EPISIS – European Policies and Instruments to Support Service Innovation Final report of Work Package 1/Task Force 5 InvestinginInternationalisationofHighGrowth
ServiceBusinesses
Work Package/Task Force Start Date: September 2011 Work Package/Task Force End Date: July 2012 Responsible Partner: BIS Report prepated by Jenny Tooth, Director, Angel Capital Innovations, UK 1 Contents Page Executive Summary 1. Background to the Report: 3‐10 11‐14 2. Current Policy and Practice for supporting Internationalisation ‐ EPISIS partners 15‐27 
The EPISIS project 
Objectives 
Background and relevance of Task Force 5 
Methodology 
Review of approaches taken by each of EPISIS partner s to internationalization and access to relevant finance 3. Barriers and Benefits of accessing external investment to support Internationalisation 28 ‐33 
Approaches to internationalisation 
Barriers to internationaliisation and how these can be addressed through external investments 
Benefits of attracting equity investment to support international growth 
Impact of access to VC investment on overall growth 
Impact of cross‐border equity investment 4. Demand and Supply Challenges to attract Investment to support International growth 34‐43 
Demand side issues: investor readiness and attractiveness 
Supply side challenges: current levels of investing in services among the EPISIS partners: 
Overview of investment activity by VC; Angels; Corporates; cross‐border investment ‐ examples 5. Challenges for the Supply of Equity Investment in Europe 
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44‐48 The equity gap The Need to build critical scale and expertise for an effective supply of VC finance The challenges for supply of cross border VC investing The supply of Angel investing Examples of measures being taken to improve the supply of VC and Angel Investing 6. Examples of Service firms that have successfully accessed international investment 49‐53  Individual examples of services firms in the EPISIS Partner countries that have accessed international growth finance 7. Recommendations for further actions 
55‐60 Recommendations for actions at both National Level and EC level 2 Executive Summary Introduction Services businesses in Europe are the lifeblood of the economy and many of the most important innovators are coming through disruptive service models, cutting across key sectors and exploiting technological developments to respond to many of societal challenges in health, environment, mobility. Accessing international markets and notably exploiting the opportunities of EU markets is a key means to ensure successful growth and the realisation of the innovation potential of Services businesses. This Study and Report has been carried out in the Context of the EPISIS Project which was launched in September 2009 and runs for three years. It is part funded by the European Commission DG Enterprise under the Pro Inno Programme. EPISIS is led by Tekes ‐ The Finnish Funding Agency for Technology and Innovation and the other government level partners are: Danish Agency for Science Technology and Innovation, Denmark; BIS Department for Business, innovation and Skills, UK ;Deutsches Zentrum fuer Luft‐ und Raumfahrt , Germany; VINNOVA The Swedish Governmental Agency for Innovation Systems, Sweden. The Study examines examine the potential benefits and impact of accessing equity to support internationalisation for services businesses as a key means to support their successful growth and the role played by Angels and VCs in realizing the benefits of international market access. The study also seeks to identify whether access to sufficient levels of equity investment should be a core component of policies and programmes aimed at the provision of internationalization and export support for high growth service businesses and how this might be effectively provided at national and European level . The Study has looked at both supply side issues and barriers, as well as the challenges for services businesses attracting equity finance to support international growth. It is notable that the study is taking place in a climate of severe economic challenges and where the current market for cross‐
border early stage investment remains very fragmented across Europe and a general shortage in the supply of VC funds in most parts of Europe. Current levels of Support for investing in Internationalisation of High growth Services businesses: In Ch 2, a review of the current schemes that the EPISIS partners have in place for supporting export growth shows that they have active schemes and a range of programmes to support new market access available to support Services businesses. All have established schemes to provide trade/export finance including loans, guarantee schemes and working capital schemes and evidence that there is a strong emphasis on increasing this provision of trade finance in response to the economic challenges and as part of national policies to support export growth. 3 However, it may be seen that the approaches taken by the EPISIS partners in the policy and provision of support to the internationalisation of services gazelles vary in the level of priority given to the issue of access to relevant finance or external investment to support international market growth. TEKES has a specific policy for ensuring access to international investment alongside its work in supporting growth of innovating early stage f services businesses Whilst the UK has now introduced a specific new strategy to support access to external investment as direct aspect of its international trade strategy. Approaches to Internationalisation and role of external investment in supporting international growth In Ch. 3, a review of the different approaches that Service SMEs may take to access international market growth showed that service companies take a number of different approaches to internationalisation, which require different models for external investment and the approach is much wider than exporting and sales, with a range of approaches across the value chain. A comparison is also be made between those businesses that internationalise incrementally and those that are “born global “and thus in their approach to the use of Equity investment to support that growth. The specific risks and challenges that service companies are likely to identify when seeking to internationalise are examined together with the benefits and support offered by external investors, the following are the most significant barriers:  Resource barriers: Finance represents a key barrier both in relation to a lack of working capital, as well as a lack of development capital, as well as the time and efforts to investigate and pursue overseas opportunities and understanding of the competitive environment  Technical and procedural barriers: including, dealing with legal, financial and tax
regulations and standards, and regulations in other EU and non‐EU countries. These
regulationsincludeproductstandards,complianceprocedures,patentandtrademark
issues.
 Cultural barriers: Lack of awareness and knowledge of local cultural norms can
impedethedevelopmentofabusinessrelationship,lackofaccesstonetworksinan
overseas market and also include language, general cultural differences, navigating
unfamiliarbusinessenvironments.
Accessing external investment is seen to address, not only the financial barriers to growth, equity investors can also support businesses through a range of ways to reduce the risks of internationalization. This can be achieved both through the support of access to domestic sources of investment and through accessing investment in the target countries, providing direct marketing and customer linkages, suppliers, reducing time to get to market; access to key business networks; providing soft landings and access to local expertise to support with addressing technical barriers and standards. Above all links into networks to support rapid integration and enable early customisation which is vital to service businesses. Overall considerable impact on high growth can be identified in equity backed businesses compared with non equity backed and notably through a combination of domestic and cross‐border investors .Thus strategies to support 4 access to not only nationally sourced investors , but also to include cross‐border investment would seem to be the most effective. Demand and Supply side Challenges for Service businesses to attract Investors: Whilst there are many advantages identified in accessing equity finance to support internationalization, the study has also shown that early stage Service Businesses may be seen to have specific demand side challenges in attracting VC to support international growth. These include systemic issues that are seen as affecting the environment for investing in service businesses. The primary issue remains the lack of a European Common Market for Services and further systemic issues were identified as:  Capability failure in the management team to understand the core requirements of investment readiness among management teams and a general lack of understanding of how to make a service business attractive to investors including a Lack of International skills and experience to attract cross‐border investment  Lack of access to networks: lack of access to investor networks across the EU or access to the intermediaries and gatekeepers as channels to the investment community Specific challenges for services businesses are:  IP Protection‐ In most cases the IP is based on intangible assets, thus very difficult to value by investors..  Services as “Credence Goods” – It is often not possible to evaluate the quality of the services before they have been purchased and consumed which can be a key deterrent to investors.  International scalability: Potential difficulties in convincing investors of international scalability of services and services needed to be productised early to convince VC investors.  Valuation and Returns: The Lack of market intelligence, case studies of successful investments, returns as well as exit comparables among service businesses Level of Current investing in Services Businesses On the Supply side, there is very little concrete evidence of investing in Services businesses, outside the key baseline statistics gathered for financial and business services. However statistics from the main trade bodies provided by EVCA, BVCA (VC Investing), EBAN and BBAA (angel investing), lack any systematic gathering of data on deals done in the much broader range of sectors where services are likely to be present, especially in a “hybrid services” where many businesses have a technology platform with a service aspect. Thus it may be concluded that a much higher level of investing in services is currently in existence with potentially 30% of all deals done across sectors in VC as well as angel investing, whilst statistics cannot verify this. This lack of general market data or visibility of the success of investing in services businesses makes it difficult for investors to value returns and likely to be a key barrier to services successfully attracting external investment. 5 Nevertheless examples are presented of 15 early stage VCs from many of the EPISIS countries as well as Angel syndicates who are actively seeking to invest cross‐border with strong combinations of cross‐border investment teams across both VC and angels. Addressing the Supply Side: Investing in Internationalisation of Service Businesses Whilst recognizing the need to increase the level of investing in Services businesses in Europe, the study also examined the ongoing challenge for ensuring an adequate supply of equity investment within Europe and notably a very strong equity gap for early stage businesses. There are now few VC funds willing to consider investing below €1.5m‐ 2m in their first round of investment in seed, start‐up or early stage. A review of the findings of the EC Expert group on Cross‐Border Matching of Innovative Firms with Suitable Investors, 1 which has been in place during the time of this study, has reported that poor historic returns obtained by VC funds for their investors over the last ten years has blighted the market for new institutional money and many existing VC funds find it more lucrative to invest into businesses at the growth stage rather than the seed. The need to have a sufficiently developed “thick “ venture capital markets to build the critical scale and expertise needed to overcome these challenges and avoid an early stage equity gap was also identified. During the time of this Study the national trade bodies for VC investing in Europe have all gathered together under EVCA to recommend to the European Commission that a large Fund of Funds model should be put in place to stimulate the private sector and notably institutional investors to establish new substantial and sustainable levels of VC funds. Whilst the supply of VC capital is diminishing, a review of the angel market in Europe shows that this accounts for about three times the amount of VC investing early stage businesses and is thus likely to be the most important source of investment support for many early stage services businesses when entering international markets. However the level of angel investing varies tremendously between EU countries. In the countries covered by the EPISIS partners, the UK has the most developed market which has been considerably stimulated by the availability of significant tax breaks and with the launch of the new £50m co‐investment fund to support syndicate investing. Whilst Sweden and Finland have quite strong Angel markets with a growing number of angel networks and groups emerging, Denmark remains relatively underdeveloped in relation to Angel investing in any visible way, although there are a number of entrepreneurial groupings of angels now emerging. It is notable that Germany considering its size does not currently have a strong angel market, however, Germany is being supported under a new scheme being, piloted by the EIF to co‐invest alongside designated Business Angels in Germany. There is thus a strong opportunity to stimulate the angel community and for joint efforts to increase the level of co‐investing between angels among the EPISIS countries. Case Studies of Successful Access of International Equity Despite these challenges, the eight examples of recent equity investment in Service businesses presented, provide clear evidence that a range of service firms within the EPISIS Partner countries 1
EC Expert Group on “Cross‐Border matching of innovative firm with Suitable Investors” , chaired by Anthony Clarke, Director, Angel Capital Group, 2011‐2012 , Minutes of the meeting 24th January 2012. 6 have successfully accessed VC finance resulting in international market expansion. This has included those businesses that have accessed domestic VC funding or Angel Funding initially and then gone on to access international investors, frequently through the investors , making contacts with their own international networks with whom they co‐invest. On other occasions they have had first round funding from one or more Funding teams across a range of different countries as part of a deliberate strategy to go global early. , frequently co‐investing and with very clear outcomes for entry into a range of markets, although it may be seen that many of these businesses were inevitably being drawn beyond Europe into both the US and in some cases into the new markets of China and S East Asia and America , as well as S America. There was a strong evidence provided through these case studies about not only on the importance of the finance being offered, but of the skills, industry experience and market linkages that these dynamic combinations of national and international investors brought to the businesses and the management team and how this was accelerating their market entry. It might therefore be concluded that there is a need for further showcasing and publicizing the level of investing actually going on among investors and thus there is a clear need to take actions to bring these successes to the attention of the investment community to encourage them to increase investment in high growth services businesses across Europe Recommendations. At national level, actions identified that could be taken by the EPISIS partners: 1. Ensure that all policy and programmes to support internationalization of innovating high growth potential service businesses include direct actions to facilitate access to external finance and notably equity investment, including support for investment readiness.  EPISIS partners should support a dedicated programme to improve the opportunity for high growth potential services businesses to access finance including actions to support investment readiness and investor attractiveness. This should include support for cross‐
border investment readiness with a focus on attracting international investment, including direct support with how to effectively pitch to investors on a cross‐border basis. 2. Ensure access to relevant market intelligence and case studies of successful growth aimed at investors to increase their awareness of the investment benefits and opportunities of investing in high growth potential Services Businesses.  EPISIS partners should take the lead in gathering information on all deals done in Services businesses across different sectors from their own countries and track the impact of this investment on the international growth and success of these businesses‐ making this available to investors and the investment trade bodies.  A further key role that EPISIS partners should take is in actively showcasing Service Businesses to both domestic and cross‐border Investors through both face to face showcasing and pitching events and through online platforms (not deal brokering). 7  EPISIS Partners should feed their data on investment in services and successful growth stories into the data being gathered in their own countries among the investment finance trade bodies or national federations ( Angel and VC investment) . This should in turn feed into the overall European knowledge base on investing in services to support European planning and decision making in relation to COSME and HORIZON 2020 and to support measures taken by the private sector‐ see below public policy. 3. Stimulate the Supply of equity investment available at both domestic and cross‐border level to support successful internationalisation of high growth service businesses  EPISIS partners should directly support their investment trade bodies (angel finance and VC finance) to back the proposal through EVCA to gain a new Fund of Funds for Europe under HORIZON 2020 .  This would enable EPISIS partners to stimulate the private sector and key institutions in their own countries to establish new national and cross‐border funds, of a relevant size, with experienced internationally focused VC teams, resulting in increased access to investment for high growth innovating service businesses on a cross‐sectoral basis.  Actions to stimulate the angel community should be taken by EPISIS members at national level. This should include introduction of tax breaks for angel investors in early stage high growth potential business, looking at the models already introduced by Member States including the UK model of the Enterprise Investment scheme.  EPISIS partners should recognize the importance of co‐investment funds to leverage the potential of angel investing in high growth potential services businesses. At national level, partners could consider the model of the Scottish Co‐Investment Fund and the new UK Angel Co‐Fund supported by the Capital for Enterprise Ltd.  EPISIS partners should support the proposals of the EC Expert group on Cross‐Border Matching of Innovative Firms with Suitable Investors 2 for a new Cross‐Border Angel Co‐
