FinNetSME: What has been achieved? Detailed outputs Financing enterprise growth in the regions of the EU – models and recommendations FinNetSME Final Conference, Brussels, 6 June 2007 Christian Müller, NRW.BANK – Christian Saublens, EURADA – Martin Dastig, Investionsbank Berlin – Thomas Hüttich, Investitionsbank Berlin – Juris Cebulis, Mortgage and Landbank of Latvia – Cornelia Gerster, EAPB

2 FinNetSME Final Conference, Brussels, 6 June 2007 Contents Christian Müller, NRW.BANK  FinNetSME: objectives and approach  Market gaps along the regional value chain of SME finance  Financial models and best practice examples  Making FinNetSME’s results accessible  Conclusions and outlook

3 FinNetSME Final Conference, Brussels, 6 June 2007 I. FinNetSME: Objectives and Approach Importance of SME Finance for Reaching the Lisbon Goals  SMEs play a central role in achieving the Lisbon objectives  23 million SMEs account for 99% of all enterprises and 66% of private employment in the EU.  SMEs are a major source of entrepreneurial skills, innovation and contribute to economic and social cohesion  Strengthening the competitiveness of SMEs is the key to more economic growth and employment!  Access to finance is one of the most severe bottlenecks in this field!  FinNetSME strives to address the existing market gaps by developing innovative financing models and strategies! Christian Müller, NRW.BANK

4 FinNetSME Final Conference, Brussels, 6 June 2007 I. FinNetSME: Objectives and Approach FinNetSME – Methodological Approach Christian Müller, NRW.BANK  Stock-taking: accumulation of information on practices in the various regions of the EU  Analysis: assessment and clustering of most common financing problems of SMEs (market gaps) in FinNetSME’s four working groups, each focusing on a specific issue of SME financing:  Regional value chain (coordinator: EURADA)  Early-stage finance (coordinator: INEC)  Micro-financing schemes (coordinator: IBB)  Equity-financing (coordinator: IB-SH)  Development of models, i.e. templates, as guidance for the development of innovative instruments to increase SMEs’ access to finance

5 FinNetSME Final Conference, Brussels, 6 June 2007 II. Market Gaps along the Regional Value Chain Starting Point: The Regional Value Chain of SME Finance Christian Saublens, EURADA

6 FinNetSME Final Conference, Brussels, 6 June 2007 II. Market Gaps along the Regional Value Chain Different Perspectives of the Same Problem To get a comprehensive view of financing problems / suitable tools, FinNetSME focuses on all players of the regional value chain:  Aspects deriving from the sphere of the SME, e. g.  Equity capital base  Collateral position  Managerial skills  Aspects deriving from the sphere of the suppliers of finance, e. g.  Profitability  Risk  Aspects deriving from the sphere of the public hand, e. g.  Bureaucracy  Lack of transparency  Lack of financial resources  State-aid-rules Christian Saublens, EURADA

7 FinNetSME Final Conference, Brussels, 6 June 2007 II. Market Gaps along the Regional Value Chain Identification of Specific Market Gaps Based on the analysis of the ideal typical Regional-Value-Chain and the discussions in FinNetSME’s working groups, three specific market gaps will serve to demonstrate the results:  Early-stage-finance, esp. SMEs’ access to venture capital  Micro-finance solutions for small and micro-enterprises  Combination of financing and consultancy / investment readiness schemes Christian Saublens, EURADA

8 FinNetSME Final Conference, Brussels, 6 June 2007 III. Financial Models and Best Practice Examples Early Stage Finance / SME Access to Venture Capital A.Clustering of Problems  Cluster 1 – Sphere of the SME  Lack of knowledge and asymmetrical information  Lack of equity capital base  Cluster 2 – Sphere of the supplier  Market not developed  Market cyclical  Specific management challenges (Risk assessment, controlling of portfolio companies, exit)  Cluster 3 – Sphere of the public hand  Bureaucracy (reporting requirements)  Attracting private funding as co-financers  EU rules for using European means Martin Dastig, Investitionsbank Berlin

9 FinNetSME Final Conference, Brussels, 6 June 2007 III. Financial Models and Best Practice Examples Early Stage Finance / SME Access to Venture Capital B.Instruments, Tools and Models  Instruments  Equity  Silent partnership / Soft loans  Tools  Funds  Fund management  EU-Funding  Models  Use of ERDF-funds  Attraction of private investors’ money  Sector-specific VC-funds Martin Dastig, Investitionsbank Berlin Venture Equity-Investment of VC provider Profit potential Company growth

10 FinNetSME Final Conference, Brussels, 6 June 2007 III. Financial Models and Best Practice Examples Early Stage Finance / SME Access to Venture Capital C.The FinNetSME Model: Equity Financing Martin Dastig, Investitionsbank Berlin

