Official Journal of the European Union

C 75/6

Opinion of the European Economic and Social Committee on ‘Promoting innovative and high-growth firms’

(own-initiative opinion)

(2017/C 075/02)



Plenary Assembly decision

21 January 2016

Legal basis

Rule 29(2) of the Rules of Procedure


Own-initiative opinion

Section responsible

Economic and Monetary Union and Economic and Social Cohesion

Adopted in section

29 November 2016

Adopted at plenary

14 December 2016

Plenary session No


Outcome of vote



1.   Conclusions and recommendations


The EESC encourages the Commission to pursue its efforts to develop policy proposals aimed at promoting the creation of innovative and high-growth firms and recommends that these initiatives are conducted, led and coordinated by a single unit responsible for assessing, monitoring and achieving synergies between innovative policies delivered by different DGs. These policy proposals should strengthen the single market, reinforce the clusters and ecosystems in which innovative start-ups are created, develop the equity component of the European capital markets, encourage an academic agenda focusing on jobs for the future and minimise the cost and red tape involved in starting a new entrepreneurial venture.


The Commission should continue its work to enforce the existing rules of the single market: long-term harmonisation projects such as accounting and insolvency standards, automatic recognition of professional and academic qualifications, accelerated implementation of the digital single market strategy and the full deployment of the Capital Markets Union initiative (1) would greatly assist the EU in benefiting from the full potential of a genuine single market. Simple and effective cross-border contract rules should boost cross-border e-commerce, reducing legal fragmentation in consumer law as well as compliance costs for business.


Equity financing needs to be further expanded to support start-ups in their development phase. Among other factors, this implies a more neutral tax system that treats debt and equity financing equally by enabling the deductibility of both interest and dividend payments (2). Start-ups should be able to use ‘stock option’ packages to attract and retain talent.


An equity culture should be created and promoted, including educational and non-legislative initiatives. The European financial system needs to develop liquid investment products suited to retail investors in order to encourage them to invest in innovative small businesses.


Cutting unnecessary red tape and reducing ‘gold plating’ are also crucial in order to minimise administrative burdens and avoid unnecessary costs and time inefficiency for entrepreneurs.


The development of new types of collaboration between universities and businesses involving both big industry and smaller firms needs to be strengthened and accelerated across Member States, undertaking novel policy measures aimed at turning the EU into a magnet for talent.

The EESC encourages the Commission to remove any legal constraints to student and young entrepreneur exchanges (3), for example with the creation of an Erasmus programme for young entrepreneurs.

To raise awareness of promising companies, the EESC advocates setting up a platform-based information database integrated into the European Investment Advisory Hub (EIAH) and the European Investment Project Portal (EIPP) (4). It would include the EU’s high-growth firms, in different sectors, selected on the basis of objective and transparent criteria and allowing for cross-company comparison and benchmarking.


The EESC believes that sharing and assessing good practices offers valuable insights for experimenting with new policies (5).


The European Investment Fund (EIF) and the European Investment Bank (EIB) are asked to support innovative firms with specific venture and seed capital to facilitate technological transfer from universities and research centres. This could be structured in the form of first loan guaranties that would help to overcome initial resistance to private funding.


The European Fund for Strategic Investments (EFSI), a EUR 21 billion fund made up of European Union guarantees and European Investment Bank capital, should play a critical role in helping innovative projects attain scale and make it to the market. Moreover, the EFSI could be a model for future EU budgets, moving from a traditional grant-based method of financing projects to a more efficient investment-led model, which would ‘crowd in’ funds for projects. The EFSI has successfully funded relatively risky areas that could have been easily overlooked (6).


The EESC calls for building a broader investment toolkit to stimulate growth-stage investment, including ‘asymmetric funds’, which deliver different returns to different classes of asset investors, and alternative finance vehicles, such as crowdfunding (7). The creation of sub-markets should also be considered in order to facilitate access to markets for European SMEs.


The Commission should address regulatory asymmetries between European and the US regarding the treatment of investments in software and remove the regulatory constraints that hamper the European financial sector in investing in digital development.