investment Fund to leverage angel investment and notably to support co‐investment between angels across the member states, thereby increasing the potential for Services businesses Recommendations for Action at European Policy Level: New Internationalisation co‐Investment Fund  As part of the HORIZON 2020 Strategy: The European Commission should establish a specific new Internationalisation Co‐ Fund aimed specifically at innovating high growth 2
EC Expert Group on “Cross‐Border matching of innovative firm with Suitable Investors” , chaired by Anthony Clarke, Director, Angel Capital Group, 2011‐2012 , Minutes of the meeting 24th January 2012. 8 
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potential service business to support access to external investment and notably to attract and leverage cross‐border investment to support successful market access. It will address the challenge that many businesses will be attracted to the US and notably Silicon Valley and offer an incentive to access investment to enter the EU markets. The finance which should be maximum €100k per SME should be designed to address key barriers for services businesses to successfully internationalise and enter new European Markets; to support local customisation of the service offer and address whatever relevant actions are required to enter the designated EU market place including local market adaptation and identification of relevant local delivery base It will especially operate where initial domestic VC has been accessed and offer an opportunity to follow‐ a strategy for new EU market access, and/or will be used to attract relevant cross‐border investment. (The research has shown that a combination of domestic and Cross‐border investment is especially effective to support growth and expansion). The subsidy should be activated once external investment is leveraged, or when cross‐
border has been identified offering an incentive to the investors to close the deal It will address the challenges for services businesses in accessing relevant investment in target markets in the EU Support the costs of market access and integration in the European target market, including local customization, identification of relevant local infrastructure and adaptation to local standards and requirements, thereby ensuring more rapid and successful entry It will complement and reinforce the actions of the local investors in providing support to address key barriers for market integration It will create a strong incentive to access external sources of finance focused on the EU market access and act as a countervailing influence against US market access which remains a key driver for many early stage businesses as a means to grow and successfully exit. The EC should support the proposal from EVCA to build a large Fund of Funds, as part of the HORIZON 2020 Strategy, enabling EPISIS partners to attract institutional investors in their own countries to establish relevant new VC funds of an appropriate size to target service based businesses and with the capacity to invest cross‐border   This should be complemented by the completion of the European Single market for Services and EPISIS partners should support actions taken by the Member States at national and EU level to ensure this is put in place during 2012. Next Steps: Piloting the proposed EC Internationalisation Fund:  Based on the above, a European pilot should be set up by the EPISIS Partners to test out the feasibility of this model, in 2013‐14, based on an initial provision of 100m euros per annum with a view to offering an estimated 100 selected high growth 9 
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services businesses across Europe to take advantage of the EC internationalization Co‐
Fund. T This would aim to leverage at least matched private sector funding, but based on other successful co‐investment models, is likely to raise at least 4x private sector finance against the public sector commitment. The pilot would therefore assess the potential for leveraging at least a further 1x ie £100m euros, but potentially up to 4x ie 400m euros co‐investment based on the experience of other co‐investment funds. The results of this project would then be fed into Horizon 2020.COSME to ensure that the EC Internationalisation Co‐Fund is integrated in the new Funding proposal and to ensure that at least 100k euros per annum is made available to support Internationalisation of Services businesses. Improving the data collection and understanding of the overall potential of internationalisation of high growth businesses: The VICO project3, as detailed in the study has identified the important positive impact of tracking data about the importance of external investment in supporting the high growth potential of these businesses. A further bid has been submitted to DG research under the Marie Curie programme to investigate the impact of equity investing on high growth businesses , working closely with angel investment networks around Europe which look closely at the impact of investing in high growth businesses and draw together case studies and data on impact. .  The EPISIS Partners should take advantage of the VICO submission to the Marie Curie programme in 2012 and notably to support the placement of researchers in key angel investment networks within the EPISIS partner countries to identify and gather data on the benefits of investing in high growth potential services businesses and should recommend this project for support from DG Research. Opportunity to integrate findings into the European Creative industries Platform and for Mobile and Mobility Platforms:  EPISIS Partners should ensure that they feed in the results of this study under TF5 and notably to the Learning Platforms, notably to link ot the Access to finance actions, and to ensure that Performance indicators and Impact measures for the work of projects under these two platforms include measurement of successful internationalisation and access to international markets. 3
Venture Capital Policy lessons from the VICO Project” , Sept 30, 2011. Led by Prof Massimo G Colombo, Polectinico di Milano with 8 other partners including, Research Institute for the Finnish Economy; Zentrum fur Europaische Wirtschaftforschung GmbH; Unversity College, London 10 1. Background to the Report The target for this Study and report is innovating high growth potential services
businesses , operating across a wide range of sectors and not just those commonly
categorisedasservicessectorsieFinancialandbusinessandprofessionalservices.
TheEPISISProject:
This Study and Report has been carried out in the Context of the EPISIS Project which was launched in September 2009 and runs for three years. It is part funded by the European Commission DG Enterprise under the Pro Inno Programme. EPISIS is led by Tekes ‐ The Finnish Funding Agency for Technology and Innovation and the other government level partners are: 
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Danish Agency for Science Technology and Innovation, Denmark Department for Business, Enterprise and Regulatory Reform, UK Deutsches Zentrum fuer Luft‐ und Raumfahrt , Germany The Swedish Governmental Agency for Innovation Systems, Sweden Objectives
The main policy level objective of the EPISIS project is to advance a broad‐based innovation policy approach by identifying emerging policy challenges for services innovation and designing new policy concepts in response to them. 
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To enhance the understanding on services innovation and to promote further the mind‐set change which is necessary for the recognition of services and services innovation as a powerful economic force in the EU. To encourage the development of necessary policy tools and measures in the field of services innovation. The project has established a “European Services Innovation Think Tank” to be engaged in policy and strategic level discussion and agenda development. The “Think Tank” covers representatives both from the EPISIS partner and non‐partner countries and it will meet twice annually during the project duration. The aim of the “Think Tank” is to be an open platform for discussions between public authorities responsible for support to services innovation and to prepare for concrete policy recommendations and validate the findings of the project activities. The project is organising three policy‐oriented conferences “International Conferences on Service Innovation” to disseminate the results for the wider innovation policy community. The project will develop new policy tools and measures in the field of services innovation and pilots and validates new service innovation support schemes on selected areas. The work of EPISIS has been divided in to a number of Task Forces to examine key issues and create policy recommendations. 11 Background and relevance of Task Force 5 Task Force 5 (TF5) focuses on the barriers to internationalisation by service firms and the strategies adopted by partners and the private sector, particularly angel/venture capital, to provide support and investment to service firms to support them to effectively internationalise. The growth of service SMEs within the Single Market and their expansion into export markets has been a consistent theme of Europe Innova and EU policy more generally. For example, the European Expert Panel on Service Innovation recommended that the Commission should develop a programme in support of service “gazelles” and notably to support them to effectively reach global markets. To give focus to the work, the target market for policy and activity are those firms, which have demonstrated a capability within their domestic markets and an appetite to take the risks associated with rapid growth in foreign markets, as well as those service businesses that are set up with an international market focus from the outset “born‐global”, usually associated with a strong risk‐taking ethos and willingness to raise angel or venture capital. The Study will examine the potential benefits and impact of accessing equity to support internationalisation for services businesses and the role played by Angels and VCs to support an international growth strategy. The study also seeks to identify whether access to sufficient levels of equity investment should be a core component of policies and programmes aimed at the provision of internationalization and export support for high growth service businesses and how this might be effectively provided at national and European level . The Study will look at both supply side issues and barriers as well as demand side challenges to attracting equity finance. It is notable that the study is taking place in a climate of severe economic challenges and where the current market for cross‐border early stage investment remains very fragmented across Europe . The opportunities for accessing VC Investing for early stage businesses remain deeply challenging for early stage high growth potential service gazelles, with a general shortage in the supply of VC funds in most parts of Europe. Angel investing is over twice as significant across Europe for early stage businesses across all key sectors with a high level of investment potentially available for services businesses. Nevertheless the Angel market remains underdeveloped in much of Europe with few initiatives to stimulate cross‐border investing. The study reviews the challenges in Europe for the provision of sufficient levels of VC funding and examines the results of key research and expert group consultations to provide potential solutions notably in relation to the planning for Horizon 2020 In examining the demand side issues in service businesses the study will seek to identify the main challenges and barriers faced in attracting equity investment in competition with technology –
focused businesses ; what are the specific approaches taken by Service businesses in seeking to internationalise and how does this affect their capacity to attract and use equity investment to support successful access to new markets. What kind of strategies should be employed to approach relevant investment sources. 12 The study also seeks to learn from strategies and support actions already in place among the EPISIS partners to support internationalization and how far these are also designed to attract equity, or whether current support actions for international market access mainly lack this dimension and thus result in a gap between international support and equity support. The study will also seek to identify examples of good practice and notably case studies of companies that have achieved successful internationalization through access to equity, examining the role played by both domestic and cross‐border investors , including understanding what works and does not work. Finally the study will seek to draw conclusions with a view to identifying the key learning points and identification of relevant strategies and policy actions that could be taken on board through national programmes, as well as key policy and new measures that the European Commission could implement to ensure that service businesses can access the benefits and opportunities of equity investment to support their international growth and new market access. In so doing, the study will complement and build on the objectives and proposed work of the European Creative Industries Alliance and the European Mobile and Mobility Industries Alliance, which will have a key aspect concerning Access to Finance and notably through the Learning Platform now being set in place for both programmes, as well as feeding into the development of HORIZON 2020 in relation to planning for financial measures to support innovation. This will include the work of the current EU Expert group on Cross Border investing, as well as linking to other elements of the EPISIS project, notably WP5 and supporting the final dissemination of results of the 3 year programme. Methodology: The Study has focused on the following actions: Workshop on Investing in Internationalisation of Service gazelles – “Crossing the Divide” A Workshop was organised on 16th November 2011, at Excel Centre, London UK in the context of the UKTI TechWorld exhibition. It was attended by representatives of the EPISIS partners together with a number of UK and European representatives of the Angel and VC market including the UK main trade bodies, British Business Angels Association, and British Private Equity and Venture Capital Association as well as other key market players and including a representative of the European Commission DG Enterprise. Whilst originally this had been planned to discuss the findings of the study , due to a delay in commencing the project, the workshop instead focused on an in‐depth exploration of key challenges and barriers for investing, current approaches and models, as well as an exploration of current policy approaches and good practice modals currently offered by some of the EPISIS partners, notably UK, Finland and Sweden, presentation of case studies and identification of the existing challenges to be investigated by the Study . 2. A review of current literature and documentation: Existing policy and measures already in operation for supporting international trade for service‐based SMEs and notably actions 1.
13 related to supporting access to equity investment to support internationalisation were examined, focusing mainly on the UK and EPISIS partners. A review of existing policy and good practice measures in relation to access to finance and investment for the internationalisation of high growth service businesses. This has been through desk research , but also by direct interviews with certain service providers. 3.
A further aspect of the study has included a review of examples of successful international high growth service businesses, notably those that have attracted equity investment to support market access. This has included interviews with key players to discuss their views on the challenges and barriers and to identify case studies of successful international entrepreneurs, notably those that have successfully received equity investments .What made them attractive for investors? What challenges did they overcome? What lessons can be learned with a view to the identification of specific business models and approaches that achieve successful internationalisation and attract investment. In addition to the current EPISIS Project being supported under the Pro Inno programme with its policy focus on growth of services businesses, under the Europe Innova framework, DG Enterprise has been supporting seven practical projects as part of the KIS Knowledge Intensive Services programme since 20074. A key aim of these projects , which have each had a different sector focus, has been to address the obstacles to accessing investment for growth and notably cross‐
border investment. The Study will draw on the results from these projects and notably from the Survey of outcomes and impacts of the Access to finance activities s which was carried out as part of the KIS Steering Group Cross‐cutting Themes.5 DG Enterprise has now built on the results of these projects and has set up two key alliances and knowledge platforms for Services SMEs: one focused on the European creative and cultural Industries services, ECIA European Creative Industries Alliance and a further one focused on Mobile and Mobility services, the EMIA European Mobile and Mobility Industries Alliance. Both of these will have a strong emphasis on access to finance and cross‐border investment, notably delivered through two dedicated pilot projects for Access to finance as well as through the new Learning platforms. The ECIA European Creative Industries Alliance and major communication platform was launched in Milan on 28th February 20126 under the How to Grow platform. Whilst it is early days in their development, we will seek to feed in recommendations and learning points from this study to support the development of these European Alliances. Finally, it should be noted that the term “ Services Gazelles” will be interspersed with the term “high growth potential services businesses” throughout this document, since both of these descriptions are used at EC and public policy level. 4.