11 FinNetSME Final Conference, Brussels, 6 June 2007 III. Financial Models and Best Practice Examples Early Stage Finance / SME Access to Venture Capital D.Best Practice: Equity Financing in Berlin, Germany  VC Fonds Berlin  VC Fonds Berlin GmbH  Management IBB Beteiligungsgesellschaft mbH  Fund volume: 20 mill. EUR  Berlin Kapital  Fund inside the bank without own fund vehicle (SPC)  Fund management by the bank  Fund volume: 15 mill. EUR  In structuring: VC Fonds for the creative industries  1st regional non-technology-oriented VC Fund in Berlin  Fund Volume: 30 mill. EUR Martin Dastig, Investitionsbank Berlin

12 FinNetSME Final Conference, Brussels, 6 June 2007 III. Financial Models and Best Practice Examples Early Stage Finance / SME Access to Venture Capital D.VC Fonds Berlin Martin Dastig, Investitionsbank Berlin Private investors‘ money VC Fonds Berlin GmbH IBB-Beteiligungs- gesellschaft mbH Investitionsbank Berlin EFRD Management- contract Portfolio Companies 50% 30% on top 100 % owner Venture AVenture BVenture C National co- financing 50%

13 FinNetSME Final Conference, Brussels, 6 June 2007 III. Financial Models and Best Practice Examples Early Stage Finance / SME Access to Venture Capital E.EU Funding  CIP Framework  Co-Investments in regional or specialised VC Funds (High Growth and Innovative SME Facility (GIF))  SME Guarantee Facility (SMEG)  Grants in the framework of the Capacity Building Scheme (CBS)  ERDF financial engineering  University spin outs as an efficient instrument for technology transfer? Martin Dastig, Investitionsbank Berlin

14 FinNetSME Final Conference, Brussels, 6 June 2007 III. Financial Models and Best Practice Examples Micro-loans for Small and Micro-Enterprises A.Clustering of Problems  Cluster 1 – the sphere of the SME  Lack of sound business and management experience  Weak collateral position of micro-enterprises and start-ups  Cluster 2 – the sphere of the supplier  High administration and credit assessment costs due to small size of loans  High risk associated with the start-up phase of the enterprise  Cluster 3 – the sphere of the public hand  Lack of financial resources  Bureaucracy and complex eligibility rules, banking regulations Thomas Hüttich, Investitionsbank Berlin

15 FinNetSME Final Conference, Brussels, 6 June 2007 III. Financial Models and Best Practice Examples Micro-loans for Small and Micro-Enterprises B.Instruments, Tools and Models  FinNetSME partnership offers a variety of instruments and tools for tailor- made micro-finance-schemes.  Some sort of public subsidies is crucial: national, regional or EU funds for capital, guarantee scheme or accompanying measures.  Accompanying business support measures can reduce risk and lower costs of the financier  Different tools cluster around two main approaches that have been formed into general models:  Facilitating micro-credit supply through commercial banks by forwarding refinancing advantages and risk sharing with public guarantee scheme (“house bank-principle”)  Revolving regional micro-credit fund co-financed by EU-Structural Funds (ERDF/ESF) with independent fund management by regional finance institution (“financial engineering”) Thomas Hüttich, Investitionsbank Berlin

16 FinNetSME Final Conference, Brussels, 6 June 2007 III. Financial Models and Best Practice Examples Micro-loans for Small and Micro-Enterprises C.The FinNetSME Model 1:  Public private risk sharing  FinNetSME examples:  INVEGA (LT)  Investitionsbank Berlin (D)  NRW.BANK (D)  TEMPME S.A. (GR)  Finpiemonte Turin (IT)  Castilla y León (E)  Latvian Guarantee Agency Thomas Hüttich, Investitionsbank Berlin

17 FinNetSME Final Conference, Brussels, 6 June 2007 III. Financial Models and Best Practice Examples Micro-loans for Small and Micro-Enterprises C. The FinNetSME Model 2:  Financial Engineering  FinNetSME examples:  MBL (LV)  Finnvera (FI)  IBB-SME Fund (D)  SAB (D)  NRW.BANK (D) Thomas Hüttich, Investitionsbank Berlin

18 FinNetSME Final Conference, Brussels, 6 June 2007 III. Financial Models and Best Practice Examples Micro-loans for Small and Micro-Enterprises D.Best Practice Example: Berlin Start Thomas Hüttich, Investitionsbank Berlin  Promotional loans up to 100 TEUR for investments and working capital  Target group: Start-ups and young enterprises up to 3 years  Obligatory combination with 80% guarantee by regional guarantee agency (BBB), thus no collateral needed  Favourable interest rates, maturity 6-10 years, 2 years repayment exemption, financing up to 100 % of costs  Attractive bank margin for credit delivery, risk assessment and remaining liability  Integrated application process, duration 10 days

