Funding innovation: why the EIF is uniquely placed to explore the space between public and private

In 2019, as the world marked the 50th anniversary of the Apollo 11 Moon landing, we at the EIF celebrated our own 25th anniversary. These milestones have inspired me to consider the role that financing plays in fostering innovation.

Earlier this year, many of us were thinking back to July 1969, when Apollo 11 astronauts Neil Armstrong and Buzz Aldrin, stepped onto the surface of the Moon. Many people still continue to regard this as the pinnacle of human technological achievement.

But it would not have been possible without considerable organisational, technical and financial commitment. Apollo is estimated to have cost around USD 153 billion in today’s money, involved the skills of over 400,000 people at its peak and close collaboration between many sectors (including the support of over 20,000 industrial companies and universities).

This is a powerful reminder, that by working together, and by enabling and harnessing innovation, we can tackle some of the greatest challenges of our own time.

The supply of public goods

Being at the forefront of innovation is a major objective around the world today. For private enterprises wishing to create new markets and remain competitive on a global scale. And, for national policy makers looking for important instruments in their public policy toolkit to improve their effectiveness and efficiency.

Governments often look at technology and innovation to promote their economic sovereignty and geopolitical agenda, which explains growing investments in knowledge, higher education, research and science, and increased public spending dedicated to R&D projects.

In other words, one can look at innovation as a public good — which can be simultaneously positive and negative.

On the one hand, public goods are associated with positive externalities: innovation will benefit many, through the creation of well-paid jobs, wider consumer choices, higher productivity, faster growth and better quality of life.

At the same time, public goods are characterised by non-rivalry and non-exclusion. This means that once provided, everyone can enjoy the benefits, from environmental protection measures to medical knowledge, whether they pay for them or not.

From this perspective, sole reliance on the market often fails, leading to underinvestment. The challenge then becomes one of how best to incentivise private market producers to generate public goods, if they cannot exclude ‘free-riders’?

The EIF’s role

With its dual mandate as a public institution, but with market-oriented approach, this is the space — if you excuse the pun — where the EIF operates.

We intervene to correct market imperfections using financial instruments. To outline the scope of our ambition, in 2018 we committed EUR 10.1bn, supporting around 280,000 small businesses to better access finance.

As we see it, innovation is increasingly emerging from agile SMEs, either individually (think of the fabled start-up on its way to become a unicorn), or aggregated around incubators and accelerators, forming digital innovation hubs in major European cities. Or in private and public research and scientific centres. But mostly no longer from the large corporates.

A stronger entrepreneurial spirit, more readily embracing professional risk-taking, is increasingly the norm amongst Millennials.

This group, now coming of age in decision-making positions, no longer expect a ‘job for life’ with an established enterprise (assuming they continue to exist) but rather often pursue ‘portfolio careers’.

Therefore, our investment strategies for the future need to adapt.

Getting the financing right

While we can offer more suitable financing options to SMEs than 5 -10 years ago, needs are becoming extremely diverse. Some innovations are incremental, while others disrupt entire industries.

How can we respond to both?

The EIF’s support is structured around two pillars: debt financing instruments and equity.

Debt financing accounts for 60% of what we do and is more suitable for incremental innovation. Although banks hugely support SME financing in Europe, their risk appetite for SME lending is generally low and falling.

The rate of return on SME lending is often insufficient to remunerate for the capital they must deploy to satisfy financial regulators. By providing portfolio guarantees, we incentivise banks to accept more risk in their SME financing.

The equity business line represents around 40% and supports more disruptive fast-growing businesses through venture capital and private equity.

Yet despite high profile successes, with names such as Skype, Skyscanner, and Spotify — the largest European exit of all time in April 2018 — viewed globally, Europe is probably still lagging behind where it could be.

Fortunately, there are comprehensive plans to improve this situation.

Operating frameworks

In the next EU budget (2021–2027) #InvestEU will replace EFSI /the Juncker Plan , combining 14 EU financial instruments. Based on a EUR 38 million guarantee from the EU budget, InvestEU will target around EUR 650 billion of new investments.

Innovation-related topics, such as digitalisation, skills, space, green and blue economy, as well as sustainability and inclusiveness are expected to continue having a prominent role within the foreseen thematic programmes.

Our aim is to match this ambition with the necessary financing for SMEs. So that Europe’s tech champions can start up, and remain competitive on a global scale.

To support Europe’s innovation capacity, there is a need to promote the emergence of EU-based venture capital funds, that have the necessary scale and international recognition for leading financing rounds denominated in euros, keeping companies on home ground.

Commencing countdown — engines on

We need to look at innovation from a common European perspective. Even if from a return perspective, the European venture capital landscape is now on a par with other geographies such as the US, a well-functioning broader ecosystem should remain our goal.

To support Europe’s innovation capacity, there is a need to promote the emergence of EU-based venture capital funds that have the necessary scale and international recognition for leading financing rounds denominated in euros, and keeping companies on home ground.

It is therefore essential that a truly Pan-European approach to funding innovation gets a more prominent role and one that acknowledges that the benefits are not always immediately clear at the outset.

After all, did you know that throughout the 1960s polls indicated that a significant number of Americans did not think that the Apollo project was worth the cost, only indicating support at over 50% at the time of the Moon landing itself? Whilst, to date Apollo has resulted in over 2000 spinoffs?

If we need a reminder of why investment in innovation matters: amongst those Apollo spinoffs are some that helped kick-start the digital revolution, enabling me to write this article and you to read it, anywhere in the world.

Pier Luigi Gilibert is Chief Executive of the EIF. All the opinions expressed within this article, and any errors, are the author’s own.