2.   Analysis of the current situation


Small and medium-sized enterprises (SMEs) are a key element of the European economy, contributing significantly to job creation and economic growth (8).


In 2015, more than 22,3 million SMEs in the European Union made up 99,8 % of all non-financial enterprises, employed 90 million people (66,9 % of total employment), generated 57,8 % of total added value (9) and provided 85 % of new jobs. Europe needs to ensure that a new breed of SME is created to compensate for the 200 000 that go into bankruptcy every year (10), affecting 1,7 million workers. However, what matters more for future economic growth are those businesses that want to innovate, grow and export.


The creation of start-ups with high rates of growth is of crucial importance because of their focus on innovation in fast-growing sectors with high added value. These are the businesses that will create jobs in the future and drive productivity growth, which is central to improving living standards. While Europe is reporting progress in some areas, it is lagging behind in the move from the start-up to the scale-up phase, which should ultimately lead to the growth and job creation that Europe needs (11).


This own-initiative opinion focuses on scale-ups: high-growth companies with an average annual growth in employees (or turnover) greater than 20 % over a three-year period, and with 10 or more employees at the beginning of the observation period (12). A key characteristic of scale-ups is that they run business models that are highly scalable. Scalability is the capacity to grow in terms of market access, revenues, and structure triggered by, for example, rapid replication of the business model in different markets or new management practices.


An OECD study of 11 countries (13) found that scale-ups accounted for less than 10 % of firms in all 11 countries but created up to two-thirds of all new jobs (14).


Start-ups tend to be less profitable in the short term and are dependent on external finance. If these innovative businesses are unable to finance their expansion plans, they fail to scale up, and the underlying potential for productivity growth and job creation is likely to be stunted.


A World Bank analysis (15) estimates that the average rate of SME non-performing loans in developed markets in 2007 was 6,93 %, more than twice that of large business loans at 2,54 %. Non-performing loans increased dramatically during the crisis in Portugal, Spain, Italy and Ireland to between 10 % and 25 %.

Policies that encourage banks to extend loans to riskier firms, particularly early-stage companies with limited collateral, could create a set of risky banks, credit contraction and increasing financial instability (16).


Europe needs to focus on the smooth functioning of the ‘funding transition’, which is currently broken.


The funding transition is composed of four chapters: start-up phase (funded by grants, seed capital, family and friends); equity growth phase (crowdfunding, microfinance, business angels); sustained growth (securitisation, private equity, venture capital, institutional investors, private debt placement) and exit (acquisition, public equity markets).

3.   Building blocks for the development of a scale-up-friendly innovation ecosystem


Successful innovation ecosystems that nurture scale-up companies are characterised by strong interconnected networks of research and education institutions, large industries, venture capital investors, and the presence of creative and entrepreneurial talent (17).


Normally, start-ups are created in technology hubs built around first class universities that act as key players in the development of a dynamic business environment, because they are a source of talent, both in terms of students and of academics. Powerful, well-connected clusters improve the productivity of business, drive the direction and pace of innovation and stimulate the genesis of new businesses. The USA and China, as well as certain centres in Europe, are leading a long-term battle to attract talent and capital and foster innovation.


However, the fragmentation of the European labour markets impedes the transition from start-ups to scale-ups. In this respect, it is paramount to facilitate labour mobility across the EU as well as to attract talent from third countries that serves as a magnet, thus creating a virtuous circle.


An Erasmus programme for young entrepreneurs could be encouraged. It fits in with the guiding principle of growth and jobs, and it is an initiative that would facilitate mobility and would be well received by businesses.

Some policies have been recently adopted to attract talent from outside the EU. The Blue Card, introduced in 2009, has expedited the entry of skilled workers with an EU employer (18). At national level, some European countries have already created specific visa procedures for entrepreneurs and others are beginning to introduce these (19).


