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Scope for venture capital in financing SMEs has been, since the late nineties, subject of many discussions and debates. With regard to the flourishing literature and political support towards venture capital, this has appeared as a way to substantially improve SMEs’ access to finance. However, recent assessments have enlightened its decline.

Investment made possible through venture capital (VC) is commonly recognised as an important path to economic growth and innovation. The report Employment Contribution of Private equity and Venture Capital published by the European Private Equity and Venture Capital Association (http://www.evca.com/html/home.asp) identifies a growing role of VC in Europe, with a 40% increase in the number of companies supported since 1995. The positive impact in terms of employment is also generally agreed so as its contribution to R&D. But the same report also underlines difficulties faced by this sector since the burst of the Internet bubble in 2000-2001. For instance, amount of VC invested in 2000 was nearly 20 billion euros, compared to 10.3 billion euros invested in 2004. One of the major consequences of this decrease is a seed capital based investment decline in start-up companies. Thus, the number of companies in which VC was invested declined from 9,187 in 2000 to 5,557 in 2004.

Comparatively, the importance of Leverage Buy Out (LBO) operations, which mainly consist in big companies’ recapitalisation, has to be taken in account. This type of financing represented the same amount of investment as VC in 1995 but has continuously risen up to 26.6 billion in 2004. Thus, LBO operations are not considered as an incentive for R&D and innovation since companies’ profits made after such operations are directly dedicated to the capital reimbursement and not to hiring or further investments.

Regarding SMEs, the European Commission has recently launched a survey in order to assess
the extent to which SMEs face difficulties when it comes to access to finance (http://www.europa.eu.int/comm/enterprise/entrepreneurship/financing/docs/sme_access_to_finance_survey_report_2005.pdf). The survey gathers views of SMEs’ Managers in the EU-15, interviewed in September 2005. The first - and surprising - finding is that more than three quarters of surveyed SMEs currently have sufficient financing to see their project through. Banks are by far the most used financial institution when SMEs need financing (79% of surveyed SMEs for leasing, overdraft or loans operations). Only 2% of SMEs have increased capital from Venture funds and 14% intend to open or increase their company’s capital in order to meet their financing needs within two years. If SMEs still use traditional types of financing, they do find bank loans more difficult to obtain and consider that banks are increasingly more cautious.

Therefore, importance and relevance of public funds are obvious: the prospect of participation in a public programme constitutes a guarantee for banks, lowers their risk aversion and enables companies to carry out complementary investments in the framework of the public programme concerned.