Promoting the sustainable growth of innovative SMEs

1. Promoting the sustainable growth of innovative SMEs Meirion Thomas Director CM International

2. Presentation structure • Introduction • The experiences gathered by Crescendo Network • Regional finance as a system • Finance Wales plc as an example of a regional finance system

3. Format of the Crescendo Network • A “platform for exchange” • Web site; Newsletters • Technical Papers • Study visits; Workshops; Conference • Workshops explored:- • the availability and accessibility of finance for innovative, growth-oriented firms. • the different financial instruments available to firms, • the factors that influence supply and demand for capital, • public-private partnerships to improve the efficiency of SME finance markets. • the main challenges facing public authorities. • the use of the analogy of the regional innovation system

4. The strategic context • National finance systems are different. • The Observatory of European SMEs identifies two types of national finance system: • market-oriented systems such as that of the UK and Ireland • bank-based systems, such as those found in Germany, Italy, Spain and Austria. • Bank-based systems = mostly loans • Market-based systems = wider range of finance instruments, including equity and bonds.

5. Some key features identified by Crescendo • A complex “tiered system” of regional funds is common • micro-loans to seed • 1st and 2nd stage finance • Guarantee funds and Mezzanine funds • Finance for innovation or SMEs is as much about “demand stimulation” as it is about increasing the supply of finance • Financial intermediaries are themselves a key target audience for awareness-raising initiatives • SMEs preparing proposals with support of finance professionals demonstrate a better understanding of the impact of an external investment • But, not all financial intermediaries are “up to the task”.

6. The region as a “system” • Crescendo members stressed the importance of understanding the regional context when providing investment funds and investment management support to small businesses. • Crescendo also revealed the complexity of the supply & demand “equation” in most countries and regions and the interactions between different “actors” • This sounds very similar to the concept of a regional “innovation system”

7. Regional finance as a system

8. The nature of regional innovation systems • Innovation is seen as a complex dynamic involving:- • government, • public authorities, • business, • educational institutions • other intermediaries, • The focus is not only on suppliers and users of new technologies, but also on the contributors, intermediaries and beneficiaries emphasising: • Links and interactions • Building awareness, • Stimulating networks • Building critical mass of entrepreneurial and innovative companies • Improving access to adequate and integrated sources of finance and related support • Many regional authorities do not see this as a horizontal, underpinning activity but it involves mobilising other regional and national partners including private sector investor

9. Forces at work within regional finance systems • National and regional authorities are significant players • Funders of the research base and of SMEs • generators of innovations (e.g. in healthcare, or education) • customers, • National and regional authorities long recognised as key stakeholders in national and regional innovation systems. But…. • Although the concept of ‘regional’ systems of finance is closely related to thinking about regional innovation and regional development, • The role of national and regional authorities in finance systems is less clear-cut

10. Challenges for regional providers of finance • How to interact with a range of financial organisations that follow commercial principles? • How to encourage and involve other, national and regional, players in the finance system? • How to ensure that all financial players develop collaborations with appropriate partners, whether from the regional innovation system, or the regional enterprise ‘system’? • Do regional and national authorities operate in a ‘market proving’ manner (rather than market failure) drawing in private sector provision?.

11. Finance Wales plc as an example of a regional system approach“We recommend that Wales should establish a Regional Development Bank or Fund to meet the identified needs of SME financing in Wales.”Extract from Task Force recommendations to the Welsh Assembly Government

12. Finance Wales was created by the Welsh Assembly Government and the Welsh Development Agency through a combination of European and private sector backing to assist in the establishment and development of Welsh SMEs

13. ERDF Loan Finance Wales plc - Company Structure Welsh Assembly Government Independent Board Finance Wales Plc Finance Wales Investments Ltd Xenos Ltd Operations IndependentBoard Management Support Programmes

14. Investment Infrastructure A lifecycle package £1,000+ 500 Equity Mezzanine Royalties licensing Culture change 150 100 Loans 50 Personal Funds/Grants 25 Public/Private Personal/Public

15. Direct investment: Equity fund (€30 million fund) Mezzanine fund (€30 m fund) Loan fund (€50m fund) Indirect investment: Business Angel network Innovation support: Academic Spin out Wales Technology Commercialisation Management support: Pre-investment support Post investment support Non Executive Director Register Mentor programme Investor ready support Access to capital Investment ready training Investor fora “First Tuesday” events Capabilities established

16. Some lessons for sustaining SME finance at regional level:- • Regional finance systems rely on persuading key players such as commercial banks and venture fund managers into niche regional finance markets • Increasing regulatory and competitive pressures on Banks will make it hard for them to service marginal SME markets, unless a range of public and private sector bodies can help them in this task. • Regional and national finance systems need to work together to collect the feedback and evidence needed to inform future decision-making. • A co-ordinated approach is required, whereby SME finance schemes involve partners with shared, synergistic interests in their delivery, and form part of a coherent strategy, articulated at both national and regional level.

17. Thank You