Access to finance for digital innovation: what are the key steps to bridge the gap with the EU?

Regulatory sandboxes and business angels, crowdfunding and venture capital – the terms may be colourful,  but the support they describe is vital to the funding ecosystem needed to kick-start and support ICT innovation among small businesses in the countries of the Eastern Neighbourhood.

In the past months, the EU4Digital Facility ICT Innovation team has been focusing its efforts to promote a common legislative framework in the EaP region that would favour ICT innovation, based on EU norms and best practices. The aim is to identify the major gaps between the EU and EaP region and to reveal the directions in which partners can take the necessary steps to bridge the difference.

Working towards this objective, the EU4Digital Facility will elaborate national policy recommendations and action plans for their implementation for each EaP partner country according to the following policy areas that each country has selected:

• Intellectual property rights management for digital innovations (Armenia)
• New organisational forms for supporting ICT Innovation (Azerbaijan)
• Digital innovation SMEs’ access to finance (Georgia, Ukraine)
• ICT innovation ecosystems for start-ups and scale-ups (Moldova)
• Digitising industry (digital transformation of SMEs in traditional sectors) (Belarus)

As a basis for analysing the gaps between the EU and EaP in the selected policy areas, the EU4Digital Facility has identified the best EU practices for regulation in the respective policy areas.

This article provides an overview of the EU best practices in the policy area of Digital innovation SMEs’ access to finance, which has been selected by Georgia and Ukraine.

EU BEST PRACTICES FOR DIGITAL INNOVATION SMEs’ ACCESS TO FINANCE 

Within the European Union, the legal framework for access to finance for start-ups and scale-ups consists of two main blocks: the Digital Single Market Strategy and the Capital Markets Union. Also, non-legislative actions enabling the effective enforcement of competition and single market laws are seen as efficient policy tools and are used more often than regulatory prescriptions.

SMEs can access finance in all phases of their lifecycle (creation, expansion, business transfer).  Relevant aspects of the financial ecosystem and policy include: regulatory sandboxes for alternative finance, crowdfunding, business angels, venture capital, fast track support for high-risk innovations, and funding of digital transformation of traditional enterprises. 

Using these best practices to develop the financial ecosystems of the Eastern Partner countries, and taking advantage of existing EU support tools, funding instruments and programmes will unlock the innovation potential among SMEs in the region, helping businesses to tailor their products and services to market needs. 

Regulatory sandboxes for alternative finance are a controlled environment in which innovation in financial technology can take place while providing safeguards to manage risks. They enable banks and FinTech players to experiment with innovative financial products or services by removing unnecessary regulatory barriers and reducing the time of bringing new ideas to market. In the EU, there are a number of cases where regulative fintech sandboxes have been established. 

In April 2019, the European Commission and the European Supervisory Authorities (ESAs) jointly launched the European Forum for Innovation Facilitators (EFIF) to promote greater coordination and cooperation between innovation facilitators (regulatory sandboxes and innovation hubs) to support the scaling up of FinTech. Crowd and peer-to-peer finance (‘crowdfunding’) is recognised as an important source of non-bank financing in support of innovative companies and start-ups. In 2018, the EC established a European label for investment- and lending-based crowdfunding platforms that facilitates the scaling up of crowdfunding services and enables cross-border activity.           

Business angels are increasingly investing alongside seed venture capital funds. These are high net worth individuals who usually provide smaller amounts of finance at an earlier stage than many venture capital funds are able to invest. Networks of business angels are established, and miscellaneous support tools are developed – ranging from training to tax incentives and co-investing. 

The most prominent business angel networks and communities include: World Business Angels Association; World Business Angel Investment Forum (WBAF); Business Angels Europe; European Trade Association for Business Angels, Seed Funds and Early Stage Market Players (EBAN); InnovFin Business Angels.

Business angels funds: European Angels Fund (EAF).

Venture capital investments are regulated and stimulated by a set of legal acts on investment funds and collective investments. The main European framework is the Directive on undertakings for collective investment in transferable securities (UCITS). The European venture capital funds (EuVECA) regulation covers a subcategory of alternative investment schemes that focus on start-ups and early stage companies. Alternative investment funds are regulated by the Alternative investment fund managers (AIFM)Directive, and a number of others, including the Directive and Regulation to facilitate cross-border distribution of funds.