19 FinNetSME Final Conference, Brussels, 6 June 2007 III. Financial Models and Best Practice Examples Combining Financing and Consultancy A.Clustering of Problems  Cluster 1 – the sphere of the start-up/SME  Lack of skills to start/develop a business  Insufficient financing (e.g., lack of collateral)  Information asymmetry (e.g. on funding sources, state support etc.)  Cluster 2 – the sphere of the supplier  High administration costs  Lack of credit history in case of start-ups  High risk associated with the start-up phase of the enterprise  Cluster 3 – the sphere of the public hand  Low level of initiative in starting own businesses (regional disparities)  Limited funding and support instruments for business start-ups  Insufficient skills/experience in providing financial/training support for special target groups (e.g. young people, unemployed, people with special needs etc.) Juris Cebulis, Mortgage and Land Bank of Latvia

20 FinNetSME Final Conference, Brussels, 6 June 2007 III. Financial Models and Best Practice Examples Combining Financing and Consultancy B.Instruments, Tools and Models  Existing non-financial instruments include:  Potential start-up training  Staff/entrepreneur/investor training  Advisory services  Mentor networks  Business plan contests  Existing financial instruments: loans, guarantees, grants, equity financing  Possible tools/ models on combining both financial and non-financial support to SMEs involves solutions like:  One stop-shops (information+ advise/consultancy+ financial support);  Pre-loan coaching schemes (consultancy+ financing) Juris Cebulis, Mortgage and Land Bank of Latvia

21 FinNetSME Final Conference, Brussels, 6 June 2007 III. Financial Models and Best Practice Examples Combining Financing and Consultancy C.The FinNetSME Model: Business plan preparation Project application Start-up StateESF Financing consultancy Analysis of business plans Consultants Financial institution Start up grants Micro loans Financial support Training/consulting Loan fund Juris Cebulis, Mortgage and Land Bank of Latvia

22 FinNetSME Final Conference, Brussels, 6 June 2007 III. Financial Models and Best Practice Examples Combining Financing and Consultancy D.Best-practice example: Integrated support for creation of SMEs in Latvia  In December 2006, MBL launched a new programme co-financed by ESF: “Training, consultancy and financial support to business start-ups”.  Goal: to stimulate small business activities by encouraging people, especially first-time entrepreneurs, to start their own business.  Results/ future perspectives: start-ups to be trained until mid-2008; 300 to be financially supported; programme to continue in new programming period Juris Cebulis, Mortgage and Land Bank of Latvia

23 FinNetSME Final Conference, Brussels, 6 June 2007 III. Financial Models and Best Practice Examples Combining Financing and Consultancy D.Best-practice example: Integrated support for creation of SMEs in Latvia Training O u t c o m e: GrantsMicro-loan Financial Support 2-3 month course; 1000 participants Business plans (BP) prepared Analysis of BP Adequate BP get financed (  300) up to 25k EUR 1. Start up grant (investment in start capital); 2. First year's salary grant 3. Mentoring grant Loan fund (11,9 mill. EUR): MBL -3,7 State - 2,0 ESF - 6,2 Juris Cebulis, Mortgage and Land Bank of Latvia

24 FinNetSME Final Conference, Brussels, 6 June 2007 IV. Making FinNetSME Results Accessible The FinNetSME Database A.Why a FinNetSME database?  Pools, categorises and analyses information on  74 financial and 24 non-financial business support instruments  19 participating regions  21 formal members and associated partners and 14 related institutions  Details of 86 relevant contact persons  Models  Transfers knowledge on good solutions onto the European level and into other regions.  Builds the cornerstone for sustainable project results and a competence centre on regional SME finance.  Is available at Cornelia Gerster, EAPB

25 FinNetSME Final Conference, Brussels, 6 June 2007 IV. Making FinNetSME Results Accessible The FinNetSME Database B.How does the database describe instruments? Cornelia Gerster, EAPB  Concise overall description + Basic information on eligible beneficiaries/investments/ amounts and financing sources + Cross-references to region, responsible partner, contact person, supplementary instruments + Class/Type: categorization + Assessment

26 FinNetSME Final Conference, Brussels, 6 June 2007 IV. Making FinNetSME Results Accessible FinNetSME – Guide on “Experiences and Practices”  A major FinNetSME print publication providing information on the project history, the activities of FinNetSME and the partners.  Gives detailed explanation of FinNetSME models of the regional value chain, on early stage finance, equity financing and micro-credits.  Hardcopies available on the documentation table. Cornelia Gerster, EAPB

27 FinNetSME Final Conference, Brussels, 6 June 2007 V. Conclusions and Outlook Key Achievements  Financing and consultancy for SME are an important key to growth and innovation in the EU.  FinNetSME developed recommendations for policy-makers and providers of innovative financing products to address the needs of these companies.  Financial models based on FinNetSME‘s ideas have already successfully been implemented in some regions.  The proposed financial models can serve as a basis for financial engineering during the new programming period.  But: State aid rules often limit the possibilities of public support measures for SMEs! Christian Müller, NRW.BANK

28 FinNetSME Final Conference, Brussels, 6 June 2007 Thank you very much for your attention!  Additional information about the work of FinNetSME is available at and in the “Experiences and Practices” guide! Christian Müller, NRW.BANK