Regional Studies, 1998, Vol.32, pp. 405-409
A Policy Response to Regional Disparities in the Supply of
Risk Capital to New Technology-Based Firms in the
the European Seed Capital Fund Scheme
Gordon C. Murray
Warwick Business School, University of Warwick, Coventry CV4 7AL, England
Venture capital High technology Regional development Small firms
The European Seed Capital Fund Pilot Scheme (1988-95) was a European
Commission response to two primary concerns that: i) private venture capital firms
in Europe were increasingly retreating from the financing and support of start-up,
early-stage and, particularly, technology-based enterprises; and ii) existing spatial
concentrations in the supply of venture capital prejudiced the formation of new,
innovative businesses in less economically developed regions of the Union. This
paper presents the updated results of a study of this Scheme in 1992. The
comparative internal dynamics of the Seed Funds are explored. The Scheme realised
its goal of encouraging private investment into innovative, technology-based young
firms. However, the continued ability of the funds to meet longer-term commercial
and/or regional developmental objectives is questioned given scale-related problems
of economic viability.
The effective economic and social convergence of the, now fifteen, member states of
the European Union was reconfirmed at Maastricht in 1991. However, a significant
barrier to realising the scale and scope economies of European-wide activity remains
the disparate economic development both across and within individual member states.
The Commission’s commitment to ‘spatial justice’ (Giannakouru, 1996) has
engendered a wide range of initiatives targeted to less developed areas of the Union.
SMALL & MEDIUM SIZED ENTERPRISES: THE ‘SPECIAL CASE’ OF
NEW TECHNOLOGY-BASED FIRMS (NTBFs)
Since the late 1970s, SMEs have been seen as an increasingly important policy
vehicle for economic and regional development goals within the Union. This interest
has come about through an increasing recognition of the major contribution of SMEs
to total employment and to the net creation of new jobs (Birch, 1979; Gallaher and
Stewart; 1986; Storey et al., 1989). SMEs are now firmly established as a major
focus of the Commission’s economic, technological and regional policies (EC White
Paper, 1994; EC Green Paper on Innovation, 1995).
Within the wider corpus of SMEs, new technology-based firms represent a peculiarly
attractive focus for policy makers. NTBFs are seen as offering significant potential
benefits in four cardinal areas of Union interest: employment creation, innovation,
export sales growth and regional development (Rothwell & Zegveld, 1982; Freeman,
1983; OECD, 1986; Oakey et al., 1988; Rothwell, 1989; Roberts, 1991; Coopers &
Lybrand, 1996). Interest in NTBFs has in part stemmed from an appreciation of their
critical role from the early 1970s in the economic growth of regions of high
technology activity in the USA, particularly Silicon Valley, California and Route 128
around Boston, Massachusetts (Oakey, 1984; Florida and Kenny, 1988; Roberts,
1991; Bygraves & Timmons, 1992), as well as their contribution to fast growth
European regions (Meyer-Kramer, 1985; Keeble, 1989) .
However, while successful NTBFs potentially offer material advantages to the
economic prosperity of a location, their genesis and early years are fraught with
extremely high levels of uncertainty and risk in virtually all areas of activity including
financing, technology and marketing (Oakey, 1984, Roberts, 1991, Murray, 1995).
For the individual NTBF, an exceptional technological offering is a necessary but not
sufficient condition for economic success. Their entrepreneurial founders have also
to manage organisational and product/market demands in both internal and external
environments characterised by their complexity and rapid rate of change.
THE FINANCING OF NTBFs
Financing difficulties are particularly acute for NTBFs on formation and at their
earliest stages of development (Roberts, 1991; Moore, 1993; Murray & Lott, 1995).
Limited tangible assets reduces their opportunity for collateral based lending from
retail banks, which is the predominant source of external finance to European SMEs
(European Network for SME Research, 1993; Storey, 1994). The economic value of
intellectual property rights created by the entrepreneur is, as yet, unproven and thus
unexploitable (Rumelt, 1984). The ability of new entrepreneurs from a technology/
scientific background to attract external equity finance, ie. formal venture capital, is
also prejudiced by their frequent lack of commercial experience and the absence of an
established track record of successful enterprise (Tyebjee and Bruno, 1984;
MacMillan et al., 1985; Goslin & Barge, 1986). In consequence, owner-managers of
NTBFs are, per force, very heavily dependent on own and family personal finance for
initial capitalisation (Oakey, 1983; Roberts, 1991; Moore, 1993) in addition to relying
on trade credit and, to a lesser extent, government grants (Utterback et al., 1988;
Moore and Garnsey, 1991).
The imperfections of capital markets have featured largely in the debates on SME
developmental constraints. The proposition of the existence of an ‘equity gap’, ie. a
market failure in the adequate provision of external risk capital, has been part of the
economic literature for over 60 years (see The Macmillan Committee, 1931). A
succession of official committees and research exercises since that date (see, for
example, Bolton, 1971; Wilson, 1979; Burns and Dewhurst, 1993; Confederation of
British Industry, 1993) have each cited evidence of the existence of equity gaps and
their deleterious effect on the viability of smaller businesses which are generally
characterised as having weaker liquidity, more volatile levels of profitability, an over-
dependence on short-term sources of finance and an insufficiency of shareholders’
funds or equity. NTBFs are seen as particularly vulnerable to capital constraints
given that initial investment costs, particularly R&D, are incurred before any prospect
of consequent revenues.
THE IMPORTANCE OF VENTURE CAPITAL
It is within the context of innovative firms seeking early-stage, external finance with
the potential promise of substantial returns but at a concomitant high level of risk that
the potential of venture capital as a source of entrepreneurial support appears most
relevant. Yet, almost without exception in the sixteen member countries of the
European Venture Capital Association, there has been a declining interest in the
support of start-up and early-stage investment since the mid 1980s. The European
venture capital industry has metamorphosed into a development capital industry
primarily occupied with the restructuring and refinancing of extant businesses (Table
Table 1. Allocation of European Venture Capital Investments by Stage 1993-95
‘Fast-track’ NTBFs, with their predominant reliance on external equity finance, are
particularly disadvantaged by such structural changes in the venture capital market.
Even if MBO/MBI statistics are removed from the European figures, the percentage
of total investment allocated to technology-based enterprises has remained largely
constant over a decade of enormous technological change in the world’s developed
economies (Fig. 1). The proportion of venture finance allocated to NTBFs in Europe
is in stark contrast to the pre-eminence of technology-based investments in the US.
Fig. 1. Technology Investments as a Percentage of ‘Adjusted’ Total Investment
(ie. excluding MBOs/MBIs and LBOs/Acquisitions) in Europe and the USA
(note: While this paper is exclusively concerned with ‘formal’ venture capital, an
exhaustive treatment of NTBF financing must necessarily address the potentially
critical role played by informal investors or “business angels” particularly within a
regional development context (Wetzel, 1993; Mason and Harrison, 1994)).
