Options for funding the "SMEs of the future" with Green Money
The "SME of tomorrow" follows the goals of the programme "Technologies for Sustainable Development" in its economic activities and holds a leading position in developing sustainable technologies and innovative production-processes, in the use of renewable raw materials as well as in the field of sustainable operation management.
However, these successful SMEs are often facing a money gap, which will be even more relevant within the future framework for bank loans called "BASEL II". The lack of equity capital is a common barrier for SME to fully exploit their chances of economic success. Furthermore, they usually have not the same financing opportunities like public limited companies. The project is focussing on this money gap concerning SMEs. It aims to provide the missing link between high potential "SMEs of tomorrow" and investors who are willing to provide "Green Money", especially "Green private equity". The target is to elicit the experience and needs of enterprises respectively private equity financing, in order to elaborate the needed financial structures and/or to adapt the exiting structures.
After conducting a survey to identify the status quo of Austria's enterprises' financing methods, the basic conditions have been elicited in an international perspective. In Austria credit financing is still the predominant form of financing. Furthermore, adequate concepts and selection approaches for the rating of economic and sustainable promising SMEs have been identified. It was shown that the usual rating processes focus on economic criteria only.
The following steps within the project focussed on the SME and its needs, experiences and interests concerning the instruments of the private equity market. In order to generate as concrete results as possible the branch of environmental technologies was examined in detail. Companies which are involved in "Factory of tomorrow" and "klima:aktiv" have been interviewed. The results showed that the biggest concern of the entrepreneurs is the shift of controlling and voting rights to the new investors.
To illustrate the market demand for private equity capital in Austria an overview of private equity and venture capital companies was created. It clearly showed that the major part of these companies does not set any focus on the sector of environmental or energy technology-enterprises. In contrast, in the entire German speaking region, about two dozen of investment companies do exist already, who invest predominantly in environmental or energy technology-firms. Subsequently, some interesting "positive" and "negative" examples have been documented:
The contractor of this project dealt with the question of which structures have to be featured by the Private Equity / Venture Capital - Model, to be an adequate financing model for the "SME of tomorrow". In the past the establishment of a private equity fund has proved to be an appropriate vehicle on the private equity market. Research showed that such a fund for the "SME of tomorrow" does not require a specific design. Nevertheless, some characteristics have been identified which have to be taken into account concerning the relation between investors and an investment company:
- The focus of investment companies on "SMEs of tomorrow" was not given until now. However, this project shows the existing interest of investment companies on the "SMEs of tomorrow". The advantage of a private equity fund with a sectoral focus lies within the specific know-how of the investors that can be offered to the SME.
- Most of the time SMEs require a significantly smaller amount of capital than what is usually offered within private equity capital deals. This aspect concerns all SMEs and not only the "SMEs of tomorrow". So it can not been seen as a specific feature of the "SME of tomorrow". Private equity and venture capital financing is a suitable financing instrument only at a bigger scale of capital.
- There exist cultural differences between investors and enterprises. Information and awareness building is crucial to clear the ambiguous views towards this financing model. The issue of controlling and voting rights is predominant and needs to be clarified.
- One important element of a good working cooperation lies in the agreement between investors and the owner of the enterprise on the targets concerning the further development of the enterprise. This is a very specific issue concerning the features of a private equity fund for the "SMEs of tomorrow": Sustainable enterprises pursue next to the economic other goals, too (e.g. ecological goals).
- For private investors the private equity fund structure is not the ideal financing model - it is more appropriate for institutional investors. Therefore, there have to be found alternative structures for private investors who are looking for a financial investment possibility that fulfils ethical or ecological criteria (e.g. like a public limited company, where investments at a lower scale are possible).
All in all this project shows in which way the "SME of tomorrow" can be financed through private equity or venture capital. The goal was to identify the existing experience and needs of SMEs concerning these financial instruments to elaborate new or to adapt existing financial structures. The importance of adequate financing models can not be denied - an economic strong company has the best preconditions to develop further its products and services, to expand or to enter a new market. However, for each company, it has to be decided if this kind of financing is appropriate: Private Equity and Venture Capital make sense, if the firm needs a larger amount of investment volume.
Mag. Susanne Hasenhüttl
ÖGUT - Österreichische Gesellschaft für Umwelt und Technik
Maga. Sophie Fromwald
Dr. Herbert Greisberger
Mag. Martin Schweighofer
Project or cooperation partner
- Dr. Jürgen Marchart
AVCO - Austrian Private Equity and Venture Capital Organisation