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In the public debate on the financing of SMEs and startups, it is frequently pointed out that these companies may struggle to acquire venture capital. As a consequence, SMEs and startups are hindered in their growth, as they are unable to invest in innovation, for example. This situation is unfavourable for the companies and for the Dutch economy as a whole. Opportunities for economic growth, increased employment, and innovation may be missed. The Dutch House of Representatives is paying attention to this issue and has asked the minister to assist entrepreneurs. To address this, she has submitted two motions requesting:
- an investigation into what is needed to establish a new version of the venture capital scheme, allowing individuals to provide funds to SMEs with tax benefits, and to determine the associated costs
- an exploration of the need for a fund for small and subordinated loans ranging from 50,000 to 500,000 euros for SMEs.
Findings
Need
- It cannot be definitively determined how large the supply and demand for subordinated loans are, as part of the market is not visible (private loans).
- Subordinated loans may have a limited positive impact on follow-on financing from parties such as banks, but this effect cannot be quantified unambiguously.
- A portion of the equity finance market (shares) is also not visible in the data due to private investments.
- Equity financing (share capital) may potentially have a positive impact on follow-on financing, but this effect is challenging to quantify.
Relationship of Instruments to Financing Landscape and Other Policy Instruments
- Due to the overlap of new schemes with other policy instruments, competition for public funds may arise.
- There does not seem to be broad support for the introduction of a new policy instrument aimed at encouraging subordinated loans for SMEs.
- Regarding potential policy options for startups, there is limited overlap with existing instruments such as the Seed Business Angel scheme (which focuses on business angels investing together, not as individual business angels).
Policy Options
- There is a high level of uncertainty regarding the actual use of the fiscal schemes. While these schemes will make risk capital available to SMEs and startups, it cannot be definitively stated how much of this is additional. Given the limited and decreasing demand for the types of financing examined, the additional aspect may be limited. There is also a high risk of misuse and improper use. Rules and conditions will need to be established to address and monitor this.
- With a fund, a budget ceiling can be set, and there is a low chance of misuse due to the fund's monitoring role. A fund can also invest in good companies through a due diligence process and be revolving. However, fewer enterprises may be reached with a fund compared to a fiscal scheme, and there are high costs for fund management due to intensive screening and management. Additionally, a fund for subordinated loans would only be feasible with substantial subsidy amounts (given the limited returns due to the small tickets and high risk of subordinated loans).
Recommendations
- Existing (public) financing instruments can already help solve financing challenges for SMEs (e.g. through Qredits with higher non-subordinated loans) and startups (e.g. through the Seed Business Angel scheme). For startups, matching supply and demand can also be improved by facilitating investors (such as business angels) to find startups seeking investment and vice versa.
- Encourage the type of financing that SMEs and startups require. There has been a decreasing need for subordinated loans for SMEs in recent years. In the case of startups, there may be a greater need for professional investors who bring not only financing but also value in terms of advice and networking (smart money).
- Consider implementation aspects when introducing a fiscal scheme.
- If new instruments are introduced, align these with (emerging) challenges in the financing market.
- Where possible, incorporate identified good practices from previous research into the design of a potential fiscal scheme for investments in startups (e.g. initial tax benefit, tax benefit on capital gains, partial targeting of companies based on age and size, a minimum investment duration, and an investment limit).
