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Science and innovation28/02/2007. Source: SJ Berwin. Simon Witney 
In recent years, says SJ Berwin, European governments have thought long and hard about how they can foster and support a more innovative economy, and one that delivers (and reaps the economic benefits of) scientific breakthroughs. It’s pretty clear that a country’s ability to respond to the challenges of innovation is a key determinant of current and future economic performance. In fact, according to the United States’ Council on Competitiveness, “Innovation will be the single most important factor in determining America’s success in the 21st century”. Most European policy-makers would agree.
But Europe has a lot of catching up to do. A recently published study - The World Business/INSEAD Global Innovation Index 2007 - shows that the US is still way ahead of Europe in its “innovation readiness and response”.
The study measures eight “pillars of innovation”, five of them inputs (such as infrastructure, human capital and investment funding), and three outputs (knowledge, competitiveness and wealth) which determine “the benefits of innovation to the citizens and organisations of a country”. The study puts the US on top by some margin, winning outright in five of the eight categories. The conclusion is that the US has “both a better environment for innovation and is more effective at exploiting it”, according to the World Business review of the Index.
Although a long way behind, Germany, the UK and France do at least appear in second, third and fifth places respectively. However, in the case of Germany and France (and several other European countries), the scores are unbalanced, showing a better score on the output side than on inputs.
That means that they do pretty well at exploiting what they have, but need to underpin this with more directed and market friendly policies to help create it in the first place. The report cites, for example, rigidity in employment laws as something which is holding Germany back.
There certainly is a focus on this in Europe, but dealing with the issues has proved tough.
In the UK, the British Government has had a champion for science and innovation sitting alongside the Prime Minister since 1998: Lord Sainsbury has acted as Minister for Science and Innovation, and has had significant influence on Mr Blair. He announced his retirement last year, and was applauded for the contribution that he has made, but his final task is to prepare a report on the challenges that still lie ahead. That report will be published in the summer, and will feed into various British reviews of policy in this area - including one published alongside last year’s budget.
One particular part of this review which is of interest to the venture capital community will be the recommendations it makes to encourage further early stage venture capital investment in science and technology. This month, the British Private Equity and Venture Capital Association (BVCA) published its contribution to that review, and it does not make comfortable reading.
While the World Business/INSEAD Index lauded the US for the availability of venture capital (saying that “great ideas have no trouble finding backing”) the BVCA note paints a very different picture. Suffering from the poor returns of the pre-bubble vintage funds, and without the history to have established a clear market position in Europe before that, the BVCA says that the UK’s early stage VC specialists have a “real challenge” in fundraising.
Funds are being raised for buy-outs and later stage venture deals, but not for early stage investments, it says - and, in turn, attracting and retaining talented individuals to work in the sector is hard, and getting harder. “Without funds to manage and talented individuals to manage them, the early stage venture capital market in the UK and Europe would wither and shrink to an even smaller size than it is at the moment”, the submission concludes.
After reviewing a number of policy interventions in recent years - including the availability of funding from the European Investment Fund, and the establishment of government sponsored funds (including, most recently, Enterprise Capital Funds), the BVCA argues that there is much more work to be done - and that “further support from Government sources would help the UK industry to achieve critical mass and lead to economic benefits accruing locally rather than overseas.”
Lord Sainsbury will know that the availability of funding for early stage businesses is a critical part of the picture, and will no doubt listen hard to suggestions from the industry to re-energise that part of the private equity sector. And there is no better place to look for lessons than the US - where policy measures have played an important role in stimulating the venture market.
Simon Witney
SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on our services to the private equity industry please contact Simon Witney in our London office 020 7533 2222 or visit our website at www.sjberwin.com.
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