Development of specific regional policies Development of specific regional policies through the analysis of early-stage financing through the analysis of early-stage financing

opportunities for innovative start-ups and spin-opportunities for innovative start-ups and spin-offs / SEED-REGoffs / SEED-REG

Situation Analysis - Central Hungary Situation Analysis - Central Hungary RegionRegion

Judit SzilberekyJudit Szilbereky, Innostart BIC Hungary, Innostart BIC HungaryReviewReview/SG/SG Meeting Meeting

Kladno, Kladno, 2 2 December, 2005December, 2005

Content

General introduction of Central Hungary Region

SME sector in CHR

SME policy

Regional Innovation Strategy

Financing of SMEs

Supporting programs

Loans and credits

Venture capital

Conclusion

Innovation Performance (finance, output and market) - Hungary

16

6

24

29

150

126

0 20 40 60 80 100 120 140 160

Share of high-tech venture capital investment

Share of early stage venture capital in GDP

Sales of "new to market" products (% of totalturnover)

Sales of "new to the firm but not to themarket" products (% of total turnover)

ICT expenditures (% of GDP)

Share of manufacturing value-added in high-tech sectors

Source: European Innovation Board, Country Report Hungary 2004

Central Hungary Region in numbers

Core position (economic, cultural and educational)

Budapest and Pest County – regional disparity

2.8 million inhabitants (most populous)

7,000 m2 (smallest region)

Most important Hungarian transport node

Concentration of educational, research and development, financial services

40% of enterprises

Central Hungary Region in numbers

Produces 45% of GDP

30% of labour force work in the Region

62% of foreign capital concentrates here

4.4% of unemployment

Service sector dominates

Sectors:

Budapest (high added value)

Electronics, pharmaceuticals, chemicals, confection, food and printing industry

Pest County (traditional)

oil refinement, production of electronic machines and tools, food and textile industry

SME sector in Central Hungary Region

SMEs

96% of enterprises is micro enterprise (high number of hybrid and pseudo entrepreneurship)

Small subscribed capital

Missing entrepreneurial skills and adequate business knowledge

Lack of financial resources

Low level of loans and credits

Business services

Enterprise development instruments (industrial, innovation, science parks, incubators and other intermediary organisations)

Regional Innovation Agency

Wide range of services

Low level of organisations offering financial support

Cooperation is not satisfactory

Most required services:

General consultancy

Joint project management

Information exchange

Training

Technology transfer

Technology development

SME needs and requirements

National Innovation System (National Office for Research and Technology, Research and Technology Innovation Fund)

Venture capital market regulation (under modification)

Tax incentives (on R&D activities, not on private investment)

Regional Innovation Strategy and Action Plan (recently accepted)

Facilitating the access to capital and loan

Creation of regional seed capital fund (pilot project)

Central Hungary Region Strategy Plan for 2007-2013 - Creative region

Handling financial problems

Support of innovation services

SME policy

Concept:

Finance the product development and realisation of innovative ideas

Public (75-50%) – private (25-50%) partnership

Capital investment and advice

Option right

Pre contract with venture capitalist

Preparatory stage: Feasibility study

Establishment (lobbying, legal, financial background, management)

Regional Seed Capital Fund – pilot project

Regional Seed Capital Fund – pilot project

Preparation (EUR)Preparation (EUR) Operation (EUR)Operation (EUR)

Feasibility Feasibility studystudy

EstablishmentEstablishment 1st year1st year 2nd 2nd yearyear

3rd year3rd year 4th year4th year

PreparationPreparation 4040,,000000 4040,,000000

OperationOperation 4848,,000000 4848,,000000 4848,,000000 4848,,000000

ConsultancyConsultancy 8080,,000000 8080,,000000 8080,,000000 8080,,000000

CapitalCapital 480480,,000000 600600,,000000 700700,,000000 840840,,000000

Indicators:

