A story of evolving ecosytems
Belgium: Flanders, Wallonia, Brussels each take the lead
Over the past decades, Belgium has evolved from a unitary to a federal state, in which responsibilities have been transferred from the centre to the regions and provinces. Following the sixth state reform in 2011, regions now control far larger sections of the economy, including in trade matters, the labour market, environment and energy. While many fiscal measures related to venturing remain federal, government venturing must always be considered also from the perspective of Belgium’s regions, namely Flanders, Wallonia and Brussels.
The crisis in the banking sector in the eurozone hit Belgian companies just as it hit other local companies in the eurozone. The small and medium‐sized enterprise (SME) landscape has been particularly affected by the aversion of banks to providing loans. Typically, SMEs have relied primarily on banks to fill any equity gaps: but in the period 2008‐11, banks provided loans to Belgian SMEs to a value of just €6.6bn ($9bn), as opposed to €31bn in 2004‐07. Therefore, SMEs have had to look at financing themselves through channels other than banks, and regional governments have sought to help SMEs access venture capital.
A relatively new source of venture capital funding in Belgium comes from its universities, which have set up funds such the Qbic Fund, a multi-sector fund supporting spin‐off companies of the Ghent, Brussels and Antwerp university associations. In May 2012, Qbic completed its first fund closing and currently has over €30m under management.
Law and policy – federal
Funds in Belgium typically overlap venture capital funds and investment holding companies, and indeed most venture capital funds operating in Flanders, for example, support growth and expansion rather than start ups. Seed capital in Belgium is typically sourced through friends and family, although business angels are on the rise and crowd-funding is developing hesitantly in the country.
Currently, companies can only raise €100,000 before an audit is necessary. However, Federal Finance Minister Koen Geens announced plans earlier in 2014 to promote crowdfunding and his plan is to increase the audit threshold to €300,000, with a maximum investment of €300 per investor. Geens is hoping to stimulate private investors to move money from private savings accounts into the economy, also by making investment in crowdfunding more fiscally attractive. Still, some experts say that too little is being done to promote crowdfunding, especially when compared with neighbouring countries where rules are much less restrictive.
Regional governments seeking to improve access to other forms of investment in general, such as venture capital, are supported by an important federal tax measure called notional interest deduction. This is a tax deduction for venture capital, created in 2006, that alleviates the differences in tax treatment between finance raised through borrowed capital and finance raised through equity capital. The system allows companies to deduct from their tax base a notional interest charge – not stated in the accounts – corresponding to a specific percentage of their adjusted equity capital.
Funds – federal
On a federal level, the Federal Holding and Investment Company manages the federal government’s shareholdings centrally. It co‐operates with the government on specific projects and pursues its own investment policy in the interests of the Belgian economy, investing in real estate, infrastructure and network management structures relevant to Belgium.
The federal government remains responsible for the fiscal climate in which funds operate and as such can stimulate or hinder the growth of the venturing industry. For example, federal legislation introduced the Privaks, private equity investment funds subject to very strict rules – 70% investment in non‐listed and growth companies, a minimum of six partners with one being active and liable, and an external auditor.
Benefiting from significant tax breaks, it was hoped Privaks might attract private investors to invest in venture capital. Public Privaks are have enjoyed only limited success, with just two listed.
Regional government – Flanders
Flanders in Action is a framework of policies set out by the current Flemish government (2009-14) with the ambition of becoming a competitive and multi-faceted knowledge economy, ranking among the top five knowledge‐intensive European regions. According to the Eurostat Innovation Scoreboard 2014, Belgium is considered to be an “innovation follower”, with Flanders – which attracts up to three‐quarters of Belgium’s venture capital activity – scoring marginally better than other Belgian regions.
Since 2009, Agentschap Ondernemen has acted as the official Flemish government information portal for all companies in Flanders on all aspects of enterprise, including finance. It offers Finmix, a free service aimed at enterprises with innovative projects or strong growth ambitions, classically needing venture capital. Companies can get advice from experts on the ideal finance mix.
One of Flanders’s most important investors is the Participatie Maatschappij Vlaanderen (PMV), an independent investment company owned by the Flemish government, with assets under management of €900m. PMV invests in the economic fabric of Flanders, providing financial support if the market fails to do so. PMV collaborates with private partners via funds and public-private partnerships, with particular emphasis on sustainable energy, biotech, clean‐tech, life sciences and infrastructure for the future. PMV undertakes commissions on behalf of the Flemish region and several funds operate under the umbrella of PMV, including:
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Tina – Transformation, Innovation and Acceleration – of Flanders, which is a €200m fund to support innovation which has strategic potential. PMV works in consortium with private sector parties.
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Vinnof, which provides risk capital to innovative start ups and young companies in their initial growth phase.
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Arkimedes, which matches euro for euro the money invested in Flemish start ups and SMEs.
