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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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%
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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
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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
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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
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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) Fon@de Castilla y León (E) Latvian Guarantee Agency Thomas Hüttich, Investitionsbank Berlin
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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
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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
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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
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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
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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
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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: 1.000 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
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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
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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 www.finnetsme.org. Cornelia Gerster, EAPB
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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
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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
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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
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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 www.finnetsme.org and in the “Experiences and Practices” guide! Christian Müller, NRW.BANK
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