REGIONAL DISCONTINUITIES IN THE SUPPLY OF EUROPEAN
The existence of a regional dimension to the supply and demand for equity has
become a theme of increasing interest to economic geographers (McNaughton and
Green, 1988; Martin, 1989; Thompson, 1989; Mason and Harrison, 1991; Mason,
1992) given the consequent implications for development in regions with poorly
developed capital markets. Thompson, op. cit., argues that venture capital is a subject
of particular interest for four reasons - its role in new investment processes including
regional development disparities; its pivotal importance to high-technology
industries; the involvement by (US) public agencies in influencing the supply of
venture capital particularly to address regional ‘gaps’; and the ‘spatial choreography’
of venture capital occasioned by behavioural, institutional and distance constraints.
Yet, as Martin, 1989, and other have noted, given that few robust analyses exist on
the processes or outcomes of regional capital formation, theoretical understandings of
the spatial organisation of capital markets remains unsatisfactory.
The European distribution of venture capital is highly skewed. Some five countries
(in rank order: the UK, France, Germany, Italy and the Netherlands) represented 83%
of the cumulative funds raised to 1995 (ECU 46.7 billion) by the membership of the
EVCA. The UK is the oldest and largest centre of venture capital activity in Europe.
It alone represents 45% of cumulative funds, a sum over twice the size of its nearest
competitor, France (ECU 10.6 billion).
The considerable regional disparities in venture capital provision between European
member states is further mirrored at the sub-country level. Venture capital firms are
clustered in areas characterised by both established financial centres and high
concentrations of economic activity (see, for example, Ciciotti, 1986; Leinbach and
Amrhein, 1987; McNaughton and Green, 1988; Martin, 1989; Mason and Harrison,
1991; Sánchez, 1992; Minns, 1993). Critically, the information and governance
advantages of a close proximity between investors and investees result in capital
being primarily allocated within these clusters (Florida and Kenny 1988).
Mason and Harrison, 1991, supporting the case for a regional equity gap in the UK,
further note that depressed regions in the Midlands and Northern England are also net
exporters of equity finance to the more successful southern regions, such as
Cambridgeshire in East Anglia (Keeble, 1989). Florida and Kenny and Leinbach and
Amrhein, (ops. cit.), similarly demonstrate the migration of US finances from less
developed central and mid Western states to the East and West coast areas. The
empirical literature is uniform in its conclusion that venture capital availability and
usage remains highly concentrated in regions of established and growing economic
A POLICY RESPONSE FROM THE EUROPEAN COMMISSION:
THE EUROPEAN SEED CAPITAL FUND SCHEME
Concern at the apparent paucity and limited regional distribution of third party equity
finance for European NTBFs engendered a policy response from the European
Commission. In October 1988, the Commission adopted a Community pilot scheme
to stimulate seed capital. The stated objectives of the Scheme were:
"...to foster enterprise creation in the Community by strengthening the
financing opportunities available to new enterprises, through the
creation of 24 new seed capital funds throughout the Community, and
by improving the quality and survival rate of seed capital projects,
through the services the funds will provide to the projects. This pilot
scheme aims to stimulate private sector and start-up investment by
providing financial incentives to these new funds...”
CEC document (SEC/88/1496), 1988
The focus of the pilot scheme was "new or embryonic companies that require
financial and/or management support for development into companies capable of
raising first round finance" (op. cit.). Importantly, while the Scheme was
subsequently translated by the participant funds as to be primarily concerned with
NTBFs, the original documentation did not specifically state a exclusive
The sponsoring Directorates General for the pilot scheme were DGXXIII (Enterprise)
and DGXVI (Regional Development). While the objectives of the Scheme did not
directly allude to distributional inequalities in capital provision, the involvement of
DGXVI ensured a regional dimension to the pilot scheme and the specific inclusion
of new funds in Objective 1, 2 and 5b areas.
Each of the supported funds in the scheme received a reimbursable, interest-free
advance of up to 50% of the annual operating costs of the fund over a three to five
year period. This loan is due for repayment after ten years when it was deemed that
sufficient investment realisations would have been made to enable the return of the
advance. Those funds which have not achieved net investment returns above a
'hurdle' (referenced to long term treasury bonds plus five percentage points during the
period of the fund's existence) are to be absolved from repaying the loan.
The operating subsidy was paid by DGXXIII to all funds. For those fourteen funds
which operated in 'selected assisted areas' of the Union, DGXVI paid a further capital
contribution of up to 25% of the funds under management - a minimum of ECU
125,000 and a maximum of ECU 250,000. This additional capital loan was a
recognition of the likely difficulties in attracting private investors which would be
faced by small regional funds. This interest-free advance is only returnable if the
fund has made a capital gain at the end of the term.
Fig. 2 Location of 21 ESCF Scheme Supported Funds Surveyed in 1992
OBJECTIVES OF THE STUDY
Three years after the Scheme’s inception, the author was invited to review the
progress of the Scheme to date. By January 1992, 22 funds had been created in ten
countries and had started to invest in SMEs. In agreement with the Commission
sponsors, the study embraced the following objectives:
1) to review progress to date of the supported funds including their ability to
attract additional private sources of investment capital
2) to ascertain indicative evidence of the funds’ ability to meet desired goals
of enterprise and job creation via technology-based new firms
3) to address the inter-relationship between economic and (regional)
developmental objectives of the funds
4) to appraise the continued viability of the funds created after the 5 year
period of Commission support
THE SURVEY METHODOLOGY
It was decided to interview personally the senior investment manager of each of the
twenty-two funds from the ten member states in the Scheme as of Jan 1992. A semi-
structured interview schedule was prepared in English and French. Only one fund
declined to be interviewed. (A further postal survey of the investee firms was also
completed but does not form part of the present paper.)
A FUND TYPOLOGY
The two types of fund, primarily supported by DGXXIII and DGXVI respectively,
were termed regional funds and commercial funds. Their characteristics are
summarised in Table 2.
Table 2 Typology of Regional and Commercial Seed Capital Funds
The following results from the study, and subsequent Commission updates, address
fund behaviour primarily from the perspective of the regional funds. Their actions
are contrasted with the commercial funds particularly to illustrate the nature and
consequences of the additional or different policy objectives placed on regional funds
as vehicles for local development.
BASIC FUND CHARACTERISTICS
Size and Investment Disparities in Commercial and Regional Funds
Table 3 Statistics of Seed Capital Funds in ESCF Scheme in 1992
By 1992, the extant funds had already started to exhibit material differences based on
both the resources employed and their regional or commercial logic (Table 3). The
average size of investment in individual firms by the commercial funds was four
times higher than their regional counterparts. Commercial funds managed their
investee portfolio more intensely. Accordingly, the operating costs of commercial
funds were 20% higher than their regional counterparts. However, when expressed
as a percentage of funds under management, these costs were one third lower for
commercial funds. This illustrates a fundamental issue for small scale investor
groups of the penal effect of indivisible, fixed governance costs.
