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INDUSTRY CALLS FOR MORE ACTION ON RISK CAPITAL FOR EUROPE’S HIGH GROWTH FIRMS

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INDUSTRY CALLS FOR MORE ACTION ON RISK CAPITAL FOR EUROPE’S HIGH GROWTH FIRMS

AFME publishes new report on the challenges of raising pre-IPO finance

AFME has today published a new report examining the specific challenges associated with raising risk capital for small and mid-size high-growth companies in the European Union. The report aims to inform policymakers about the challenges facing Europe’s high growth companies in obtaining crucial early stage financing.

“The Shortage of Risk Capital for Europe’s High Growth Businesses” was authored by AFME with the support of 12 other European organisations representing all the different stakeholders involved in pre-IPO finance. These include the European Investment Fund (EIF), seven other European trade associations representing business angels (BAE, EBAN), venture capital (Invest Europe), accountants (Accountancy Europe) and crowdfunding (ECN), as well as stock exchanges (FESE, Deutsche Bӧrse, LSE, Euronext, Nasdaq).

Simon Lewis, Chief Executive of AFME, said: “Europe’s shortage of risk capital for high-growth businesses is a pressing issue, particularly given the enduring low growth environment. Collectively, we are pleased to present this pan-European report providing data and recommendations on improving access to equity and venture debt financing for high growth companies. The industry looks forward to working with the Commission to help further the Capital Markets Union and growth agenda and boost EU companies’ competitiveness.”

Olivier Guersent, Director-General at DG FISMA, said: “The European Commission welcomes this new pan-European study on the shortage of risk capital for ambitious firms seeking to expand. This is one of the core challenges that the EU’s Capital Markets Union seeks to address. The inadequate supply of risk capital has been a longstanding constraint on European firms with high growth potential. Under CMU, the Commission has tabled several initiatives to improve the functioning of these markets. However, there is no quick fix. European policy-makers need to stay focussed on this structural challenge in the years ahead. This report is very timely as the Commission prepares to refresh the CMU action plan through its mid-term review.”

The report identifies the main barriers preventing the creation and growth of businesses in Europe and makes the following recommendations to address them:

Fragmented start-up market

Establishing a single EU framework for start-ups with standard rules across EU Member States would enable young businesses to scale-up across borders and facilitate access to 508 million customers. This could be done through the establishment of an EU expert group to focus on the revision of the various EUlegal frameworks, insolvency laws and tax incentives for investors. There is already momentum for such a transformation with the recent Commission Start-up and Scale-up Initiative, including the proposal for an Insolvency Directive

Lack of awareness of risk capital benefits among businesses

Improving awareness among entrepreneurs of how to gain and retain risk capital investors would reduce business failure rates. Better business structure and governance from the start would increase the chances of raising subsequent rounds of financing from professional investors. Businesses with stronger cash positions would emerge, leading to higher chances of survival;

Under-developed business angel and crowdfunder capacity

Unlocking business angel and crowdfunder capacity would allow them to invest in companies across the EU. Creating a single market for business angel investors by aligning best practices and ensuring consistent tax incentives in the EU28 could be one way to provide more risk capital to Europe’s innovative businesses. Education, training and certification of individual investors, as well as the promotion of the role of syndicates and networks with a European reach, would also increase the number of crowdfunders and business angels;

Insufficient business angel exit opportunities

If business angels and crowdfunders are to invest more, they must have access to better exit opportunities. The development of networks and training, as well as the development of secondary markets for private shares at EU level would enable such access;

 Insufficient venture capital funding

If Europe’s VC industry is to provide more funding, it needs to scale up. This could be achieved by providing incentives for investing in VC funds, encouraging investment in the asset class and promoting pension savings in the EU28 generally. Achieving a workable EU-level marketing passport for VC fund managers (as part of the review of the EuVECA) and the launch of the pan-European fund of funds are good steps forward;

Small venture debt market

Developing the venture debt market in Europe could provide the necessary funding for VC-backed businesses to reach their next milestone. Venture debt can fill the gap between two VC equity rounds.

Favourable environment for businesses to access public markets

Building a favourable environment for access to capital markets would help small businesses access the information necessary to initiate long-term growth financing strategies. To do this, the development of SME advisory ecosystems of issuers, advisors, entrepreneurs, academics and European centres of innovation is recommended;

Sluggish primary equity market

There is a need to tackle the decline in IPOs, which play a crucial role in Europe’s economy. The proposed Prospectus Regulation is a great opportunity and further initiatives should be undertaken, such as supporting new categories of investors to invest in high-growth companies.

