At last, Malta desires to attract Unicorns

By Dr Ovidiu Tierean 

Dr Ovidiu Tierean is a Senior Marketing Advisor at PKF

On 31st October, Economy Minister Silvio Schembri announced the introduction of a venture capital fund for start-ups that, under normal banking rules, cannot get a commercial loan. He laments that Malta is the only European country that did not have a venture capital fund. What could be the cause of this situation? In Europe, the performance of venture capital funds from public money has been mixed.

A 2022 study by the European Court of Auditors (ECA) found that public venture capital funds have underperformed private funds on several key metrics, including internal rate of return (IRR) and realized returns. The ECA study found that the median IRR of public venture capital funds in the EU was 10.5%, compared to 12.3% for private funds. Public funds also had a lower rate of realized returns, with only 60% of funds realizing a positive return, compared to 70% of private funds. The ECA study attributed the underperformance of public venture capital funds to several factors, including a lack of investment experience among fund managers on public administered funds. 

Certainly, studies show a more cautious and risk averse investment approach by appointees on State governing boards.  An inbred aversion is common among local banks particularly when investing in early-stage companies, which are riskier but have the potential for higher returns.  Readers may ask why in the past decade we never managed to build a proficient business incubator that turns up successful startups which can survive international competition?

A study, by the University of Luxembourg, found that public VC funds were more likely to invest in companies that were located in less developed regions of the EU. So, the primary task is to outline ministry’s objectives for a State venture fund, by undertaking a list of the industries you want to focus on, the types of startups you want to support, and your desired rate of returns.  Next question is what are the essential legal structures needed to attract and maintain a healthy crop of start-up companies. Ideally, a basic approach is a flexible legal structure of the fund, whether it will be a public fund, private fund, or a combination of both.  Naturally, the ministry must seek legal advice to ensure compliance with regulatory requirements.

Other essential steps to make this a fruitful exercise and not another damp squib, is to identify alternative sources of funding for the venture fund. This may come from government grants, the Development Bank, private investors, corporate partners, or a combination of these. The Maltese government may wish to offer incentives or grants to encourage investment in startups and innovation.

Next step is a vital consideration which concerns regulatory compliance: it should not be draconian, as was the case back in 2015, when a rushed Blockchain methodology collapsed.  Next, applicants need to develop a Business Plan.  This is a prerequisite, so let them create a comprehensive business plan that meets fund's mission, investment strategy, target sectors and expected financial returns. The ministry plan should detail how it wants to usher a new culture towards startups and SMEs.  Getting the horse to the water is an essential first step.  We can never reach the acclaimed success of Silicon Valley in US, but at least let us hope the ministry assembles a team of experienced professionals with expertise in venture capital, start-up mentoring, and industry-specific knowledge.

Our exports need a boost and a new dimension.  Needless to say, having a strong team will help in the selection and growth of portfolio companies.  An unbiased process of due diligence will help develop a rigorous process to evaluate and select startups for nurturing and guidance. The State appointed team carries an onerous duty to assess the management team, business model, market potential and scalability of start-ups.

A professional business incubator caters for effective networking and host regular educational meetings to guide young entrepreneurs up the slippery slopes of internationalization.  Only by inculcating a solid ecosystem reached by regularly hosting educational fora to establish innovation hubs and networks within the startup and SME’s group in Malta.  This means a healthy collaboration in regular practical sessions with incubators, professors, accelerators, universities, MCAST, and industry associations to tap into local talent and resources.  The Chamber of SME’s has been active to provide mentoring, business development support, together with access to networks, and guidance on international scene.

Obviously more needs to be done. Malta Enterprise has copious schemes and offers to applicants which unless guided by a professional, one is bewildered where to start.  The lack of success in this sector is evident that we must change tack at Trade Malta.  It must seriously provide access to international acclaimed facilitators to reach partners and collaborators in EU markets.  Help start-ups with export strategies and connect them with international investors, customers, and partners.  At a time of generative AI domains why are startups not helped to create a strong online presence, or to participate on Metaverse.  Reaching out to subsidized industry events, and targeted conferences overseas fielded by FinanceMalta. 

By following these steps, Malta can create a supportive environment for startups and SMEs to grow and export their ideas. As, the government in the coming months aims to embark on creating a public venture capital fund, it must navigate several critical considerations to guarantee the fund's success and make a purposeful impact.  First and foremost, the government needs to establish clear objectives and a strategy for the fund. This means defining the fund's intended outcomes, such as stimulating innovation, job creation, or industry support, and outlining a comprehensive strategy to guide investment decisions.  Finally, establishing governance and oversight mechanisms is vital for transparency and effectiveness. This often involves forming a board of directors or an advisory committee to provide governance and oversight. Managing investment risks is essential, and the government should devise a comprehensive risk management plan. This plan includes assessment and mitigation of potential investment risks and establishing risk tolerance levels and strategies how to manage those risks.

Clearly defining investment criteria is crucial. This includes specifying the types of businesses eligible for funding, the development stages they should be in, and any geographical preferences. This methodology involves financial, technical, and market assessments while ensuring unbiased evaluations.  Brand new companies may receive up to €10,000 to develop their ideas and up to €200,000 to cover salaries. Let us augur that the ministry will succeed to grace Malta with lively Unicorns that individually reach a billion-euro status.