The figures suggest that regional funds were pursuing a diversified portfolio
approach by making modest investments among a larger number of client firms. In
contrast, commercial funds had restricted their activities to relatively few but larger
investment thereby allowing for contingencies and planned ‘follow-on finance’ to
existing investees. This latter strategy is consistent with the practice in private
venture capital firms with a technology focus (Bygrave and Timmons, 1993; Murray,
1994). It was not possible to determine if the regional funds’ policy was purposeful
or contingent on supply-side limitations, ie. fewer attractive candidates available in
which to invest larger sums.
FINANCE RAISING BY THE FUNDS
Some two years after the inception of the Scheme, the funds had raised ECU 36.2
million of new finances for equity investment. This figure excludes the capital
subvention of approximately ECU 2.6 million made to regional funds by DGXVI.
The small scale of this sum is put into context when it is recognised that 15 (71%) of
the funds had total financing of under ECU 2 million. The average external finance
raised per fund was ECU 1.72 million (range ECU 0.5-7.0 million). The importance
of this figure is apparent if referenced to average operating costs of the funds.
Without making any investments whatsoever, the regional and commercial funds
would have exhausted their original capital in eight and twelve years, respectively.
The ‘Leverage Effect’ of European Commission Subsidy
The effectiveness of the imprimatur of the EU in assisting the process of fund raising
was significant, particularly for the regional funds. Fund managers were asked to
estimate the amount of finance they believed they would have been able to raise from
private investors without the existence of the Scheme. Only two of the thirteen
regional funds reported that they would have been able to raise any finance. The
total fund raising estimate of the regional managers, in the absence of the Scheme,
was ECU 2.8 million compared to the actual sum raised of ECU 13.5 million. The
‘pump priming’ role of the Commission resulted in an increase of finances raised by
the thirteen regional funds of 382%. Conversely, only three of the eight commercial
funds believed that they would not have been able to raise finance unaided. Their
views as to the Commission’s influence was that it represented an additional ECU 4
million - a 27% increase in funds raised.
Thus, the Scheme had met initially one of its objectives of stimulating private sector
financial transfers. However, the effectiveness of the Commission’s intervention,
more pessimistically, may conversely be seen as an indication of private investors’
circumspection as to the economic viability of regional seed capital investment in the
absence of significant EU subsidy.
Sources of Private Investment
The proportion of finance provided by private sources for the regional funds was
64%. although government agencies represented the largest category (28.9%) of
contributor (Table 4). Over three-quarters (77.3%) of the commercial funds’
finances came from institutional and private investors, ie. the source from which
most mainstream venture capitalists attract finance
Table 4 Types of Institutional Investors in Seed Capital Funds in 1992
Investors’ Reasons For and Against Supporting Seed Funds (Respondents’
However, only one quarter (27%) of regional fund managers believed that investors
contributed to their funds for predominantly commercial reasons (Table 5). This
makes the material contribution of venture capital firms to regional funds surprising
(although several of these firms were owned by regional banks.). Conversely, nearly
half (48%) of commercial fund managers believed that profit was the primary
reasoning of their investors. None the less, both types of fund managers
acknowledged the critical importance of non-economic reasons in motivating
institutional investors. This has implication for further finance raising. In the
absence of tangible evidence of attractive investment performance, initial fund
supporters may unlikely be a reliable source of further finance. Critically, all funds
are likely to require further finance raising before tangible evidence of their
investment performance is available. Investors who declined to participate were, in
the opinion of the fund managers, discouraged by the high risk and poor prospects for
attractive returns from seed capital investment.
Table 5 Investors' Reasons For & Against Contributing to a Seed Capital Fund
Fund Performance Evaluation by Their Managers
The regional fund managers appeared to give little priority to quantitative
performance variables in their own individual benchmarks for their fund’s
performance (Table 6). The absence of formal monitoring/evaluation criteria for
nearly half the funds in the Scheme was potentially alarming given the managers’
fiduciary accountability to their public and private investors. Particularly for regional
fund managers, the interim results of substantial investment activity appeared to have
received little explicit analysis.
Table 6 Primary Criterion for Fund Performance Evaluation
THE IMPORTANCE OF DEAL FLOW
A key prerequisite of success for a venture capital firm is its ability to attract a flow
of attractive, potential investee businesses. Only six of the 21 funds admitted to
having a formal marketing strategy for attracting deal flow. However, the funds did
not appear to have suffered from a limited supply of entrepreneurial firms seeking
equity finance in the period 1990-92. Collectively, the respondents’ funds had
received a total of 1,410 approaches, and from which 69 investments had been made
in total. While no data were collected on the quality of this deal flow, the overall
acceptance rate of 5.6% accords closely to other researchers’ findings of venture
capital acceptance rates (Bannock, 1991; Dixon, 1991; Roberts, 1991). For the 669
deals on which specific information was available, there appeared to be little
difference in summary acceptance rates between the two types of fund.
Table 7 Sources of Funds’ Deal Flow 1992
Sources of Referrals
The apparent ease with which the funds had managed to engender interest among
entrepreneurs is arguably a recognition of the strong networking skills applied by
managers within often strictly defined regional locations or specific product/
Table 7 illustrates the wide spread of sources of referral employed by managers of
both types of fund. Hustedde and Pulver, 1992, in the US have indicated that the
source of the advice and referral can be an important indicator as to the likely
outcome of the subsequent investment. These authors reported that public sector
conduits tend to be associated with, subsequently, less successful investee firms in the
US. If valid in a European context, these findings will be a cause for concern to the
regional funds which largely employ public sector channels for prospective deal flow.
Different Fund Types, Different Networks
The close relationship between the regional funds and the Business Innovations
Centres (BICs) is evident. (BICs were set up by DGXVI in 1984 and were originally
designed to ‘assist areas undergoing economic restructuring and/or economically less
advantaged areas of the Community.). BICs are normally represented on the board of
the regional seed funds.
The limited data suggest that commercial funds employed wider and more
heterogeneous sources of referral, and non-public contacts were particularly
important. Bank and financial institution originated enterprises represented over one
quarter of the commercial funds’ investment portfolios. In contrast, none of the 26
firms introduced by banks to the regional funds resulted in an investment. The lack
of locational/developmental constraints on commercial funds may represent an
advantage in deal sourcing.
PROJECT APPRAISAL AND SELECTION CRITERIA
The would-be investor has to reach a judgement on three critical sources of
uncertainty - the viability of the technology; the existence of an attractive
product/market opportunity; and the abilities of the entrepreneur/management team.