The report outlines the various sources of EU financing available to Europe’s high-growth businesses, (including family and friends, accelerators, equity crowdfunding, business angels, venture capital, venture debt, public markets and public funding), but highlights that many of these are underused:

  • Europe could invest more in risk capital: three million EU citizens hold non-real estate assets in excess of €1m – if even a small part of this were used for business angel investing, it would make a huge difference;
  • European companies received €1.3m on average from venture capital compared to €6.4m in the US;
  • Venture debt is underused: only 5% of VC-backed EU companies obtain venture debt financing compared to 15-20% in the US and 8-10% in the UK.

The report also includes an analysis of the main providers of risk capital for small innovative companies in Europe, showing that there is room for improvement in the European risk capital landscape:

  • Business angels invested in half the number of businesses in Europe compared to the US. Only 12 EU Member States have tax incentives for early-stage investments;
  • VC funds in Europe invested €4.1bn compared to €26.4bn on average in the US between 2007-15;
  • Only 44% of EU VC investments went to later stage businesses compared to almost two-thirds of all VC investments in the US;
  • Equity crowdfunding is growing in Europe with €354m invested;
  • Origination activity in the EU has remained subdued since the 2007 crisis: in 2005-2007 an average of €11bn was raised annually through 300 IPOs per year. Since then, the annual average has fallen to €2.8bn with 161 IPOs per year between 2008 and 2015.
  • A majority (61%) of European listed companies have market capitalisation of less than €200m compared to just 46% in Hong Kong and 39% in US emerging growth companies.

The report is part of AFME’s broader growth initiatives and is the third in a series of publications focussing on unlocking growth and jobs in Europe. Earlier publications include Bridging the growth gap, which highlighted the gaps in equity financing for small and mid-sized companies. This was followed by Raising finance for Europe’s small and mid-sized businesses translated in six languages.

Finance

Beyond Transactions: The Payment Revolution

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Beyond Transactions: The Payment Revolution 1

By Marwan Forzley, CEO of Veem 

The uninterrupted disruption brought on by the pandemic accelerated the need for robust, digital-first tools created to support remote teams and accelerate online commerce.

As offices across the US moved to work from home for indefinite periods, specialized back office departments handling sensitive information have had to go a layer deeper to find tailored solutions that support the transition of their in-person workflow. For finance teams, payment approvals, issuance, and general management became a challenge overnight. Particularly for those who — even in 2020 — continued to send and receive paper checks through the mail.

For years and even to this day, millions of small business owners around the world have relied on slow and confusing bank processes to manage their business finances. Every day, they spend valuable time using old, complex and expensive platforms to transact with domestic and international vendors — never knowing where their payment is or even when it arrives at its destination.

With ongoing economic and logistical uncertainty looming as we move into 2021, this old norm should not be expected for much longer. This year has seen small business owners wear more hats than ever before, and has influenced a mass adoption of online financial applications that offer heightened security, save more time, and provide more value as budgets tightened.

A study conducted by Mastercard earlier this year saw online business-to-business payments skyrocket in popularity with more than half (57%) of small business owners across North America turning to digital services since the start of the pandemic to improve cash flow and modernize their payment processes.

If this study is of any indication, the days of making an appointment with a banker or sending a wire transfer through an outdated web portal have passed. And the time for the payment revolution is here.

Putting the user in the driver’s seat

Major world events have always acted as a catalyst for innovation and change. As of a result of the growing pains we experienced this year, in 2021 businesses can finally say goodbye to huge transaction fees and bank-imposed gatekeeping when it comes to managing their financial processes.

The financial technology firms, in partnership card and local bank networks and sometimes even each other, have been building and iterating on products over the past decade that were created to work flawlessly from a desktop or smartphone.

For the first time, small businesses have access to needed, user-friendly financial tools packaged to make their lives easier. No longer reserved for major enterprises, those previously underserved by traditional banks can sign up for applications that consolidate billing, payments, working capital and more to one central dashboard.

With the owner in the driver’s seat, they can better communicate with vendors and customers and reallocate their time previously spent manually sending, receiving and reconciling payments toward growing their business — without ever stepping foot out of their home.

Marwan Forzley

Marwan Forzley

Genuinely seamless and automatic integrations with complimentary functions aligned to core financial activities mark a fundamental change in how businesses will choose to operate moving forward. Not only should experiences be integrated, but the entire lifecycle of the transaction should be digital.

Consider a freelance contractor that uses a time tracking and invoicing software to invoice a client. Through an integration between the time tracking tool and Veem (a complete online business payment tool) the client receives and captures the invoice within their Veem payment dashboard. Because Veem and Quickbooks are integrated partners, as soon as the invoice is received, a bill is automatically created, marked as paid, and reconciled on the client’s accounting software as soon as the funds are issued.