A remarkably successful case of a technology hub would be ‘Oxbridge’, which refers to the region of influence encompassing Oxford and Cambridge universities in the UK. The high-tech community in the UK continued to grow and innovate during the prolonged period of economic recession and stagnation between 2008 and 2012 (20).

However, many of Europe’s universities do not have the standing, structure, or inclination to create conditions for the growth of entrepreneurial ventures on campus or to champion this agenda to governments (21). University leaders and Government should develop links with industry, investing in technology transfer offices on campus and education in entrepreneurship (22).


Spin-offs created as a result of technological transfers from universities face difficulties in scaling up due to a lack of money and specialised management. It is crucial therefore that they are able to count upon institutional public support to overcome the initial reluctance of private funding providers to invest in spin-offs with a technical profile, since these are perceived as too technical and risky and are often not well understood.


Despite having a similar level of education, Europeans set up new businesses remarkably less frequently than Americans. The manifold reasons for this include high levels of risk aversion, administrative burdens, an underdeveloped culture of second chances, underdevelopment of entrepreneurship-related education programmes and lack of private equity culture. Attention should also be paid to early development of an entrepreneurial culture at elementary and secondary-school level.


In fact, the risk of bankruptcy is what Europeans fear most about setting up a new business: 43 % in Europe v 19 % in the US. In the US (23), the fairly efficient and non-punitive corporate bankruptcy regime, as well as a generally greater acceptance of corporate failures, contributes to a willingness to take risks. Developing a more entrepreneurial culture should become a priority for policymakers as well as educational institutions.

A recent study shows that companies founded by re-starters have higher turnover and employment growth and higher chances of acquiring external funding (24). In Spain, only 20 % of entrepreneurs creating their first start-up succeed; for those that try a second time, the success rate goes up to an astonishing 80 %.


High-growth and innovative businesses are often more likely to be rejected for bank loan financing because they lack capital, which forms a key part of banks’ credit assessments (25). Equity finance is therefore fundamental for start-ups and for businesses with significant expansion plans but uncertain or negative-forecasted cash flows. Bank lending should thus be complemented by improving the diversity and flexibility of funding sources with special emphasis on the role of equity finance.


An equity culture should be created and promoted in Europe, and European financial systems need to develop investment products that are suitable for retail investors and provide the necessary liquidity for them to invest in innovative small businesses.


Due to the lack of later-stage funding, European start-ups cannot keep up with the growing pace of their US counterparts and either need to generate revenues earlier in order to stay alive or are sold at a premature stage at a discount price. Indeed, by 2009, only 5 % of European companies created from scratch since 1980 were in the top 1 000 in terms of market capitalisation. In the US, this share was 22 % (26).

Remarkably, over half of all venture capital worldwide is granted in the US, only 15 % in Europe. In 2013, EUR 26 billion of venture capital was provided in the US and EUR 5 billion in Europe, while business angel investors provided EUR 6 billion to European start-ups and EUR 20 billion in the US.

The EU thus suffers from a major deficit in business angel and venture capital funding, which are respectively three and five times higher in the US. This is a crucial difference as it is this kind of capital that is needed to transform firms into larger and more successful enterprises.

The main reason for this is the high fragmentation of the EU venture-capital industry along national borders. At around EUR 60 million, the average European venture fund is only half the size of the average fund in the US, and 90 % of the EU venture-capital investment is concentrated in only eight EU Member States (Denmark, Finland, France, Germany, the Netherlands, Spain, Sweden and the UK) (27). Due to the diversity of rules in the Member States, venture capital firms face high costs in raising funds across Europe. As a result, they are small and have less capital to support growing businesses. If Europe’s venture capital markets were as deep as in the US, as much as EUR 90 billion of additional funds would have been available to finance companies between 2008 and 2013 (28).

Also problematic is the insufficient involvement of private investors. Over the last decade, the European venture capital sector has become increasingly reliant on public sector institutions, which contributed 31 % (29) of the total investment in 2015, up from a mere 15 % (30) in 2007. The aim should not be less public money but more private sources. The investor base needs to be broadened and diversified if the industry is to become self-sustaining in the long run.

