Backing SMEs to lead a European recovery

To find out how the European Commission is putting its weight behind SMEs, GrowthBusiness journeyed to the first SME Assembly in Cyprus.

Discussion time: Delegates on the stage at the inaugural SME Assembly in Cyprus

Discussion time: Delegates on the stage at the inaugural SME Assembly in Cyprus

With the SME population in Europe reaching 23 million, the ability for them to spearhead wealth generation and provide a sustainable source of employment has reached a crescendo.

To provide a way for policy and initiatives to work together across the continent, the European Commission brought together delegates from each member country to partake in the inaugural SME Assembly.

Hosted in Cyprus due to its presidency of the council of the European Union for the latter half of 2012, the two-day event saw discussions on growing through finance, how regions and cities can help SMEs grow and simplifying the rules to help SMEs grow.

Business brackets

SMEs, in their European Commission classification, are independent companies with fewer than 250 employees. They provide two out of three private sector jobs and are responsible for 85 per cent of new jobs created.

The Commission estimates that SMEs account for 67 per cent of total employment and 58 per cent of gross value added. Of these, the lion’s share of enterprises (92 per cent) are represented by micro firms with fewer than ten employees.

Research shows that, compared to the EU average, the UK economy appears to be bias towards larger companies, which represent a larger share of all enterprises, employment and value added.

In recent years there has been a 15 per cent reduction in the number of small companies which, coupled with a small increase in the amount of micro businesses, suggests some scaling-down.

Official opening

Kicking off proceedings at the conference, European Commission vice president Antonio Tajani, who is responsible for industry and entrepreneurship, announced that, ‘If SMEs grow, the economy grows’.

He added, ‘Public finances and the financial markets have to be stabilised, but growth can only come from the real economy.

‘The real economy must therefore be at the centre of our measures to overcome the crisis. And to speak of the real economy is to speak about SMEs because SMEs are the backbone of our society, representing more than 20 million businesses and have been, for years, the major source of new jobs in Europe.’

He went on to outline the details of Europe 2020, the European Commission’s plan for growth.

The ten-year growth strategy will aim to address the shortcomings of Europe’s growth model and create the conditions for a different type of growth that is ‘smarter, more sustainable and more inclusive’.

Europe 2020 sets out five key targets to achieve before the end of the decade covering employment, education, research and innovation, social inclusion and poverty reduction and climate/energy.

Sitting alongside the Europe 2020 agenda is the new Programme for the Competitiveness of Enterprises and Small and Medium-sized Enterprises (COSME), which will run from 2014 to 2020 with a planned budget of €2.5 billion.

COSME will have a set of objectives including: facilitating access to finance for SMEs; creating an environment favourable to business creation and growth; encouraging an entrepreneurial culture in Europe; increasing the sustainable competitiveness of EU companies and helping small companies operate outside home countries.

Access to finance formed the backbone of the conferences agenda, with a number of different avenues explored during the panel discussions.

Finance from above

Anthony Clarke, chief executive of Angel Capital Group, was a speaker during the Growing Through Finance debate and told GrowthBusiness that the angel finance environment has changed during the last five years and moved towards an increasing number of syndicated deals.

‘Why is that,’ he said. ‘Probably because the early stage venture capital market has fallen back quite considerably so the amount of capital entrepreneurs can get from VCs in the UK at the early stage is much smaller.

‘In my own network [not Angel Capital Group] we have closed funding rounds for businesses from anything as low as £150,000 to over £2 million in the last 12 months. And you wouldn’t have seen that five years ago, not the big £2 million or even north of £1 million.’

In terms of making angel investment integrated on a pan-European scale, Clarke said that the basic problem is a lack of tax breaks for high net worths backing countries outside of the UK.

Introducing some bilateral rules could help, he added, but another problem could then emerge when governments of different European nations begin to bicker about the size of their market.

Also attending the conference in his role as national policy chairman at the Federation of Small Businesses was Mike Cherry. Taking him aside, his biggest problem revolved around ‘horrible classification’ that is ‘an SME’.

‘We need to re-classify them as micro and small and then separate entity of medium,’ he went on to say.

‘Whether you define it though the number of employees or turnover, that is entirely up to the commission, but we can start with micro and small and then people will have a much greater understanding and you can start addressing specific issues.’

With small companies being those with up to 50 staff, and medium-sized businesses having up to 250 employees, Cherry believes that the two definitions are ‘a world apart’.

At the time of the conference, the FSB was busying itself with the upcoming Autumn Statement. It will be pushing for policy to tackle issues including access to finance, late payment and stimulating long-term centralisation for growth initiatives like extending the national insurance holiday away from just pure start-ups and those deemed to be in ‘deprived areas’.

One-by-one

To give Europe a more joined up approach when it comes to promoting SMEs, the European Commission has created an SME Envoy network which sees one representative from each member state partake in discussions.

The UK’s envoy is Adam Jackson, director of enterprise at the Department for Business Innovation & Skills. To coincide with the conference, the Envoys met as part of their efforts to promote SMEs’ interests throughout all government bodies.

They also act as the main interface between the European Commission and national policy-makers for contributing towards the dialogue on implementation of the Small Business Act.

Cherry said that it is encouraging that there are individuals in each of the countries that can come together and talk.

‘We have engaged with Adam [Jackson] in his own right and will be talking more with him going forward given the emphasis by the Commission on the envoys,’ he added.

With government policy never far from the table during the two day conference, James Burnham says there are still a number of issues which need to be tackled in the venture capital space.

Burnham, who is external affairs director at the European Private Equity & Venture Capital Association, believes that first and foremost there is requirement for appropriate and proportionate financial regulation across the board.

Catching up with him after his appearance as a speaker on the Growing Through Finance panel, Burnham added that the regulation should be both investor-based or regulation for VC firms themselves.

‘Secondly,’ he told me, ‘It is using the Commission’s financing for venture capital funds to be instrumental and catalytic, to be a game changer in order for the VCs themselves to become game changers rather than to be slush money administered through government agencies in perpetuity.’

Burnham would also like to see less reliance on government funding for venture capital funds. Of VC funds raised in 2011, 40 per cent was sourced from a government agency, be-it the European Investment Fund of Capital for Enterprise in the UK.

‘Pension funds, investors, sovereign wealth funds outside of Europe all want to write large tickets to invest into whatever alterative investments, be that infrastructure, real estate or later stage private equity,’ he told me.

‘To encourage them to invest in small venture capital there needs to be a mechanism in place that can both channel funding into small VC companies to help them raise money on capital markets and also make sure that the investments are made into larger cross-border VC firms that can really take advantage of the international market.’

Test of time

With the SME Assembly in its infancy, its impact, and whether the topics of discussion will lead to solid policy creation, is still largely unknown.

Cherry declared,  ‘If we can get some things implemented and understood properly, and we come back in a years time and see something has been achieved then it could be said to be a stimulant.’

Next year’s conference is set to be hosted in Vilnius, Lithuania, which will hold the presidency after a period of six months in Ireland.

The envoys will continue to meet throughout the next year to discuss SME policy in Europe. With solid framework in the form of the Small Business Act, Europe 2020 and COSME already in place, it seems that SMEs have already been given the nod to drag Europe back to its feet and compete on a world stage.