September 30, 2016

EU Monitor: Start-ups and their financing in Europe

The new Deutsche Bank research EU monitor looks at Start-ups and their financing situation in Europe. How could the Capital Market Union contribute to improve the funding environment for start-ups in Europe?

Start-ups play a paramount role in job creation and growth. Yet, in some larger economies of the euro area, the number of start-ups is small and their success is limited which can partly be attributed to problems in access to finance.

Even established start-ups are seldom listed on public stock markets these days which may to a large extent be due to cost considerations. To enhance participation in equity markets, the CMU should aim to relax one-size-fits-all issuance rules that are particularly burdensome for small firms. In addition, preferential risk weights could spur demand by incentivising institutional investors to invest more in start-up equity.

Following years when the focus was primarily on reforming banks, European policymakers finally also set their sights on something else: the capital markets. With the Capital Markets Union project, they aim to ensure sufficient financing for start-ups and innovative firms, among other objectives.

To boost bank lending to start-ups, measures that link banks’ credit risk to capital markets are necessary. The CMU should for instance ease regulations that have stymied investor demand for securitisations and allow small loans to serve as collateral for covered bonds. Banks meanwhile should focus on innovative ways to evaluate the credit risk of start-ups.

Venture capital is one of the most efficient ways to finance start-ups in their early stage. In order to spur venture capital markets in Europe, the CMU should grant European pension funds more flexibility in their portfolio allocation. To reduce imbalances in VC investments within Europe, creating a pan-European VC fund of funds would also be useful.

Platform consolidation is a crucial step in order to expand crowd funding in Europe. To facilitate this, the CMU should introduce a common legal approach at EU level to act as catalyst for cross-border mergers. Similarly, the CMU should establish union-wide rules to avoid contradictions and inconsistencies in the national treatment of crowd-funding platforms.

You can read the full report here: EU Monitor: Start-ups and their financing in Europe