4
Europe Innova European Programme for Partnerships in Innovation DG Enterprise and Industry http://www.europe‐innova.eu/ A review of outcomes of the Access to Finance activities of the IS Sector Partnership projects , Jenny Tooth, Chair of the KIS High Growth Steering group, 2010. 6
European Creative Industries Alliance ECIA https://www.howtogrow.eu/ecia/ 5
14 2. Current policy internationalisation and practice to support EU Policy Approach: The European Commission’s findings in their Expert group report “Supporting Internationalisation of SMEs”7 focused on the importance of increasing internationalization to ensure the growth and competitiveness of SMEs and thus for the EU economy. Whilst the EC report was not directly focused on the services sector, the findings and recommendations would seem to be directly relevant to the focus of this current study. The report identified key challenges for internationalization as:  Lack of sufficient skills and experience of the management team to successfully develop and implement an international strategy and  Lack of access to Finance as a fundamental pre requisite to support successful internationalization These two are seen as directly connected and thus actions to support skills and knowledge among entrepreneurs to internationalise should closely link to awareness raising and support to access relevant finance. However, it would seem that according to the Expert Group findings, many national programmes around Europe for support to internationalize or export have tended to focus more on providing knowledge and skills on how to export and direct support on access to new markets and linking to export and market services, rather than knowledge and skills on how to attract relevant finance to support internationalisation and on making those direct connections to relevant finance sources both nationally and in the target countries. A further key recommendation of the report was to ensure that support was not just focused on exports, but on a wide range of successful internationalisation activities that could benefit SMEs including: b2b co‐operation; joint R&D; intra‐Europe value chains. The Report also identified that there was a need for the Single Market for Services to be urgently completed which could lead to a considerable increase in the potential for intra European international opportunity for this sector. Examples of policy and programmes supporting Internationalisation of services gazelles among the EPISIS partners: 7
Final Report of the Export group on Supporting the Internationalisation of SMEs, Dec 2007 15 In reviewing the information provided by the EPISIS partners to support this study, including the presentations made during the EPISIS Workshop on 16th November 20118 , the national programmes developed by the EPISIS partners to support internationalisation in relation to service businesses may be seen to have a considerable number of actions in common, generally reflecting the recommendations set out in the EU report. These actions include: : • subsidise access to support or external advice and mentoring ; • increase skills in developing an effective strategy ; • access to market intelligence • reduce the opportunity costs to access new markets, such as travel and attendance at international trade fairs exhibitions or market research visits. All of the partners offer services to support export promotion and including access to export loans and guarantee schemes. However, it may be seen that the approaches taken by the EPISIS partners in the policy and provision of support to the internationalisation of services gazelles vary in the level of attention given to the issue of access to relevant finance or external investment to support international market growth. TEKES, Finland: support to internationalisation TEKES operates a specific programme called ‘Young Innovative Enterprises’ which offers direct public grants at a subsidy of 75% to support innovation and growth . The model of the Young Innovative Enterprises9 is designed to accelerate growth and support access to internationalisation and investment and the target is companies beyond start‐up and reaching growth phase. The e companies are not all service businesses, but there is a strong focus on services based businesses. It is a phased approach with a maximum funding grant of €1m. Companies are selected on the basis of their potential for rapid growth with a focus on internationalization, having been in existence for less than 6 years and at least 15% of their turnover spent on R%D, At an initial phase about 150 companies are selected and can gain a 50,000€ grant for support to develop their business plan for growth over a period lasting 6 months. 40‐50 enterprises are selected from this pool on the basis of their high growth potential and can gain up to €250,000 (@75%) for up to 18 months support and acceleration. In the second phase 10‐20 enterprises are identified as having rapid growth and can gain up to €750,000 (@75%) for up to 18months. The programme started in 2008 and over 120 companies have been supported so far. 8
“Crossing the Divide‐ Investing in the Internationalisation of Service Gazelles” Workshop held on 16th November 2011 at TechWorld and hosted by Allan Mayo, BIS, UK 99
Young Innovative Enterprises model as described by Juha Heinola, TEKES, at the “Crossing the Divide” Workshop held on 16th November 2011 16 As part of this initiative, TEKES actively supports the SMEs in the YIE programme to access relevant sources of external finance and investment to support their international development. This includes:  Access to government supported sources of finance, including Finnvera: Loans, guarantees and export credit guarantees;  Seed/early stage investments (alongside or with the international angel network)  The Finnish Investment Fund : Consolidated VC investments (with international VC network).  As well as to private sector VC investors and Angel Investors including FINBAN National Angel Network Association‐ comprising angel networks in Finland. Investors are also engaged in screening the businesses for entry into different stages in the programme thus creating ongoing linkages with finance sources. Tekes also supports Investment Showcasing Events to directly enable the YIE businesses being supported on the programme to pitch to investors not only on Finland, but internationally. TEKES also works with Finpro, offering general support and advice on exporting and internationalization, including focusing on overcoming barriers to new markets, and focusing on the capability building elements, but taking a wider approach to this role. The aim of Finpro is to speed up the internationalization of Finnish companies while minimizing the risks involved. 10 VIGO Accelerator Programme11 In 2009, the Ministry of Employment and Economy, Tekes and Finnvera jointly launched the Vigo Programme, through which independent private accelerator companies help young enterprises to grow. The programme is managed by Tekes and is directly complementary to the Young Innovative Entrepreneurs programme , in being focused on supporting growth and internationalization, but aiming at start‐ups and seed stage companies and with a strong focus on access to external funding. All firms under the Vigo accelerator scheme benefit directly from the funding available through YIE and in many cases are a feeder into this programme 12. The Vigo Programme encourages highly qualified serial entrepreneurs and early stage investors to establish and operate private accelerators who help innovative enterprises to develop their business ideas, grow and internationalize. The programme's accelerators play a key role by addressing one of the main problems faced by young innovative enterprises, and helping them to build up the skills necessary for establishing a solid business concept and taking it to international markets. 10
http://www.finpro.fi/en‐US/About+Finpro/Our+Story/ 11
VIGO Accelerator Porgramme, www.vigo.fi 12
Peer review of the Support for Young Innovative Enterprises in Finland, under Inno‐Nets , June 2012 17 The programme also aims to develop Finnish venture capital markets. The Vigo accelerators help young innovative enterprises to obtain funding from both local and international investors. The accelerators must also themselves invest in the enterprises. It is envisaged that the programme will eventually raise funding totalling at least 200 million euros for young innovative enterprises. Mode of Operation The income of the Accelerators is based on the growing value of the target companies. The Accelerators can then realize this value growth in connection with exits. The Accelerators can also charge a negotiable monthly acceleration fee from the target companies. The target companies can apply for funding from Tekes that can cover the acceleration fees. The acceleration period lasts 18 to 24 months and at the end of this period, the target company should have the operational and financial wherewithal for fast international growth. The target companies have access to both private and public funding sources. Private sources include venture capital funds, business angels, and the accelerators. The public funding of the programme consists of funding from Tekes, Veraventure, and Finnvera. Public equity funding is also available for any accelerators wishing to establish and/or manage their own funds. All funding providers make independent funding decisions, but the process is coordinated and streamlined. Normal public funding criteria are used in the program. Other public policies will meanwhile be implemented aiming to enhance the volume and quality of deal flow, and improve the venture capital ecosystem so as to facilitate growth and internationalization. Young innovative enterprises may be required to pay fees for the acceleration services they obtain. Up to 9,000 euros per month of such fees may be covered by public funding. Tekes estimates that each accelerator will maintain a portfolio of 5‐12 young innovative enterprises at any time. Private accelerators for the Vigo Programme are selected through a competitive tendering process, run according to strictly defined procedures. Tekes currently estimates that some 8‐15 private accelerators will be selected for future four‐year framework agreements. The current Vigo Accelerators are: 



Cleantech Investment – supporting cleantech businesses KoppiCatch ‐ supporting web/mobile businesses Lifeline Ventures ‐ lifesciences and telecoms Veturi Venture Accelerator – ICT B2B , or ICT –growth enables businesses Whilst none of these are currently specifically focusing on services businesses, there will be many service businesses supported across these sectors to be specifically focused. There is potential among the new call for tenders for further Accelerators to be established that an accelerator specialising in services may emerge. Export promotion services in Finland 18 The main direct support to companies wishing to expand into international markets are provided through The Ministry for Foreign Affairs and the Finnish diplomatic and consular missions abroad, and through Finpro. The range of services broadly covers the two policy areas outlined above, with the overseas network focusing on overcoming barriers to new markets, and Finpro focusing on the capability building elements, but taking a wider approach to this role. The sphere of tasks is broadly defined: to speed up the internationalization of Finnish companies while minimizing the risks involved, using the resources of its own organization and co‐operating with other service organizations working the same goals – including the National Technology Agency, Tekes, Finnvera plc, the Employment and Economic Development Centres and Sitra, the Finnish National Fund for Research and Development . Finpro also acts as the provider of finance and guarantee schemes to support SME exports and to provide working capital The Finnish overseas network: The website describes the network, “consisting of about 100 service points with Finnish staff in different parts of the world”, as follows: The geographically wide network of diplomatic and consular missions abroad, in cooperation with other EPI actors, provides companies with public services related to export promotion and internationalisation. The services are generally provided free of charge, although direct expenses, such as in relation to the costs of arranging a promotional event, would be wholly or partly charged. VINNOVA: Support to Internationalisation in Sweden Government policy for internationalisation in Sweden is based on two key initiatives13:  In 2008 the Swedish Export and Internationalisation Policy Report recommended that a hands‐on approach is necessary and should focus on the demand side as well as small and medium sized businesses with potential in foreign markets. A holistic policy was needed to ensure that the internationalisation of Swedish companies is integrated into economic policy; a key feature of policy should be to create good conditions for research and education for future competitiveness  2009 The Globalisation Council identified the need to identify companies that “dare to grow”; to strengthen the structures that ensure that Sweden can survive in an economic downturn and to focus on our most important factor for production ‐ knowledge In July 2010 the Swedish government launched a new strategy to support service innovation. The aim is to adapt and develop policies and systems for enterprise and innovation promotion to take into account the conditions for service innovation. Services innovation represents potential for the entire economy – for service enterprises as well as industry and for private and public activities. The strategy was drawn up in dialogue with companies, organisations and public sector actors at local, regional and national level. The key elements are an efficient framework conditions for 13
The information on Vinnova was provided by Irene Martinsson, Vinnova, at the “Crossing the Divide” Workshop held on 16th November 2011 at TechWorld , hosted by Allan Mayo, BIS, UK under EPISIS TF5 19 service innovation; building knowledge and competence; develop the digital infrastructure and notably to support internationalisation of service innovations. An example of this support was the e‐Health Accelerator programme aimed at speeding up the time for ehealth businesses from existing service innovation to international expansion. In terms of business support for internationalisation, Vinnova has identified that companies need:  Start‐up and development processes (general business)  Internationalisation strategy  Information on new markets  Pricing models in new markets  Guidance in contacts with public authorities and procuring organisations  IPR and patents, licensing The Swedish Trade Council has a key role to assist Swedish companies to grow internationally. They essentially provide all services required to establish a company and its products, services or ideas in new markets. Founded in 1972 the Swedish Trade Council serves the Swedish Government and Swedish business with offices in 60 countries and work closely with trade associations, embassies, consulates and chambers of commerce around the world to support access to markets and softlanding for businesses and develop international partnerships. They arrange bilateral events such as seminars, fairs, press‐trips and match‐making projects. The government owned company ALMI Företagspartner provides hands on support to enable Swedish companies to grow, including enabling them to successfully internationalise. ALMI can give loans to companies to support an export business. ALMI can provide loans even if the company has utilised the full credit potential of its bank. The export loan can be provided in local currency which means that ALMI takes the currency risk for the exporting company.14 Financing for exporting The financing system for Sweden exports includes commercial Banks, EKN and SEK. These last two are government agencies organized by the Swedish commerce department and have the goal of increasing exports and internationalization of industry from that country. Both provide credit support to Swedish companies to export. personalized financing through alliances with different institutions The Swedish Export Credit Corporation, SEK, is a state owned bank with a mission to secure access to financial solutions for export and infrastructure. SEK is a niche operator in the financing market. It works offering loans and as result, it acts as complement to banks. Its independency also means freedom to cooperate with others banks and financing institutions without competing for clients. SEK can provide export credits, lending and structured finance solutions for Swedish 14
www.ALMI Företagspartner. 20 companies as well as advice on exporting.15 SEK signs an agreement through which Swedish SMEs can obtain financing solutions to sell their products overseas. Financing amount fluctuates from 100 thousand Euros and 5 million Euros personalized financing through alliances with different institutions The Swedish Export Credits Guarantee Board, EKN, 16 can share the risk with a bank that provides financial services for an export business. EKN is an agency that provides export credits and that encourages sales overseas issuing guarantees against the risk of non‐payment in export operations. While SEK grants the loans, EKN insures the credit risk. EKN has banking products to cover risk, credit letters or bills of exchange, a whole range of products that provide support for operations. With EKN as a risk‐sharing partner, it becomes easier for the bank to approve a financing proposition from an exporting company. Swedfund is the Swedish state‐owned venture capital company 17 and can invest with equity in new or existing companies together with Swedish and international co‐investors. Swedfund also has lending products for Swedish or international companies. Swedfund offers financial support for small and medium‐sized Swedish enterprises to invest in equipment and knowledge transfer when setting up businesses in the emerging markets of Africa, Asia and Latin America, as well as the non‐EU countries of Eastern Europe. This support is a special venture from Ministry for Foreign Affairs and is financed with a separate budget called Swedpartnership. The objective of the loans under Swedpartnership is to motivate enterprises to start up sustainable businesses in challenging markets. The loan can be amortized once the project has been carried out and its results approved. The maximum loan is SEK 750,000 or 40 per cent of total estimated costs, at least one third of which must be for knowledge transfer. In terms of access to equity and notably private equity sources such as VC or Business Angels, there are no specific government sponsored programmes in place to promote access to support investing in internationalisation, or directly aimed at internationalisation of service businesses. Measures to Support Internationalisation of Services in Germany: The Government strategy report Exportability and Internationalisation of Services 18 focused on three key issues: barriers to expansion of services internationalisation; new management models to strengthen approach; new international networks of research; training etc. 15
More information can be found www.sek.se 16
www.ekn.se 17
www.swedfund.se 18
