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Venture capital: the policy changes that will make it fly in 2018

NewsFromThePlatform | January 31st, 2018

In the Finance Bill, a more generous deduction of 30%. But the real opportunity will be the European EuVeca reform, in March

The big news that was so long awaited for by the world of Italian Venture capital? In the end it was not even discussed. It was the beginning of December when the case was made that the 2018 Budget Law could contain the proposal of including 3% of the Italian ISAs (called PIR) into venture capital funds. We are talking about an inflow of 300M Euros, which are undoubtedly relevant for an industry that was worth little more than half that number at the end of 2016. In that same year, VC seed and start-up funding financed 92 companies, for a value of 181.4M Euros, as appears in the report by Venture Capital Monitor presented last July by LIUC-Cattaneo University, Italian Association of Private Equity, Venture Capital and Private Debt (Aifi) and Eos Investment Management.

However, Minister of Economic Development Carlo Calenda and advocate for Industry and Enterprise 4.0, in his first report of the industrial plan, defined the result regarding venture capital as the only negative one. “Where are we not doing well? We are not doing well in everything that I may mistakenly call venture capital. The growth is low, 2%,”  he said during the presentation of the new 2018 plan, “CDP (the National Promotional Institution Cassa Depositi e Prestiti) has begun to use some tools that we will also bring to the Finance commission, using Mise (Ministry of Economic Development) funds that won’t be tied to calls for tenders. But we still are way back from the rest of Europe. And growth is not satisfactory.

In its 2017 Annual Report on National strategy in favour of start-ups and innovative SMEs, Mise asserts that, even though the investment in the equity of innovative start-ups has increased (+64% between 2014 and 2015), “the main problem of the Italian innovation system is represented by venture capital, which is growing but is still underdeveloped.” According to the Report, the approximately 8,000 start-ups and 700 innovative SMEs that were monitored are worth 2 billion Euros in terms of turnover, employ 50,000 people, and have a survival rate of 90% compared to 2011.

So what has been done to encourage the development of venture capital? In the 2018 finance bill, the only improvement for VC is a more generous tax deduction, from the previous 19% to 30%. For investors, deductions double from 500K Euros to 1M Euros, with tax benefit potentially going from 95K to 300K Euros per year, provided that the investment is held for at least 3 years. The incentive is also made permanent, so it does not need to be renewed every year. According to Mise estimates, the new norms should enhance private investment by 2.6 billion Euros between 2017 and 2020, including obligations by the CDP. The Italian innovative ecosystem needs these money to grow. The goal is to bring early stage funding to 1 billion Euros by 2020.

However, the most relevant news will probably come from the European Commission Venture Capital Reform, published in the EU Journal on 11 November 2017. For European Venture Capital funds (EuVeca), the reform provides simplified procedures and an extension of the market starting from March 1, 2018. The new regulation opens the market to VC investments in small and medium-sized companies that are listed on a regulated market and to funds that manage over 500M Euros.

 

The EU simplification concerns the following points: streamlining of the registration procedure to use the EuVeca passport that has to be presented to competent authorities; the establishment of common rules in terms of requirements and potential appeals against refutation to register; and an online central database listing all the qualified “EuVECA” VC Funds, as well as all the countries in which these funds are marketed.