Red Paper on Entrepreneurship Follow up to Green Paper «Entrepreneurship in Europe »

1. Red Paper on EntrepreneurshipFollow up to Green Paper «Entrepreneurship in Europe » Dr. Bert W. M. Twaalfhoven Entrepreneur Verena Kugi, Harvard University Research Consultant European Ideas Network Job Creation Seminar June 10, 2003, Brussels TO EUROPEAN COMMISSION

2. Agenda • Entrepreneurship from an entrepreneur's perspective • Role of entrepreneurs and job creation • Prerequisites for successful entrepreneurship • Urgent actions to support entrepreneurship in Europe

3. Bert Twaalfhoven's entrepreneurial experience of failures and successes Started 51 companies in 40 years In 11 countries Focussed on 10 global niches Nationalities: 5 at board level 12 at management level 25 at operating level Works with 28 universities in 10 countries Result: Lost $55 million in start-phase 17 failures - 34 successes Created 3500 jobs by 2003

4. Agenda • Entrepreneurship from an entrepreneur's perspective • Role of entrepreneurs and job creation • Prerequisites for successful entrepreneurship • Urgent actions to support entrepreneurship in Europe

5. Unemployment in Europe high and increasing: Urgent action needed to support start-up growth!!! Spain France Euro Area Germany • Average expected rate of unemployment of 8,6% in the Euro Area • Lisbon agenda out of reach USA Source: OECD Standardized Unemployment Rates

6. 500 GrowthPlus Winners in 2002 created 277.000 jobs in the last five years Number of jobs created CAGR*22 % * Compound annual growth rate Source: „2002 Europe’s 500 Fastest Growing Companies – Europe’s Most Dynamic Entrepreneurs, The Real Job Creators”, GrowthPlus, 2002

7. Agenda • Entrepreneurship from an entrepreneur's perspective • Role of entrepreneurs and job creation • Prerequisites for successful entrepreneurship • Urgent actions to support entrepreneurship in Europe

8. Favorable risk-reward trade-off and adequate access to risk finance Entrepreneurial know-how and motivation Incentive to grow 1 2 3 Three factors are especially critical to enhance fast growing companies in Europe Evidence • It takes 5+ years on average to break even • Most risk capital is provided by family and friends and not by banks or venture capitalists • There are many start-ups in Europe but they are not fast growing • Many companies do not grow across borders in Europe • Entrepreneurship is not considered a priority for life in Europe by students • There is a lack of entrepreneurial education especially at technical universities

9. On average, the first business plan promises high payoffs after 30 months EXPERIENCE FROM 1000+ BUSINESS PLANS First business plan Profits Break-Even 24 36 48 60 Losses Months 12 24 36 48 60 Source: Dr. Bert W. M. Twaalfhoven, EFER

10. Reality: It takes much longer to stop the losses and more capital is needed than planned EXPERIENCE FROM 200 START-UPS INCLUDING 51 OF BERT TWAALFHOVEN First business plan Profits Actual performance Break-Even 24 36 48 60 Depth of risk • 80% of start-capital is lost Length of risk • 30 months to stop the losses • 60 months to recover losses Losses Months 12 24 36 48 60 Source: Dr. Bert W. M. Twaalfhoven, EFER

11. Most risk capital is provided by family and friends and not by banks, venture capitalists or business angels Total annual start capital needed: 10 billion EUR (1 million new companies x 10.000 Euro (3.000 per job)) 5 sources: 1) Private Equity and Venture Capital* 2.7 billion EUR 2) IPO window : dead since 2001 0 3) Banks : only loans with interest 0 4) Business Angels : estimate is 125.000 with pool of 10 billion but only invest 1.0 billion EUR 5) Family and Friends : largest source of in Europe 6.3 billion EUR In addition, the GEM survey found that informal support for start-ups was five times that of domestic venture capital support with venture capital support declining significantly. * Venture Capital lost in 1999 and 2000 15 billion starters capital in USA and Europe (Venture One Corp, September 2002) Source: A.D.I. Report from EVCA June 20, 2002; The Green Paper on Entrepreneurship in Europe; Global Entrepreneurship Monitor; Dr. Bert W. M. Twaalfhoven; EFER

