Becoming big business: why SMEs need more equity capital

A string of recent reports has suggested that a lack of equity capital funding is a big part of why European SMEs are lagging behind rivals in the US – and there's some sound reasoning behind the statistics.

One step behind

According to The Telegraph, the Capital Markets Union Green Paper from the European Commission, and a detailed study by the Association for Financial Markets in Europe (AFME) and The Boston Consulting Group (BCG), both concluded that the shortage of equity capital is holding back entrepreneurialism, innovation and growth among European SMEs.

That's not to say that European SMEs are under-funded. AFME found that European companies had significantly more funding from banks than their American counterparts, but only 75% of the equity capital.

The problem with this is not only that European companies are saddled with more debt, interest and risk, but they miss out on some of the benefits that come with taking investment from VCs and angel investors. These could be strategic advice, financial oversight, business contacts, office space or simply shared ideas and business with other companies in their portfolio – just the kind of thing found in start-up incubators like Tech Hub.

New thinking

Part of the reason for this funding imbalance comes from the side of the investors. US pension funds and fund managers invest an average of 53% of their assets in equities, compared to an average of 37% in Europe. There's an argument that the regulatory barriers of the fragmented European economies makes investing trickier than across the pond. But some responsibility must lie with the businesses themselves.

As part of their study, BCG interviewed 30 asset managers, controlling €9 trillion of funds between them, and found "a culture of risk aversion" among SMEs. Separately, a 2014 study by ICAS interviewed entrepreneurs and found they were actively distancing themselves from venture capital for fear of them "encroaching on their freedom".

Perhaps if SMEs across Europe opened up to new ideas and funding models for their business, the potential for growth equivalent to that seen in the US (during a comparably stagnant spell in Europe) would significantly improve.

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