Bundesminsterium fur Bildung und Fosrschung, Marting Schmied DLR, Walter Ganz, Fraunhofer, 2006, provided by Dr Andreas Theilmeir At German Aerospace Center, under EPISIS 21 A number of different sectors were examined and projects established to examine specific challenges for internationalisation including Healthcare projects; Environmental services; Industrial services; knowledge intensive services. The aim was to look at the whole value chain; identified key areas for international development strategies and key target markets including new accession countries Various options for internationalisation models are explored and defining the specific requirements for successful adaptation and expansion into new markets including: • Outsourcing: which services are most suitable for being outsourced to external suppliers in key target companies ( especially focusing on East Europe) • Franchising: Innovative co‐ordinated international expansion models including franchising‐ branding; systematic selection of target countries and businesses • Modularisation of Services: breaking them down in standardised packages that can be transferred and how to adapt to specific locations • Integration models‐ identifying Subcontractors in key target markets Eureka Project SERVNET The Government is also supporting a project entitled "Services made in Germany" funded by the German Federal Ministry of Education and Research (BMBF) and supported by the project coordinator "Work organisation and services" at DLR and supported under the EU EUREKA programme . The project is looking at strategies and models for successful internationalisation of service businesses. (This project begun in 2009 has not yet reported its results). There is no evidence from the information so far under the Germany strategy that there is any specific focus on access to financing or external equity investment, as part of the policy and direct support for internationalisation of service businesses. The Globally Active Programme is the German Government’s Trade and Investment Promotion Programme for more growth and Employment19. The programme offers a wide range of services and assistance to access international markets. It is supported by the German Chambers of Commerce and a worldwide networks of correspondents. Globally Active also supports a Foreign trade Internet Portal IXPOS, providing information on foreign markets; market intelligence, opportunities and assistance. Finance for exports:  This is mainly supported by the Federal Export Guarantee scheme is operated by Hermes Cover  The KfW SME Enterprise Programme offers finance to support international preparations including market studies and visits. Denmark: Support for Internationalisation of Services Businesses Support for financing International growth in Denmark 19
Globally Active: The German Government’s Trade & Investment Programme , Budesministerium fur Wirtschaft und Arbeit. 22 Export Credit Agency EKF 20 The SME guarantee is aimed at small and medium‐sized enterprises. The guarantee puts the enterprises in a better position to offer a buyer abroad long‐term credit on a specific export order.The credit period must be at least 181 days. The SME guarantee gives the bank security if the payments from abroad are not made as agreed. EKF guarantees up to 100 per cent of the loss and the exporter's deductible is typically 10 per cent Working capital guarantee is a scheme for Danish export companies and their sub‐suppliers to allow EKF to guarantee their credit and loan with their bank. In providing this guarantee, EKF assumes a large share of the bank's risk on the extended credit, making it easier for your company to secure credit or a loan from the bank. The credit can be used to cover the company's general operating expenses or the company's expenses on filling specific export orders. EKF can also provide security for the frameworks for making guarantees for advance payments, tenders and work on filling a specific export order. In a three‐year deal struck last October between the Danish Government and the Pension Fund , PensionDanmark, agreed to provide DKK10bn in financing to support exports. Dansk Vækstkapital fund In 2011, pension fund pledges helped secure DKK5bn (€673m) of equity finance for SMEs. This offers loans for Internationalisation and subordinated debt, as well as risk cover.21 Internationalisation of Service SMEs: UK Approach The UK Plan for Growth22 has signalled the need to rebalance the economy, with a greater focus on exports, with a better balance between the different sectors of the economy, and with the aim that all regions of the UK can benefit from economic growth. The report was complemented by the publication of a new 5 Year strategy23 by UK Trade and Investment (UKTI), the organisation responsible for promoting UK exports and attracting foreign direct investment (FDI) into the UK. The strategy has been developed in the light of two important reports: an economic analysis of international trade and investment and the rationale for Government support24, and a study undertaken by PA Consulting on the prioritisation of sectors for the strategy. Two further papers have been produced by Dept of Business Innovation and Skills : one on UK trade performance25 and another on the internationalisation of innovative and high growth SMEs26. UKTI is the main agency supporting SME internationalisation and under its new strategy, SME support will be focussed on 20
www.ekf.dk www.vaekstfonden.dk 22
The Plan for Growth. March 2011. 23
Britain Open for Business 24
BIS Economics Paper No 13. International Trade and Investment – the Economic Rationale for Government Support. May 2011 25
BIS Economics Paper No 8. UK trade performance: patterns in UK and global trade growth, Nov 2010 26
BIS Economics Paper No 5. Internationalisation of Innovative and High Growth SMEs, March 2010 21
23 -
developing the potential of more companies to export, both “new to export” firms and helping those, which are exporting, to diversify to other markets; and -
accessing international markets, especially high growth and emerging markets. These services will be underpinned by an improved, interactive on‐line service with the aim of developing a community of exporters, able to pass on experience/tips, as well as access to direct personal contact with the network of International Trade Advisers located around the country. Other support for SMEs looking to expand into international markets include: ‐ A High Value Opportunities programme creating a pipeline of major projects and contracts, which will include supply chain opportunities for SMEs, underpinned by an online service giving access to sales leads around the world. ‐ A programme of specialist support for SMEs in innovative and technology rich sectors, underpinned by a high impact Tradeshow Access Programme, alongside the active promotion of green exports. ‐ A new business service for SMEs in the defence and security sectors, including an interactive web presence targeting export advice, information and support to companies at key stages of their development. ‐ Programmes of high impact UK regional events to raise awareness about high growth and emerging markets, targeted at companies not yet doing business in those markets. ‐ An enhanced Overseas Market Introduction Service (OMIS), which offers companies of all sizes a tailored and chargeable package of expert help through our global trade teams, including market entry strategies, access to local business networks, and wider political and economic advice. ‐ An online Business Opportunities Service providing several hundred global sales leads every month − companies can sign up to receive online alert messages about particular markets or sectors. (Visit: www.ukti.gov.uk) ‐ An online Overseas Security Information for Business (OSIB) service, run jointly by UKTI and the FCO, giving access to up‐to‐date information and advice about political, economic and business security issues in overseas markets. (Visit: www.ukti.gov.uk) ‐ Business mentoring for companies taking their first steps into new markets through a global network of experts called Catalyst UK. ‐ A new prize for first time SME exporters, to complement the Queen’s Award for Enterprise (International Trade), to be judged by a panel of “dragons”, aimed at rewarding excellence and inspiring other companies to export for growth. Based on UKTI’s Plan for Growth, a cross‐cutting sectoral approach will be taken to build value chains of business offering across complementary sub‐sectors many of which will include services to strengthen internal market opportunities. Key priorities will include Creative industries Education, Skills and Training; Financial Services; Professional and Business Services ; Retail. 24 In terms of target countries whilst there will be a strong focus on global markets and key emerging market targets, Europe remains a key target and UK Government will retain its focus on strengthening these opportunities. On an EU level, the UK Government will be working with the European Commission and Member states to ensure that the European Directive for Single Market for Services is enacted to support these measures. New UK Strategy to directly support increased access to finance to support internationalisation. The UKTI support strategy will be complemented by access to finance through the availability of Export Credit Guarantees which will be enhanced to provide increased support for all exporters, especially SMEs, through an expanded range of products aimed at widening access to meet the need for both capital and credit insurance to make the most of international trade opportunities. In addition, the UK Government has put in place in 2011, a new explicit strategy focusing on increasing access to overseas venture capital for UK SMEs, both to support direct access to international markets and to strengthen the opportunity for financing growth of UK based businesses. UKTI in its strategy, ”Britain Open for Business” has identified that accessing venture capital remains a key challenge facing innovative and high growth SMEs. Venture capital providers overseas have the potential to plug the gap in the UK market. UKTI will both facilitate introductions – thereby cutting costs for SMEs − and work to a ract this investment to the UK. It will develop strategic relationships with venture capital decision makers across the world and make intensive use of their networks to stimulate interest. It will also work to strengthen the links between overseas technology clusters such as Silicon Valley, where there are concentrations of venture capital operations, and UK technology hotspots such as Cambridge and Tech City in the East End of London (many of which have SMEs operating service‐ based business models). Alongside this, UKTI will work with partners, such as the Technology Strategy Board, the UK Government’s Agency supporting Innovation and Technology, to identify and support SMEs best placed to pitch to overseas investors at events both in the UK and overseas. This new package will aim to attract significant new investment for high growth and innovative SMEs, and bring new venture capital operations to the UK. The package of support and new Unit were launched in the autumn of 2011. There is now a team in place with a CEO and the strategy is being developed as the basis for a programme of actions to be fully launched during 2012. Comparison of Support models of the EPISIS Partners Thus in terms of current provision by the EPISIS partners in relation to access to relevant sources and notably equity , it may be observed that whilst all of the partner countries have general 25 export finance services offering loans and guarantees to reduce risk in dealing with foreign buyers and suppliers, only the UK and Finland have an explicit strategy and action programme to support access to domestic and international equity to support international growth. The Swedish Fund, whilst offering equity instruments, is not targeted at supporting access to EU markets. A comparison between these approaches is made below. Overview of international support services related to access to finance Country Access to Export Finance Support with Access to equity finance to support internationalisation Finland Finpro‐ Min of Trade Finance & guarantee TEKES Young Innovating Schemes Enterprises‐ direct support to access seed, angel and VC funds both in Finland and support to access cross border funding ; Vigo Accelerator model, offering hands on support and direct support to links funding to international growth Sweden SEK Swedish Export Credit Corporation‐ state owned bank offering loans and structured finance instruments; EDK Export Credit Guarantee Fund , offering loans and credit guarantees; Swedfund‐ State‐backed venture fund, especially to support entry into non EU and emerging markets, some equity and also co‐invests with other equity providers, but mainly loans to SMEs. Germany Federal Export Guarantee scheme operated High‐Tech Gruenderfonds by Hermes Cover invests in young, high potential high‐tech start‐ups. The seed financing can be sued to support international market launch No information on specific Internationalisation schemes to support access to equity Denmark Export Credit Agency EKF‐ SME guarantee No details of equity‐backed fund and working capital guarantee. Dansk schemes to support Vækstkapital fund offers loans for internationalisation Internationalisation and subordinated debt, 26 UK as well as risk cover‐ UK Export Finance‐ Government backed scheme‐ offering a range of products including Guarantees: Buyer and supplier credit; Loans for major projects; bond support ; Export Working Capital scheme New UK VC Strategy and new Specialist VC Unit under UKTI, with a view to proactively seeking VC finance and notably cross‐border finance to support UK SMEs to grow and internationalise. 27 3. Barriers and Benefits to Accessing Investment for internationalisation for High Growth Services Businesses It is useful to consider the different approaches that Service SMEs may take to access international market growth as well as the risks and challenges that service companies are likely to identify when seeking to internationalise and what role accessing investment can play in addressing these barriers and supporting growth. Approaches to Internationalisation Companies take a number of different approaches to internationalisation, which require different models for external investment and is much wider than exporting ie sales., with a range of models across the value chain. Evidence from the UK report on “Born Global Companies” 27 particularly emphasises the difference between “Incremental Internationalisation” which supports the view that businesses first needed to succeed in their domestic market and build their market and customer base before international expansion, based on the Uppsala model28 compared with the rise of evidence about benefits of “Born Global”29. Contrary to the model of slow stepwise internationalisation, Born Globals exhibit rapid internationalization which is likely to derive from intangible, knowledge based competitive advantage over other firms . For services businesses this could be for example a patented or proprietary process, or disruptive business model. A further driver is to maximise the benefits of a first‐mover advantage. This ‘Focus and Grow’ strategy is particularly important where a service is niche and has a limited global market. The need to achieve rapid sales internationally can also drive a decision to export via agents or distributors in some overseas markets. “ Virtual Entry” into global markets without the need for resources to be expended overseas using the internet also aids service firms in gaining new markets and clients, agents etc, they can also play in a role in knowledge generation and learning, enabling a direct link with clients can reduce transaction costs and useful when designing products specifically for certain customers. Finally, “Buy and Build” was found by Prof Markku Maula to be a common characteristic of successful International service growth by acquiring relevant small players in more fragmented target markets to provide a coherent overall platform30. The German report by Schmeid on Exportability and Internationalisation for Services,31 2006 also outlined a number of strategies that could be used by services businesses which were being tested out these included:  Outsourcing: this requires identifying which services are most suitable for being outsourced to external suppliers or subcontractors in key target companies 27
“Born Global Companies” building on the FAME dataset and Community Innovation Survey, Prof Richard Harris and Q Cher Li, report to UKTI 2007 28
Uppsala model of experiential learning for internationalization ,Johanson and Vahle, 1977 29
“Born Global Firms” GA Knight, Mitchigan University , USA, 1977 30
Attracting venture capital in service businesses, Prof M .Maula , Feb 2010 31
“Exportability and Internationalisation for Services”, Schmeid 2006 28  Franchising: Innovative co‐ordinated international expansion models including also branding; using systematic selection of target countries and businesses  Modularisation of Services: breaking them down in standardised packages that can be transferred and how to adapt to specific locations  Integration models‐ identifying Subcontractors in key target markets The UK Position paper32 also identifies a range of different models by which services can be exported: Cross Border Supply: where services are supplied by means of telecommunication or by sending documents and data electronically; Consumption Abroad: mainly tourism but also language trips or studies abroad; Commercial Presence: where foreign affiliates provide services locally; and Movement of Persons: where the service is delivered by a temporary resident. Based on the above models , the main options for services businesses to expand internationally are likely to be: .  Cross‐Border Remote Sales and Supply‐ Direct sales of Services supplied through e‐
commerce and m‐commerce, with minimal presence in target markets  Outsourcing and Subcontracting ‐ to local distributors or agents, as part of an integrated supply chain  Commercial Presence – designated affiliates in the target countries providing services locally or through development of overseas sites  Franchising‐ Standardisation of brand , using systematic selection of target countries and businesses  Establish wholly owned subsidiaries in key target countries for supply or distribution  Buy and Build ‐ acquire other relevant service businesses in target markets  Consumption Abroad through tourism and educational programmes Barriers to Internationalisation and how these can be addressed through external investment Based on these approaches to internationalization and models identified likely to be appropriate for services businesses, there remain a number of identified risks which frequently hold businesses back from achieving growth through internationalization. These include: Resource Barriers; Technical Barriers and Cultural Barriers. 32
Overview of UK Position on Internationalisation of Service, Allan Mayo, BIS 2011 29 Supporting Access to External Investment may be seen as a key means to address many of these barriers. This not only addresses the financial barriers to growth, equity investors can also support businesses through a range of ways to reduce the risks of internationalization. This can be achieved both through the support of access to domestic sources of investment and through accessing investment in the target countries. See table below: RoleofExternalInvestorsinaddressingKeyBarrierstoInternationalisation
Barrier Role of External Investment Resourcebarriers:
Lackofworkingcapital,as
wellasalackof
developmentcapital,
marketingcostsassociated
withdoingbusinessin
overseasmarkets.Barriers
alsorelatetofindingthe
confidence,management
timeandotherresourcesto
investigateandpursue
overseasopportunities;
includingunderstandingof
thecompetitive
environment.