It is in the area of project evaluation that the regional and commercial funds exhibited
most commonality. Asked to cite the five most important project selection criteria,
the two types of funds only differed in the importance given to the ‘nature of the
technology’ (Table 8). This likely reflects the commercial funds greater focus on
technology investments. Their responses also confirmed the findings of several other
studies which have indicated that the essentially subjective appraisal of the
entrepreneur or management team dominates more formal financial appraisals in
early-stage investments (see Tyebjeee & Bruno, 1984; MacMillan et al., 1985 &
1987; Goslin & Barge, 1986; Sapienza, 1992; Hall and Hoffer, 1993).
Table 8 Fund Managers' Rating of Key Project Selection Criteria
The commonality of the two types of fund managers’ response was also reflected in
their reasons for refusing a new project proposal (Table 9).
Table 9 Fund Managers' Reasons for Refusing New Projects
However, the views of the two types of fund managers did diverge markedly on the
minimum level of financial attractiveness of a project proposal as assessed by the
target Internal Rate of Return acceptable to the fund. Only three (23%) of the
regional fund managers would impose a rate of return at >20% per annum, ie. a level
significantly below the threshold of 57% imposed by UK technology investors
(Murray & Lott, 1995). Half of the commercial funds stipulated this minimum IRR
target. That nearly half of all managers did not have a defined financial performance
target was arguably a reflection of the extreme practicable difficulty of setting an ex
ante target given the imperfect information available for early-stage technology
investments. However, this omission may also reflect, especially for regional fund
managers, the subordination of financial objectives to wider developmental goals.
INVESTMENT FOCUS OF FUNDS
Targeted Stage of Investment
As noted, the history of the European venture capital industry illustrates a marked
movement away from early-stage investment (Murray, 1995). The logic of the
Scheme was to encourage the supply of finance dedicated to enterprise formation and
growth. The actions to date of the two types of funds show that their activities
remain exclusively directed to early-stage investment (Table 10). There was no
evidence of a ‘creep’ to later stage, less risky development capital investments.
Table 10 Percentage of Investments Made by Stage of Investee Firm Development
Commercial funds were particularly likely to invest in young businesses before any
sales had been made. That the regional funds had, on average, over one third of their
portfolio in firms which had already started making sales may likely be a reflection
of their close relationship to existing support agencies, eg. BICs. This relationship is
also likely to explain the greater proportion of low/medium technology firms within
their portfolios when compared to commercial funds. Given the geographic
constraints of regional funds, it is also highly probable that the supply of early-stage
NTBF opportunities was significantly more constrained than for their commercial
Targeted Level of Technology Investments
Within broad definitions, the respondents were asked to ‘self code’ their portfolio of
investee firms regarding the degree to which they incorporated advanced and
novel/innovative technology processes or product features. Such a process of
categorisation is less robust than that employed by Butchart, 1987, and OECD, 1992,
but the researchers were primarily interested in a broad classification of the existing
investments rather than determining the technology status of a single firm.
Table 11 Percentage Distribution of Investee Firms by Level of Technological
Two particular observations resulted from this enquiry. The regional funds espoused
a greater preferred interest in advanced technology investments but it was the
commercial funds which had assumed this role in practice (Table 11). This, as noted,
may be a reflection of the limited supply of such investments in funds constrained by
regional boundaries. Secondly, while both types of fund indicated a preference for
including between a quarter and a fifth of low technology investments, in practice,
these investments represented around 10% of the average portfolio. Managers
observed that technology-based firms were potentially more attractive from either the
perspective of job creation or capital gain.
Central to the logic of venture capital investment is the ability for the investors
eventually to liquidate/realise their investment at a capital gain reflecting risk and
illiquidity premia. (it has been argued that the limited role of small firm
stockmarkets in Europe has been a major disincentive to potential investors in growth
SMEs, see EVCA, 1993; Bannock, 1994).
Table 12 Planned Exit Route for Investee Companies (weighted by rank ordering)
Managers were asked to give their assessment of the most likely exit routes for their
present and future portfolio companies. Table 12 indicates that trade sales remain the
most likely source of a project exit for both types of funds. This is in line with
general venture capital behaviour (Relander & Syrjänen, 1992). The two categories
of funds are similar in their exit expectations. The exception is the relatively greater
importance given to an Initial Public Offering by the commercial funds. However,
such a route is only feasible for the commercially most successful NTBFs. The
limited importance given to a stockmarket exit suggests that only a small minority of
investments are regarded as being of the highest commercial potential or, conversely,
the inappropriateness of existing bourses for NTBFs in several European countries.
The importance of a repurchase of the investors' equity by the original
entrepreneur(s) reflected the peculiarities of investing in small businesses which were
faced by several funds. These managers noted that entrepreneurs would not accept
seed capital investment without the contractual right to subsequently repurchase the
investor's portion of the equity. Such an exit channel is of no interest to commercial
investors as the entrepreneur has a direct incentive in discouraging or delaying the
growth in the value of the enterprise in order to repurchase the equity he/she does not
control (an ‘agency cost’ problem, see Amit et. al., 1991). For most funds, this
route remained the ‘exit of last resort’.
Venture capitalists were also seen as a potentially important source of follow-on
finance as co-investors in growing enterprises needing significant increases in
capitalisation. However, Murray, 1994, has noted the limited interest of UK later
stage venture capitalists in providing follow-on finance for seed capitalist derived
projects. It is also noteworthy that there was a negligible incidence of syndicated
financing of the original investments. Mason and Harrison, 1991, have observed that
inter-regional co-investment is one means by which regional equity gaps may be
CONTEMPORARY PERFORMANCE OF THE ESCF SCHEME
Subsequent to the original study in 1992, the Commission has provided updated
statistics on both the participating funds and their investee companies on an annual
basis. Two additional funds has been introduced and the non-respondent Greek fund
has been removed from the Scheme.
Importantly, the author’s original classification has been refined by the Commission.
Funds are now segregated into exclusively commercial, high-tech funds, and two
regional categories which are defined by the nature of the predominant sources of
finance. This re-classification serves to increase the differences cited in this paper
between the commercial and the regional funds in 1992.
Private High-Tech Funds (n=4) investment raised exclusively
from private investors and directed only to high technology projects
irrespective of location
i. Private Regional Funds (n=8) >50% of funds raised from
private investors with investments directed to one or more well
ii. Public Regional Funds (n=11) <50% of funds raised from
private investors with investments directed to one or more well
FUND CAPITALISATION AND INVESTMENT ACTIVITY POST 1992
Table 13 Growth of Total ESCF Scheme Funds Under Management
There has been relatively little additional fund raising in the three year period.
