Thursday, 7 April 2016

Bringing Science to Finance and Finance to Science

Key Enabling Technologies (KETs) are a cornerstone for innovation in Europe's economy and SusChem was heavily involved with the development of the European Commission’s policy in this area. KETs are important drivers of innovation, growth and industrial competitiveness in Europe. Approximately 10 000 smaller to medium-sized companies in Europe, including many developing sustainable chemistry solutions, base their businesses on the development and commercialisation of KETs. The European Investment Bank (EIB) has just published a study that reviews access-to-finance conditions met by companies investing in KETs and proposes nine recommendations to improve conditions.

The study highlights that, despite good market conditions in the financial markets, not all companies benefit from these conditions in the same way. Many dynamic innovators and research-driven newcomers find it hard to raise growth capital to develop and scale-up their businesses. Investment in innovation in Europe still lags far behind that of the US and Japan.

“We must bring “science to finance” and “finance to science”. It is my priority for the EIB Group to ensure that effective finance solutions and targeted advisory support are available for innovative companies to do just this,” says Werner Hoyer, President of the EIB in his foreword to the study.

What is the problem?
The key insight of the study is that many KETs companies struggle to obtain adequate debt financing. Due to its general risk aversion, the banking sector does not cater to the specific needs of many KETs companies with almost 30% of KETs companies in the study failing to obtain adequate debt financing. More KETs companies (about 50%) find themselves struggling to obtain the finance needed to generate further growth and innovation.

The study concludes that a high capacity for innovation and strong growth figures alone are not guarantees of adequate access-to-finance. Current conditions on Europe's financial markets are not to blame – the overall lending climate is described as favourable by market participants. But Europe's conservative financing “ecosystem” is not in favour of the most dynamic innovators. Most R&D-driven businesses find it hard to convince traditional/regional banks to provide the desired level of funding.

KETs companies can be clustered into three categories depending on their financial needs:

  • Post start-ups: typically smaller KETs companies, which have outgrown the R&D phase and are generating profits but have a high business risk
  • Quantum leap companies: KETs companies of various sizes, targeting a large scale-up requiring large amounts of debt in relation to their company size
  • Well-established innovators: typically relatively larger KETs companies with a stable market position and a solid revenue base

KETs financing is a highly knowledge-driven business. In order to assess investment plans and business outlooks, enhanced technology, market and financial expertise are needed, but not always available to banks. By sharing and leveraging its existing knowledge base, the EIB could significantly improve access-to-finance conditions for KETs companies.

Big is beautiful – smaller KETs companies face more difficulties and require broader support beyond pure finance. The current banking system places smaller KETs companies at a disadvantage. These companies, which are often young and highly innovative, tend to fail in raising adequate finance due to the conservative, asset-based lending approach followed by the smaller banks/regional branches. Better preparation of both these financial intermediaries and smaller KETs companies, coupled with a higher-risk-taking approach to lending, is needed in order to help innovative KETs companies realise their full potential.

Public financing agencies could also play a stronger role in leveraging private money - in addition to "merely" providing funds. The public sector must take the lead initiative in order to significantly leverage the growth and employment potential of KETs companies providing access to higher risk capital and also advisory services and facilitating the meeting of demand for and supply of capital.

What can be done?
The study’s review of high-tech innovation financing worldwide yielded a number of approaches that the EIB could build on. The most promising innovative approaches for KETs financing found were higher-risk-taking debt instruments, specific equity-based programmes and the combination of financing instruments with advisory services. In addition the ability of financial instruments to attract private co-financing is a key element of successful public support to improve financing conditions for KETs companies.

The EIB is well-positioned in technology financing, with substantial funds available from EU-level programmes and financial instruments under the umbrellas of InnovFin and the European Fund for Strategic Investments (EFSI). The existing programmes, however, do not fully meet the specific needs of many KETs companies.

The study has developed nine recommendations on how the EIB and European Commission can help improve access-to-finance conditions for KETs companies. These are detailed below.

The EIB and European Commission should place particular emphasis on two areas:

  • Improving “knowledge” in the market on both technology and finance to bring “science to finance” and “finance to science”
  • Higher-risk-taking products and instruments designed to meet the specific needs of the identified KETs company types

In a highly fragmented European KETs landscape, the EIB has a unique ability to combine a deep understanding of the market with the necessary boldness to make a significant difference the study concludes.

You can download the full study here, which was carried out by InnovFin Advisory with the support of Roland Berger Strategy Consultants.

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