The Italian Startup Act:a case study for policy M&E

OECD-ICSB Policy Roundtable on EntrepreneurshipParis, 9 April 2018

Mattia CorbettaPolicy Analyst: Startups, Industry 4.0, AI

Italian Ministry of Economic DevelopmentDG for Industrial Policy, Competitiveness and SMEs

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1. What is the Italian Startup Act? Vision and policy measures

2. The first pillar of a sound M&E system:Main outputs of the ISA monitoring effort

3. A holistic evaluation of the Italian Startup ActApproach, key findings and policy recommendationsfrom the OECD DSTI study

Contents

Key to this legislation is a legal definition

(including indicators on R&D, highly qualified

team, IP) of innovative startup, an original

approach among OECD countries.

Eligible companies can (self-selection)

register as innovative startups, and benefit from

a vast array of benefits, i.a.:

Free & digital incorporation,

Free public guarantee on bank loans,

Equity crowdfunding,

Waiver on standard bankruptcy law.

The Italian Startup Act (ISA) aims to support

startups throughout all phases of their life-

cycle (setup, growth, maturity) and the national

startup ecosystem (linkages with established

SMEs, universities, incubators etc.) as a whole.

The Italian Startup ActA holistic strategy for startup growth

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• More flexible corporate managementfewer legal constraints to internal governance (e.g. non-proportional voting rights for shareholders, longer times to cover financial losses)

• Internationalisation support by the Italian Trade Agencylower consulting fees, free-of-charge participation to events

• Stock options and work-for-equity schemes are not taxed as income

• Exemption from certain duties and fees

• Special visa policies for startups

Online, free of charge incorporationUnlike other Italian companies, innovative startups can be incorporated without a notarial deed

Special measures for innovative startups:non-financial benefits

• Conversion to innovative SME status«mature» startups (e.g. by age and size) can keep most of the benefits previously applied by shifting toanother special status

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30% tax relief for seed- and early-stage investorsOne of the most generous schemes of its kind in Europe:

• individuals can deduct from income tax 30% of equity investments in startupsup to €1m

• limited companies can deduct from their tax base 30% of investments up to €1.8M

Equity crowdfunding campaignsfor startups since 2013, for any company since 2017 – and booming since 2018

Public subsidised finance schemesat the national (Smart&Start Italia) and local level

Debt finance: fast-track access to a Public Guarantee Fund for SMEsa highly popular initiative: approx. €1bn of facilitated loans issued in 5 years

Special measures for innovative startups:financial benefits

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1. What is the Italian Startup Act? Vision and policy measures

2. The first pillar of a sound M&E system:Main outputs of the ISA monitoring effort

3. A holistic evaluation of the Italian Startup ActApproach, key findings and policy recommendationsfrom the OECD DSTI study

Contents

A first step to a sound M&E framework

A DB of all registered innovative startups and SMEs, freely accessible and editable (.csv format), with a rich set of

information, published on startup.registroimprese.it

4 reports:Italia Startup Visa (it – en)Digital incorporationSME Guarantee FundTrends in the Business

Register

Minister’s Report to the Parliament,

based on the work of a M&E Committee

everyMonday every3 months everyyear

The Italian Startup Act includes an explicit commitment for the Italian Minister of Economic Development to M&E the impact of the policy, in a view of ensuring accountability and inform future policy interventions.

An extensive survey on startuppers has been conducted with Istat (Startup Survey 2016), with the goal of gaining new information on the “human side” of the phenomenon: data has been collected on their educational & professional background, their ambitions, the difficulties encountered, and their advice on how to improve the policy framework.

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The Italian startup ecosystem map

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Last update: 01 April 2019

Total:

10,075#startups

#new limited

companies

2.74%

In Trieste and Trento,> 6% of all new firms

are startups.

Startups thatentered the policy in 2013: 7 out of 100 reported a

turnover above 1M€ in 2017

16 out 100 have closeddown

■ startups shut down

■ turnover < €50k

■ €50k < turnover < €100k

■ €100k < turnover < €500k

■ €500k < turnover < €1M

■ turnover > €1 M

Source: Business Register data (RAWGraphs)9

Italian startups’ growth patterns

• 2 023 new companies incorporated and

registered as innovative startups;

953 in 2018 only.

• In 2018, 40% of all new innovative

startups chose the new procedure.

• Significant regional variance in uptake

rates.

In some areas, over 7 new startups in 10

used the new procedure. In others (e.g.

Turin, Bologna) a large majority of

startups opted for incorporation via

notarial deed.

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Torino:16.7%(11/66)

Sassari:91.7%

Pavia:81.3%

(13/16 startupsincorp. online)

Rome:41.7%

(101/242)

Messina:75%

Oristano:0 startups

online

Milan:36.6%

(139/380)

Innovative startups can write their founding acts for free, through a fully digitised procedure.