To incentivise public-private partnerships, asymmetric funds could be considered. These are venture capital funds where investors are given different conditions and returns based on their investment goals, recognising the various interests of partners in different collaborations. They already exist in Finland, Greece, the UK and the Netherlands.


The creation of sub-markets should also be considered in order to facilitate access to markets for European SMEs. They should allow for low listing costs and a flexible tailored approach to the needs of smaller, dynamic companies. Good examples are London’s Alternative Investment Market (AIM), Paris’s Nouveau Marché, or Madrid’s Mercado Alternativo Bursatil (MAB). This flexible regulation system can be a double-edged sword. Small companies can have easier access to the stock exchange to float shares but, on the other hand, inexperienced investors could face difficulties in assessing the exact risk profile of a firm.


Specific sector regulation is sometimes hampering the capacity of EU businesses to invest in technology development when compared to their US counterparts. For example, there is a regulatory asymmetry between European, US and Swiss financial entities regarding the needed investments in software and other intangible assets, which are critical for digital development.

The banking sector is, by far, the biggest IT sector in the world: USD 700 billion are spent on IT innovation — 1 in 5 EUR is spent by the financial sector and 5 to 10 % of investment (31). Consequently, banks are both a major actor in the digital transformation and the main financier of the digital economy.

Nevertheless, the regulatory framework is penalising their much-needed investments in IT. Financial regulation should treat software as an ordinary asset and should not force EU banks to deduct this investment for capital requirement purposes.


Different tax treatments across Member States and between different types of financing pose an obstacle to the development of pan-European capital markets, with an impact on both investors and issuers.


Most corporate tax systems in Europe favour financing by debt rather than equity, by allowing a deduction for interest costs; there is no deduction for dividend payments in the case of equity. Such debt bias could be addressed through tax deductions for the cost of both equity and debt financing (32).

Tax incentives play an important role in the provision of finance to high-growth early-stage companies, and several governments around the world allow tax deductions for individuals and companies invested in high technology start-ups or qualified venture capital funds (33).

A traditionally attractive benefit to employees and start-up entrepreneurs is to put in place stock option programmes, as many of them would forego salary compensation. In the majority of Member States, the tax treatment of stock options is very punitive since they are treated as normal income and taxed at a marginal rate. A preferred tax treatment for stock options should be encouraged in a similar manner to the incentive stock options (ISOs) (34) in the US.


It is costly for businesses to comply with VAT obligations, in particular if the company sells goods or services cross-border. The EESC is pleased to learn that the Commission has announced, as part of its Digital Single Market strategy, that it will put forward legislative proposals by the end of 2016 to reduce the administrative burden on businesses caused by different VAT regimes. Among these measures, the Commission proposes introducing a VAT-free threshold to help start-ups and microbusinesses (35).


Unlocking the full potential of the single market is essential so that start-ups can offer their services and products across the whole EU at an early stage and swiftly scale up to compete in global markets.


Simple and effective cross-border contract rules for consumers and businesses are a priority in the digital single market strategy. They would foster cross-border e-commerce in the EU by eliminating legal fragmentation in the area of consumer contract law. The removal of barriers due to contract law differences would boost consumption in the EU by EUR 18 billion and gross domestic product would increase by EUR 4 billion from its current level (36).


Unnecessary administrative burdens are also a cause of extra costs and time inefficiency for entrepreneurs.


During 2013-2015, the average cost for starting a business in the EU was 4,1 % of GDP per capita, while in the US it was 1,17 % (37).


In terms of the time taken to establish a company in the EU, on average registration was completed within 11,6 days. In the US, it takes just 6 days to start a business.


Information asymmetry is another reason why Europe does not produce enough high-growth firms. Investors lack a complete view of all investment opportunities. Moreover, non-European investors face additional limitations trying to understand the specifics of the different national markets. A dedicated portal, integrated with the European Investment Advisory Hub (EIAH) and the European Investment Project Portal (EIPP) (38), would help to provide visibility to high-growth projects and reduce information asymmetry.