AccesstoCross‐BorderAngelnetworksandVCs
whilstofferingrelevantdirectfinanceresources,
alsoofferakeymeanstoaddressinformation
asymmetriesandresourcebarriers.VCsoffer
directsupporttotheirinvesteebusinessesto
enablebusinessestostrategisefortheir
internationalgrowth.Investorsareabletobring
internationalmarketexperiencethroughtheir
team,internationalVCandmarketcontactsand
investmentportfolio,includingmarketintelligenc
andaccesstoresearch,M&Aactivity,information
oncompetitorsetc.toidentifytargetmarketand
approach.Theycanalsosupportidentificationof
potentialinvestorsinthetargetcountrieswith
whomtheycouldco‐investtosupportinvestment
andmarketaccess.
Access to cross‐border Investors in the countries concerned will also bring direct support and soft‐landing, including direct links into key customers and markets Experienced VCs can support scalability through mergers and acquisitions of other complementary businesses in the target markets. Alternatively the VC can invest in other relevant international businesses to build a platform for expansion. Technicalandprocedural Angel and VC investors in the target markets can support barriers:
soft landing and enable access to relevant local technical and procedural advice. Investors will have a vested Dealingwithlegal,financial interest to ensure that standards and technical aspects are andtaxregulationsand
compliant and transferable to ensure the competitive standards,andregulations
advantage of their investment is maintained in the inotherEUandnon‐EU
marketplace. This will often be part of the original due 30 countries.Theseregulations diligence process. includeproductstandards, complianceprocedures,
patentandtrademark
issues.
Cultural Barriers Lack of awareness and knowledge of networks in an overseas market and developing business relationships, also language, general cultural differences, navigating unfamiliar business environments, gaining access to networks and contacts, including identifying potentially useful contacts and establishing a dialogue once they have identified the right people.. Angel Networks can play a key role as highly connected Networks in supporting access to international market links and contacts in target countries. For VCs , they will draw on their ongoing cross‐border linkages to support direct market access, as well as direct professional linkages. Access through local investor networks will enable direct integration into the business environment, overcoming local cultural and information barriers, enabling personalized market and customer introductions personal contacts and relationship building. 31 Benefits of attracting Equity Investment to support International growth As stated above, Angels and VC investors can play a key role in addressing the key barriers that service businesses are likely to experience in entering international markets. Research has also confirmed the potential for superior growth performance of companies that access external investment. The EU paper on Challenges for EU support to Innovation in Services 33especially noted the importance of Globalisation of gazelles that it is vital to combine both innovation support with internationalization and notably to exploit the potential of access to finance to support early globalization Impact of access to VC investment on overall growth The VICO research project on the Role of VC in financing entrepreneurial ventures in Europe, funded under the 7th Framework Programme 34, studied the impact of Venture Capital on innovation; employment creation; growth; competitiveness and role of VCs in bridging the experience and competence gap in high growth entrepreneurial firms in UK, Finland, Germany, Italy, France, Spain and Belgium, including over 8,000 firms identified. Drawing on the results of this report , VC backed businesses can be seen to achieve much higher growth, rather than non VC‐backed . A further key finding is that In the financial crisis the VC backed firms outperformed the non‐VC backed firms significantly in terms of sales and employment. The availability of VC also has an impact on the growth ambitions of entrepreneurs: where there is plenty of VC available in a country, there is evidence in the VICO study of a higher level of nascent high growth innovating businesses than in countries where there is little VC funding available. Where there is little VC available it is likely that entrepreneurs do not think about accessing VC to support their growth and are less aware of its benefits or how to attract it (with no peer to peer experience or local case studies of success) so therefore do not actively look for it outside their own country. Where there is a good level of VC available, entrepreneurs more aware of benefits and actively look for VC, including international VC investment Impact of accessing Cross Border Equity investment Whilst considerable benefits may be identified in accessing external investment, the VICO project also identified that the strongest impact was on a combination of domestic and cross border VC. If businesses only have domestic investment , it is slower to internationalise. The project also noted that if the business only had publicly funded VC, there was generally a counterveiling pressure to maintain the focus of growth on the local economy. Nevertheless, it was noted that if businesses only have cross‐border they are also slower to grow (due to distance and lack of close strategic support and advice relevant to the business needs), although in later years exhibited faster growth. Companies backed by a syndicate of domestic and 33
Challenges for EU Support to Innovation in Services Pro Inno Europe Commission Staff Working Paper 2009 34
“Venture Capital Policy lessons from the VICO Project” , Sept 30, 2011. Led by Prof Massimo G Colombo, Polectinico di Milano with 8 other partners including, Research Institute for the Finnish Economy; Zentrum fur Europaische Wirtschaftforschung GmbH; Unversity College, London 32 cross‐border investors experienced more vibrant growth than other VC backed businesses both in the short and long term. Also companies initially backed by domestic VC firms which later added an international investor performed equally well as those having international investment firms on board from the outset. Notably, portfolio companies which have a mixed investor base (domestic AND cross‐border investors) have been found to continuously outperform portfolio companies that are only financed by domestic investor or only by non‐domestic investors making a cross‐border investment. Thus it may be seen that a good model for international growth of Services businesses would be based on combining domestic investors offering good local strategic support with cross‐border sources, providing access to international markets, networks and skills. 33 4. Demand and Supply Challenges in Accessing Equity to support International growth Demand Side Issues: Investment readiness and Investor Attractiveness Whilst as may be seen there are many advantages in accessing equity finance to support internationalization, early stage Service Businesses may be seen to have specific challenges in attracting VC to support international growth. Many of these may be regarded as systemic issues which are seen as affecting the environment for investing in service businesses. These were especially identified in the EC Pro Inno Report on Support to Innovation in Services35 including:  Capability failure in the management team –‐ there is frequently a lack of overall understanding of the core requirements of investment readiness among management teams of high growth potential service businesses leading and notably a general lack of understanding of investors core requirements and how to make a service business attractive to investors in competition with technology focused businesses  Lack of International skills and experience: ‐ there is often a failure to bring international business experience into the management team in the early stage of growth. This results in failure to create an effective strategy to access cross‐border investment , or to directly seek out and pitch to international investors. Understanding how to interact with investors outside the domestic market and identify and understand their requirements is vital to successfully attract cross‐border investment.  Network failure: lack of access to the networks of investors across the EU or access to the intermediaries and gatekeepers as channels to the investment community, whilst this is also generally not a very visible community with its own rules of engagement. This results in failure to identify suitable investments sources, or have early contacts and discussions to position the business to access investment.,  Lack of a European Common Market for Services – the existence of national markets and national technical requirements and standards restricts market access, prevents opportunity to exploit economies of scale and to exploit the knowledge and skills and customers in other markets‐ this is likely to result in a failure to achieve sufficient scalability to attract investors Further challenges include:  IP Protection‐ In most cases the IP is based on intangible assets, created through the knowledge and expertise of the management and thus very difficult to value by investors. 35
Challenges for EU Support to Innovation in Services Pro Inno Europe Commission Staff Working Paper 2009 34 Services businesses have strong challenges in establishing a defensible competitive position‐ there is a strong risk of leakage of IP since service innovation is generally based on the business model and is very difficult to protect and thus less attractive to investors and difficult to value.  Services are “Credence Goods” – it is often not possible to evaluate the quality of the services before they have been purchased and consumed. Building up reputation and brand recognition and brand awareness is much harder than product oriented businesses. This can be a key deterrent to investors ho generally require good evidence of customer validation in order to commit investment Many services businesses also fail to use trademarks to protect brands as a key way to support customer recognition and as differentiating factor for investors.  International scalability: potential difficulties in convincing investors of international scalability of services (Taivonven examined the internationalisation of KIS businesses and concluded that services needed to be productised early to convince VC investors36)  Valuation and Returns: The Lack of market intelligence, case studies of successful investments, returns as well as exit comparables among service businesses makes it difficult to convince both domestic but also international investors of current market value as well as investment potential and returns. Development of Investment Readiness Programmes for Services Businesses: It may be seen that in order to enable Service Businesses to benefit from accessing external finance to support international growth it will be essential to ensure that national or regional programmes designed to support international market access also include actions to support investment readiness and pitching to investors , addressing these challenges and investor perceptions. Thus in addition to providing support for an international growth strategy, reflected in their business plan, services businesses should also be assisted in developing a clear international investment strategy . This should include their plan for accessing and using investment, both national and/or cross‐border sources to support their international growth; the role that they expect investors to play in supporting new market access; and the benefits and returns to investors in terms of international growth, including an internationally focused exit strategy. Supply Side Challenges: Current levels of equity investing in Services businesses: 36
Toivonen.m et al, Tekes, Helskini, 2009 35 Level of VC Investing in Services: There is a lack of concrete evidence of investing in Services businesses, outside the key baseline statistics gathered for financial and business services. Markku Maula37 in his review of statistics of service investing was only able to look at these key sectors . On this basis, he noted that UK was highest with 11% of total VC deals in these main services sectors, with both Finland and Sweden at 9% each and this compares with 11% VC investing in main services sectors out of total VC investing across over the whole of Europe; Germany has 13% of whole market38 but level of investing in services was not reviewed. However, Maula noted that any statistics identifying service companies as a category of investment necessarily show only the tip of the iceberg since many businesses are product‐service hybrids‐ especially software . Whilst many product companies transform to service companies as a business model as they further mature (see also case studies below) . In Finland, 41% of revenue for software businesses comes from service, also new business models such as Software as a Service. We know that services are cross‐cutting many of the main sectors eg telecoms and mobile; Creative industries; ; environment and cleantech; healthcare; leisure and tourism; retail and distribution. With on line services and e‐business as well as m‐commerce, many areas of business are using a service model to grow their business Whilst it is impossible to verify this, if we review recent statistics for investing by VCs looking at EVCA for EC overall and BVCA for UK, we can see that whilst there is a high level of investment in key financial and business and consumer services, within all of the main categories there are also services. It may therefore be concluded that potentially between 20‐40% of investments are in service businesses, if we include the hybrid‐technology‐service business models : Level of Angel Investing in Services If we also review statistics for Angel investing currently there are an estimated 334 Angel networks:€3‐5bn:EBAN). This should be compared with the level of early stage VC investing which is €4bn with very little start‐up and seed investing . Among the EPISIS partners, the Angel market is varied in its level of development. The UK has a longstanding angel market and represents an estimated €1bn annually (based on Enterprise Investment Scheme statistics). Angel investment is very active and growing in Finland and it is growing in Sweden, but in Denmark is much less developed . In Germany whilst Angel investing has been in operation for many years, it is not as developed as may be expected ,but there is evidence of new Super angel and entrepreneurial investor groups emerging especially around the Berlin digital and technology clusters .39 37
Attracting Venture Capital in Services businesses , Prof Markku Maula, report for TEKES, Feb 2010 Reinhilde Veuglers Mind Europe’s equity gap, Bruegler Policy Paper Dec 2011 39
EBAN Annual review of Angel Investing across Europe 2010 38
36 In relation to investment by sectors, EBAN statistics are not collected for services . In the UK, the British Business Angels Association review of sectors, does not distinguish service investing except for Business services ( 12% of total) with greatest level of investing in Software/IT/Internet/telecoms (25%); Medical/healthcare (19%);Creative industries (7%); Retail and tourism/hospitality 4%).Whilst Statistics are not gathered on Services investments specifically, we may assume that many of these investments are services . Corporate investing: Mergers and Acquisitions “Big fish eat the little fish” It is extremely difficult to identify the level of corporate investment and corporate M&A acquisition of Service businesses. However, it is clear that many major corporations that have built up their assets over the past two years in the wake of the financial crisis and have been on the hunt during 2011 for suitable innovating business which include service businesses. This pattern was apparent recently when Microsoft bought the Internet telephone service Skype for $8.5 billion (6 billion euros). And Hewlett Packard bought Autonomy for $4bn. Such massive business transactions are still unthinkable by European corporates because the equity financing market is that much younger than in the US, however this offers a key means for service businesses to access major international markets. However key M&A acquisitions of service based businesses in Europe, included in the past year a considerable number that are using e‐commerce as their main platform: Amazon acquired Love Film ($318m); eBay acquired Brands Friends ($200m); Photobox acquired Moonpig (195m); Google acquired daily Deals ( Undisclosed)40 Examples of cross‐border investing supporting international growth Despite the challenges, there are a number of investors across Europe who are actively focusing on supporting the internationalisation of their portfolio businesses and are actively syndicating with other investors across Europe to support further international market expansion. This also reveals that there are some very active early stage VCs from many of the EPISIS countries and Angels seeking to invest cross‐border with strong combinations of cross‐border investment teams across both VC and angels, frequently co‐investing and with very clear outcomes for entry into a range of markets. Set out below are examples of VCs which have been syndicating cross‐border to do deals in relevant businesses including services : 40
