies.

9.33  Although they have only been in force since 2011, the EuVECA and EuSEF Regulations have already undergone review and evaluation in 2016 which resulted in the proposal for amendment of both Regulations.33

9.34  As mentioned before, the EuVECA allows fund managers to obtain a unique European VC passport. To become eligible, funds have to prove that (i) the assets under their management do not exceed EUR 500 million; (ii) they are incorporated on the territory of an (p. 200) EU Member State; and (iii) at least 70 per cent of the capital in the fund is invested in young innovative companies.34 The profile of investee companies is also clearly defined. They must not be admitted to trading on any stock exchange, must have fewer than 250 employees, and must have an annual turnover not exceeding EUR 50 million or a balance sheet not exceeding EUR 43 million.35 Simultaneously, fund managers may market participation in these funds only to professional investors or investors who are willing to commit at least EUR 100,000 and have declared their awareness of the risks involved in these investments.36

9.35  EuVECA’s criteria are thus related to the aggregate amount of assets managed by the fund manager, to the EU origin of the fund manager, to the profile of investee companies that have to dominate the portfolio of EuVECA funds, and the type of investors who commit their capital. The EuSEF Regulation imposes almost identical requirements on the stakeholders involved with one important addition. As the name of the Regulation already indicates, the EuSEF label is tailored to funds targeting businesses committed to a specific social cause.37 The positive impact of investments must also be measureable through indicators such as employment, social inclusion, protection of particular groups, or public health and safety.38

9.36  The amendment proposal outlines three major changes. Firstly, the current legal status quo strictly distinguishes EuVECA and EuSEF eligible funds from AIFMD funds. The crucial threshold is EUR 500 million under management. Contrary to such strict division, the proposal cancels the current ‘500 million EUR assets under management’ threshold, which effectively broadens the scope of the Regulation.39 Under amended conditions, fund managers with larger portfolios could also decide to enter the VC market and thus bear the European VC Fund label.

9.37  At the same time, the proposal eases the limitations regarding portfolio companies in several respects. Firstly, the limit on the number of employees in investee companies, which is currently 250, is doubled to 500. Secondly, portfolio companies are, according to the proposal, allowed to be listed on SME growth markets, which are often perceived as springboards for full IPOs and important means of scale-up financing.40 In addition to that, investee companies have to comply with these requirements only at the time that the investment is made.41 Thirdly, the amendment proposal simplifies the registration process and reduces the costs for such registration. In particular, a successful registration under the EuVECA Regulation will effectively make registration under the AIFMD unnecessary.42 The general aim of the proposal is to broaden the scope of the EuVECA and EuSEF Regulation so that more types of investors become eligible.

(p. 201) 9.38  Besides regulation that addresses the operation of VC funds directly, VC activity may be catalysed through other legal rules. For example, investors are encouraged to make VC investments through fiscal incentives and tax breaks. Take for instance, the UK. The Seed Enterprise Investment Schemes (SEIS) and Enterprise Investment Scheme (EIS) aim to stimulate private investments into early stage start-ups and smaller businesses by offering tax reliefs to individual investors.43 Both investment schemes have become largely successful in their effects, rapidly raising the number of wealthy individuals investing into start-up companies.44

IV.  But … Entrepreneurs Don’t Always Benefit

9.39  But even if these measures significantly increase the amount of VC available, entrepreneurs are not always better off. In any industry sector enjoying a boom, non-specialists will emerge looking to get a piece of the growing pie. There are too many examples of ‘new’ VC investors that have started to invest in innovative companies without doing their proper homework or understanding the rules of the game. They are riding the wave of innovation without really caring about the goals and hardships facing the founders.

9.40  Moreover, many incompetent incubators, accelerators, and crowdfunding platforms that emerged only recently have attracted inexperienced start-ups and consequently failed to provide the promised added value or even harmed the interests of their clients.45

9.41  The real fear of giving up equity with the risk of losing both ownership and control of the company has made many founders suspicious of VC investors, especially those who exhibit little domain knowledge or demand unrealistic returns on their investment. This only feeds a growing scepticism among entrepreneurs about the need to attract VC or other sources of risk capital.