A broad set of policy tools to foster local and foreign venture capital investments and increase investment capacity includes a special taxation regime on the national level.  

Venture capitalists are also provided with opportunities to co-invest with proven European funds in order to amplify venture investments.

The European Investment Fund (EIF), part of the EIB Group, has thus financed more than 1 million SMEs using either own resources or those provided by the European Investment Bank (EIB), the European Commission, EU Member States or other third parties. In Ukraine, 713 SMEs with 46,257 workplaces have received EIF funding so far, at a total value of €213 million, while in Moldova,  254 SMEs representing more than 11,000 jobs have received funding worth €102 million (www.eif4smes.com). Armenia and Georgia are also eligible for support under a number of EIF tools.

InnovFin Venture Capital targets investments into venture capital funds that provide funding to enterprises  in their early stage operating in Horizon 2020 sectors (open also for Horizon 2020 Associated Countries, including Armenia, Georgia, Moldova and Ukraine). In April 2018, the EC and EIF launched the Pan-European venture capital fund-of-funds programme (VentureEU). Around 1,500 start-ups and scale-ups are expected to gain access across the whole EU.

Fast track support for high-risk innovations – The Fast Track to Innovation (FTI) is a fully-bottom-up innovation support programme promoting close-to-the-market innovation activities in any area of technology or application. It can help partners to co-create and test breakthrough innovation ideas and give them the last push before shaking up the market. Armenia, Georgia, Moldova and Ukraine are eligible to apply to the programme.  

Funding of digital transformation of traditional SMEs at EU level is provided by the EU COSME Loan Guarantee Facility (LGF), regardless of current level of the enterprise digitalisation. SMEs from COSME Associated Countries, including Armenia, Moldova and Ukraine are also eligible. 

Training opportunities and decision-making tools are promoted across the EU and internationally to facilitate awareness-raising, the exchange of best practices and extension of special knowledge required for high-risk investments. 

The Early stage investing Launchpad (ESIL) and WBAF Business School are prominent institutions for investors who wish to act as business angels, venture capitalists, and venture fund managers. STARTUP ECOSYSTEM EU provides coaching to start-ups and companies wishing to attract venture funding and helps them to prepare their business for dialogue and relations with these types of investors.

Information and advisory support are available to SMEs seeking to finance digital innovations through one-stop-shop portalsacross the European Union. Among those are the Access2finance portal, which extends to Ukraine and Moldova, and the EIC wizard (which is also available to innovators from countries associated to the EU Horizon 2020 programme). Information systems like EuroQuity and ALTFInator act as matchmaking platforms connecting finance-seeking SMEs with investors and lenders. 

For the EaP countries, the following tools are available: Amadeus; Crunchbase; Kompass; European Business Register – EBR; EU Insolvency Registry, alongside national databases.

NEXT STEPS – RECOMMENDATIONS AND ACTION PLANS

The full report developed by the EU4Digital ICT Innovation team on EU best practices in the area of access to finance for digital innovation SMEs has been used to develop the gap analysis framework for Georgia and Ukraine; on the basis of the gap analysis, a set of policy recommendations is currently being drawn up for the two countries, which will be aligned with national counterparts. 

These recommendations will then form the basis for the elaboration of individual national policy implementation action plans for Georgia and Ukraine. The action plans will identify concrete stakeholders in the partner countries, EU tools, platforms, and practices that can be accessed and adopted by EaP stakeholders, and possibly concrete counterparts in EU countries. Further activities by the Facility (training, study visits, networking events, promotion activities, etc.) will then support the interested stakeholders in their further activities on overcoming the gaps.

Adopting EU best practices in this way will help to boost the development of a mature ICT innovation and start-up ecosystem with well-functioning support organisations in the Eastern Partnership countries. It will also allow researchers and innovative businesses to access EU funding instruments more easily.

Ultimately, a common legislative framework will enable Eastern Partner countries to benefit from the EU Digital Single Market, and to exchange and develop new innovative ideas with counterparts from EU member states.

The policy recommendations and national policy implementation action plans can be downloaded from the EU4Digital library for Georgia here and Ukraine here.