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PMV and Capital@rent launched the first mezzanine fund in Belgium in April 2014.
PMV also manages the Guarantee Scheme, which offers banks or credit providers greater security if a start up, SME or large enterprise is unable to provide adequate security. The government stands surety for up to €1.5m. The system also guarantees leasing contracts.
Alongside PMV, LRM – a government‐backed ever–green life sciences fund – provides risk capital to companies in Limburg province.
VPM (Vlaamse Participatie Maatschappij) manages a 27% Flemish government share in Gimv – a stockmarket‐listed investment holding company. VPM invested €250m in the Gimv‐XL fund, supporting large, growth‐stage companies, one of which, Electrawinds, recently narrowly avoided bankruptcy, causing federal and Flemish government funds to lose around €91m. This case has had a major effect on public opinion and what role the government should play in venture capital.
Regional government – Wallonia
While Flanders has VIA, Wallonia has the Marshall Plan 2. Green, aiming to invest €2.75bn in the regional economy over the period 2009‐14. A large part of the budget goes into the development of human capital, the promotion of Wallonia as a region for investment, and setting up research‐industry clusters and networking opportunities. Wallonia’s objective is to rid itself of the image of heavy industry – steel and mining – and it has been investing in the development of high-potential specialised sectors
In comparison with Flanders, there are fewer university spin-offs and fewer private venture capital funds, and this gap is filled by a strong presence of government‐con–trolled funds.
The SRIW Group is the Walloon counterpart of PMV in Flanders and provides funding of various types, such as equity capital, subordinated debenture loans, convertible loans and loans with warrants, to businesses in Wallo–nia, with the exception of the steel, hotels, restaurant and catering industries. It registered €194.5m of total com–mitments in 2012 and is an umbrella for other local funds and specialised funds.
Sowalfin offers the bank or credit provider greater security for loan applicants.
Regional government – Brussels
In Brussels, the SRIB‐GIMB presents itself as the financial partner for companies, mainly SMEs, in the Brussels capital region. It invests in third‐party funds and provides minority equity and other early-stage and start up funding, as well as expansion or development capital and support with turnaround, restructuring and bridge financing. In 2012, it invested €2.8m in 16 companies at a ratio of 75% capital and 25% loans.
Netherlands: venturing into the 21st century
The Netherlands has a long history of venture capital dating back to the 1600s, when rapid trade and prosperity during the 17th century included the establishment of the Dutch East India Company, the first multinational corporation to initiate and fund private and public ventures, and the first company to issue shares.
The Dutch government is proud of its innovative history and maintains efforts to provide a long-term favourable framework for growth, including the provision of cash grants, low-interest loans, tax credits, government capital participation and export guarantees for selected regional areas. Many of the conditions required to create an ecosystem, where business creation and entrepreneurship can thrive, are in place, and Amsterdam has become one of the largest hubs for start ups in western Europe.
However, structural reforms are needed to address the challenges of sustaining growth following seed funding. One inhibiting factor seems to be the reluctance of banks to engage in lending since the crash. Small and medium‐sized enterprises (SMEs) struggle to attract funding, which in the longer term will curb innovative growth if alternative funding cannot fill the gap.
Law and policy
Grants for research and development (R&D) projects are as high as 50% of total project costs, with sustainable energy R&D particularly encouraged. The Dutch government is committed to improving both science and engineering within education and the workforce, and providing more support for public-private partnerships in key technology areas. R&D spending is also being increased after three years in decline, although the weight is being shifted from direct to indirect funding, with more focus on tax incentives.
The Netherlands has one of the highest rates of tax subsidies for SMEs, while the “innovation box”, which is part of the Dutch Corporate Income Tax Act, provides a reduced rate of 5%, which can be applied to a company of any size that fits the R&D criteria, with no limit on the amount to which the benefit can be applied.
In 2013, the government enacted legislation to introduce a one-tier board system for the management and supervision of both public and private companies. This has resulted in changes to rules regarding conflict of interest, the introduction of target figures for recruiting from diverse backgrounds, and limits placed on the number of positions on a board. More broadly, the act hopes to streamline the managing of companies on a day-to-day basis.
Funds and finance
Stichting Pensioenfonds ABP, the state pension fund for government employees, often acts as a replacement for early venture capital funding. A 15‐year programme, Inkef (Investing in the Knowledge Economy of the Future), has recently been announced. The fund will invest €200m ($250m) as part of a joint venture between ABP and Canada‐based Ontario Municipal Employees Retirement System, offering mentoring for entrepreneurs in both Canada and the Netherlands over the next five years.
The National Investment Institution (NII) was created in May 2014, supported by 13 Dutch institutional investors, including five pension funds. The NII will provide risk-bearing, subordinate loans to enterprises and hopes to encourage additional funding from banks previously dissuaded by high losses on bad loans.
