Challenges

Lack of sufficient collateral and asymmetric information are among the two largest market failures preventing young and innovative SMEs from accessing traditional bank-lending and giving rise to a “scale-up” gap. While lack of collateral prevents banks from getting hold of valuable assets in the event of a default, asymmetric information limits the extent to which banks are able to collect relevant information before and after issuing a loan. Innovative and young firms are even more exposed to these market failures, which also affect several funding rounds after the initial seed phase and discourage growth and investments. Aiming to reducing the size of the scale-up gap in Europe, the EIB has recently launched a venture debt product targeting.
innovative European SMEs.

Description of Innovation

Venture debt is a debt product characterised by long maturity, designed to address the unique funding needs of fast growing innovative companies that have already raised venture (equity) capital. Venture debt is an important tool to assist small or medium-sized enterprises (SMEs) and mid-caps heavily involved in research to continue to invest in research and development and market expansion. These research-focused companies have limited access to standard debt financing due to a low asset base and not yet having reached profitability. The EIB venture debt product is structured to fit with investment plans. A longer loan maturity is extended to fit with
full profitability forecasts, and for instance, repayment terms include a bullet repayment on maturity to facilitate repayment based on future funding plans. It is a quasi-equity product, with loan repayments depending on the performance of the company. The EIB gets warrants for Impact assessment of EIB venture debt shares in the company when it makes a quasi-equity investment, but the founders have call and put options to retain their share. This research analyse the impacts of EIB venture debt, designed to address the unique funding needs of fast growing innovative companies that have already raised venture capital.

Results

The impact of EIB venture debt financing is estimated empirically using data for the treated EIB venture debt beneficiaries and the control group before and after receiving venture debt. The findings are that relative to their peers—innovative firms that received venture capital and are similar in age and financial circumstances, but that did not receive any venture debt loan—EIB venture debt beneficiaries:
• Higher firm growth. EIB venture debt
beneficiaries report about 30% on average higher total assets in the years after the venture debt loan signature compared to their peers that did not receive venture debt
loans.
• Crowds in financing. Beneficiaries receive additional financing from the market following the receipt of the EIB loan. Firms have an average of 250% additional long-term debt,
defined as a firm’s debt minus the volume of the EIB venture debt loan, after the loan signature.
• Higher productivity. Show strong additionality in terms of beneficiaries’ productivity (as measured by a firm’s value added). EIB venture debt beneficiaries’ value added increased
by about 50% on average relative to comparable firms that did not receive EIB venture debt financing.