9.42  In Europe, the risk of the venture is usually entirely with the founders. And failure is often fatal for a founder’s career in that country. That explains why European entrepreneurs prefer bootstrapping, perhaps with small government grants or private loans from family, friends, and fools (the ‘3 Fs’). Bootstrapping can also have very valuable side effects. Since the founders do not obtain any external funds, they need to secure paying clients rather quickly. This provides them with an instant feedback in their minimum viable product and invaluable insights into customer preferences, all while the initial product is being developed.46

(p. 202) 9.43  On the other hand, such approach may be possible only in those cases where minimum viable product can be made operational early on, such as SaaS-based (Software as a Service) solutions. In contrast, start-ups in capital intensive sectors such as healthcare need significant investments before they can start generating any cash flow.

9.44  In fact, such a forced approach of ‘growing incrementally’ exposes the founders to a much greater degree of financial risk and uncertainty. Grants may fill a funding gap, but managing and administrating such grants is often costly and time-consuming. Founders often become distracted by these small amounts of money, putting them at a severe time-to-market disadvantage. Start-ups in Silicon Valley are much better at ‘failing faster’, pivoting, and then developing a better idea.

V.  A Different Approach for Europe?

9.45  Venture capital is not the missing ingredient for most innovation ecosystems. The more businesses that are created, the more money becomes available for innovation and innovative firms. There is often an extensive infrastructure supporting entrepreneurs in starting a new business.

9.46  Take the example of AI. Most of the acquired AI companies come from outside Silicon Valley (see Figure 9.2). And according to CB Insights, ‘only’ 46 per cent of the acquired AI companies had attracted and received VC.

(p. 203)

Figure 9.2  Location of acquired ‘AI’ companies

Source: author’s representation based on data from PitchBook, <http://www.pitchbook.com>, accessed 5 April 2017.

9.47  So, if it is not really a question of VC, what is Silicon Valley doing that is missing in Europe? And what can we do to ensure the success of sector-focused innovation ecosystems, such as an AI-oriented community?

9.48  We think a big part of the solution involves tapping into established enterprises. For instance, large global ‘established’ corporations often recognize that they must engage with AI, robotics, and automation. They have the motive and resources to play a crucial role.

9.49  And yet, all too often, existing corporate culture and governance structures mean that older, established firms struggle to adjust to new realities. Twentieth century companies rely too heavily on hierarchical, formal, and closed organizations. As such, they are ill-prepared to make the bold and agile decisions necessary to succeed in a world of constant disruptive innovation.

9.50  And yet, to survive it is imperative for established firms to re-invent their own innovation strategies. This means how to organize for innovation, building, and improving on the valuable lessons from the Silicon Valley experience. Crucially, younger firms in the innovation sector are typically organized around three governance principles that provide them with the energy and ideas to constantly innovate, namely a ‘flat’ organization, ‘open communication’, and a ‘best-idea-wins-culture’.47 Since these governance principles are more likely to be found in the organization of start-up companies, large corporations try to gain access to this —what Elon Musk termed — ‘Silicon Valley operating system’ by cultivating open and inclusive partnerships with entrepreneurs, founders, and start-ups in the innovation space.

9.51  When multiple established corporations build relationships of this kind, the basis for the ‘right kind’ of ecosystem can be put in place. But to build a network, community, or ecosystem around this new type of partnership, two strategies need to be better understood and embraced. In this way, large corporations can become the crucial link in building innovation ecosystems.

1.  Driving genuine opportunities for serendipity

9.52  The first strategy is for established enterprises to use corporate incubator and accelerator programs to put in place an open architecture that offers opportunities for mutual learning. Start-up founder and employees can then get to routinely mix with corporate employees. Such programs have become popular in recent years. In 2017, Amazon, Apple, Facebook, General Electric, and Telefónica announced the opening of new accelerator programs in France, India, the UK, and the US (see Figure 9.3).

Figure 9.3  Launch of corporate incubators/accelerators

Source: author’s representation based on data from Corporate Accelerator DB/TechCrunch, corporate-accelerators.net, accessed 5 April 2017.

9.53  The initial and mutual advantages of such an approach seem obvious:

  1. (1)  For established corporations. Corporate incubator and accelerator programs allow large firms to engage alongside start-ups and their founders. Such collaborations give them access to ideas and strategies they would never be able to nurture internally.

  2. (2)  For start-up companies. Corporate incubator and accelerator programs are interesting if there is a good cultural match. They can provide start-ups with necessary capital, and deliver tremendous resources in the form of access to relevant knowledge and established international distribution channels.

(p. 204) 9.54  Nevertheless, success depends on the structure of the program. For instance, there are programs powered by external incubator-accelerator service providers, such as TechStars and Plug and Play. But the clear majority of programs are directly set up by the corporate hosts themselves (see Figure 9.4). This would indicate that innovation is more than just the process of involving start-ups.

