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Despite years of trying, eastern Europe still lags the west in its success in research and innovation. As an example, just 5.7% of the EU’s flagship research programme, Horizon 2020, went to the region – causing political tensions within the EU. “Widening” is the name for the European Commission’s €3.3 billion plan to broaden the networks and opportunities for R&D cooperation across the EU and bridge the East-West innovation gap. At the same time, member states have agreed to relaunch the European Research Area, the EU flagship effort to create a single market for research that would help boost public and private R&D investments across the EU. The plans sound good on paper but the implementation will be tricky. Some eastern member states have already started reforming their R&D systems, but others are still struggling to get their public investment in R&D above 0.2% of GDP.  

Yet the potential in the region is huge, with multinationals investing there, long academic traditions ready to foster young scientists, and a promising crop of tech start-ups, spin-offs and projects springing up from Riga to Belgrade. Who are these people? How to make sure they stay in the region? A recent report of the European Court of Auditors observes that widening measures can only nudge countries in the right direction – but cannot make up for a lack of reforms and investment in lagging member states. To what extent EU and national instruments in place help retain and attract talents? From a policy perspective, what is required to streamline their functioning? What else can be done? What are the lessons learned to ensure that the next generation of scientists in central and eastern Europe are better integrated in EU programmes?  

On 10 November 2022, during the Czech Presidency of the EU, Science|Business will gather R&D leaders – from the public and private sectors – in central and eastern Europe, as well as those in Brussels and other western capitals eager to bridge the gap between east and west. The conference is the first regional event organised as part of the newly-launched Science|Business Widening initiative. 

Q1: How can capital be deployed to the firms with the highest potential? Who is to decide which firms have the highest potential in advance of them achieving it?

A: The importance of allocating capital effectively is not a function of any one investor but of the market of investors as a whole, a vibrant constantly evolving community of investors and advisers which makes and trades investments which are capable of being valued.

The benefit of hindsight as to whether an output will be “new to market”, is not available at the time of investment in an early stage technology company.

It follows that one cannot frame intervention measures in legislation which will succeed in only supporting those early stage technology firms whose outputs are “new to market” as many firms will fail in the quest for “new to market” outputs.

Any scheme which seeks only to back the winners is as commercially naïve as it is impractical to achieve.

Why? One of the problems is that a ‘wild eyed’ visionary young genius capable of innovating ‘new to market’ outcomes is unlikely to be able to communicate or be specific about the outcome of his work to private investors; that is for the young genius to discover.

So, of necessity, the investment must be made in the person of the young genius rather than in a project which is only capable of being ill-defined too widely or too narrowly to be properly valued. The capital required for investment in a person really does need to be patient.

Q2: So how could one encourage more private money – private ‘patient’ money to invest at an earlier stage?

In 2016 I was commissioned by CERN, in its capacity as the lead institution for the ATTRACT consortium of European Research Institutions to devise two novel funding mechanisms for the financing of early stage technology commercialisation in support of the ATTRACT bid to the European Commission for Phase 1 funding, which was successful.

My ‘micro’ proposal modelled investment into note obligations issued by young scientists which, pursuing a strategy of ‘investing in the person not the project’ could be converted in the future, on a pick and mix basis, into slices of the intellectual property rights developed by a young scientist which looked promising or into a share of the equity acquired by the same young scientist in one or more spin off companies. I called this model ‘Young Genius Funding’.

My ‘macro’ model proposed the raising of capital for investment funds, which I termed ‘Sundance Innovation Funds’, with the support of a bullet guarantee, issued by one or more ATTRACT institutions, to underwrite a proportion of losses recognised after a Sundance Innovation Fund had been in existence for ten years. Such guarantees would be awarded on a reverse auction basis to the  private investor groups willing to put up the most private sector capital in return for the lowest level of guarantee support.

