In a report on the financing of the technology sector (160 page / 4.8MB PDF), particularly start-up companies, the EIB said the creation of an information and data platform would help European ‘deep tech’ companies – those in fields such as micro- and nanoelectronics, nanotechnology, industrial biotechnology, advanced materials, photonics, and advanced manufacturing systems – to access funding.
The EIB said a tool to help investors better understand the technical and economic viability of highly innovative technology ventures would also support technology start-ups to access financing when they needed it.
The report said there was a “substantial market failure” in the financing of deep-tech solutions as the innovations these companies develop are “inherently risky, capital intensive and require patient, long-term financing”.
The EIB also noted there was a knowledge gap between investors and innovators which stops investors from assessing the viability of the technology they are looking to invest in.
TMT financing expert Andrew McMillan of Pinsent Masons, the law firm behind Out-Law.com, said the report and its recommendations were to be welcomed.
“It's always good to see initiatives with a view to making capital more easily available for development in the technology sector. This is quite clearly aimed at areas which the EIB have identified as having a longer gestation cycle than others,” McMillan said.
McMillan said technology companies found funding difficult especially as they started to grow from the initial stages of innovation.
"There seems to be agreement that for the smaller start-up business funding is available from friends and family and angel or seed investors. Where people are most vocal about not being able to find funding is in the scale-up stage and this is something the UK government has identified as well. There's definitely difficulty in finding funding at that level,” McMillan said.
McMillan said EIB’s focus on a knowledge gap between investors and technology companies was a good approach, but that different investors with varying risk appetites required differing amounts of information.
“Venture capital, which is beneficial for business on the smaller side, works because they're willing to take risks in the context of a portfolio of investments. Private equity has, in some ways, a more constrained approach in that investors expect a certain return from private equity funds, and to the extent there's a knowledge gap which is causing a problem I suspect it’s at that end of the market,” said McMillan.
“In the UK we have already seen an increase in ‘patient capital’, that is, investors who are willing to take a longer term view on returns and I suspect this is partly what the EIB is seeking to encourage elsewhere in Europe through these measures,” McMillan said.
The report identified nine solutions to the challenges it said the deep technology sector and small start-ups were facing, including providing grants, supporting the development of venture debt, and ensuring that technology companies were financed through their life cycles.
It then made three ‘core recommendations. The first is to introduce an information sharing platform and, in the medium term, a technology credit assessment tool to support public decision-making processes.
The second recommendation was to refine existing financial instruments and programmes to better fit this sector’s risk-return profile, and the third was to enhance the funding environment by fostering innovation ecosystems and regional clusters. These, the EIB said, should provide essential business advice to technology companies and facilitate networking with potential investors.