Unlike the standard procedure provided for limited companies in Italy, the validation of a notarypublic is not required, with significant savings for entrepreneurs (up to €2,000).

Last update: 31 December 2018

Free, digital incorporation counter

In the last 5 years, 4 223 loans and other financing operations have been issued, for a

total amount of €871m (€206 000 per operation on average).

205 loans became non performing, a ratio less than half the average of all operations

towards young companies!

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17.6%

77.6%

4.9%

Fully paid off

Repayment inprogress

NPLs

Public guarantee Fund: effects on innovative startups

-

50

100

150

200

250

300

350

400

2013 2014 2015 2016 2017 2018

figures in million euros

Green: credit issued per year via Guarantee FundRed: credit not issued despite GF interventionYellow: operations not yet finalised

Last update: 31 December 2018

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51

115

15

23

28

40

0

20

40

60

80

100

120

140

160

180

200

2014 2015 2016 2017 2018

No. of calls 2014-18

Successful Unsuccessful Currently raising

Source: Crowdinvesting Observatory, PoliMILast update: March 2019

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182

74

33

1610

4,4

11,7

36.2

5.4

0

5

10

15

20

25

30

35

40

2014 2015 2016 2017 2018 2019 Q1

Capital raised per year 2014-18 (M€)

Equity crowdfunding: a pattern of exponential growth

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Tax incentives to startup investment results 2013-2016

Due to reporting lag in tax data,the last administrative numbers on the measure refer to the 2016 fiscal year.

Key figures:

• Over €100m of investments coveredby the incentive in 2016

• 2 716 investors• 2 542 individuals• 525 limited companies

• 981 beneficiary startups

• Effective tax relief awarded: €14m

Preliminary data for 2017:tax relief > €25 million

Territorial distribution:Milan area leads

20 pending evaluations223 accepted 175 rejected

419 applications

x3 x2

46 countries of origin

x2

x1

x1

x2

x1

x1

x2

x1

x1

x1

x89

x6

x22

x20

x32

x80

x34

x27

x1x2

x1

x4

x3

x3

x8

x5

x3

x3

x2

x1

x1x2

x1

x3

x1

x2

x3

x3

x1

x1

x1

x1

x1

x1

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Last update: 31 December 2018

The Italian Startup Visa programmeresults so far

Startup Survey 2016: the 1st census of Italian innovative startups

A detailed questionnaire (42 questions) sent to all startups registered at 31-12-2015 (5,150 startups) between 31 March and 27 May 2016. 2 250 firms answered (43% response rate)

4 areas for analysis

Complementing administrative data on enterpriseswith the socio-economic background of entrepreneurs.

The ultimate goal is to strenghten the monitoring system and to broaden the set of information to shape future policy interventions.

Purpose

Theme 1 –human capital

socio-economicbackground, motivation, social mobility of entrepreneurs and employees

Theme 2 –finance

source of finance(equity, bank loans, own resources),experiences and preferences of entrepreneurs

Theme 3 –innovation

R&D expenses, sourcesof knowledge, IP and other strategies to protect innovations.

Theme 4 –the voice of startuppers

assessing theirknowledge and satisfaction with the ISA

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1. What is the Italian Startup Act? Vision and policy measures

2. The first pillar of a sound M&E system:Main outputs of the ISA monitoring effort

3. A holistic evaluation of the Italian Startup ActApproach, key findings and policy recommendationsfrom the OECD DSTI study

Contents

A very large amount of data has been

collected in the last 5 years. It represents

thus an international best practice for SME

policy monitoring (steps 1-2-3 of the OECD

framework).

However, by 2017 no proper evaluation

exercise had ever been completed – i.e., the

causal effects of the policy had never been

formally assessed, also due to the young

age of the policy.

Data coming from the monitoring system

all points toward an organic trend of growth

for the companies registered as startups.

But would this growth performance take

place also without the policy?

The need for an econometric evaluation

OECD Framework for the evaluation of SME

and entrepreneurship policies (2007)

Monitoring

1 Take up of schemes

2 Recipients’ opinions

3Recipients’ views of the differencemade by the assistance

Evaluation

4Comparison of the performance ofassisted with typical firms

5 Comparison with match firms

6 Taking account of selection bias

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In mid-2017, the Department for Science, Innovation and Entrepreneurship of the OECDcarried out a comprehensive evaluation exercise on the economic and socialimplications of the Italian Startup Act.

The policy is of particular interest for the OECD for several reasons:

1. It is very comprehensive, encompassing interventions of a very different nature.

2. The motivations and the objectives of policies supporting entrepreneurship are highlydebated in the economic literature: in particular, there is lack of consensus onwhich are the policy levers that should be activated.