4.   Example of good practices among the many that are currently in existence


A number of countries have developed good practices to support start-ups and scale-ups. The EESC recommends that the Commission study carefully the possibilities for their implementation at a European level


Germany requires firms to join a German chamber of commerce (IHK) that in turn provides support and advice (39).


Government loan guarantee schemes like those in Italy, the UK, Poland and France should be explored, as well as state co-financing such as in Germany and Sweden (40).


The United Kingdom is providing tax incentive schemes to increase the flow of funds into riskier assets with its EIS, SEIS and VCT schemes (41).


The Piedmont region in Italy has developed networks in 12 industry clusters, bringing together firms, universities and local government (42).


In the Basque region in Spain, the Elkar-Lan cooperative encourages the creation of other cooperatives via a complete viability analysis of the project, training, and access to subsidies and financial aid (43).


Digitalisation of government services, as demonstrated by the case of Estonia, could provide a breakthrough in facilitating the growth of high-tech, innovative companies. On a pan-European scale, developing e-government would have a massive impact.


In the era of the data-driven economy, a competitive advantage may rely on intangible assets, which are difficult to assess and value using traditional financing mechanisms. The UK’s Intellectual Property Office has developed ways to identify and measure these assets in terms of cash flow (44).


In the United Kingdom, a dedicated team within Tech City UK called Future Fifty supports the UK’s top 50 growth-stage digital companies. The programme provides access to expertise within government and the private sector, builds links to the UK’s institutional investor base, and offers tailored support to help companies grow rapidly and establish the foundation for IPO (45) readiness, M&A and global expansion (46).


In 2015, the US federal government put in place the STEM scheme, which aims to inspire children to study science, technology, engineering and maths. A key pillar is dedicated to preparing students for the future needs of the labour market (47). There is an increasing focus on transferable skills and STEAM, with the ‘A’ referring to ‘Arts’.

5.   Initiatives taken by the European Commission to promote the creation and growth of start-ups


The European Commission has made a remarkable effort to support entrepreneurs, rolling out multiple initiatives in the past few years, with a number of different directorates-general leading the process, namely DG CONNECT (48), DG EAC (49), DG GROW (50), DG RTD (51) and DG FISMA (52).


Many of these initiatives are recent and it is still too early to assess their effects. However, the EESC believes that the Commission is on the right path and encourages it to keep working in this direction, always in consultation with the relevant European and national stakeholders.

Brussels, 14 December 2016.

The President of the European Economic and Social Committee

Georges DASSIS

(1)  The EESC has expressed support for the initiatives of the Capital Markets Union in its opinions on the ‘Action Plan on Capital Markets Union’ (OJ C 133, 14.4.2016, p. 17), ‘Securitisation’ (OJ C 82, 3.3.2016, p. 1) and the ‘Prospectus’ (OJ C 177, 18.5.2016, p. 9).

(2)  The EESC has repeatedly called for measures to eliminate the debt bias in tax systems, for example in its opinion ‘Finance for business/alternative supply mechanisms’ (OJ C 451, 16.12.2014, p. 20).

(3)  See the EESC opinion ‘Engaged universities shaping Europe’ (OJ C 71, 24.2.2016, p. 11).

(4)  European Investment Advisory Hub: http://www.eib.org/eiah/index.htm

Information about the European Investment Project Portal: https://ec.europa.eu/eipp/desktop/en/index.html

(5)  See point 4.

(6)  European Digital Forum, From start-up to scale-up: Growing Europe’s digital economy, Sergey Filippov and Paul Hofheinz, 2016, pp. 3-5.

(7)  Ibid, p. 5.

(8)  EU definition of SMEs (OJ L 124, 20.5.2003, p. 36).

(9)  http://www.eif.org/news_centre/publications/eif_annual_report_2015.pdf

(10)  Bankruptcy and second chance for honest failed entrepreneurs — the European Commission’s policy. Entrepreneur’s Day 12 November 2015.

