Abstract

Venture Capital Markets in Europe

In the current economic situation venture capital activities are highly desirable. The most appropriate approach to external equity financing of promising, yet highly risky young enterprises is generally believed to be the portfolio approach: a venture capital company acquires a fair number of minority interests, and the investing public has access only to venture capital company shares, which represent a venture capital portfolio. An alternative approach is the public new issue of young company shares and their subsequent trading on a suitable secondary market as early as possible in the development of the company. The author focusses on the second approach, on direct open market equity financing. Since it alleviates problems of valuation control and exit, this market is a necessary supplement as well as an alternative to the portfolio approach. Fundamental considerations and a survey of exchange and off-exchange markets for small company shares in Europe point to the need for two small company market segments: a bottom level segment and an advanced level segment. Advanced level segments serve young companies which already achieved profitability; these companies want to signal that they can pass a threshold of quality that is advanced though still below the level of full listing. By contrast, bottom level segments cater to companies that do not measure up to this standard. As the creation of new advanced level segments in various European countries indicates, there is a trend toward opening up European exchanges to young enterprises. As the author points out, even investor protection considerations do not militate against lecting this trend extend down to the bottom level segments, which should be activated or created. Finally, drawing on a study that he recently submitted to the Commission of the European Communities, the author outlines proposals aimed at fostering direct open market equity financing of promising young companies.