3. The data sources available for evaluators are extensive.

Is the Italian Startup Act working?A first econometric evaluation of the policy

• The Italian Business Register, including the “special section” for innovativestartups

• 2016’s “Startup Survey”, administered by MISE and ISTAT in 2016, which offersvery detailed information on around 50% of start-ups enrolled in the policy

• Balance sheet data for all incorporated firms (via ORBIS)

• Loan applications and their acceptance, via the Credit Registry maintained by theBank of Italy

• Data on funding activities (e.g. VC deals), via Crunchbase.18

Challenges of the counterfactual analysis

Compared to other firms, registered innovative startups have fairly distinctive characters

(e.g. very high spending in R&D and intangible assets).

While also being a measurable effect of the policy, this feature makes it difficult to identify a

suitable control group – unless this population is found within the firms that are themselves

part of the policy.

How to find a counterfactual? Three steps:

1. Control for time-invariant unobservable characteristics with a firm fixed-effect in a

panel setting (i.e., comparison of the same firm before and after treatment);

2. Control for trends over time specific to treated firms;

3. Identification, based on the different timing of treatment within the treated group,

which is plausibly explained by factors fully exogenous to the policy.

The main limitation imposed by this approach is that the effect of the policy may only be

identified for startups that have registered aged two or more.

In fact, the analysis can be carried out only for firms that have deposited at least one

statement of accounts before getting innovative startup status.

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Results of the counterfactual analysis

The policy appears to positively affects the performance of

participants in a number of ways:

+10/15%Input variables: Assets, book value of capital, tangibility ratio

Output variables: Revenues, value added, productivity and patent activity

Conversely, differences in

eligibility criteria appear

instead to have little or no effect

on performance

Those effects appear stronger

for firms with access to bank

credit through public

guarantee fund

+ =

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Effects are visible since the very first year of entry in the startup

register.

-0.1

0

0.1

0.2

0.3

0.4

0.5

Uponregistration

Year1

Year2

Year3

Last year

Variation in assets

-0.10

0.10.20.30.40.50.60.70.80.9

coeff

Year2

Year3

Last year

Uponregistration

Year1

Variation in value added

Moreover, access to credit finance is significantly enhanced by the ISA:• The net flow of loans to registered startups increases by 14 percentage points• The interest rate charged is on average lower by 1 percentage point.

Results of the counterfactual analysis

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Were tax breaks effective in boosting VC?

The study also investigates a long-standing issue in the Italian startup ecosystem: the limited

availability of alternatives to debt financing.

Italian startups receive significantly less VC funding than other European economies of similar size.

For this reason, generous tax incentives (a 30% deduction) are provided for risk capital investors,

in a view of incentivising entry in this market.

Source: Dealroom.co

A difference-in-difference estimation shows

that, since the implementation of policy…

• there is a significant increase in the number of

VC deals amongst startups

• enrolled firms are twice as likely to receive VC

financing within the first three years of life

• But, the total amount of VC funding is still

stuck on low levels, and appears

unaffected by the policy

(no additionality effects)

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Main takeaways and policy recommendations

An effective policy alone is not a sufficient condition for innovative startups to thrive

A number of synergic reforms needed to remove bottlenecks that affect all firms,

but are particularly detrimental for young businesses:

• improving the efficiency of the civil justice system

• rejuvenating the public sector

• facilitating access to public procurement

Ideas for refining the policy framework

Balance support to debt and

equity finance

Streamline access to

domestic market

Further cutsthroughred tape

New measures for disadvantaged

groups

Increase communication

outreach

Support the scaling-up of the

national VC market

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The ISA evaluation: lessons learned

M&E make policies resilientThe ISA has survived five governments, six ministers and three (sharply different) parliamentary majorities.

The monitoring system is seen as an useful communication tool. The evaluation effortreinforced the idea that the policy is worthy and cost-effective, no less because it represents a signal of continuity amidst deep political change.

The devil is in the detail – policy evaluators need «hands-on» expertiseThe research design of the OECD policy paper benefitted from consultation with the personnel in charge of implementing the policy.

The eligibility requirements and certification mechanisms are quite complex, and not all aspects and implications can be grasped at first glance. The cooperation between the evaluators and ‘street level bureaucrats’ was therefore essential to properly identify the variables and the population to consider for the counterfactual analysis.

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Thank you for your attention.

Contact:

mattia.corbetta@mise.gov.it startup@mise.gov.it

Visit:

www.mise.gov.it startup.registroimprese.it

Mattia CorbettaPolicy Analyst: Startups, Industry 4.0, AI

Italian Ministry of Economic DevelopmentDG for Industrial Policy, Competitiveness and SMEs