GP BullHound Annual activity Review, presentation by Hugh Campbell, at BBAA Winter Workshop January 2012 37 Seedcamp: This is a group of over 50 VC investors which convened first in 2009, consisting of some of the leading early stage and Seed investors in Europe, including from all of the EPISIS Partner countries who are all collaborating and sharing deals. They have also created a common term sheet as a means to reduce the complexity for early stage businesses in structuring a deal with VCs in different countries. These investors and deals stretch across the UK, Germany, France, Israel, Ireland and Scandinavia, amongst many others. Estag Capital estag | Capital AG is a private investment company based in Berlin. It invests venture capital in young, up‐and‐coming companies and concepts, in particular in the areas of renewable energy / cleantech, Web 2.0 and gaming. With the aid of seed or early‐phase financing and a network of experts, young entrepreneurs or start‐ups are supported from their foundation onwards in the implementation of their promising business models. estag | Capital AG is a capital provider, financing partner and adviser in all forms of entrepreneurial activity. Northzone Ventures Northzone is a European Venture Capital Partnership with a Nordic stronghold. With nine dedicated professionals in Offices in Oslo, Stockholm and Copenhagen ‐ most of whom are themselves former successful, entrepreneurs. Northzone is one of Europe’s leading venture funds and was first investor in companies such as Spotify, Lastminute.com and Stepstone. Profounders Capital, based in London, Profounders regarded as one of the Super Angel Groups. A venture capital fund for entrepreneurs powered by entrepreneurs, featuring some of the best‐
known players within the digital media space, led by the entrepreneurial investor Brent Hoberman (Last Minute .com). One of its investments is City Socialising which is an online network for Professional women, offering a range of professional services. It was initially funded by a transnational syndicate of angels investing under the EASY project, with a lead investor from 38 London Business Angels in investors from Sweden, Netherlands, Finland . It subsequently has taken on further £1m investment from ProFounders capital. Notion Capital is a UK Venture Fund and advisory business that focuses on early to mid‐stage growth businesses in the Internet based services sector. They create value by helping companies to accelerate their growth through financial injection combined and are part of the Seedcamp cross‐border grouping Passion Capital is a Super Angel partnership of entrepreneurs and operators who are applying our experiences to helping founders and early‐stage teams build great digital media/technology companies led by top entrepreneurs Stefan Glaenzer (Last fm), Eileen Burbidge ( Beebo) and Robert Dighero. Index Seed is an offshoot of Index Ventures, a European based venture fund that has also invested heavily in U.S. startups. The seed fund focuses on early stage deals. Partners Neil Rimer, Danny Rimer, Saul Klein and Mike Volpi manage Index Seed. Earlybird Venture Capitalnvests in innovative, fast growing companies with outstanding management teams and high growth potential on international markets. Earlybird’s portfolio currently includes 28 companies in seven countries (Austria, Germany, Italy, Netherlands, Switzerland, UK and USA). Since its inception, Earlybird has invested in over 70 companies. Besides several successful trade sales Earlybird has led six companies to an IPO at four different European exchanges Grazia Equity, Based in Stuttgart and Munich, is one of Europe’s top names in venture capital. Grazia specializes in start‐up or early‐stage financing for innovative companies with market‐
changing potential and opportunities for superior returns. Unlike traditional venture capital companies, Grazia works exclusively with private‐sector capital, with no institutional funding involved.The goal of helping to finance fledgling companies in Germany was one of Grazia’s original engines. The Grazia team has helped to build over 40 European and American businesses. 39 Creandum ‐ €120 million under management. Creandum is an early stage Nordic venture capital firm based in Stockholm Sweden, investing in Nordic companies and teams in the technology sectors. Creandum invest in the early stages of a company's life cycle, often defined as seed and start‐up phases. The initial investments can be as small as a couple of hundred thousand Euros and can go up to 10 million Euros over the life cycle of a company. Creandum divides its investments in five main categories each representing one level in the value chain of the high technology business: materials, components, systems, software, and services. Creandum is among other major international investors supported by the European Communities Growth and Employment Initiative, MAP ‐ ETF Start‐up Facility, and has as one of its corner investors the 6th Swedish National Pension Fund.creandum.com Norventum Capital, Norventum Capital focuses on seed and early stage technology start‐ups with significant growth and value creation potential. The sector and the geography are much less important to Norventum Capital than the idea, the market, and the team. It only invests in companies that focus on markets that are, or will be, experiencing high growth. The geographic focus is primarily the Nordic region. Vækstfonden, Denmark, Business Development Finance (Vækstfonden) supports Danish companies by helping to finance R&D, internationalisation and skills development projects. This support is organised through an institution operating under the legal form of a private venture capital company. With a capital base of more than 300 million EURO Vækstfonden is one of the largest Danish VC players. provides funding to fast‐growing Danish companies and act as a fund‐of‐
funds investor (provides co‐funding for banks/ venture funds) in the private equity sector in the Nordic region. The foundation invests in early stage ventures mainly focusing on Life Science/Med Tech and High Tech, and provide mezzanine financing. It is part of the strategic objectives to work actively to facilitate access to international venture capital and drive the development of an internationally competitive private equity environment in Denmark. 40 DTU Symbion Innovation, The geographic focus is Copenhagen and the Danish capital region. DTU Symbion Innovation invests in ambitious and visionary start‐up companies who produce innovative, high‐technological, research or knowledge intensive ideas that are abreast of the technological and marketing development. They emphasize that the products target a growing international market, and a company to become needs to show the ability or interest in establishing a qualified and proactive management. In return, DTU Symbion Innovation offer to invest up to DKK 4 million in a company. The capital will typically be contributed as share capital Angels Investing Cross‐border There are also a growing number of European Business Angels, who have lived and worked in other countries who make regular investments cross‐border. For example, Marco Villa, serial angel investor and Founder of a network investing across border called Italian Angels for Growth, Marco presented his experiences at the recent EPISIS Task Force 5 Internationalisation workshop on 16th November 2011, described his own approach to angel investing: “As an angel investor, whilst many of us are committed to helping the local economy of our communities, in reality we want our money to go where there are the best companies. This is the most important message that must be given to both entrepreneurs, those who are working with entrepreneurs and those seeking to increase cross‐border investing.” On‐line approaches: The use of the internet, Skype , U‐Tube and social networking has dramatically changed Business Angels approach to investing, enabling business angels to access cross‐border deal flow, see remote pitches, share due diligence data and also to monitor deals remotely. This can be very effective to stimulate cross‐border investing .There remains a question about online deal brokering in terms of its legitimacy for deal promotion under MiFId rules41 . Whilst showcasing, 41
MiFid Markets in Financial Instruments Directive‐ current review October 2011 41 leading to more face to face methods of finalising the deal and then offering remote monitoring and contacts is also acceptable. Cross‐border Angel Syndication An important approach to stimulate and support effective internationalisation is through angels investing in syndicate on a cross‐border basis. The EASY project was an example of this, operated under Pro Inno actions it focused on building communities among the investors to break down barriers between investors and support cross–border investment and achieved considerable success in investment in SMEs across borders . A programme of cross‐border events across Europe built trust and understanding among angel investors to underpin the process of investment. The EC backed EASY Project42 which involved angel networks from 11 countries across Europe, piloted cross‐border pitching events of selected European businesses in key locations across Europe attended by angel investors from over 20 countries. A deal sharing platform was also developed to support ongoing due diligence and deal structuring This resulted in 11 cross‐border deals being done, (50% of which were service‐based or hybrid‐
service based businesses) all in syndication with angels from a number of countries. A key finding of the success of these deals was based on the concept of a trusted lead angel based in the country where the business was based to provide monitoring support of the deal; a further key finding was that the angels identified the opportunity to enable the companies to access their own domestic markets and actively encouraged them to set up branches or outlets in their own countries where they were able to offer soft landing , customer access and ongoing monitoring support. The EASY Project recommended ongoing stimulation of cross‐border syndicated investing through an Angel co‐investment fund43. Cross‐Border Angel Syndicate: True Global Ventures 42
43
EASY Cross‐border investing in SMEs, DG Enterprise, led by GLE,UK and 17 other partners 2006‐8 Evaluation Report of the EASY Fund, submitted to DG Enterprise ,March 2009 42 True Global Ventures is a new early stage fund developed by a group of technology entrepreneurs turned angel investors with angel investors from Sweden, Germany, France, US and China and draws on the personal networks of the entrepreneurs. It was founded by Dusan Stojanovic, a serial angel investor from Croatia and Sweden and who was an active participant in the EASY Cross Border Programme and also in MOBIP. True Global Ventures invests between 100k and 400k euros and has a strong focus on supporting internationalization. They were investors in Brainglass as detailed above. 43 5. Challenges for the Supply of Equity Investment In Europe Whilst there are strong benefits of investment to support internationalization, there are significant challenges in the supply of equity investment within Europe and notably there remains a very strong equity gap for early stage businesses, This will inevitably have an impact on the capacity of high growth services businesses to access the finance they need. . There are now few VC funds willing to consider investing below €1.5m‐ 2m in their first round of investment in seed, start‐up or early stage. Fund managers experience difficulties in assessing the quality of SME proposals and associated likely returns leading to transaction costs which do not vary for the size of investment, such as due diligence costs. The result is a structural gap in the market where investors and risk capital fund managers focus on fewer, larger investments in more established (lower risk) businesses, leaving viable businesses with growth potential not being able to obtain equity finance. The EC Expert group on Cross‐Border Matching of Innovative Firms with Suitable Investors, led by Anthony Clarke,44 has reported that over time, funds have been starved of new finances by disillusioned investors (particularly institutional investors). The near term climate for new supplies of VC money investing into Europe’s seed/start up/early stage SMEs was seen as bleak as many existing funds remain focused on supporting their portfolio companies in the current economic climate with few meaningful exits being announced. Furthermore, the fragmentation of the market which leads to a less competitive environment also deters investors from this end of the market as it tends to negatively influence returns. This position was also emphasized by Richard Anton, Chair of the British Private Equity and Venture Capital Association BVCA, at the recent workshop “Crossing the Divide”, held on 16th November 2011, as part of this EPISIS TF5 study45. The Equity Gap: It was also noted by the EC Expert group that the equity gap changes by region and sector. However across Europe, seed, start‐up and early stage businesses are the most affected by this lack of VC funding, with VC investments having shifted to the later stages of financing company development. At the same time the reliance on the public sector for VC funding to fill this gap has increased and the European Investment Fund is now the largest VC investor in Europe (European VC market depends on the EIF; EIF is, for example, backing 70% of the VC market in the UK). In relation to the EPISIS Partners’ own challenges on the supply side, the stage at which the equity gap is felt can be seen to vary. Whilst there is strong evidence of an early stage equity gap in UK 44
EC Expert Group on “Cross‐Border matching of innovative firm with Suitable Investors” , chaired by Anthony Clarke, Director, Angel Capital Group, 2011‐2012 , Minutes of the meeting 24th January 2012. 45
“Crossing the Divide”, Investing in Internationalisation of high growth service businesses, held on 16th November 2011, TechWorld, UK 44 and Germany, Sweden and Finland and Germany do have an active seed stage VC market, with large national government backed fund of Funds to support this.46 The Need to build critical scale and expertise for an effective supply of VC finance The need to have a sufficiently developed “thick “ venture capital markets to build the critical scale and expertise needed to overcome these challenges and avoid an early stage equity gap was identified by Prof Gordon Murray in his report “From Funding Gaps to thin Markets”47. Actions are being taken to address this situation and cerate a viable VC market by key players in the market place, notably the European Venture Capital Association EVCA which made a submission on behalf its members in November 2012 48 for a new Fund of Funds to address the very low level of VC available across Europe currently only £5bn in early stage in 2010 with a significant fall in institutional investing in VC from 35% in 2007 to only 5% in 2011. The current situation is seen as unsustainable by EVCA in view of the economic crisis. EVCA identifiesthat it is essential that EIF and public funds are used to create longterm sustainable VC not as a substitute for VC. A pan European Fund of Funds was seen as vital to stimulate demand and attract investors, as well as attracting new institutional investors into the market place to co‐invest. The challenges facing the supply of Venture capital in Europe were further emphasized by the announcement of EVFIN in December 201149 with nine signatory institutions, who are studying the feasibility of setting up by 2013, an EU Venture Capital Fund of Funds designed to pool their respective capital and expertise with an aspiration of € 250 million supporting primarily venture funds having a cross‐border investment strategy . The Challenge for supply of Cross‐Border VC Investment The European Commission’s recent report DG Internal Policies, Potential of Venture Capital in the European Union50, noted that each Member State is operating a different operating environment for VC in the EU, with frequently double taxation and high transaction costs to invest cross‐border or to syndicate. The recent Introduction of the “Passport for VC Managers” was intended to address this to reduce cross‐border complexity. The study also identified that the there was very patchy demand side quality and too few schemes to address this. The VICO research project 51, also identified that a key reason for the lack of cross‐border investing or cross‐border syndication with other funds is that many domestic VC funds, lack VC 46
