How to bridge Europe’s SME finance gap

European high-tech SMEs are having a difficult time raising finance for growth, as bank lending has been shrinking since 2008, and venture capitalist are seeking fast exits and are increasingly risk-averse.

But nifty IP management strategies and well-targeted government policies could help SMEs raise more finance and cement the backbone of the European Economy, according to two new Science|Business reports.

European SMEs create over 65 million jobs in Europe, representing roughly two thirds of EU’s employment. 

But for these companies, accessing finance and scaling-up is always a hurdle. SMEs are struggling to find the money they need to grow, as private investors shy away from betting on risky projects and prefer to hold on to their cash or invest in less risky ventures.

One of the latest Science|Business reports, released earlier this week, shows that SMEs should rely more on their IP assets in order to raise more finance. Clever intellectual property management can help small firms convincing the right investors to commit to long-term risky projects.

But for SMEs, realising the value of their IP is not a straightforward process. One major problem is the difficulty of putting a price on intangible assets such as patents, trademarks and copyright. Banks and venture capitalists will rarely take risk on something that is too difficult to value.

Another problem is the shift in patenting activity toward Asia and away from Europe. Data from the World Intellectual Property Office (WIPO) show that Asia received 58.4 per cent of patent applications filled worldwide in 2013, according to the report.

Asian governments were quick to capitalise on this shift and developed strategies to help SMEs raise finance through their IP. Malaysia launched a programme of IP-backed credit for local SMEs and Singapore launched an initiative aimed at creating an international marketplace for IP trading. 

Meanwhile, similar policies in Europe “have stalled due to political infighting within the Brussels bureaucracy,” says the report.

High-growth entrepreneurship policies in Finland

But there are ways through which entrepreneurship policy can help SMEs overcome these issues, according to the second Science|Business report, written by researchers at Aalto University in Finland, which shows that Finnish policies in this area have been successful.

To boost the growth of its start-ups and SMEs, Finland’s policymakers helped “mitigate money and skills gaps in the Finnish entrepreneurial ecosystem and helped new innovative firms to grow,” the report says.

The NYI Programme and the VIGO Accelerator Programme have been set up by the Finnish government to boost the number of new ventures with potential for growth and to help these ventures raise growth finance.

The report says firms participating in this initiative have been successful in raising equity funding. In 2011, 21 companies that participated in the VIGO Programme raised a total of €27 million in equity finance, whereas the same companies were able to raise only €3 million in 2009. Also in 2011, 85 companies participating in the NYI Programme raised €112 million, whereas in 2009 they raised only €56 million.

The steps taken by the Finnish government have, “helped firms to mobilise financial and managerial resources,” the report says. But it is hard to judge if the Finnish example could be replicated in other countries, or if the EU can adapt some of the policies.

Nonetheless, government policies can have a significant impact, if they are carefully designed, the report concludes.

The reports

Picking up where the banks left off: Can IP help small companies grow, and Europe’s economy revive?