Getting Private Investors involved in SMEs
US-Europe Economic Policy for Small and Medium-sized Enterprises Part 1: Overview
The US Commerce department delegation conducted a workshop and symposium in Brussels July 10, 2012. It gathered experts from the US and EU discussing topics of increasing Small and Medium-sized Enterprise access to capital formation, reduction in non-tariff costs and removal of red tape in a more competitive landscape. The US delegation was 10 strong with Mr. Drake joining as as an expert on the JOBS Act (Jumpstart Our Business Startups Act) plus 10 European representatives attended with an additional 10 EU Commission members. These members included the European Commission head, Daniel Crespo, Director General of the DG Enterprise and Industry at the European Commission (one of 27 pan-European industry focused Director General divisions – soon to be 28 member countries in August).
Some of the remaining 30 guests attending included Gordon Murray of Exeter Business school, Anne Glover of Amadeus Capital in London, Ella Van Gool from Square 1 Bank in San Francisco, Joseph Bartlett former Under Secretary of the US Commerce department, Sven Wieber formerly of Silicon Valley Bank, Karen Wilson of OECD, James Burnham for the European Venture Capital Association, Tim Creed of the fund of fund Adveq, George Arnold of the US fund of fund Knightsbridge, Harry Haskins Deputy Associate Administrator for Investment at the US Small Business Administration acting as a government fund of fund program since 1958, Daniel Cloquet of BusinessEurope, Uwe Eiteljoerge of the European Commission of DG Internal Market and Susannah Haan of the EuropeanIssuers.
The challenge we portrayed was how do private investors get more involved investing into SMEs and learn from existing programs in Europe and the US. A series of the results of these meetings held in Brussels and discussed with Mr. Drake in Rome July 12-13. Ambassador Miriam Shapiro, Deputy US Trade Representative joined in Rome with the Italian Minister of Foreign Affairs, US Ambassador to Italy, Mr. Thorne, 20 Embassy representatives and 180 private as well as regulatory and legislative bodies of the EU Commission and Italian Government.
“This was a fascinating discussion between fund of funds, government programs, public exchange platforms, VC and Angel networks, crowd funding to SBA and SBIC program extensions on both sides of the Atlantic. Transatlantic cooperation of the US and European Transatlantic Economic Council (TEC) forum of the most amazing sort has started. I could not have been prouder to partake in these movements.” says Mr. Drake
Access to Venture Capital and Angel Networks for SMEs
US-Europe Economic Policy for Small and Medium-sized Enterprises Part 2: 2-day Brussels Symposium, July 10-11, 2012
The U.S. Commerce Department Delegation conducted a workshop and symposium in Brussels July 10, 2012. It gathered experts from the United States and EU to discuss the topic of increasing small and medium-sized enterprise access to capital formation, reduction in non-tariff costs and removal of red tape in a more competitive landscape. The U.S. delegation was 10 strong with Mr. Drake joining as as an expert on the JOBS Act (Jumpstart Our Business Startups Act) plus 10 European representatives attended with an additional 10 EU Commission members. These members included the European Commission head, Daniel Crespo, Director General of the DG Enterprise and Industry at the European Commission (one of 27 pan-European industry focused Director General divisions – soon to be 28 member countries in August).
The meeting acknowledged the potential for significant growth in European venture capital (VC) projects and angel networks. Current estimates place VC investments in Europe at about $5 billion, essentially equal to the value of current angel network investments across the continent. Place these estimates in the context of an economic block of 27 (soon to be 28) member states with some 500 million inhabitants, and the potential for growth in investment partnerships becomes more clear. As a point of comparison, the US has a similar population but US Angels and US VCs spend $20 billion a year each on investments.
