Market Gaps on Access to Finance - Bank of Valletta

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Economic sectors Current financing needs Current financing options Scope for financial instruments Innovative/ creative industries Malta performs below EU average in innovation, with its main weaknesses being a shortage of qualified human resources and low levels of public and private investment in R&D. Government policy is aimed at addressing these weaknesses and is behind the development of innovative/ creative sectors. This is especially the case with the digital gaming industry and the film industry. Other initiatives are being carried out to develop audiovisual products, theatre and design. These are all potential growth areas, especially given the likely increase in demand through the Maltese Presidency of the EU in 2017 and Valletta being awarded the European Capital of Culture in 2018. The large majority of start-ups would be operating in the innovative sector, including ICT, gaming and renewable energy. The business needs for this sector would therefore relate to attracting specialist skills, investing in the necessary infrastructure, and R&D expenditure. According to the survey results, firms in this sector have the largest access to finance issues – starting off from obtaining external financing in their start-up phase, to their day-to-day operations, as well as to finance specific projects or investments in their growth stage. Weak R&DI performance Government directed policy “One-off” project based funding 2017 Maltese Presidency of the EU 2018 European Capital of Culture Given the predominantly intangible nature of these companies’ product/ services, traditional providers of finance have generally shied away from this sector. Looking at the funding history of some of the local established IT/ ICT companies in Malta, it is clear that most started as small units with limited capital, generally internally sourced. At the point where further capital was required to fuel growth, these founders informally approached leading local entrepreneurs, who were generally seeking diversification/ freewheeling opportunities. Some of these local businessmen are still shareholders in such IT companies. The involvement of these individuals was also beneficial to the company since it facilitated access to bank financing. Investment in these companies was also facilitated through clearer exit strategies routes – a number of companies have merged, have been acquired by larger international companies or have sought financing from capital markets. Government has stepped in through various grant schemes through national/ EU funds, including ERDF Innovation Actions (Innovation and Environment) grant scheme, ERDF e-Business Development grant, tax credits for the development of digital games, Innovative Start-ups Programme, CREATE, and Invex. This is also reflected in the survey results, where half of the respondents in this sector have utilised national/ EU funded schemes. A number of previous VC fund initiatives in Malta had targeted this sector. Difficulty in tapping bank financing, especially for start ups National/ EU grant schemes Interest from local businessmen Limited take up / success for VC funds in the past Page | 60 This sector provides the greater scope for equitybased financial instruments, as evidenced by the survey results - about two-thirds of respondents are interested in non-traditional sources of finance. This is mainly spurred by the higher potential returns, growing interest in the sector, but also a founder readiness to accept new partners bringing in not only the necessary capital but also new business ideas. This is also the sector where traditional sources of finance are less likely to provide financing. Hence the funding gap created by traditional sources can be offset by the increased interest from the private sector. There is therefore significant market scope for further equity investment. Boxes 3.5.4.1, 3.5.4.2, 3.5.4.5 and 3.5.4.6 all refer to financial instruments that will be available in the upcoming MFF. Examples could include: (a) VC fund for innovative companies (not necessarily start-ups). Where critical mass is the main stumbling block, such fund could be designed to have a wider scope (covering other sectors), or be a sub-component of a pan-European VC fund. (b) looking for equity investment through informal business angels (local entrepreneurs) or formal business angel networks. (c) equity guarantee schemes, such as one of the products offered through JEREMIE (d) hybrid financial instruments providing both equity and debt elements. (e) Public – private partnerships, such as the University of Malta’s Research, Innovation & Development Trust Fund. A proposal for a Culture Venture Fund and crowd funding has also been put forward as part of Malta’s Strategy for the Cultural and Creative Industries (e.g. WEFUND.com). Further scope for grants, especially for R&D and start-ups Further scope for financial instruments – loans and loan guarantees, but also risksharing hybrid forms Equity instruments for innovative companies in all lifecycle stages Potential for VC funds Crowd funding for creative/ cultural concepts
6.1.1 Mapping by firm lifecycle The analysis by firm lifecycle takes into consideration the various typical stages in a firm’s development, including inception (covering both pre-seed and seed), the start-up phase, and the growth (covering emerging/ development/ expansion) phase. The current financing needs of firms in these stages are clearly different, with firms in the primary stages still struggling with the commercialisation of their ideas, and thus requiring investment in setting up. On the other hand, growth stages require financing to increase market penetration, but also to expand through internationalisation. The following table provides an assessment of the financing needs and local scope for further financing by firm lifecycle. Page | 61
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Market Gaps on Access to Finance - Bank of Valletta

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