1. TREND IN INNOVATION FINANCE IN THE EU Marc Schublin, Head of Division, European Investment Fund Coordination – General Affairs – Advisory Services Knowledge Economy Forum IV, Istanbul, 23 March 2005

2. 2 Finance for innovation = the EU side  EIF as EU Fund of Funds  Venture Capital: a difficult market  The limits of Venture Capital in supporting innovation  New Initiatives throughout the EU  Towards new financial instruments and concepts Summary

3. 3 EIF at a glance  Institutional set-up :  Shareholders: European Investment Bank (60%) – European Commission (30%) – 31 banks 10%)  Contribute to Community objectives (entrepreneurship, research and innovation, regional development, etc …)  Ensure an appropriate return on its own resources  Important role in the context of Lisbon Strategy / 3% target (Innovation – Employment)  EIF products – Venture capital / “Risk Capital Arm” of EIB SME Portfolio guarantees … and Advisory services / Technical assistance

4. 4 VC investments: EIF’s role  Biggest European early-stage Fund of Funds (EUR 3bn in 200 Funds)  Participates as a pari-passu cornerstone investor (always commercial terms)  Long-term committed and pro-active investor  Know-how helps in structuring a fund / best practice  Widespread network in European venture capital industry which may help to attract co-investors  Neutral, supranational investor  Investments based on own resources and mainly on behalf of EIB VC mandate, EC Seed Capital scheme and ERP Facility (early stage in Germany)  Investment activity only in EU and Acceding Countries

5. 5 The innovation cycle covered by EIF Future coverage Later-stage Buy-out IPOs Tech Transfer Incubators Pre-Seed Business Angels Expansion / Dev. Capital Early StageSeed * Currently covered by EIF advisory services (Technology Transfer Accelerator) ADVISORY « VENTURE CAPITAL »« PRIVATE EQUITY » Future extended coverage *

6. 6 European VC Funds Raised 1990 to 2003: few investors stay on board Source: EVCA / Thomson Financial / PricewaterhouseCoopers

7. 7 VC is a Risky Business Pooled IRR - December 31, 2003:  Early stage: 1.9% (Top Quarter: 14.8%)  All Venture: 7.2% (Top Quarter: 23.9%) best performing funds are in the segment of €100-250m = 9.2% or 12.8% over a 10-year period  All Private Equity: 9.9% (Top Quarter: 24.3%) Source: European Venture Capital Association (EVCA)

8. 8 Constraints and limits of VC in supporting Innovation  High risk; very qualified management teams needed  Balance public/private investors?  Good VC funds governance (independence of managers vs investors, transparence, etc.)  Management costs, long maturity  Critical mass  Seed-early stage especially efficient near important “technological clusters” (Heidelberg, Cambridge, Finland, etc…)  In the EU, about 15 000 companies supported by VC (compared to a total SME population of 14 million)

9. 9 Constraints and limits of VC in support of Innovation: some lessons learnt  Mainly recent public initiatives through appropriate use of budget funding (Research, SME)  Critical mass, grouping of energies, system approach necessary (national vs regional?)  Legal, tax issues are key (No European patent!)

10. 10 How to support seed? Interesting initiatives (private, public, financial, political)  IP2IPO (UK)=example GBP 20m loan to Oxford Chemistry Department repaid through 50% of IPR during 15 years  KAROLINSKA (S)=pooling of spin-offs sold to VCs  France = merger of Public Innovation Agency ANVAR (managing grants) and SME Development Bank creation of “pôles technologiques” (super clusters)  + UK, B, NL, ITA, etc Appropriation of “Lisbon Strategy” by EU Member States

11. 11 EIF’s role in this context  Be proactive (EU summit 23 March 2005) on the investment side = 1.Side funds with Business Angels (BA) (if structured as BA networks) (Specific EU funding under the Competitiveness & Innovation Programme) 2.Common approach with EIB, generation of hybrid instruments (Loan – Equity – Mezzanine)  Develop Advisory Services and Technical Assistance

12. 12 Advisory Services  Complement the 2 main product lines, EIF as a “ Multilateral Development Bank ” committed to provide technical assistance and advisory services  Objective is to provide financial engineering to organisations active in the field of VC and SME Guarantees  Fee based activity Two domains of intervention  Creation, growth and development of SMEs  VC, seed capital, guarantee schemes, business angel networks, tech transfer, etc. for regional and national authorities / Agencies  Complex financial structures: for the European Commission

13. 13 Advisory Services  TTA:Avoid fragmentation, incentive Research Centres to work together, bridge the gap between Research and Market  CDTI project:public Innovation Fund of Funds, with targeted support to Tech SMEs (Spain)

14. 14 TTA 1 Cluster Size Cambridge UK MunichBoston Researchers23,5509,2006,300 Publications38,00015,00010,000 Number of public companies created >38>11>4 Number of biotech companies located in cluster >200>110>60 Bay Area N/A 29,500 >44 >190 Large clusters necessary to build self-sustaining ecosystem Source:European Innovation Scoreboard, BCG Cluster Report 2001, EIF analysis and interviews

15. 15 TTA 1 Licensing Revenues 2002 Licensing activity too small to create any noticeable effects US Europe UniversityRevenues [m€]UniversityRevenues [m€] Pasteur32.6 University of Edinburgh4.5 Utrecht*4.0 Cambridge3.1 INRIA*3.0 VIB*2.7 LMU Munich0.2 Note:*Includes other forms of revenues Source:European Innovation Scoreboard, BCG Cluster Report 2001, EIF analysis and interviews

16. 16 TTA 2: Focus of TTA funding: Types of SPVs funded by the TTA R&D Tech transfer / Proof-of-concept Marketable product «Techno- logy» IP «Prototype » IP LAB « Licensing » SPVs « Spin off » SPVs « Hybrid » SPVs Licensing to corporation Sale to corporation Purchase / investment by other investors IPO Potential exits for the SPV projects Investment focus of TTA

17. 17 CDTI 1 Fund of Funds Parallel supplementary vehicle The CDTI/EIF Spanish Venture Capital Investment Programme EIF Programme Manager/Advisor CDTI Programme technology partner Young Fund Window Generalist funds Tech / Innovation funds Foreign tech funds Tech SMEs Generalist SMEs Tech SMEs Co-invests 1:1