Reinhilde Veuglers, Mind the Europe’ss Early stage equity gap, Bruegal Policy Paper December 2011 Gordon Murray & Marriott 1998; also then taken up by NESTA : “From Funding Gaps to thin Markets”, 2009 48
Using Public sector Capital to attract Private sector Venture capital Investors, EVCA submission the European Commission, Nov 3rd 2011 49
EVFIN announcement December 2011 entitled “European Long‐term Financial Institutions Launch a Strategic Partnership on Venture Capital Funding” The EVFIN partners include: Capital for Enterprise Ltd, UK; Caisse de Depots, France; 50
FG Internal Policiies, Economic and Scientific Policy, Industry research and Energy, Potential of Venture Capital in the European Union, 2012 51
“Venture Capital Policy lessons from the VICO Project” , Sept 30, 2011. Led by Prof Massimo G Colombo, Polectinico di Milano with 8 other partners including, Research Institute for the Finnish Economy; Zentrum fur Europaische Wirtschaftforschung GmbH; Unversity College, London 47
45 managers with international experience – those VCs that had most successfully invested cross‐
border had internationally experienced managers or who had worked in other countries. It was therefore recommended that actions should be taken to increasing international experience in VC firms, and to recruit VC teams with international skills as a means of encouraging cross‐border syndication between VC firms. As noted above in the market statistics, angel investing in Europe accounts for about three times the amount of VC investing in early stage businesses. However the Angel market in Europe remains very fragmented and patchy with some countries have a very developed market and others having a much less developed market. In the countries covered by the EPISIS partners, the UK has the most developed market with over 15,000 investors, offering around 1bn€ pa. This market has been considerably stimulated by the availability of significant tax breaks and with the launch of the new £50m co‐investment fund to support syndicate investing. However, Sweden and Finland have quite strong Angel markets with a growing number of angel networks and groups emerging. Finland has provided considerable support to grow its angel community and has set up FINBAN as a new national federation. Sweden’s angel market is supported under the Swedish Venture Capital Association but Denmark remains relatively under developed in relation to Angel investing in any visible way, although there are a number of entrepreneurial groupings of angels now emerging and investing both locally and cross‐border. Germany considering its size does not currently have a strong angel market. However, Germany is being supported under a new scheme being, piloted by the EIF to co‐invest alongside designated Business Angels in Germany (see below). Angel investing is also largely invisible with only statistics on investing available from those investing in networks and groups part of national federations or registered with EBAN. However there is a strong imperative across the EC and specifically in the Partner countries to grow the angel market to support early growth of service businesses. Awareness raising among targeted communities of High net Worth individuals is vital to enable them to identify the benefits of investing in early stage high growth potential service businesses through marketing campaigns and capacity building events Angel market Incentives: Action can also been taken to stimulate the supply of angel investing Tax Breaks: The UK has made specific efforts to stimulate the Angel market place through the Enterprise Investment Scheme which brings tax breaks of 30% against investments of up to £500,000 per annum into SMEs. This is being reinforced by a new 50% tax break under the Seed Enterprise Investment Scheme SEIS which enters into force in April 2012 and which is designed to enable High Net worth individuals to put up to £100,000 per year into very early stage start‐up businesses less than 2 years old can take on board up to £15,000 in total of SEIS investment. Both France and Portugal also have tax schemes though more restrictive for investors. 46 Ideally all the EPISIS Partners should seek to adopt similar measures to the UK. The Finnish Government has been also considering tax incentives for angel investors and has been looking at the UK system. Angel Co‐investment A key means to stimulate the angel community is to provide co‐investment funding to leverage alongside angel money. The UK has recently brought in the Angel Co‐Fund which has £50m Funding under the UK Regional Growth Fund and is administered by Capital For Enterprise Limited. The Fund is designed to co‐invest along angel syndicates rather than individual angels, with the aim of encouraging angels to invest in groups to share finance and experience and due diligence as well as offering broader skills to offer to the business and with a view to further professionalizing the concept of angel syndication. The EIF has also launched an important new pilot in Germany to co‐invest alongside individual angels on a deal by deal basis, working the German National Angel network BAND. This is aimed at eliminating structural barriers to investing and notably to cross‐border investing. It is planned to widen this pilot to other countries to stimulate and professionalise angel investing. Cross‐Border Supply of Angel Investing The Expert Group on the cross‐border matching of innovative firms with suitable investors52 noted that “Further simple structures/ways are needed to enable business angels to invest together to avoid highly fragmented investment structures. Such fragmented investment structures make it difficult for the company to obtain follow‐on investments from (international) investors.” It may also be seen that whilst tax breaks have been very important in stimulating the supply of angel investment in the UK, it can also militate against cross‐border investing, since UK angels will lose their tax breaks if they invest in businesses without a substantial base in the UK. However, a number UK angels have the interest and willingness to support the international growth and expansion of their portfolio businesses and generally are attracted to business that either already show an international customer base, or a strategy to expand internationally. Around the rest of Europe and notably in the other EPISIS Partner countries, there are fewer constraints in relation to tax breaks to prevent Angels from investing cross‐border. Many angels invest outside their own countries due to the lack of deal flow of suitable high growth propositions. However the original view that angels like to invest locally to watch over their deals still prevails for many in the more developed angel communities who would mainly invest in their own domestic entrepreneurs. Marco Villa of Italian Angels for Growth who spoke of his own experiences at the recent TF5 “Crossing the Divide Workshop” in Nov 201153, noted the importance of regularly networking at 52
Expert Group on the cross‐border matching of innovative firms with suitable investors, Meeting 24th January, Chaired by Anthony Clarke 53
“Investing in Internationalisation of service gazelles‐ Crossing the Divide”: Workshop 16th November 2011, at Tech world, London UK 2011, organised in the context of Tf5 Study 47 cross‐border pitching events and also going out on study visits, benchmarking trips to interact with other angel groups on a cross‐border basis and share experience and deal flow. Marco said “The benefit of this is that it builds trust and it makes it easier for potential co investment. This has resulted in participation in a number of cross‐border deals and building up extensive deal‐flow opportunities. This has had an important impact on our investment portfolio with 30% of deal flow being international and 30% of our investment being cross border” There is a clear role for the EPISIS partners to play in supporting measures to increase the supply of both VC and angel investment for high growth services businesses, both nationally and at EU level and to support the environment for cross‐border investing to support international market access 48 6. Examples of Service Firms that have Successfully Accessed Investment to Support International growth Despite these challenges in the supply of finance, there is clear evidence that a range of service firms within the EPISIS Partner countries have successfully accessed VC finance resulting in international market expansion. This has included those businesses that have accessed domestic VC funding or Angel Funding initially and then gone on to access international investors, frequently through the investors making contacts with their own international networks with whom they co‐invest. On other occasions they have had first round funding from one or more Funding teams across a range of different countries as part of a deliberate strategy to go global early. It is also clear from the case studies above and further publicized deals, that many investors across Europe are actively focusing on supporting the internationalisation of their portfolio businesses and are actively syndicating with other investors across Europe to support further international market expansion. Although it may be seen that many of these businesses were inevitably being drawn beyond Europe into both the US and in some cases into the new markets of China and S East Asia and America , as well as S America. These examples reveal not only on the importance of the finance being offered, but of the skills, industry experience and market linkages that these dynamic combinations of national and international investors have brought to the businesses and the management team and how this was accelerating their market entry. Examples of these internationally funded service businesses are set out below: Finland: Footbalance developed an innovative concept for fitting customised insoles for sport; medical markets. Having started in 2003, with some seed investment and then gained Tekes R&D grant. It grew successfully in the domestic market and had a loan from Finnvera in 2005 and was taken onto the Young Innovative Enterprise programme in 2008 and begun trading internationally. By 2010 it had international sales of 5m€ and gained VC investment from Swedish investor of 7m€, receiving the biggest A and C VC Funding rounds, including 7m€ from Scope a Swedish Private equity firm. Today it has customers in 18 countries in 3 continents, available in 600 stores (partner with Intersport Europe); employees in 8 countries; subsidiaries in US and Sweden. 49 Digia: online web design received VC investment 2.5m€ from Finnish VC investors Oy and Sonera Corporation, then received a further round from a syndicate of foreign investors (Investor Ab;Intel Capital; Robertson Stephens and General Electric equity) who invested €31.9m . Digia has since became one of world’s leading smart phone systems and has since floated on stock exchange. Sulake Corporation‐Interactive entertainment‐multiplayer online games and Habbo virtual world. Received R&D finance through Tekes .The company expanded into foreign markets including UK, and grew rapidly in other countries before going on to attract international VC investment from 3i and Benchmark Capital, and ultimately attracted investment from a Japanese investor ( Movida) enabling it to expand strategically into the Japanese market. It had continued to receive R&D funding from Tekes for key projects. Annual revenues reached €50m by 2008. Dopplr www.Dopplr.com Dopplr a Finnish company is a prime example of born global business. It created an online service for frequent traveller sand lets you share your future travel plans with a group of trusted fellow travellers whom you have chosen. They attracted a group of international investors including Martin Varsavsky from Spain/Argentina, Joichi Ito from Japan, Reid Hoffman ( Founder of Linked in) and The Accelerator Group led by Saul Klein, UK. This international team has separately made previous investments in many successful Internet companies and enabled the businesses to go onto multiple markets. It has since exited ( acquired by Nokia). 50 SponsorPay , Berlin: Sponsorpay is the leading global cross‐platform advertising solution for the monetization of premium content or virtual currency on social networks, virtual worlds, mobile apps as well as online games and services. The company’s innovative product suite creates value for different entities. SponsorPay partners with leading publishers Ubisoft, Bigpoint, Gameforge and NHN as well as developers Gameview Studios (DeNa), Creative Mobile and Playdom (Disney) on platforms such as Facebook, iOS and Android. The company runs successful campaigns for renowned advertisers including Vodafone, Coca‐Cola and Nike. The Company initially received investment from Estag Ventures a German VC Firm , but then went on to access investment from a cross‐border syndicate of investors including Team Europe, Hasso Plattner Ventures, Kite Ventures and Nokia Growth Partners and Estag ventures. A commitment to a localized, high‐quality user experience has allowed SponsorPay to now reach over 120 million customers across more than 100 countries. The company is headquartered in Berlin and now has offices in San Francisco, London, Paris and Tokyo. Brainient (www.brainient.com), a UK‐based video advertising company .Brainient's helps advertisers increase the engagement and performance of their video adverts through the company’s two products: BrainRolls, an interactive video platform that enables advertisers to insert rich‐media interactive elements into their video ads and BrainAds, the first personalised video retargeting platform The company Existing invehad inital investment from a serial business angel in the UK, Sherry Coutu and 500 Startups ( Acclerator) and has enjoyed exceptionally strong growth through 2011, with nearly 100 campaigns served over the year for customers like Samsung, Volvo, Canon, GetTheLabel and GlassesDirect. Brainient closed a further round in January 2012 €3 million in funding from a collective of strategic investors. The round was led by Prague‐based Credo Ventures. Other backers include Atlas Venture (investors in DataXu, AdSafe Media, OwnerIQ) and Estag Capital (investors in RevenueMax, Germany’s leading yield optimization platform). The capital will be used to expand the company’s client services and technology teams, by expanding its offices in London and Bucharest and opening a new office in New York. 51 Brave New Talent BraveNewTalent.com Founded by, a University of Edinburgh graduate, received an initial loan of £102,000 from the Enterprise Finance Guarantee (EFG) Scheme via the Royal Bank of Scotland in April 2009 followed by a seed investment round of £120,000. Nine angel investors joined BraveNewTalent’s second round of investment through channels such as Cambridge Angels and CMyPitch. This enabled the company to bring extensive technological expertise and entrepreneurial experience to its board of directors, inlcuidng the technological and entrepreneurial expertise of Chairman Alex Hoye, CEO of the Latitude Group, and Adrian Cox, former CEO of Ask Jeeves Europe. Pierce Casey and Mike Bourne as angels. Pierce Casey is a serial private investor in the recruitment sector, was co‐founder of Walker Hamill and Imprint PLC and is currently Chairman of Norman Broadbent. In addition he is an experienced Private Equity specialist having been Director of Apax Partners and Alchemy Venture Partners and who all supported new market access . In May 2010 the company secured £350,000 of investment to fuel its development and international growth. This included funding from Northzone Venture Capital Partnership in Oslo, Stockholm and Copenhagen ‐ most of whom are themselves former successful, entrepreneurs. Northzone is one of Europe’s leading venture funds and was first investor in companies such as Spotify, Lastminute.com and Stepstone. North zone brought both finance and sector specific international skills to their investment in BraveNew Talent. As part of the investment, Bjorn Stray, Co‐Founder & Partner at Northzone joined the BraveNewTalent board. Bjorn is one of Europe’s most experienced venture capitalists in the online recruitment sector having sat on the board of Stepstone between 1996 and 2009, and spent the first three years as Chairman. Bjorn assisted BraveNewTalent with its next stage of international development plans for overseas expansion both into the Scandinavian market and to Australia and SE Asia. The funds also enabled the company to invest further in sales and marketing to attract more subscribing employers and users. Brainglass, Sweden: Education and motivational learning experiences and effective elearning processes through a cross‐platform of mobile and social media. The company received investment og €1.9M from ALMI Invest Stockholm and STING Capital, Swedenand now combined with two international angel investors form the mobile industry as part of the True Global Ventures international network of Angel Investors led by serial Angel Dusan Stojanovic ( Croatia, Sweden and Paris). This combined industry and market expertise will take Brainglass into 52 extensive new international market opportunities. NB Brainglass pitched at the recent MOBIP Cross‐Border investment event on 16‐17 November, UK. Detailed Case study of a UK Company’s successful growth through Investment: 54 Brandwatch, UK: The company was set up by Giles Palmer, in 2006, originally ( called Magpie), based in Brighton, UK, as a financial services sector search engine to monitor what competitors were selling, enabling them to fix competitive prices. In 2006, the company 0,5m from London Business Angels and London Seed Capital, a government backed Angel Co‐investment VC fund. With the support and advice from the Investors on the Board , the company moved the target to Advertising, monitoring advertising campaigns, providing feedback to target customers to measure feedback from consumers to enable them to adapt their campaigns to be more effective and address any negative publicity. IN 2007, a further £400k was provided by London Seed capital and the angel investors. Over this period, the team identified the opportunity offered by social media to grow the client brand base. As social media developed, the company realized that a huge amount of data could be monitored and tracked from consumers, offering real time monitoring, and Client relationship management. The company further developed its service platform , changed the name to Brandwatch and started to build up some very large global brand customers eg Kraft; British Airways; Virgin. At this time , 2010, a leading market research company, in UK and Ireland Ipsos Mori , became a key partner and created many new market channels and created a number of white labelled services. Brandwatch services are able to operate in a number of European languages and it is moving to the French speaking and Spanish markets . Ipsos Mori as a corporate partner has taken Brandwatch into the German Market. It has a big base of clients in Germany working with some of the Corporate brands in Germany including Pharmaceutical companies and consumer brands. As a web‐based company, only a few people on the ground are required in each market, in order to ensure that the service is customized. 54