However, nine funds have noted an intent to raise a further ECU 20 million, two-
thirds of which will be via new shareholders. This imperative is greatest for the high-
tech funds which are almost fully invested. Their average investment values and the
costs associated with a ‘hands-on’ method of governance remain significantly higher
than for all regional funds. Additional demands on their funds from existing, or new
investees, cannot be sustained from extant resources. This places these funds and
their existing investees in a position of vulnerability in the event of unforeseen
Table 14 Total Investments Activity by Type of Fund by Jan 1995
The continued structural differences between regional and high technology funds is a
recognition of the diversity of their respective goals (Table 14). Significantly,
interim figures show the firm failure rate of commercial funds to be nearly one third
of that of all regional funds. This may be a consequence of the ‘better’ stock of
available investee businesses, more discriminating investment policies of commercial
funds and/or their greater investee support activities. However, it is still premature to
draw strong conclusions.
Table 15 Number of Jobs Created by Category of Fund and Technology Status
Table 15 serves to reinforce the importance of NTBFs as potentially attractive source
of employment creation relative to SMEs embracing less innovative technologies.
The degree of technological sophistication of the investee firms appears directly
related to the firms’ potential to create new jobs. The figures also illustrate a
paradox. The regional funds were created for developmental objectives including
additional employment generation. In contrast, the high technology funds remain
primarily an economic activity. Yet, it is the high technology firms which have
recorded the greatest employment growth per investee firm and per fund. The
Commission (DGXXIII) has drawn the conclusion from the Pilot Scheme results to
date that its future policy focus should concentrate exclusively on commercial funds,
which target high technology enterprises and employ finance from the private sector,
regardless of their location.
Table 16 Cost of Community Support per Job and Enterprise Created
On a Commission assumption of a 30% loan default, the cost to the EC of the
Scheme per job and enterprise created was ECU 1,260 and 13, 979, respectively
(Table 17). These figures appear to be remarkably attractive. Storey’s (1994)
analysis of the Enterprise Allowance Scheme in the UK estimated a public cost of
ECU 2,600 per job and ECU 78,000 per firm. The cost per job of the Urban
Development Corporations in England and Wales has been cited as ECU 28,000 per
job (The Guardian 19/8/95, p.9). Statistics (1980-96) from the Massachusetts
Technology Development Corporation in Boston, an arguably more relevant
comparison given its NTBF focus, show similarly effective public funds leverage
with a cost per job of ECU 1,055 and cost per enterprise of ECU 110,000. MTDC
has created relatively fewer, larger enterprises (60 active) but with a higher average
employment growth at 104 new jobs per firm.
The efficacy of the Scheme is in part a result of the leverage effect of public loans on
private investment. While high tech funds created the most jobs in advanced
technologies, the greater total number of jobs and enterprises created by the regional
funds relative to the public subsidies given significantly increased their comparative
performance. However, a more rigorous analysis of the employment impact of the
Scheme will necessarily have to address deadweight arguments regarding the actions
of entrepreneurs in the absence of the Scheme. Further and critically, the longer-term
viability of fledgling NTBFs cannot yet be assumed.
THE THREAT OF INVESTMENT/REALISATION DISCONTINUITIES
The interim success of the high technology/commercial funds has produced one area
of considerable threat. In early-stage venturing, the investment cycle is generally
seen as seven to ten years (Bannock, 1991). During this period, successful investees
will frequently require several rounds of finance as the business grows and develops
but remains insufficiently profitable in the short/medium term to fund growth and
R&D investment exclusively from retained earnings (Murray, 1994). The cycle of
costs and returns are not synchronised and the fund needs to be able to have recourse
to substantial finance prior to a profitable realisation of its investments. The ability
of the Scheme’s high-tech funds to meet future cash demands is, at present, highly
constrained in the absence of further sources of finance.
Table 17 Fund Statistics in January 1995
Table 17 takes no consideration that the existing investments of the technology funds
may require additional finance over the remaining six year average life of the funds.
Nor are the substantial costs for an investee firm of a market flotation or a trade sale
included in the above calculations. In short, for the most successful fund category,
there is a present danger that the funds will imminently run out of operating finances
before the majority of their investments can be successfully realised. In these critical
circumstances, any attempt to obtain additional fund finance from investors is likely
to be problematic given the parlous negotiating position of a financially weak fund.
CONCLUSIONS AND DISCUSSION
Problems in the supply of seed and early-stage venture capital remain endemic in
Europe. In the absence of professional investors or the complementary, informal
investor/business angel sector, prescriptions to address ‘equity gap’ issues are heavily
dependent on public initiatives. The ESCF Scheme represents a European response.
It is properly judged according to its objectives. Yet, as a pilot programme, its
findings have their greatest import in influencing subsequent EC regional and
By February 1995, at a budgeted public investment of ECU 8.76 million, twenty-
three funds (and a support network) had been created and had attracted ECU 41
million of institutional finance. The 188 extant, early-stage enterprises had created
2,085 direct jobs, predominantly in technology-related activities. Failed enterprises
currently represent 17.5% of investments. Under the EC’s revised fund definitions,
the nineteen regional funds representing 60% of the finance raised (ECU 24.8m.) and
had supported 147 enterprises. The explicit objectives of the Scheme had been
successfully realised and the estimated subsidies per job and enterprise created
appeared highly cost effective. EC intervention cannot be challenged on either
‘opportunity cost’ grounds, nor as displacing (‘crowding out’) established private
markets for venture capital (Fisher, 1988).
However, conclusions must remain circumspect until the longer term viability of both
the new enterprises and the funds as economic entities are proven. The urgent need
of the high-tech funds for additional finance raises serious concerns as to future
viability. Without exception, the small scale of all funds prejudices viability given
the penal effect of fixed management costs. This future viability may well be
conditional on the development of what Florida and Kenny, 1988, describe as
indigenous ‘technology infrastructures’and by which additional finance, information
and advice is efficiently provided to NTBFs and their investors through symbiotic
All funds raised institutional finance on the basis of securing an acceptable return for
their investors. This return can only be met by the subsequent, profitable sale of their
portfolio companies. At the end of the 10 year funding period, if the investors do not
receive a risk and time adjusted return on their capital, they have in effect subsidised
the social goals of enterprise creation. This is likely to severely curtail future private
fund raising in addition to increasing significantly the real cost of the Scheme.
There is an evident quantity/quality divide between regional and commercial (high-
tech) funds. The latter actively discriminated by investing greater finance and
managerial support in a smaller number of attractive (by sales and employment
growth) firms. Unencumbered by developmental goals, the four high tech funds
appeared demonstrably more professional in managerial behaviour. The separateness
of the regional funds from private communities of finance, information and deal flow
is potentially problematic if these agents are to be judged ultimately as commercial
The funds had established effective networks as evidenced by the availability of
initial funding and a robust deal flow. There does not appear circumstantial support
for Bennet and Krebs’, 1994, assertion of the more fractionated networks in less
developed regions. However, the regional funds were not sited in the most
economically and socially disadvantaged areas of the Union. The ability of the
regional funds to make technology investments would suggest that a latent demand
exists and is frustrated by supply side constraints of finance. However, that investees
are willing to accept finance allows no observation on the quality of these enterprises.