12. Entrepreneurship is not considered a priority for life in Europe by many students Student interest in becoming an entrepreneur Within three years after completing studies 50% ? Within five years after completing studies 50% ? Source: Ministry of Economical Affairs/Netherlands

13. Agenda • Entrepreneurship from an entrepreneur's perspective • Role of entrepreneurs and job creation • Prerequisites for successful entrepreneurship • Urgent actions to support entrepreneurship in Europe

14. 2 Action 1: Tax relief for start-ups equal to start-up capital Recommendation & Actors • Evidence/ Rationale • Grant a tax relief to the entreprise equal to the start-up capital within the first ten years of operation to be applied at the choice of the entrepreneur • Offer employment tax reimbur-sement of last three years as employee to future entrepreneur • Actors: Ministry of Finance of National Governments 15% ROE Profit 1 10% ROE Time Loss Perspective of entrepreneur Bert Twaalfhoven "Why take risk?" "I want the tax break when I start making profits, not while I am losing money."

15. Favorable risk-reward trade-off and adequate access to risk finance Incentive to grow More actions with regard to risk financing and incentive to grow • Actions 1. Tax relief for start-ups equal to capital within 10 years 2. Tax relief from corporate/income tax for business angels of the total amount of the investment in start-ups up to EUR 40.000 per year (UK example) 3. a) Funds to match equity participations in start-ups during the first three years of operation at a rate of 3:1 b) Expand current EIB equity program tenfold to EUR 5 billion per year (SBIC example) 4. Map clusters in Europe and incentivise start-ups within clusters. Transform the role of all actors within clusters in efforts to mobilize (not create) clusters 5. Provide fiscal incentives to grow across borders 6. Organize entrepreneurship days across EU and candidate countries

16. Shortage of 500 professors in entrepreneurship in Central and Western Europe!! # International Faculty in Start +Spin off Country University students students Innovation/E'ship Companies USA MIT 10.200 26% 33 5.000 Harvard Business 2.000 30% 28 50% of alumni School own or share business Stanford 720 28 % 24 Bus. Start 1/3 of alumni EUROPE UK Cambridge* 16.500 17% 8 1.250 +65 practitioners Switzerland ETH Zurich/ 13.000 30% 5 200 St. Gallen Finland Helsinki University 13.000 3% 4 300 of Technology* Belgium Leuven 26.000 9% 4 45 Netherlands Delft 13.000 8% 5 200 in 10 years Source:EFER; Universities mentioned above; Dr. Bert W. M. Twaalfhoven

17. Entrepreneurial know-how and motivation Actions to enhance entrepreneurial know how and motivation • Actions • "Teach the Teachers" of entrepreneurship - Train 500 professors in entrepreneurship in 120 Central and Western European universities - Conduct joint seminars on best practice in the teaching of entrepreneurship with leading faculty - Create networks between entrepreneurship professors on a European level • Create networks between technical universities and business universities • Enhance partnerships between universities and businesses

18. Favorable risk-reward trade-off and adequate access to risk finance Entrepreneurial know-how and motivation Incentive to grow Overview of urgent actions on the basis of the Green Paper: Don't treat entrepreneurs special but honor risk taking!!! Green Paper Questions • Actions • Tax relief equal to start-up capital • Grant tax relief for business angels in start-ups • Provide matching equity capital for investments in start-ups 2 & 6 • Map clusters in Europe and incentivise start-ups within clusters • Provide fiscal incentives to grow across borders • Organize entrepreneurship days across EU and candidate countries 3 & 5 • "Teach the Teachers" of entrepreneurship • Create networks between technical universities and business universities • Enhance partnerships between universities and businesses 4 & 9

19. Action needed but the future is bright • One Europe • Enlarged Europe • EURO • Young Talent • Large savings • Recognition of entrepreneurship