“Innovation credit” loans are made available by government agency RVO to stimulate innovative drug development in the Netherlands.
RVO recently invested €3.6m in biopharmaceutical company Lanthio Pharma to develop its LP2 drug for treating idiopathic pulmonary fibrosis. The innovation credit loan is risk‐bearing and will be matched by Lanthio Pharma’s investors.
Government initiatives
The Green Deal was launched in 2011 as part of a national shift to a bio‐based economy, targeting projects aimed at saving energy, materials and water. The Green Deal offers clean‐tech companies non‐financial government support, including access to capital markets, a reduction in the administrative burden, access to networks and the creation of new markets for new products. So far, 160 companies have participated in the scheme.
Luxembourg: from global giants to start ups
The Grand Duchy of Luxembourg may not lie at the geographical heart of Europe but it is home to many EU institutions, such as the European Court of Justice, the Secretariat of the European Parliament and the European Investment Bank.
A small country of some 530,000 citizens, over 40% of Luxembourg’s workforce is publicly employed, while Luxembourg’s national motto is “Mir wëlle bleiwe wat mir sinn” – We want to remain what we are. Despite this sentiment, there are some areas where Luxembourg is a leader. In September 2006, it created LuxConnect, a government-owned company whose sole purpose is to bring 1Gbps internet to every home in the country by 2020. This infrastructure investment is starting to pay off, with data centres in Luxembourg taking the top three positions in a 2013 report that compares their speed and reliability to data centres in London, Amsterdam and the US.
Since 2004, Luxembourg has also been focusing on biotech and healthcare industries. The government recently funded 80% of the €5m acquisition of a cutting-edge, radiotherapy device, of which only two exist in Europe, for the National Centre of Radiotherapy. The state has also been instrumental in setting up the Luxembourg Centre for Systems Biomedicine (LCSB) and the Integrated BioBank of Luxembourg, which both match government investments with venture capital. The LCSB has produced two spin-outs, one of which has received funding through a government‐backed fund.
Luxembourg is welcoming to large companies: it houses European headquarters for global players such as eBay, Apple and Amazon. There appears also to be light at the end of the tunnel for start up entrepreneurs, with some incubators having been created, including by the government.
Law and policy
Luxembourg’s legal framework is hardly conducive to a start up culture. Entrepreneurs must first apply for a business licence, an administrative nightmare that takes 15 days, and raise starting capital of €12,500 ($17,000). The Chamber of Commerce recognised the problems of this in a January 2011 report, in which it proposed a so‐called simplified limited company, for which an entrepreneur would have to provide €1 starting capital and be given five years to reach €12,500 of revenue. If the revenue milestone is not reached, the company would be shut down; if it were reached, the start up would become a traditional limited company. Three years on there is still a campaign for the concept by various groups – including the government’s own incubator Technoport.
Funds and finance
The National Society for Credit and Investment is a banking institution fully owned by the state. Founded in 1978, the state offers several different kinds of loans through this institution – start up, long‐term and equity. To qualify for a start up loan, the company must already be incorporated – the loan cannot be used to fund the €12,500 starting capital.
LuxInnovation is the National Agency for Innovation and Research. The Ministry of the Economy and Foreign Trade assists start ups in applying for funding from one of several public agencies – research, development and innovation funding, eco-technologies and sustainable development funding, and funding for young innovative enterprises.
The Ministry of Small and Medium‐Sized Businesses and Tourism offers funding for skilled crafts and retail small and medium‐sized enterprises. Research grants are provided by the National Research Fund. The agency organises an annual award for young enterprises and runs a Start up Weekend. The size of funds is unknown.
Investments and deals
Luxembourg’s government has been particularly successful with its investments in the film industry. Several high‐profile movies of the past decade were filmed and produced in the country, and have gone on to success at the Cannes Festival. Investments made through the state’s Film Fund means the country now houses some 40 production companies. The government has allocated €40m to the fund for the financial year of 2014‐15.
Research funding is also increasing, with the government allocating €1.09bn, including €232m through its National Research Fund, while €565m will be invested in Luxembourg University over the period 2014‐17, an average annual increase of €41m compared with 2010‐13. The remaining money is allocated to several research centres.
Additional writing and research by Thierry Heles.
The government has opened two incubators, Ecostart Enterprise and Innovation Centres and Technoport, as well as a relay centre, Op der Hei. It has invested €200,000 in Technoport this financial year. The amount invested in Ecostart and Op der Hei is not known. Technoport, which hosts 27 companies, is a partner of the Microsoft BizSpark and Sun Start up Essentials accelerator programmes. Both incubators are part of the government’s ambition to create a high-tech cluster called City of Sciences, Research and Innovation.
Meanwhile. third‐party initiatives, such as Luxembourg Business Angel Network or the Impactory, a co‐working space and workshop organiser, maintain close links with the government.