Indeed, the limited evidence from the study suggests that regional investees are
smaller, grow less quickly, are less technologically intensive and are more liable to
fail than the recipients of commercial fund investments.
That these funds had to be created de novo, lends support to Thompson’s, 1989,
questioning of Neo-classical diffusion arguments regarding the correction of either
regional or early-stage investment shortages. The steeply sloped ‘distance decay
curves’ witnessed by McNaughton and Green, 1988, in Canada remain evident in
Europe. Governance and information demands ensure the continued spatial
concentration of venture capital activity. The materiality of these constraints present
a powerful argument for the logic of public initiatives which address barriers to the
local supply of additional private venture capital finance. However, such schemes
are likely to be necessary but not sufficient catalysts for continued regional
enterprise/ employment growth in the absence of complementary, techno-commercial
networks to assist the subsequent development of the new firms.
The author would like to thank the European Commission (DGs XXIII and XVI) for
their financial support of the original 1992 study, and David Francis whose
participation in the fieldwork and subsequent analysis was invaluable. Any errors of
fact, interpretation or omission remain the sole responsibility of the author.
Amit, R., Glosten, L and Muller, E. (1990) Does Venture Capital Foster the Most
Promising Entrepreneurial Firms?, Californian Management Review, Spring,
Bannock G. (1991) Venture Capital and the Equity Gap. National Westminster Bank
Bennett R. J. and Krebs G. (1994) Local Economic Developments Partnerships: An
Analysis of policy networks in EC-LEDA Local Employment Development
Strategies, Reg. Studies 28, 2, 119-140.
Birch D. (1979) The Job Creation Process, in MIT Program on Neighbourhood and
Regional Change. MIT Press, Cambridge, MA.
Bolton J. E. (1971) Report of the Committee of Enquiry on Small Firms. Cmnd. 4811,
British Venture Capital Association (1996) Report on Investment Activity 1995.
Burns P. and Dewhurst J. (1993) Financial Characteristics of Small Companies in
Britain. 3i plc/ Cranfield School of Management, England.
Butchart R. L. (1987) A New Definition of the High Technology Industries, Econ.
Trends 400, February, 82-88.
Bygrave W. D. and Timmons J. A. (1992) Venture Capital at the Crossroads.
Harvard Business School Press, Boston, MA.
Ciciotti E. (1986) Natalità delle imprese e diffusione di una innovazione di processo
in distretto tecnologico, Quaderni delle Fondazione Agnelle.
Commission of the European Union (1995) Fourth Progress Update on the Seed
Capital Pilot Scheme, DGXXIII, Brussels.
Confederation of British Industry (1993) Finance for Growth. CBI, London.
Coopers & Lybrand (1996) Sixth Annual Economic Impact of Venture Capital Study.
Coopers & Lybrand L.L.P., Boston, MA.
Dixon R. (1991) Venture Capital and the Appraisal of Investments, Omega 19, 5,
European Commission (1994) Growth, Competitiveness, Employment: The
Challenges and Way Forward into the 21st Century, White Paper, EC, Brussels.
European Commission (1995) Green Paper on Innovation, EC, Brussels.
European Network for SME Research (1993) The European Observatory for SMEs:
First Annual Report. Commission of the European Union, DGXXIII, Brussels.
European Venture Capital Association (1996) Venture Capital in Europe: 1995
EVCA Handbook. Ernst & Young, London
European Venture Capital Association (1993) Special Paper: Capital Markets for
Entrepreneurial Companies - a European Opportunity for Growth. EVCA, Zaventem.
Fisher P. S. (1988) State Venture Capital Funds as an Economic Development
Strategy, APA Journal, Spring, 166-177.
Florida R. and Kenney M. (1988) Venture Capital, High Technology and Regional
Development, Reg. Studies 22, 33-48.
Freeman C. (1983) The Economics of Industrial Innovation. MIT Press, Cambridge,
Gallagher C. and Steward H. (1986) Jobs and the Business Life Cycle in the UK.
Applied Econ. 18, 875-900.
Gaston R. J. (1989) Finding Private Venture Capital for your Firm: a Complete
Guide. Wiley, New York.
Giannakourou, G. (1996) Towards a European Spatial Planning Policy: Theoretical
Dilemmas and Institutional Implications, European Planning Stds., 4, 5, 595-613.
Gorman M. & Sahlman W. A. (1989) What Do Venture Capitalists Do?, J. Bus.
Venturing 4, 231-248.
Goslin N. L. and Barge B. (1986) Entrepreneurial Qualities Considered in Venture
Capital Support. Frontiers of Entrepreneurial Research, Babson College, Wellesley,
Hall J. and Hoffer C. W. (1993) Venture Capitalists' Decision Criteria in New
Venture Evaluation. J. Bus. Venturing 8, 25-42.
Hustedde, R. J. and Pulver, G. (1992) Factors Affecting Equity Capital Acquisition:
The Demand Side, J. Bus. Venturing 7, 363-374
Keeble D. E. (1989) High-technology industry and regional development in Britain:
the case of the Cambridge phenomenon, Environment and Planning 7, 153-172.
Leinbach, T. R. and Amrhein, C. (1987) A geography of the Venture Capital Industry
in the U.S., Prof. Geogr., 39, 2, 146-158.
McNaughton, R. B. and Green, M. B. (1988) Spatial Patterns of Canadian Venture
Capital Investment, Reg. Studies, 23, 1, 9-18.
Macmillan H. (1931) Report of the Committee on Finance and Industry. Cmnd. 3897,
MacMillan I. C., Siegal R. and Narishima P. N. S. (1985) Criteria Used by Venture
Capitalists to Evaluate New Venture Proposals, J. Bus. Venturing 1, 119-128.
MacMillan I. C., Zemann L., and Subbanarasimha P. N. (1987) Criteria
Distinguishing Successful from Unsuccessful Ventures in the Venture Screening
Process, J. Bus. Venturing 2, 123-137.
Martin, R. (1989) The Growth and Geographical Anatomy of Venture Capitalism in
the United Kingdom, Reg. Studies, 23, 5, 389-403.
Mason, C M. and Harrison, R. T. (1991) ‘Venture Capital, the equity gap and the
‘north-south divide’ in the United Kingdom’ in M. Green (ed.) Venture Capital:
International Comparisons. Routledge, London.
Mason C. M. (1992) The supply of equity finance in the UK: a strategy for closing
the equity gap, Entrepreneurship and Reg. Dev. 4, 357-380.