Figure 9.4  Structure of corporate incubators/accelerators (2010–16)

Source: author’s representation based on data from Corporate Accelerator DB/TechCrunch, corporate-accelerators.net, accessed 5 April 2017.

9.55  Building an innovation ecosystem around established firms has to be more than simply a PR exercise, but a genuine commitment to building open and trusting partnerships (see Figure 9.5). To this end, most corporate incubator-accelerator programs provide for temporary office space, mentors, and general business skills training. Yet, the most lucrative incubators-accelerators also give access to tremendous resources and relevant international networks that can give a major go-to-market advantage to any company just starting out. After all, large companies have established distribution lines, strategic partners, deep domain intelligence, not to mention an experienced marketing and sales force and, of course, a global presence.

Figure 9.5  Support offered by corporate incubators/accelerators (2010–16)

Source: author’s representation based on data from Corporate Accelerator DB/TechCrunch, corporate-accelerators.net, accessed 5 April 2017.

9.56  As Moore’s Law begins to slow down, clever high-tech companies are putting more emphasis on the longer-term strategies. Innovation is not a department. It is a culture that needs to embrace the entire enterprise. It means accepting that innovation cannot be ordered like a product. Without the right environment of clever, motivated, collaborative people, the best ideas will wither and die. Building and then sharing a vision of the domain is crucial. By putting actors together in the right way, the boundaries between corporate and start-up can be blurred, creating new opportunities for positive encounters and interaction.

2.  Aligning incentives and ‘signalling’

9.57  The second set of strategies essential for building a successful AI ecosystem is to keep things simple and transparent. There can be no misalignment between the interests of the start-ups within the ecosystem and the interests of the corporation.

(p. 205) 9.58  Once a start-up has been accepted into the program, the main focus of the corporation should be on assisting and accelerating start-ups. That means actively connecting them to potentially interesting networks, customers, etc. The possible strategic returns for the corporate partners are a secondary effect or by-product of collaborating with the start-ups.

9.59  Moreover, by working ‘cheek-by-jowl’ with start-up founders, the corporate employees are better able to identify ‘out-of-the-box’ solutions to specific business challenges. The potential benefits are particularly high in a ‘blue sky’ field such as AI where the technology is complex and the ‘solutions’ are not immediately obvious.

(p. 206) 9.60  From this perspective, non-equity programs might be preferable. Avoiding minority stakes can help simplify relationships, especially at a stage where neither party has a real insight into the true market value of the start-up. A corporate program that has a first objective of making money makes the mistake of trying to execute a business model before the start-up has verified that there is one. Such an approach provides for an important ingredient in developing mutual trust. The absence of direct financial interest in participating start-ups can help to convince founders that the corporation will not try to appropriate their technology or limit their future options for external financing and strategic partnerships with other corporations (see Figure 9.6). For instance, Microsoft accelerator does not take any equity stake in participating start-ups and at the same time does not require applicants’ product or technology to directly complement or fit with products of Microsoft.48 To a certain extent Microsoft relies on serendipity occurrences in the use of technology and cooperation, which may not always be foreseen.

Figure 9.6  Equity versus non-equity-based corporate incubators

Source: author’s representation based on data from Corporate Accelerator DB/TechCrunch

9.61  Managing minority stakes in portfolio companies is often daunting from a legal and accounting point of view. Many start-ups fear that accepting direct or indirect investments from a corporation will restrict their future funding opportunities and bring about the risk of ‘negative signalling’ should the corporation decide not to support or continue the investment in the future. The corporation needs to send a strong signal to the ecosystem that they are a trusted partner for start-ups and that they will not sacrifice a founder for their own strategic or financial benefits.

VI.  Both Cultures Need to Adapt

9.62  The most active corporations in the technology sector already understand their role very well. Even after they have acquired a start-up, they seek to preserve that start-up’s unique (p. 207) identity (often by retaining the founders on CEO positions) and do not seek to assimilate it (which has been the conventional M&A practice).

9.63  And it is precisely this kind of open and inclusive partnering that needs to be at the centre of an innovation ecosystem, if it is to be effective. Although large corporations play an increasingly important role in start-ups ecosystems, policymakers have often been unwilling to recognize this fact.