The details of this case study were provided by Robert Desborough, Investment Director, London Seed Capital and Investment Director, YFM Private equity 53 In October 2010 , Durrants a major global corporate in press and media campaigns, made a corporate VC investment in Brandwatch of £1.1m . Durrants is now taking Brandwatch into the US market, however in this market it is necessary to have a full business base and team. Brandwatch has identified their markets by leveraging the relationship through their customers and through the support of key corporates Ipsos and Durrants who also invested. With the support of equity investment, Brandwatch has moved from a 10 employee company to 54 employees and will build to 80 this year and has become a global leader in the field of realtime competitive customer monitoring, moving into multiple European and global markets. Exit potential: last year Radion 6 acquired SalesForce which is Brandwatch’s main competitor for £323m. 54 7. Recommendations for Action to support Investing in Internationalisation of High Growth services Businesses resulting from Task Force 5 At National Level: Based on the findings from this study of the challenges and opportunities offered by accessing external investment to support successful internationalisation of high growth service businesses, the following recommendations for actions that could be taken at both national and EU level. Recommendations for Actions by the EPISIS partners: 1. Ensure that all policy and programmes to support internationalisation of innovating high growth service businesses include direct actions to facilitate access to external equity investment, including investment readiness. This should include the following actions:  Support for business planning for international growth to address specific challenges in attracting investors  Support for investment readiness to address all of the current challenges that have been identified that service businesses have in attracting investors and notably, a dedicated programme should be designed to support cross‐border investment readiness with a focus on attracting international investment, including direct support with how to effectively pitch to investors on a cross‐border basis.  Support with development of a clear international investment strategy which shows their plan for accessing and using investment, both national and/or cross‐border sources to support their international growth, the role that they expect investors to play in supporting new market access, and the benefits and returns to investors in terms of international growth, including an internationally focused exit strategy.  Directly involve Investors in training and mentoring businesses seeking to effectively internationalise, to ensure that investor requirements are addressed in the business strategy and pitch. 2. Ensure access to relevant market intelligence and data of relevance to investors to enable them to better identify investment benefits and opportunities of investing in Services Businesses 55  EPISIS partners should take the lead in gathering information on all deals done in Services businesses across different sectors from their own countries both at a national and international level an also to track the impact of this investment on the international growth and success of these businesses.  This will be vital to support investors in valuing deals in service businesses and in generally increasing the awareness and attractiveness of investing in services businesses, increasing the overall availability of investment for service businesses in Europe  Encourage their main trade bodies to have much more systematic gathering of data on investing in services based businesses and to have with this category added as a subset of the main trade body data collections.  This could be issued regularly on the EPISIS platform and in the individual partner web‐
sites as a regular quarterly publication, with an annual review.  The data related both to services investing in CI Businesses and Mobile/Mobility businesses should also be fed directly into the two learning platforms of the new ECIA and EMIA Alliances  A further key role that EPISIS partners should take is in actively showcasing Service Businesses to both domestic and cross‐border Investors through both face to face showcasing and pitching events and through online platforms (not deal brokering) so that investors can effectively identify those businesses seeking international growth and which markets and sectors they are targeting , so that they can identify potential deals s and how they can add value.  EPISIS Partners should feed their data on investment in services and successful growth stories into the data being gathered in their own countries among the investment finance trade bodies or national federations ( Angel and VC investment) . This should in turn feed into the overall European knowledge base on investing in services to support European planning and decision making in relation to COSME and HORIZON 2020 and to support measures taken by the private sector‐ see below public policy. 3. Stimulate the Supply of equity investment available at both domestic and cross‐border level to support internationalisation of high growth service businesses  Actions to stimulate the angel community should be taken by EPISIS members at national level, looking at the benefits of specific models of other EU countries such as the UK Enterprise Investment Scheme, including o Introduction of tax breaks for angel investors in early stage high growth potential business o Provision of a national angel co‐investment fund to stimulate syndicated angel deals. 56 This could include a specific focus on services business across all relevant sectors  This would also stimulate cross‐border investing in service businesses since angels would be able to enjoy similar benefits in each country and enable crossflows of capital to entrepreneurs to support market access.  Increase the provision of Accelerators in EPISIS partner countries in connecting early stage innovative service businesses to internationalise investment: Accelerator Programmes allow very early stage innovative SMEs to work with organisations that have specialist sector in‐house entrepreneurial expertise and funding and provide strong mentoring with SMEs in order to develop and seed fund their business models. These programmes are often closely linked to angel networks and VC’s. There could be potential to establish specific models focusing on the Services sector and replicating the Finnish VIGO Programme  EPISIS partners should directly support their Investment market trade bodies to back the proposal through EVCA to gain a new Fund of Funds for Europe under HORIZON 2020 .  This would enable EPISIS partners to stimulate the private sector and key institutions in their own countries to establish new national and cross‐border funds, of a relevant size, with experienced internationally focused VC teams, resulting in increased access to investment for high growth innovating service businesses on a cross‐sectoral basis.  EPISIS partners should support the proposals of the EC Expert group on Cross‐Border Matching of Innovative Firms with Suitable Investors 55 to support new supply side and demand side measures to increase access to investment across Europe. Notably to support the proposal for a new Cross‐Border Angel Co‐investment Fund to leverage angel investment and notably to support co‐investment between angels across the member states, thereby increasing the potential for Services businesses Recommendations for Action at European Policy Level: New Internationalisation Co‐Fund:  The European Commission should establish a new Internationalisation Co‐Fund aimed specifically at innovating high growth potential service business to support access to external investment and notably to attract and leverage cross‐border investment to support successful market access.  It will address the challenge that many businesses will be attracted to the US and notably Silicon Valley and offer an incentive to access investment to enter the EU markets 55
EC Expert Group on “Cross‐Border matching of innovative firm with Suitable Investors” , chaired by Anthony Clarke, Director, Angel Capital Group, 2011‐2012 , Minutes of the meeting 24th January 2012. 57  The finance which should be maximum €100k per SME should be designed to address key barriers for services businesses to successfully internationalise and enter new European Markets; to support local customisation of the service offer and address whatever relevant actions are required to enter the designated EU market place including local market adaptation and identification of relevant local delivery base  It will especially operate where initial domestic VC has been accessed and offer an opportunity to follow‐ a strategy for new EU market access, and/or will be used to attract relevant cross‐border investment. (The research has shown that a combination of domestic and Cross‐border investment is especially effective to support growth and expansion).  The subsidy should be activated once external investment is leveraged, or when cross‐
border has been identified offering an incentive to the investors to close the deal The EU subsidy is intended to have the following objective  It will address the challenges for services businesses in accessing relevant investment in the target markets in the EU  Support the costs of market access and integration in the European target market, including local customization a, identification of relevant local infrastructure and adaptation to local standards and requirements, thereby ensuring more rapid and successful entry  It will complement and reinforce the actions of the local investors in providing support to address key barriers for market integration  It will create a strong incentive to access VC investment focused on the EU market access and act as a counterveiling influence against US market access which remains a key driver for many early stage businesses as a means to grow and successfully exit. Methodology  High growth potential services businesses that have identified suitable investment sources aimed at entering key EU markets can apply for up to €100,000 subsidy, alongside the investment.  The Internationalisation Co‐Fund would take its decisions based on the investment proposition and relevant paperwork developed by the investors, showing due diligence and relevant documentation including term sheet; shareholders agreement and Articles to be drawn up by the relevant VC/Angel investors and as evidence of their intention to invest and notably having carried out all relevant due diligence demonstrating the potential for successful integration and growth in the targeted markets  The EC Internationalisation Co‐Fund will provide co‐finance alongside both private VCs and publicly funded VCs, including ERDF based VC schemes and those funded under the EC Jeremie Funds.  This would also aim to support a change of approach by these funds which are currently investing only in SMEs in the local economy, enabling them to identify opportunities for attracting co‐investing alongside cross‐border VCs to support internal market access– this 58 will be a key driver to promote a change of approach among regionally focused VC funds with local economic objectives This should be complemented by the completion of the European Single Market for Services and EPISIS partners should support actions taken by the Member States at national and EU level to ensure this is put in place during 2012.
Next Steps: Piloting the proposed EC Internationalisation Fund:  Based on the above, a European pilot should be set up by the EPISIS Partners to test out the feasibility of this model, in 2013‐14, based on an initial provision of 100m euros per annum with a view to offering an estimated 100 selected high growth services businesses across Europe to take advantage of the EC internationalization Co‐
Fund. T  This would aim to leverage at least matched private sector funding, but based on other successful co‐investment models, is likely to raise at least 4x private sector finance against the public sector commitment. The pilot would therefore assess the potential for leveraging at least a further 1x ie £100m euros, but potentially up to 4x ie 400m euros co‐investment based on the experience of other co‐investment funds.  The results of this project would then be fed into Horizon 2020.COSME to ensure that the EC Internationalisation Co‐Fund is integrated in the new Funding proposal and to ensure that at least 100k euros per annum is made available to support Internationalisation of Services businesses. Improving the data collection and understanding of the overall potential of internationalisation of high growth businesses:  The VICO project56, as detailed in the study has identified the important positive impact of tracking data about the importance of external investment in supporting the high growth potential of these businesses. A further bid has been submitted to DG research under the Marie Curie programme to investigate the impact of equity investing on high growth businesses , working closely with angel investment networks around Europe which look closely at the impact of investing in high growth businesses and draw together case studies and data on impact. . 56
Venture Capital Policy lessons from the VICO Project” , Sept 30, 2011. Led by Prof Massimo G Colombo, Polectinico di Milano with 8 other partners including, Research Institute for the Finnish Economy; Zentrum fur Europaische Wirtschaftforschung GmbH; Unversity College, London 59  The EPISIS Partners should take advantage of the VICO submission to the Marie Curie programme in 2012 and notably to support the placement of researchers in key angel investment networks within the EPISIS partner countries to identify and gather data on the benefits of investing in high growth potential services businesses and should recommend this project for support from DG Research. Opportunity to integrate findings into the European Creative industries Platform and for Mobile and Mobility Platforms:  EPISIS Partners should ensure that they feed in the results of this study under TF5 and notably to the Learning Platforms, notably to link ot the Access to finance actions, and to ensure that Performance indicators and Impact measures for the work of projects under these two platforms include measurement of successful internationalisation and access to international markets. - End-
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