Mason C. and Harrison R. (1994) The Role of Informal and Formal Sources of
Venture Capital in the Financing of Technology-Based SMEs in the United Kingdom,
in R. Oakey (ed.) New Technology-Based Firms in the 1990s. Paul Chapman
Meyer-Kramer, F. (1985) Innovation Behaviour and Regional Indigenous Potential,
Reg. Studies 19, 523-534.
Minns, R. (1993) The value added by Community interventions to enhance the access
of SMEs to capital, in the context of regional policy, paper give at the European
Seminar on Financial Engineering and Regional Development, June, DGXIII,
Commission of the European Communities, Luxembourg
Moore B. (1993) Financial Constraints to the Growth and Development of Small,
High-Technology Firms. Small Business Research Centre, Cambridge University,
Moore I. and Garnsey E. (1991) Funding for Innovation in Small Firms: the Role of
Government. Dept. of Engineering, University of Cambridge, England.
Murray G. C. (1994) The Second 'Equity Gap': Exit Problems for Seed and Early-
stage Venture Capitalists and their Investee Companies, Int. Small Bus. J. 12, 4,
Murray, G. C. (1995) Evolution and Change: an Analysis of the First Decade of the
UK Venture Capital Industry, J. Bus. Fin. and Accounting 22, 8, pp. 1077-1107.
Murray G. C. and Lott J. (1995) Have UK Venture Capital Firms a Bias Against
Investment in New Technology Based Firms?, Res. Policy 24, 283-299.
National Venture Capital Association (1996) Annual Report 1995, Venture
Economics Inc., Arlington, VA.
Oakey R. O. (1984) High Technology Small Firms. Francis Pinter, London.
Oakey R. O., Rothwell R. and Cooper, S. (1988) Management of Innovation in Small
Firms. Francis Pinter, London.
Organisation of Economic Co-operation & Development (1986) R & D, Innovation
and Competitiveness, Science and Technology Indicators 2, OECD, Paris.
Organisation of Economic Co-operation & Development (1992) Industrial Policy in
OECD Countries: Annual Review. OECD, Paris.
Relander K. E., and Syrjänen A. P. (1992) Analysis of the Trade Sale as a Venture
Capital Exit Route, paper given at the 1992 European Foundation for
Entrepreneurship Research Conference, December, London.
Roberts E. B. (1991) Entrepreneurs in High Technology. Oxford University Press,
Rothwell R. and Zegveld W. (1982) Industrial Innovation and Small and Medium
Sized Firms. Francis Pinter, London.
Rothwell R. (1989) Small Firms, Innovation and Industrial Change, Small Bus. Econ.
Rumelt R. P. (1984) Towards a Strategic Theory of the Firm. in Competitive
Strategic Management. Lamb R. B. (Ed.), Prentice Hall, Englewood Cliffs, NJ,
Sánchez A. M. (1992) Regional Innovation and Small High Technology Firms in
Peripheral Regions, Small Bus. Econ. 4, 153-168.
Sapienza, H. J. (1992) When Do Venture Capitalists Add Value?, J. Bus. Venturing 7,
Storey D. J. (1994) Understanding the Small Business Sector. Routledge, London.
Storey D. J. and Johnson S. (1987) Are Small Firms the Answer to Unemployment?.
Employment Institute, London.
Storey D., Watson R. and Wynarczyk P. (1989) Fast Growth Businesses: Case
Studies of 40 Small firms in the North East of England. Paper No. 67, Dept. of
Thompson, C. (1989) The Geography of Venture Capital, Progr. Human Geogr. 13,
Tyebjeee T. T. and Bruno A. V. (1984) A Model of Venture Capital Investment
Activity, Manag. Sci. 30, 1051-1066.
Utterback J. M., Meyer M., Roberts E. and Reitberger, G. (1988) Technology and
Industrial Innovation in Sweden: a Study of Technology-Based Firms Formed
Between 1965 and 1980, Res. Policy 17, 15-26.
Wetzel W. E. (1993) Angels and Informal Risk Capital, Sloan Manag. Review 24,
Wilson H. (1979) The Financing of Small Firms. Cmnd. 7503, HMSO, London.
Table 1. Allocation of European Venture Capital Investments by Stage 1993-95
1993 1994 1995
Stages of ECU % ECU % ECU %
Venture Capital million Total million Total million Total
Seed 20.8 0.5 37.1 0.7 34.4 0.6
Start-Up and 179.7 4.4 273.3 5.0 286.5 5.2
Expansion 1,888.5 45.9 2,294.2 42.2 2,298.6 41.4
Replacement 345.9 8.4 434.1 8.0 354.5 6.4
MBO/MBI 1,680.2 40.8 2401.0 44.1 2,572.0 46.4
Total Investment 4,115 100.0 5,440 100.0 5,546 100.0
Source: BVCA 1995, EVCA 1995
Fig. 1. Technology Investments as a Percentage of ‘Adjusted’ Total Investment
(ie. excluding MBOs/MBIs and LBOs/Acquisitions) in Europe and the USA
70 US Technology-
% Value Total
40 EUR Technology-
% Value Total
Source: BVCA and EVCA Annual Statistics 1985-96,
NVCA Annual Reports 1990-1996
EVCA statistics aggregate sixteen European countries
including the UK.
NB. The trends in Fig.1 should only be seen as indicative
given broad definition of technology-based investments.
Fig. 2. Location of 21 ESCF Scheme Supported Funds Surveyed in 1992
C R C C
= Capital Cities (and Berlin)
C = Commercial Funds
R = Regional Funds
Table 2. Typology of Regional and Commercial Seed Capital Funds
Regional Funds Commercial Funds
Primary Fund Objective Encouragement of New Firm Attractive Capital Gain to
Formation and Employment Investors fully reflecting
in location of fund premia for risk and illiquidity
Secondary Fund Positive and Acceptable New NTBF Formation
Objective Financial Return to Investors
Capitalisation Public Funds and 'Social' Primarily Commercial
Investment by Private Sector Investors but including some
Investee Focus New & Early Stage Exclusively, NTBFs with
Enterprises with some exploitable Intellectual
Technology component Property Rights in attractive
and fast growing markets
Locus of Operation Development Region Area determined by
practicability of regular
Support Infrastructure BICs* and other Public Private, Commercial Networks
Enterprise Support Agencies, & Commercial Consultants
Public and Commercial
* Business Innovations Centres
Table 3. Statistics of Seed Capital Funds in ESCF Scheme in 1992
Regional Funds Commercial Funds
ECU 000s N=13 N=8
Average Fund Size ECU000 1,345.4 2,341.3
Range Funds Raised ECU000 500 - 2,575 750 - 7,000
Number of Investee Firms 48 31
Average Investment per Firm ECU 58.922 232.777
Annual Operating Costs ECU 157,176 189,162
Range Ann. Operating Costs ECU000 21 - 195 87 - 406
Operating Costs as a %
Funds Under Management 11.7% 8.1%
Table 4. Types of Institutional Investors in Seed Capital Funds in 1992
Investment % Total Investment % Total
in Investment in Investment
Source: (ECUs) Funds Funds
Private Banks 1,569,000 12.3 3,063,040 16.4
State Banks 2,500,000 13.3
Business Innovation Centres 132,000 1.0 - -
Chambers of Commerce 120,000 0.9 1,000,000 5.3
Churches 556,000 4.4 - -
Private Financial Institutions 2,775,000 21.7 8,751,960 46.7
Nat. Government Agencies 2,886,650 22.6 - -
Reg. Government Agencies 805,600 6.3 750,000 4.0
Private Companies 402,000 3.1 - -
Venture Capitalists 2,748,650 21.5 1,480,000 7.9
Universities 77,250 0.6 - -
Individuals 693,000 5.4 1,185,000 6.3
Total Funds Raised 12,765,150 18,730,000
Table 5. Investors' Reasons For & Against Contributing to a Seed Capital Fund
Reasons For: Ranking No. Reasons Against: Ranking No.