•Amount of fund capital

•Invested seed capital

•Portfolio companies

•Successful investments

•Other indicators

Financing

Supporting structure

Programmes – calls and tenders

National Programmes under National Development Plan, Economic Competitiveness Operative Program, co-financed by European Structural Funds

National Programmes financed from national resources

Regional Programmes from regional resources

Loans and credits – 4-step loan programme

Venture Capital

Government capital programmes

ProgramsNational Programs co-financed by European Structural Funds

National Development Plan Economic Competitiveness Operative Program

National Programs financed from national resources

SME Priority R&D&I Priority SME programs R&D programs

Development of technical and technological background of SMEs Development of entrepreneurial culture and knowledge Development of cooperation

Support of application –oriented co-operative RTD activityImprovement of conditions for research, TT and cooperation at publicly financed and non-profit research facilitiesSupport of corporate R&D&I capabilities

Internet presence of SMEs SMEs’ patent and industrial property rights foreign trading IPO of companies

Long-term strategic research Establishment of innovative SMEs, implementation of R&D results and innovative ideas establishment of R&D clustersEstablishment of Regional University Knowledge CentresElaboration of innovative ideas: Regional Innovation Agency, Innocheck, Regional Development Package

Government loan programNameName AmountAmount Interest rateInterest rate DurationDuration Other conditionsOther conditions

Budapest Budapest SME loanSME loan

Max. Max. 600,000 600,000 euroeuro

Average rate Average rate 6.9%6.9%

5 years5 years 6 month of grace period + non 6 month of grace period + non refundable interest supportrefundable interest support

Micro Micro LoanLoan

Max. Max. 20,000 euro20,000 euro

Central Bank Central Bank Base RateBase Rate

5 years5 years For micro enterprises 6 months of For micro enterprises 6 months of grace period 50% of prepaymentgrace period 50% of prepayment

Micro Plus Micro Plus LoanLoan

Max. Max. 40,000 euro40,000 euro

Central Bank Central Bank Base RateBase Rate

10 years10 years 2 years of grace period2 years of grace period

Széchenyi Széchenyi CardCard

Max. Max. 40,000 euro40,000 euro

2% interest rate 2% interest rate support support

Guarantee rate support; without Guarantee rate support; without own equity; no restriction for useown equity; no restriction for use

Midi LoanMidi Loan Max. Max. 100,000 100,000 euroeuro

4% interest rate 4% interest rate support for 3 support for 3 yearsyears

7-10 years7-10 years For development, 4% of non For development, 4% of non refundable interest support for 3 refundable interest support for 3 yearsyears

Europe Europe LoanLoan

40-200,00 40-200,00 euroeuro

Exchange rate Exchange rate guarantee, guarantee, max. 6-7 % max. 6-7 % interest rateinterest rate

4-15 years4-15 years Investment needed for technology Investment needed for technology catch up, max. 2 years of grace catch up, max. 2 years of grace periodperiod

Venture capital market

Characteristics:

Lack of business angels

Foreign capital dominates the venture capital market

Number of enterprises with great growth potential is limited

Low liquidity of stock exchange (no new companies on stock exchange)

Venture capital market

Main types of investors:

Business Angels

Corporate venturing

Institutional Investors

Business Angels

30 active and 100 potential business angels

Business Angel Club operated by Innostart since 2000

Matchmaking events

Innostart’s contribution:

Compilation of an information database

Providing consulting opportunity (advice, preparation of business plan, partner service, preparation of proposals, etc.) for entrepreneurs

Organising BAC events regularly

Institutional investors

Hungarian Venture Capital and Private Equity Association (HVCA) since 1992

27 full and 30 associated and 11 individual members

516Meuro newly raised fund in 2004

108Meuro in 35 companies

Highest number of transaction in consumer and computer related sectors

Majority of investment belongs to expansion segment (2/3 of transactions, 72% of total capital investment)