As there would be no obligation to pay out under such a guarantee for ten years; the ATTRACT institutions could pursue a ‘wait and see’ strategy as to when to start provisioning for potential losses, should this become necessary. In this way, the purchasing power of public money allocated for investment in deep science might be multiplied many times over as the guarantee structure would always be potentially far more cost effective that the provision of grant aid and, additionally, private money would have been levered in to work at an earlier and riskier stage of investment. As CERN physicists think in terms of billions this macro proposal was well received.

Q3: What is the outlook for the UK venture capital market?

British businesses are increasingly turning to private capital to grow, with the total amount invested in UK companies by private equity and venture capital rising to an all-time high, according to a BVCA  new report published July 2022.

Research by the British Private Equity and Venture Capital Association (BVCA) – which looked at the economic contributions of more than 200 of its members – found that the total amount invested across all stages of the business life cycle, from venture to buyout, grew by more than 80 per cent in 2021 to £17.3bn. The amount of growth capital invested in UK companies had risen by 75 per cent to £3.89bn.

Of the 1,320 businesses which received funding, nine in ten were small or medium-sized, showing the importance of private capital to the UK’s entrepreneurs and start-ups. Year-on-year, venture fundraising increased by 30 per cent, showing the increasing investor interest in backing firms which invest in the earlier stages of a business lifecycle.

Q4: How can an eastern European Company access venture capital through the UK enterprise investment scheme and UK Venture Capital Trusts?

UK tax payers obtain a 30% income tax relief if they invest in companies that qualify for investment under the UK UK enterprise investment scheme and UK Venture Capital Trusts?

We also have the concept of ‘knowledge intensive companies’. You only need to apply as a knowledge intensive company if: you need to raise more money than the usual scheme limits allow; your company is older than the usual scheme limits allow; or your investor wants to make use of higher investor limits. As a knowledge intensive company, you can raise up to: £10 million of investment per year and £20 million of investment in the lifetime of your company and any subsidiaries. This includes amounts received from other venture capital schemes and state aid approved under the risk finance guidelines.

For EIS, investors can invest up to £2 million, if at least £1 million of this is invested in knowledge intensive companies.

To qualify as a knowledge intensive company, you and any qualifying subsidiaries must have less than 500 full-time equivalent employees when the shares are issued and either: (i) be carrying out work to create intellectual property and expect the majority of your business to come from this within 10 years; or (ii)  have 20% of employees carrying out research for at least 3 years from the date of investment – these employees must be in a role that requires a relevant Master’s or higher degree

Operating costs conditions: You must spend money from your overall operating costs on research, development or innovation. This should be either: 10% a year for 3 years or 15% in one of 3 years. If your company is at least 3 years old, you must have done this in the 3 years before the investment. If your company is less than 3 years old, you must do this in the 3 years following the investment. You’ll need to submit a schedule, supported by accounts to show that you have.

Limits on the age of the company. You can receive investment under EIS as long as it’s within 10 years of either your: annual turnover going over £200,000 or your first commercial sale. If you have any subsidiaries, former subsidiaries or businesses you’ve acquired, use the earliest date of the group. If you received investment in this period (under any venture capital scheme or state aid approved under the risk finance guidelines), you can raise money for the same activity as long as you showed intent in your original business plan. You must follow the scheme rules so that your investors can claim and keep tax reliefs relating to their shares.

Q5: What do overseas companies need to do to benefit from EIS or VCT investment?

In particular, they need a permanent establishment in the UK either a fixed place of business there through which the company’s business is wholly or partly carried on; or, less commonly, an agent acting on behalf of the company has and habitually exercises there authority to enter into contracts on behalf of the company. A permanent establishment must be more then preparatory or auxiliary in character, i.e. storage or display of goods is not enough. A common route is putting a UK holding company over the top of an overseas trading group and signing a lease for the rental of UK offices. An overseas-registered parent company will not be regarded as having a permanent establishment in the UK merely by virtue of the fact that it has a subsidiary which is resident in the UK.

Roger is a panel discussion member at  the Science Business conference in Prague on 10th November 2022 Talent retention: How can Europe tackle the challenges of brain drain and capacity building in EU13 countries?