Market Gaps on Access to Finance - Bank of Valletta

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Malta Business Bureau – <strong>Market</strong> gaps in access to finance April 2013 hence enhance the chances of success during the start-up phase of a business venture in selected sectors 42 through seed capital. The fund also aimed at investing in established businesses seeking a capital injection for innovative projects 43 . The initial seed capital put forward by Government amounted to c. €2.3 million (i.e. MTL 1 million), with further funding envisaged from the EU and the private sector (including international venture capital partner/s). Apart from initial funding, the fund was also planning to assist in mediation between SMEs and banks, share potential credit risks with banks, and co-operate with transnational bodies. About 10 applications from prospective start-ups were initially received, but only a couple of applicants were eventually assisted and this fund did not proceed further due to administrative difficulties. The fund was initially intended to be managed by the MDC, with the eventual intention of forming the fund as an independent entity, and potentially achieving public listing. It was envisaged that the fund would be selffinancing from interest earned on preference shares and from the redemption of all preference shares, and that it would break-even despite the inevitable losses from certain failed investments. The establishment of a business angel network was also taken into consideration. Apart from the applications received, interest in TVF was also shown by a UKbased asset management firm/ fund manager, who was willing to develop and manage the fund. Malta Business Angels Network (MBAN; 2003) – a local network set up through a private initiative to establish the idea of formal equity investment in Malta. The MBAN was set up in November 2003 with its core function being to match Maltese entrepreneurs starting their new venture, or seeking growth finance, with successful local entrepreneurs who actively seek to invest equity capital and bring entrepreneurial know-how and experience to enterprises with growth potential. MBAN provided them with the formal framework to do so more effectively by facilitating start-up ventures, often considered to be high-risk investments, and matching them to the right business angel. The entrepreneur must in return be ready to offer a share of his business in return for equity finance 44 . Technology Innovation Fund (2004-2005) – In an attempt to revamp the previous work carried out on the TVF, it was renamed as the Technology Innovation Fund, re-offering seed capital for start-up enterprises, preferential equity capital and the possibility of collaborative agreements between industry and University. Malta Venture Capital plc (2006) – Government set up a venture capital fund through its investment arm Malta Investment Management Company Limited (MIMCOL), with the intention of licensing it as a collective investment scheme. The company's aim was to fill the gap in the economy's financing systems and assist entrepreneurs to find the required finance to embark on projects and start up operations. It also aimed to encourage the Maltese private sector to provide finance on a small scale but at high risk to regenerate Maltese private enterprise, and provide finance for innovative processes and ideas and new technologies. Government initially injected around €2 million, with the remaining capital intended to be obtained from private investment 45 . The board of directors of this fund was composed of government officials, bank representatives, and members from the business community including key local businessmen. In addition, the University of Malta set up a Research, Innovation and Development Trust in 2012 with an initial capital of €500,000 invested by Government 46 . Though not a venture capital fund, this trust is intended to allow individuals and companies to donate money to the trust fund either by earmarking their donations for specific projects or allowing the board of trustees to manage the funds. Donations to the fund are tax deductible. 42 Biotechnology, IT applications, multimedia activities, software development, e-Business and e-Commerce, environment and waste management, energy, marine applications, education and entertainment, and health 43 Ministry for Economic Services (2001), Budget Speech 2002; Times of Malta (2002), Lm 1m technology venture fund launched 44 Times of Malta (2004), European business angels to converge in Malta 45 Times of Malta (2006) Malta venture capital set up with Lm 10m authorised capital 46 Times of Malta (2011), University appeals for private donations to new research fund; Times of Malta (2012), Malta Freeport Terminals funds University research Page | 20
Malta Business Bureau – <strong>Market</strong> gaps in access to finance April 2013 Reasons for the limited success of the above venture capital initiatives are various, and based on stakeholder consultation relate to low quality sales pitches by potential start-ups, lack of willingness to dilute ownership 47 , potential past experiences of failed local mergers, high expectations of entrepreneurs, administrative difficulties and the fact that our small size facilitates informal approaches to venture capital. 47 European Central Bank (2012), SAFE tables – 2011 (Excel file). For 80% of Maltese respondents, an equity injection from third parties as an additional source of financing was never relevant to their firm. The EU27 average was c. 79%, mainly due to the responses provided by a number of other countries (> 70% for Austria, Bulgaria, Czech Republic, Germany, Ireland, Italy, Latvia, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain and the UK). A greater responsiveness to third party equity was observed in the Nordic countries (non-EU Norway – 26%, Denmark and Sweden – 35%), Lithuania (46%) and France (48%). Page | 21
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