Regional 1 13 Excessive Risk/ Poor 1 11
Development /Job Expected Returns
SME Development 2 7 Alternative Investment 2 3
EC Financial 3 6 No Seed Capital 3= 2
Support for the Experience/Interest
Growth 4 4 No Track Record 3= 2
Opportunities by Seed Fund
New Products/ 5= 3 Already Investing in 3= 2
Technologies Seed Capital
Attractive 5= 3
Table 6. Primary Criterion for Fund Performance Evaluation
Regional Funds Commercial Funds
Fund Performance Criteria: N=13 N=8
No. of Jobs Created - 1
No. Businesses Created 1 -
Return on Capital 4 5
No Formal Evaluation Criteria 8 2
Table 8. Fund Managers' Rating of Key Project Selection Criteria
Regional Funds' Commercial Funds'
Key Acceptance Criteria: N=13 N=8
Entrepreneur's Character 4.9 4.8
Entrepreneur's Experience 4.1 3.9
Degree of Expected Competition 4.0 4.1
Legal Protection of Technology 3.2 3.0
Nature of Technology 2.8 3.6
*Rating Scale: Not important 1 - Very Important 5
Table 9. Fund Managers' Reasons for Refusing New Projects
Regional Funds Commercial Funds
% Total % Total
Unprompted Reasons: N=29 N=22
Entrepreneur's Lack of Experience 20.7} 13.6}
Character of Entrepreneur 13.8} ∑34.5 22.7} ∑36.3
Market/Growth Potential of Product 24.1 27.3
Technology Potential 10.3 13.6
Other 30.1 22.8
Table 10. Percentage of Investments Made by Stage of Investee Firm Development
Concept Pre- Prodn/ Initial Early No. of
Testing Sales Sales Growth Responses
Regional Preferred 32 32 36 0 13
Funds: Actual* 12.5 52.1 33.3 2.1 48
Commercial: Preferred 20 33 47 0 8
Funds Actual* 28.1 56.3 15.6 0 31
*Estimated from investments made
Table 11. Percentage Distribution of Investee Firms by Level of Technological
Technology Low Medium High No. of
Regional Funds: Preferred 23.1 53.8 23.1 13
Actual* 11.4 61.3 27.2 48
Commercial Preferred 25 62.5 12.5 8
Actual* 9.5 46.9 43.6 31
*Estimated from investments made
Table 12. Planned Exit Route for Investee Companies (weighted by rank ordering)
Planned Exit Routes: Regional Number Commercial Number
Funds of Funds of
% Exits Responses % Exits Responses
Trade Sale 34.4 21 34.3 37
Entrepreneur Share 33.3 36 31.1 19
Sale to a Venture Capitalist 30.6 33 27.9 17
Initial Public Offering 1.8 2 6.6 4
Table 13. Growth of Total ESCF Scheme Funds Under Management
Jan Jan Jan Jan
1992 1993 1994 1995
Number of Funds 21 24 24 23
Total (non-EC) Capital Raised 36.2 37.7 39.9 41.0
Average Capital per Fund 1.72 1.57 1.66 1.78
Average Fund Operating Cost ECU 142,685 155,441 174,254 176,126
Table 14. Total Investments Activity by Type of Fund by Jan 1995
Private Public Private
Regional Regional High Tech
Funds Funds Funds
n=8 n = 11 n=4
Average Capitalisation ECU million 1.3 1.3 4.06
Percentage of Fund Invested 45 47 92
Annual Fund Operating Costs ECU 145,997 122,618 259,762
Total No. of Investments 62 85 41
Average Investment Value ECU 59,736 68,836 333,576
Percentage High Tech Investments 31 42 85
Percentage Medium Tech 45 45 15
Percentage Low Tech Investments 24 13 0
No. of Business Failures 21 15 4
Failures as a % of Total Investments 33.9 17.6 9.8
Table 15. Number of Jobs Created by Category of Fund and Technology Status
Public Private Private Total Jobs No. of Jobs/Firm
Number of Jobs Regional Regional High- by Firms by
Created Funds Funds Tech Tech. by Tech.
n = 11 n=8 Funds Status Tech. Status
High-Tech Companies 261 360 514 1,135 90 12.6
Med.-Tech Companies 239 377 119 735 72 10.2
Low-Tech Companies 118 97 0 215 26 8.3
Total Jobs Created 618 834 633 2,085 188
No. of Jobs/Fund 56.2 104.3 158.3
No. of Jobs/Firm 7.3 13.5 15.4
Table 16. Cost of Community Support per Job and Enterprise Created
Assumption of 30% Repayment Overall All Private
Default Scheme Regional High- Tech
n = 23 n = 19 n=4
Total Cost of Repayable Operating 8.76 4.77 3.99
and Capital Subsidies ECU million
Estimated Real Total Subsidy Cost 2.628 1.43 1.20
Cost per job (2,085 jobs created) ECU 1,260 985 1,892
Cost per enterprise (188 enterprises 13,979 9,731 29,210
Table 17. Fund Statistics in January 1995
Private Public Private
Regional Regional High Tech
Funds Funds Funds
n=8 n = 11 n=4
Total Funds Raised ECU million 10.4 14.4 16.2
Percentage of Available Finance per 47.4 45.0 92.4
Average Uninvested Finance per 0.68 0.72 0.31
Fund ECU million
Annual Operating Costs ECU 122,618 145,997 259,762
Time in Years to Exhaustion of
Present Finance (excluding new 5.6 4.9 1.2
investment) for an Average Fund