(11)  A start-up is commonly defined as an entrepreneurial venture designed to search for a repeatable and scalable business model. These newly created companies are usually highly innovative, typically based on ideas, technologies or business models that did not exist before. By contrast, a ‘scale-up’ company is one that rapidly expands and grows in terms of market access, revenues or number of employees. See the Octopus high-growth small business report 2015 (London: Octopus, 2015).

(12)  https://www.linkedin.com/pulse/20141201163113-4330901-understanding-scale-up-companies

(13)  UK, Finland, Spain, Italy, US, Canada, Norway, Netherlands, Denmark, New Zealand, Austria.

(14)  Supporting investors and growth firms — T. Aubrey, R. Thillaye and A. Reed, 2015, p. 11.

(15)  http://siteresources.worldbank.org/INTFR/Resources/BeckDemirgucKuntMartinezPeria.pdf.

(16)  Supporting investors and growth firms — T. Aubrey, R. Thillaye and A. Reed, 2015, p. 21.

(17)  Tataj, D. ‘Innovation and Entrepreneurship. A Growth Model for Europe beyond the Crisis’, Tataj Innovation Library, New York, 2015.

(18)  https://www.apply.eu/directives/

(19)  http://tech.eu/features/6500/European-start-up-visa

(20)  www.cambridge.gov.uk/sites/default/files/documents/cnfe-aap-io-employment-sector-profile.pdf

(21)  Clustering for Growth, How to build dynamic innovation clusters in Europe, p. 11.

(22)  See the EESC opinion ‘Engaged universities shaping Europe’ (OJ C 71, 24.2.2016, p. 11).

(23)  Bankruptcy and second chance for honest failed entrepreneurs — the European Commission’s policy.

(24)  Research by Professor Kathryn Shaw at Stanford Graduate School of Business.

(25)  Supporting investors and growth firms — T. Aubrey, R. Thillaye, and A. Reed, 2015, p. 40.

(26)  http://eref.knowledge-economy.net/uploads/documents/Born%20to%20Grow.pdf.

(27)  European Commission, Building a Capital Market Union, Green Paper, op. cit.

(28)  Ibid.

(29)  http://www.investeurope.eu/media/476271/2015-european-private-equity-activity.pdf

(30)  http://www.investeurope.eu/media/340371/141109_EVCA_FOF_scheme.pdf

(31)  European Banking Federation, 16 September 2016.

(32)  Serena Fatica, Thomas Hemmelgarn and Gaëtan Nicodème, The Debt-Equity Tax Bias: Consequences and Solutions, European Commission Taxation Papers/Working Paper 33-2012: http://ec.europa.eu/taxation_customs/resources/documents/taxation/gen_info/economic_analysis/tax_papers/taxation_paper_33_en.pdf

(33)  e.g. point 4.3.

(34)  https://www.law.cornell.edu/cfr/text/26/1.422-2

(35)  http://europa.eu/rapid/press-release_MEMO-16-1024_en.htm

(36)  http://europa.eu/rapid/press-release_IP-15-6264_en.htm

(37)  www.theglobaleconomy.com/USA/Cost_of_starting_business

(38)  See footnote 4.

(39)  http://www.dihk.de/en

(40)  Supporting investors and growth firms — T. Aubrey, R. Thillaye and A. Reed, 2015, p. 36.

(41)  Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trust (VCT).

(42)  cordis.europa.eu/piedmont/infra-science_technology_en.html

(43)  www.elkarlan.coop

(44)  https://www.gov.uk/government/publications/banking-on-ip

(45)  Initial public offering or stock market launch.

(46)  http://futurefifty.com/

(47)  https://www.whitehouse.gov/the-press-office/2015/03/23/fact-sheet-president-obama-announces-over-240-million-new-stem-commitmen

(48)  Entrepreneurship 2020 Action Plan.

(49)  Erasmus programme.

(50)  Single Market Strategy.

(51)  Horizon 2020 Programme for Research and Innovation.

(52)  Capital Markets Union.