Institutional investors

Scale of Scale of transactiontransaction

Number of Number of transactiontransaction

%% Estimated Estimated value value

(Meuro)(Meuro)

%%

Less than 1 Less than 1 MeuroMeuro

2222 54%54% 99 8%8%

1-2.5 1-2.5 MeuroMeuro

1111 27%27% 1717 16%16%

2.5-5 2.5-5 MeuroMeuro

11 2%2% 33 3%3%

5-15 Meuro5-15 Meuro 55 12%12% 3737 34%34%

More than More than 15 Meuro15 Meuro

22 5%5% 4242 39%39%

TotalTotal 4141 100%100% 108108 100%100%

Average 409 thousand euro investment in smallest transaction category

Level of small transaction is high due to government activity

In 2003 12 VC fund intended to invest into enterprises in their early stage of development

In 2003 1/3 offered less than 1M dollar

Source: HVCA, 2005

Government Capital ProgramsNameName Target groupTarget group AmountAmount Results 2003-04Results 2003-04

NumberNumber AmountAmount

Small Enterprise Small Enterprise Development LtdDevelopment Ltd

Small enterprises Small enterprises (development and venture (development and venture capital)capital)

40,000 – 40,000 – 400,000 euro400,000 euro

2727 7.2 7.2 MeuroMeuro

Suppliers’s Suppliers’s Investment Investment CompanyCompany

Processing, environmental Processing, environmental and logistic industry; SMEs and logistic industry; SMEs min. 3 years of suppmin. 3 years of suppyyling saleling sale

80,000 – 80,000 – 1Meuro1Meuro

55 1.6 1.6 MeuroMeuro

SMEs less than 3 years of SMEs less than 3 years of innovation activityinnovation activity

40,000 – 40,000 – 200,000 euro200,000 euro

Corvinus Corvinus International International Investment LtdInvestment Ltd

SMEs aiming to enter SMEs aiming to enter international marketinternational market

40,000 – 1M 40,000 – 1M euroeuro

1010 9.2 M 9.2 M euroeuro

IT Venture Capital IT Venture Capital Fund Manager LtdFund Manager Ltd

IT and IT and telecommunicationtelecommunication SMEsSMEs

200,000 – 1.8 200,000 – 1.8 MeuroMeuro

66 6.8 M 6.8 M euroeuro

Government Capital Programs

State funds receive minority shares in enterprises

State funds do not involved in the management of enterprises

Innovativeness is not a prerequisite

Financial structures offered by the funds is similar to loan financing

Other initiatives

CHIC start-up and seed capital fund initiatives

Introducing Austin incubation and technology transfer program

National Technology Incubation and Seed Capital Program Initiative

Initiative for the 2nd National Development Plan (2007-13)

Promoting newly established enterprises and providing related financing

Main elements:

Co-financing of development of incubators and financial support for their operation and services

Establishment of seed capital fund

Other initiatives

Expected results:

30-40 technology incubators with an average of 3-4 incubator managers and 8-12 start-ups;

2-3,000 potential successful innovation projects

3-400 new innovative enterprises

2-3,000 new workplaces with high-added value

40-60 Meuro private investment into innovative enterprises

Conclusion

Lack of business angels, seed funding

State loan and capital programs

Not focusing on innovative SMEs

State capital funding is similar to loan financing

No private investment is attracted into state funds

Do not intend to invest into private funds

Regional Innovation Strategy and Action plan

Pilot action: Establishment of seed capital fund

Desperate need for seed capital financing

Questions

What kind of incentives needed for the involvement of private capital into seed capital funds?

How could the region most effectively facilitate the establishment of the fund?

Necessary steps for detection and identification of prosperous innovative enterprises. How could the number of prosperous marketable innovative projects be increased?

Judit Szilbereky

INNOSTART Hungary National Business and Innovation Centre

Phone: +36 1 382 1513

Fax: +36 1 382 1510

E-mail: szilbereky@innostart.hu

www.innostart.hu

Thank you for your attention!