Venture Capital in Europe. Evidence-based insights about Venture Capitalists and venture capital-backed firms

The purpose of this report is to provide an overview of the recent trends in the venture capital (VC) market in the European Union (EU). In particular, it investigates and documents the characteristics of VC transactions, venture capitalists and VC-backed firms in the context of EU small and medium-sized enterprises (SMEs). In recent years, the European Commission has devoted increasing attention to this area through relevant policy actions aiming to stimulate the adoption of different sources of external financing available to SMEs that face barriers to more traditional financing. In particular, the 2015 capital markets union (CMU) action plan included among its key objectives the financing of innovation, start-ups and non-listed companies, including by supporting new VC investments. Moreover, the new 2020 CMU action plan further incentivises the adoption of alternative sources of funding for SMEs (see, for instance, Action 5). The increase in VC penetration in the EU market would lead to at least two complementary beneficial effects, i.e. the diversification of the funding portfolio of companies and professional support in their earlier stages of development to new and innovative SMEs, the backbone of the European economy. At the same time, being the target of a VC investment could have implications for the SME status of the VC-backed company. The current European Commission definition of SMEs (Recommendation 2003/361/EC) sets size-based thresholds for a company to be considered an SME. If a firm is not autonomous, i.e. it is controlled by a third party, the assessment of the size should also include the figures for other companies within the same group asthe assessed firm. Accordingly, if the VC investor acquires more than 50 % of the company’s capital or voting rights through its investment, the target company itself and the VC investor are considered as a group and, consequently, these companies may lose their SME status. Besides classifications, this may lead to a concrete impact on the VCbacked firm, which, by losing SME status, would cease to be eligible for the European Commission’s dedicated funding programmes (e.g. Horizon 2020). The report focuses on various aspects of the status of the VC market from 2008 to 2018. In particular, it provides evidence on (i) the development of VC investments; (ii) the most significant features of VC transactions; (iii) characteristics of firms targeted by VC investments; (iv) the impact of VC investments on measures of the growth of target companies; (v) investment strategies of venture capitalists in targeting firms; and, lastly, (vi) the implications of VC, and potential changes to the 50 % threshold, for the current definition of SMEs.