In this flow, the contractor only needs to send an invoice, and the client only has to approve the payment for everything else to move. Thoughtful integrations like these empower businesses to log-in to one application, but benefit from several, ultimately eliminating inefficiencies.

Relentless transparency

Understanding that old habits die hard, it’s expected that businesses of any size have questions when it comes to moving payments from a bank to an online provider.

Answering these questions with unprecedented product value and relentless transparency is the best way forward to bring more businesses onboard in 2021.

This means providing up front pricing, tracking, choice and flexibility to users. Before, during and after the pandemic, cash flow management remains the most critical part of running a small business. Digital payment providers enable the entrepreneur to have unparalleled insight, visibility, and control over their cash flow.

Through non-bank payment options, businesses can secure their information over a secure data network, watch their money move from origin to destination, and choose the speed at which they would like funds to move. By these tools working in harmony, the user can remove friction and spend more time focused on their business.

Separating the signal from the noise

2020 is a year that changed everything for the global small business community. In a report by Veem issued at the start of the pandemic, an overwhelming 80% of businesses shared that they anticipated COVID-19 to impact their business over the next 12-16 months. Problems surfaced that many didn’t even realize they had. And in finding those problems, businesses turned to technology to support them.

As enabling technology, it’s our job to listen and bring clarity and solutions to those contributing to and growing our local and global economies despite the hurdles and challenges they’ve faced.

Right now, small businesses deserve more. More access, more choice and more credit. In the road ahead we expect online payments and bundled user friendly financial services to play a pivotal role in the recovery of small businesses. The payment revolution will see the continuation of important and meaningful products that value the users time and enable businesses to launch, grow, and scale regardless of what’s to come in 2021.

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The UK’s hidden payments crisis: why businesses should rethink their payments strategy

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The UK’s hidden payments crisis: why businesses should rethink their payments strategy 2

By Edwin Abl, Chief Marketing Officer at Modulr.

As the economic conditions imposed by the Coronavirus endure, businesses are facing a dilemma about how to reduce operational costs while meeting customer needs in as economical a way as possible. And all without compromising on their quality of service.

A recent survey of 200 payments decision makers across the UK, revealed there are hidden costs of payment processing which will have an exponentially greater impact on wider businesses if left untreated. It found, UK businesses are spending an average of £1.5m a year in costs attached to payments – money they simply cannot afford to lose to inefficient processes in these uncertain times.

Businesses need to plug any holes in their boat to avoid sinking. And for many this includes the examination and recalibration of their payments strategy.

The research reveals that the payments process now represents a huge 12% of a business’s total operational expenditure. With two-thirds (64%) of all businesses expecting the cost of payment processing to increase over the next two years.

Two thirds (67%) of payments decision makers surveyed believe the way they process, and service payments has had a direct impact on their customer experience. In fact, 62% of respondents believe the hidden costs of poor payments outweigh the hard costs. This indicates that a poor payments strategy is no longer something business leaders can ignore, as it now has a far greater and unseen impact on wider business mechanics.

The top three hidden costs attached to inefficient payment processes were ‘impact on customer experience/satisfaction’ (38%), ‘influence on relationships with other teams and departments (35%) and ‘impact on competitor differentiation’ (31%).

These findings suggest there is widespread consensus that getting payment operations right, directly creates performance boosts elsewhere in the business. When asked to estimate, as a percentage, the business performance boost received if hidden payment inefficiencies were resolved, the average margin for improvement was +14%, with traditional banking the sector most likely (31%) to predict a performance gain greater than +15%.

The 5 key steps UK businesses can take to drive payment efficiencies

There are five key areas payments decision makers and tech leaders should be looking to change, so that they can drive end-to-end payment process efficiencies:

1 – Locate hidden payment process inefficiencies

Visibility is a key issue. Respondents across large (46%) and small businesses (47%) say they have very clear metrics directly related to payment process costs. Only 8% say that they don’t understand the costs involved. Yet, businesses know they could do better with improved visibility of costs. Both large and smaller companies cite ‘lack of visibility for operational costs’ as the top challenge when it comes to achieving strategic goals around payment process and money services provision.

Digital banking companies, including lenders and FinTechs, identified ‘lack of visibility for operational cost’ as a challenge when it comes to increasing payment services revenue (37%). This is in comparison with all respondents mentioning other issues such as lack of skills (25%) and constrained resources (25%) as secondary and tertiary challenges respectively.