David Drake, founder of The Soho Loft Capital Creation Event Series, attended as a delegate at the symposium’s focus on Transatlantic cooperation of the US and European Transatlantic Economic Council (TEC) to assist Small and Medium-Sized Enterprises (SMEs) access finance, access markets and reduce red tape. Emphasizing that currently 85% of EU jobs originate within the 23 million EU SMEs existing today, Mr Drake asserted, “Finance is the biggest challenge to SMEs right now. In addition, this challenge is accentuated as there is little history of consumer credit card debt [in the EU]….philanthropy is more commonplace in the US and credit is more embraced and understood in the US.”
Other finance experts attending agreed with these comments, adding that tax credits like the UK’s Enterprise Investment Act also bring challenges and create friction for investors and VCs as they do not give firms enough incentive to perform. Conversely, the matching fund programs in the UK have encouraged the investment community in the local market and attracted international co-investments.
Mr. Drake also stressed the value of education, claiming that different angel networks in the US approach due diligence and valuation processes in very diverse ways. “It is important that European angels are trained and that we have cross Atlantic exchanges of knowledge through forums, conferences and expos,” stated Mr. Drake. A report from the OECD on angel networks has claimed that the average retired executive lacks an entrepreneurial history and rarely engages in angel work. “Such key figures need to be trained about how such investment networks work and on how to be an angel,” said David Drake. Unfortunately, the European Business Angels Network was not represented at the Rome event to comment on its experience in this regard.
Also discussed on the day were corporate Venture programs that the US has successfully run through firms such as Intel and TVentures. Speakers stressed that access to international capital creates a competitive advantage and can lead to longevity in an enterprise’s global market leadership. Vincent Molinari, CEO and founder of Gate Technologies reinforced this concept recently in his comments on Cisco, claiming the company’s “$35 billion (and other sources of capital) allows corporate ventures to create and isolate disruptive technologies as spin offs or integrate core technologies and enhance the position of existing company divisions. Intel has been successful doing this for decades.”
All participants in Rome agreed that a key issue for co-investment funds for angels is that evaluations have not been done yet. “The key to evaluating any project is to establish criteria before start-up and then to strategically assess progress against these criteria over time,” says Douglas Ellenoff, a partner at US law firm Ellenoff, Grossman & Schole.
The meeting acknowledged the work of some European groups such as GoBeyond and Serafin UK Fund in promoting cross border Angel co-investments. “The challenge faced is that angel networks are a local phenomena,” says David Drake. “There needs to be education for angels and networks in Europe to see how angels can be encouraged and can leverage their knowledge across both borders and cultural boundaries.”
Drake claims that multinational executives are advantaged in this regard as they have the experience and skill sets needed to review and manage accounting discrepancies between countries and cultures. This, he says, allows them to adapt to angel financing more quickly than other business leaders. “We clearly appreciate that the challenges are both physical, cross border and cross cultural,” he says. “In some places, the lack of infrastructure is an impediment to faster business evolution and in such circumstances we need to bring the knowledge in.
Drake concludes that “Education is one key and access to start up capital is another, and we [the US – EU TEC summit] make each of these fundamentals accessible to entrepreneurial companies and individuals. Events such as the Rome symposium build networks that can produce synergies of passion, knowledge and capital that allow fledgling business concepts to flourish and succeed.”
Innovative Programs Advancing Capital Access for SMEs in US and Europe
US-Europe Economic Policy for Small and Medium-sized Enterprises Part 3: 2-day Rome Symposium, July 12-13, 2012
On July 13, 2012, LDJ Capital was part of the US Commerce delegation that held a workshop and symposium with experts from the United States and European Union on the topics of increasing small and medium-sized enterprises’ (SMEs) access to capital formation, reducing non-tariff costs,and removing red tape in a more competitive commercial landscape. The US delegation was 10-strong, with David Drake, Chairman of LDJ Capital and founder of The Soho Loft Capital Creation Events, speaking as expert on the Jumpstart Our Business Startups (JOBS) Act. 10 European representatives attended, with another 10 EU Commission members, including the host and European Commission head Daniel Crespo, Director General of the DG Enterprise and Industry at the European Commission (one of 27 pan-European industry-focused Director General divisions).