9.64  Does that mean that policymakers are looking in the wrong direction? Not necessarily, but their view does not offer the full picture. In the context of start-ups, intensive governmental support is focused mainly on developing financial markets and catalysing venture capital industry. This oftentimes prevents them from identifying corporates as a crucial ‘ingredient’ of start-up ecosystems. Only recently several initiatives emerged that aim to support closer start-up-corporate cooperation. For instance, the government-supported COSTA (Corporates and Start-ups) initiative in the Netherlands, that attracted such corporate giants as Philips, KLM, Unilever, and AkzoNobel, promotes a more intensive alliance between corporates and start-ups.49 While such initiatives can highlight the importance of start-up–corporate cooperation, there is indeed still space for policymakers to introduce more measures and thus strengthen the triple helix cooperation.

9.65  A well-run innovation ecosystem provides multiple benefits for society in general. It creates the necessary links between complementary sources of risk finance. Also, it helps build the capacity of entrepreneurs to identify future partners that are best suited to deliver a meaningful, long-term relationship and give a young firm the best chance of scaling.

9.66  Finally, such an ecosystem helps policymakers develop more dynamic and responsive regulation. In the ‘right kind’ of ecosystem environment, flexible and inclusive processes benefit start-ups and established companies, regulators, experts, and the public. The goal is to prepare local and regional ecosystems for a world with a very different level of automation and artificial intelligence. Having a working strategy gives them a credible chance of competing with Silicon Valley.


*  Erik Vermeulen is Professor of Business and Financial Law at Tilburg University and Tilburg Law and Economics Center.

1  Victor W Hwang and Greg Horowitt, The Rainforest (Edition 1.02, Regenwald 2012).

2  See for instance Josh Lerner, ‘When Bureaucrats Meet Entrepreneurs: The Design of Effective Public Venture Capital Schemes’ (2002) 112 The Economic Journal 73.

3  Hwang and Horowitt (n 1) 10.

4  Chris Weller, ‘Mark Cuban Thinks the World’s First Trillionaire Will Work in Artificial Intelligence’ Business Insider (14 March 2017) <https://www.businessinsider.nl/worlds-first-trillionaire-mark-cuban-2017-3/?international=true&r=US> accessed 29 June 2017.

5  See for instance the new initiative of the European Commission, which contributes to the Entrepreneurship 2020 policy plan ‘Start-up Europe | Digital Single Market’ <https://ec.europa.eu/digital-single-market/en/startup-europe> accessed 26 April 2017.

6  See for instance equity and debt-related instruments of the European Investment Fund ‘What We Do’ <http://www.eif.org/what_we_do/index.htm> accessed 26 April 2017.

7  Invest Europe, ‘Annual Activity Statistics: European Private Equity Activity Data 2007–2015’ (2016) <https://www.investeurope.eu/research/activity-data/annual-activity-statistics/> accessed 15 May 2017.

8  ibid.

9  European Investment Fund, ‘EIF Timeline: 20 Years of Support to SMEs across Europe’ <http://www.eif.org/who_we_are/20years/index.htm> accessed 27 May 2017.

10  European Investment Fund (n 6).

11  For the crowding-in effect see for instance Massimo Colombo, Douglas Cumming, and Silvio Vismara, ‘Governmental Venture Capital for Innovative Young Firms’ (2016) 41 The Journal of Technology Transfer 10, 14.

12  Helmut Kraemer-Eis, Simone Signore, and Dario Prencipe, ‘The European Venture Capital Landscape: An EIF Perspective—Volume II: Growth Patterns of EIF-Backed Start-ups’ vol I (2016) 16 <www.eif.org/news_centre/publications/eif_wp_34.pdf> accessed 30 October 2017.

13  European Investment Fund, ‘European Angels Fund—Co-Investing with Business Angels’ <http://www.eif.org/what_we_do/equity/eaf/> accessed 2 May 2017.

14  European Investment Fund, ‘Pan-European Venture Capital Fund(s)-of-Funds Programme’ <http://www.eif.org/what_we_do/equity/paneuropean_venture_capital_fund_of_funds/index.htm> accessed 2 May 2017.

15  Regulation (EU) 1291/2013 of the European Parliament and the Council of 11 December 2013 establishing Horizon 2020—the Framework Programme for Research and Innovation (2014-2020) and repealing Decision No 1982/2006/EC [2013] OJ L347/104.

16  ‘COSME. Europe’s Programme for Small and Medium-Sized Enterprises.’ <https://ec.europa.eu/growth/smes/cosme_mt> accessed 27 April 2017.

