In order to finance and stimulate innovation of small and medium-sized enterprises (SMEs), the European Commission has proposed measures to boost cross-border investments of venture capital funds. Up to now venture capital funds, which are vitally important for the financing of growing innovative small companies, face too many problems to overcome different national regulations for cross-border fund raising and investment. For this reason they often don't reach the necessary critical mass.  Venture capital is being increasingly important for environmental sustainability (€1.25 billion was raised in 2006). Sustainable venture capital funds invest in the range of €1-5 million with focus on early-stage and typical investments in renewable energies and clean technologies.

Venture capital structure in Europe
Venture capital market is fragmented with currently 27 different operating environments. This adversely affects both fund raising and investing. Operating across borders is increasingly complex and smaller funds tend to avoid investing outside their home jurisdictions. Especially in smaller or emerging venture capital markets, funds have difficulties in expanding, growing and getting a critical mass of deals.

A better regulatory framework will lower operational costs and risks, raise returns, increase flow of venture capital and improve the functioning of venture capital markets. This will particularly benefit innovative SMEs.

The Commission believes that to remove barriers to cross-border venture capital investing and fund-raising venture capital structures that are functioning well could be adopted and recognised in other Member States. The Commission invites the Member States, when reviewing existing or adopting new legislation, to enable cross-border operations and consider mutual recognition of venture capital funds. National authorities could recognise that funds domiciled in another Member State and operating in their market are already subject to the regulatory regime of their home country. The proposed solution implies that national authorities should have mutually acceptable levels of supervision and transparency on venture capital funds.

In order to benefit from a possible source of venture capital, the Commission invites the Member States, where it is not yet the case, to extend the ‘prudent person rule’ to those institutional investors that are not yet covered by it. Member States are in addition invited to encourage the development of competitive clusters and promote more liquid alternative stock markets to facilitate investor exits.

What is venture capital?
Venture capital in particular provides a vital source of external finance for growing companies, generally in return for a share in the company. Financing innovative SMEs is considered by many finance providers as an unattractive activity due to high transaction costs and low returns given the risk incurred, especially at the early-stage. Venture capital is a professional equity co-invested with the entrepreneur to fund an early stage or expansion investment. To compensate for the higher risk, venture capital investors expect higher than average returns.