For many businesses, developing a cost model for current and projected payment process costs, both hard and hidden, is a top priority.

2 – Make payments key to stakeholder experience management

Customer, departmental and even supply chain partner experiences are increasingly intertwined. There is no doubt that customer experience is a top priority for payment services strategy. But enhancing the broader stakeholder experience is a close second, and certainly complements the former.

Employee experience affects customer experience. So, payment services innovation must extend beyond customer touchpoints. Happy employees who feel they are working with effective and efficient payments systems will be best placed to enhance the customer experience. And, employees in commercial roles who have bought into the benefits of efficient payments will naturally want to extoll those benefits to customers.

Edwin Abl

Edwin Abl

Companies with a sophisticated and integrated supply chain are likely to be the frontrunners in implementing the integrated payment services that benefit all stakeholders, due to their historic experience. As customer experience management evolves into a broader discipline of stakeholder experience management, including employees and supply chain partners, it will become more crucial than ever to include payment services experience

3 – Integrate and automate to support payment innovation

Payment innovation is driving a culture change, connecting previously siloed functions such as IT and finance. There is increasing integration of systems from customer relationship management (CRM) and enterprise resource planning (ERP), into accounts and payments. The research tells us that payment processes are impacting nearly every department, affecting areas including customer experience, brand, leadership, business agility and ultimately, revenue. Integration enables new business models for paying suppliers and customers.

Automation is key to driving efficiency, replacing manual error-prone and time-consuming processes with real-time and responsive, digital ones. This is particularly the case when it comes to operational and payment processes.

Indeed, 52% of large companies say that team hours spent on payment processes was their biggest hard cost attached to payments, compared with 26% of smaller companies who share that view. This suggests that automation could contribute more to cutting the cost of payment processes in large companies.

A host of payments-as-a-service providers (including Modulr) are supporting customers to do just this by enabling them to stream a whole unified product ecosystem of payments functionality directly into their own software.

4 – Bring business leaders together

Payments innovation is driving systems integration and creating a more collaborative stakeholder ecosystem. As all the C-level roles become increasingly focused on the customer experience, the finance remit now includes overall business operations and its associated risks and opportunities. The role is evolving beyond just accounting, tax liability and funding. Therefore, closer collaboration between senior leaders is key to driving efficiencies and enhancing customer experience.

5 – Innovate by adding finance and payments to vertical services

Companies with a vertical focus are well placed to innovate by offering new payment services. In many vertical sectors, especially employment services, software vendors are increasingly embedding financial services facilities, such as payments, into their technology platforms. Employment services SaaS providers, across payroll, accounting, bookkeeping and more are offering financial services to existing and new customers within their specific ecosystem.

This means they can develop hyper relevant, convenient and delightful financial products and services for their end users through highly flexible, ‘plumbed in’ payments. This creates an ecosystem of stickier products while boosting the lifetime value of each end user.

Moving forward – engaging technology to drive efficiencies

If the onset of the Coronavirus crisis has taught us anything, it is that there are many advantages to investing in technology and having a digital infrastructure as responsive as your customer-facing experience.

However, whilst digital technologies enable companies to provide customer service in new ways during lockdown. These same businesses are failing to transform their digital strategies, with the biggest priority still being cost reduction (41%).

By not shedding legacy technology and shoring up operational efficiency, UK businesses are following an increasingly risky strategy. And one which will have an exponentially greater impact on the wider business if left untreated. Particularly when this widespread failure to act concerns the customer experiences that sit at the very heart of a proposition – the payments.

To find out how you can drive payment efficiencies into 2021 and beyond, download the full report here for all the insight you need.

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Gain financial regulation qualification online

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Gain financial regulation qualification online  

Warwick Business School in partnership with the Bank of England are delighted to offer two online specialist Postgraduate Awards, which are perfect for anyone working in financial regulation to evidence their professional development.

  • Financial Conduct, Leadership & Ethics – Starting in February 2021
    You will debate and cover questions such as how do financiers judge ethical questions in financial markets? What are the implications for regulators and for clients?
  • Financial Regulation & Supervision – Starting in June 2021
    You will develop a comprehensive understanding around financial regulation by looking at topics such as its tools, benefit and practical application.

Studied online over a period seventeen weeks, you will gain a detailed knowledge of the subject, learn industry best practice and gain a qualification to evidence your understanding.

The wider Global Central Banking & Financial Regulation qualification offers three start dates and four qualification levels.

Gain financial regulation qualification online 4

Invest in your career

Find out more about these Awards and the qualification levels offered by Warwick Business School in partnership with the Bank of England, by downloading the brochure here.

This is a sponsored feature

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