The Symposium brought together financial specialists from international government agencies and major financial and academic institutions. The 30 guests included: Gordon Murray of Exeter Business school (moderator), Anne Glover of Amadeus Capital in London, Ella Van Gool of Square 1 Bank in San Francisco, Joseph Bartlett, former Under Secretary of the US Department of Commerce, Sven Wieber, formerly of Silicon Valley Bank, Karen Wilson of OECD, James Burnham of the European Venture Capital Association, Tim Creed of the fund of funds investment company Adveq, George Arnold of the US fund of funds Knightsbridge, Harry Haskins, Deputy Associate Administrator for Investment at the US Small Business Administration (acting as a government fund of fund program since 1958), Daniel Cloquet of BusinessEurope, Uwe Eiteljoerge of the European Commission of DG Internal Market and Services, and Susannah Haan of the EuropeanIssuers.
The symposium was a successful mix of informative discussions and presentations between the participants and moderators.
Anne Glover agreed with David Drake that although VC market performance has historically been poor, it has been outperforming the bio market in the UK for the last two years.
VC funds received 10% versus 40% of capital from government agencies in 2007, compared to 2011. David Drake feels this is a problem for European VC’s. While Europe has 2,500 family offices versus the more mature US market (11,500 family offices have a desire to invest in venture capital), Mr. Drake feels that Europe can replicate a VC sector and be a managed fund with funding from a the European government as as catalyst. Performance in the buyout industry has superseded the VC component. Mr. Burnham would like to see private VC capital buyout public VC capital (e.g. a kicker to remove public capital).
Fund of Funds
Adveq has $4.5B in assets under management. David Drake feels that Adveq has done well in European VC investments, with money in 7 out of the world’s 10 leading VC’s. Mr. Drake noted that to compensate for European VC funds being the 17th most popular investment, “European venture investments should be boosted or subsidized and given the upside if the market takes a downturn.” Adveq’s fund of funds are about $300M in size.
The US fund of funds Knightsbridge is focused on growth capital and venture capital funds. The company’s assets under management were $20M in 1980. They peaked at $400M; now they are at $200M and shared their European interest.
Sven Wieber is a former president of SVB Investment Management, in venture of $1.8B with 20% globally (1 investment in Europe and 1 investment in Asia) and 80% in the US. Mr. Wieber agrees with Mr. Drake that the question in Europe has become “is this really benchmarking the performance in the US?” Drake feels this must be the number-one focus to attract additional capital. When EU VC funds pitched Wieber, they were large in the Europe but tiny compared to US VC funds. Drake suggested that “Europe should help VC’s to build stronger management teams.”
Conversely, European VC’s have been successful, and emulating the US is not necessary. Instead, European VC’s should emulate a global platform, according to Drake. He pointed out that “VC funds in Europe with investments from fund of funds programs have a more difficult time reaching the top-10 in terms of performance.”
“However,” he asserted, “the EU may want to create a strategy to find the upcoming leader and may want to invest top 20 to get more of the upside. Then again, institutional and pension-fund money should not take such risks.”
Small Business Administration (SBA)
The US Small Business Administration has been fund of funds program from since 1958. that It matches 2 to 1, with $2 leverage up to $150M. The SBA has since creation issued $1.8B; $2.83B was invested in small business investment companies (SBIC) and $2.8B was invested in job creation and SME growth. Costco, Amgen, Staples, Apple, HP, AOL, INntel, and Fedex are some examples of firms backed in this way. The US SBIC’s current focus is on standard licenses, impact investment licenses in clean energy, and innovation licenses for early-stage investors to cover debentures for investors.
Small Business Investment Companies (SBIC)
SBIC also leverages standard debentures–some with no interest payments due for 5 years. Requirements are that companies have less than $18M net worth and less than $6M after-income per year for the previous two years, or they must qualify as ‘small’ under the SBA’s NAICS Industry Code Standard. Investor profits can be distributed to the investors at any time.
