Venture Capital Principles in the European ICT Ecosystem: How can they help ICT innovation?

Abstract

This report looks at venture capital (VC) funds, their characteristics, and functioning. It specifically focuses on the relationship between VCs and innovation, investigating whether VC funds encourage innovative companies to innovate or whether they successfully predict which companies will innovate more. The report also focuses on the selection process at micro-level. VC funds invest in young and innovative companies and decide where to invest based on imperfect information and signals. The ICT industry has a number of young innovative companies and unsurprisingly VC funds have concentrated their efforts on the ICT industry. In 2013, about 25% of invested funds went into ICT companies even though ICT companies represent less than 6% of all companies. The report then steps back to look at the macro-level. Once they have invested, VC funds use stage financing, monitoring, and exit incentives to re-align their incentives with those of the company receiving the funds. Since they rely on monitoring, VC funds usually prefer to invest in local companies that they can visit regularly. This issue of local investment is seen as a hindrance and EU policymakers have tried to remedy it passing a regulation to facilitate the cross-border funding. The EU has also partly funded the European Investment Fund to further encourage investment and cross-border investment.