17  ‘Horizon 2020: SME Instrument’ <http://ec.europa.eu/programmes/horizon2020/en/h2020-section/sme-instrument> accessed 1 June 2017.

18  ibid.

19  ibid.

20  ibid.

21  European Commision, ‘Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions Action Plan on Building a Capital Markets Union’ COM (2015) 468 final.

22  ibid 1.

23  ibid 4.

24  European Commission, ‘Commission Staff Working Document Economic Analysis Accompanying the Document Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions Action Plan’ SWD (2015) 184 final 8.

25  Action Plan (n 21) 4–5.

26  Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 [2011] OJ L174/1.

27  Rule 203(l)-1 (the ‘Venture Capital Rule’) codifying the exemption for venture capital fund advisers from registration under the Investment Advisers Act of 1940, as amended by the Private Fund Investment Advisers Registration Act of 2010; for analysis and comparison of VC regulation in general see Erik PM Vermeulen and Diogo Pereira Dias Nunes, ‘The Evolution and Regulation of Venture Capital Funds’ [2012] 1 Topics in Corporate Law & Economics 3, <http://ssrn.com/abstract=2163193> accessed 1 June 2017.

28  Articles 31–33 AIFMD.

29  Vermeulen and Pereira (n 27) 8.

30  ibid.

31  See for instance European Commission, ‘Assessing the Potential for EU Investment in Venture Capital and Other Risk Capital Fund of Funds’ (2015) 30 <ec.europa.eu/newsroom/horizon2020/document.cfm?doc_id=14543> accessed 27 May 2017.

32  Regulation (EU) 345/2013 of the European Parliament and of the Council of 17 April 2013 on European Venture Capital Funds [2013] OJ L115/1; and Regulation (EU) 346/2013 of the European Parliament and of the Council of 17 April 2013 on European Social Entrepreneurship Funds [2013] OJ L115/18.

33  Commision, ‘Proposal for Regulation of the European Parliament and of the Council Amending Regulation (EU) No 345/2013 on European Venture Capital Funds and Regulation (EU) No 346/2013 on European Social Entrepreneurship Funds’ COM (2016) 461 final.

34  Article 2 EuVECA.

35  Article 3(1)(d)(i) EuVECA.

36  Article 6(1)(a) and (b) EuVECA.

37  Article 3(1)(d) EuSEF.

38  Article 10 EuSEF.

39  ibid.

40  See EuVECA and EuSEF Amendment Proposal (n 33) 15–21. These SME growth markets are for instance Entry Standard Deutsche Börse, Alternative Investment Market London SE, NewConnect Warsaw SE, mid-market Wiener Börse, First North Nasdaq OMX Nordic.

41  See EuVECA and EuSEF Amendment Proposal (n 33) 15–21.

42  ibid.

43  See ‘Seed Enterprise Investment Scheme (SEIS)’ <http://www.seis.co.uk/> accessed 15 May 2017; ‘Enterprise Investment Scheme—GOV.UK’ <https://www.gov.uk/government/publications/the-enterprise-investment-scheme-introduction/enterprise-investment-scheme> accessed 15 May 2017.

44  ‘HMRC Key Statistics—April 2017’ (2017) <https://www.eisa.org.uk/using-eis/facts-figures/> accessed 1 June 2017.

45  See for instance ‘How Crowdfunding Nearly Killed My Company: The Smarchive Story’ <http://www.whiteboardmag.com/how-crowdfunding-nearly-killed-my-company-the-smarchive-story/> accessed 27 May 2017.

46  Young Entrepreneur Council, ‘8 Ways Bootstrapping Makes You A Better Entrepreneur’ <https://www.forbes.com/sites/theyec/2013/02/06/8-ways-bootstrapping-makes-you-a-better-entrepreneur/#7e031253c9cb> accessed 1 June 2017.

47  See Mark Fenwick and Erik PM Vermeulen, ‘The New Firm: Staying Relevant, Unique & Competitive’ (Working Pa Lex Research Topics in Corporate Law & Economics Working Paper No 2015-5) 17–22.

48  Interview with Maya Grossman, Head of Global Communications, Microsoft Accelerator (Tilburg/Tel Aviv 7 December 2016).

49  ‘The COSTA Programme: Bringing Corporates and Start-ups Together’ (2016) <http://www.brainport.nl/en/news-developments/costa-moet-start-ups-en-bedrijven-verbinden> accessed 1 June 2017.