Drake feels that “the SBIC has strong, stable returns with a flexible fund structure.” The regulatory benefits are exempt from SEC registration requirements with rapid deployment of funds, and it is qualified to get Community Reinvestment Act credits. “What is interesting,” he feels, “is that the program has had a growth spurt these last 2 years, while it has been around since 1958.”
European Equivalents: Horizon 2020 Plan Versus the Competition Innovation Program of 2007-2013
Daniel Cloquet is head of BusinessEurope’s entrepreneurship program and is its SME Director. He agreed with Drake that “the Horizon 2020 Plan may not make the deadline, but the Competitive Innovation Program of 2007-2013 has been a success.” (The former program guarantees 150,000+ Euro loans, while the latter offer up to 150,000 Euro Loans).
US Small Business Investment Research Grant (SBIR)
The SBIR is a $23B market from Agriculture to Defense in the US. According to David Drake, very few entrepreneurs will not apply for this grant.
“That’s like a good housekeeping seal of approval for a company to get VC rounds easier later,” said Mr. Drake. “The European Union was duplicating this program but in tranches; the changes have been to the SBIR. VC-backed firms can now apply these changes if a group of VC groups own 50%. VC’s do not want to control a gazelle, so the fiduciary responsibility to all shareholders is bad. They prefer board seats with minority shares.”
Drake stated that the opening up of the SBIR is “positive for the US and is interesting for the purposes of replication in the rest of the world.” He believes “This program enhances the guarantee of the novel innovation as a stamp of approval.”
Congress has renewed this program for in 2-year intervals for the past 16 years, but the most recent renewal was for 7 years (This includes National Institute of Health (NIH) grants). Drake explained that “this is liberalization to the point of being a significant feeder in the high-tech industry. 11 federal agencies with research access of $11B work as an independent venturesome structure to find the best innovations–not necessarily buying into them, but signaling to the market that it is a worthwhile product for market commercialization.”
EU Alternative Investment Fund Managers Directive
Drake discussed the European fund changes from two years ago, which allows funds to market to raise up to $150 million through European intracontinental trade.
Drake asserted: “The AIFMD (Alternative Investment Fund Managers Directive) is a voluntary regime, so you don’t have to opt in. Management and marketing passports are available to market to qualified investors under MiFID and to investors with tickets over 100M Euro.” In order to qualify, 70% of investments must be VC-qualified companies that are not admitted to trading, are below 50M Euro, and are not financial institutions.
Federation of European Securities Exchange
European firms looking for capital markets is are usually in it for the wrong reasons, Drake feels. “European audits are similar to Sarbanes-Oxley in the US. Firms are dissuaded to list in Europe and they hear about European companies often wanting to leave the market.” The Federation of European Securities Exchange (FESE) is a family of 40 exchanges, including commodity exchanges. It’s clear that the cost of listing and maintaining a listing is expensive in the EU as well.
JOBS Act Title I – Onramp IPO
Joseph Bartlett, chairman to the Angel Advisory of the ACA and board member of the Angel Development Association–whose nickname since 1963 has been ‘Chief Justice of Venture Capital’–discussed the Title 1 online IPO opportunity for the US and offshore for public and private companies He concurs with Mr. Drake, who believes “You can trade at 4-second markets for some liquidity, since the dot-com Title I reduces reporting requirements under the Sarbanes-Oxley Act and its costly compliance requirement for up to 5 years for Emerging Growth Companies (under $1B in revenue). Drake added, “The soccer team Manchester United is going public in the US with the ongoing IPO Title I exemption.”
Clearly there are several functioning programs that allow capital access to SMEs, and the Transatlantic Economic Council is bridging the gaps and sharing best practices from both continents. This article is a small synopsis of the topics covered at the Rome symposium, as 2 days was not enough to delve into any of the topics. However, we expect that 4-5 of these programs will be top choices for transatlantic implementation. Mr. Drake is currently working with a dozen groups in Europe to advance capital access and formation for their 23 million SMEs.