sme financing tools for innovation angel milev, programme director arc fund coordinator, enterprise...

SME financing tools for innovationAngel Milev, Programme Director ARC Fund

Coordinator, Enterprise Europe Network-Bulgaria

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Topics to Discuss

The presentation covers the following topics:

Funding requirements of innovative SMEs;

Different forms of finance and the implications of using them;

Role of Government in financing innovative SMEs;

Instruments for SMEs under coming Horizon 2020 and COSME.

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Innovation – “A new idea that can generate profit”

Costs that incur before that profit appears:

•Development costs•Intellectual Property costs•Prototyping / Proof of Concept costs•Marketing costs•Manufacturing costs•Distribution costs

Funding requirements of Innovative SMEs

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•Development costs - for research (including market needs), conceptualisation, design, simulation etc.

Usually personal efforts and time – own financing and spare time

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•Development costs•Intellectual Property costs – To IP or Not to IP. What type of? What area?•Prototyping / Proof of Concept costs•Marketing costs•Manufacturing costs•Distribution costs

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•Development costs•Intellectual Property costs•Prototyping / Proof of Concept costs: materials,development, design, manufacturing;•Marketing costs•Manufacturing costs•Distribution costs

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•Development costs•Intellectual Property costs•Prototyping / Proof of Concept costs•Marketing costs – research, strategy,plan, channels•Manufacturing costs•Distribution costs

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•Development costs•Intellectual Property costs•Prototyping / Proof of Concept costs•Marketing costs•Manufacturing costs – materials, manufacturing, own production or subcontracting?•Distribution costs


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•Development costs•Intellectual Property costs•Prototyping / Proof of Concept costs•Marketing costs•Manufacturing costs•Distribution costs – transportation, networks etc.


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Different forms of finance may be characterised according to:

the type of financial instrument involved; the source of the finance; the implications for the SME of using that type of finance, including:

• Cost• Relationships and obligations• Implications of changes in business on the financing of the business

whether they are direct or indirect.

Forms of finance

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Forms of finance include:

•Grants•Loans•Mezzanine•Equity Investments

In general SMEs will seek the least expensive finance first, but cost should not be the only consideration.

Types of financial instrument

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Forms of finance include:•Grants - non-repayable funds disbursed by one party (grant makers), to a recipient. In order to receive a grant, some form of "Grant Writing" often referred to as either a proposal or an application is usually required.

•Loans•Mezzanine•Equity Investments


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Forms of finance include:

•Grants•Loans - An arrangement in which a lender gives money or property to a borrower, and the borrower agrees to return the property or repay the money, usually along with interest, at some future point(s) in time.

•Mezzanine•Equity Investments


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Forms of finance include:•Grants•Loans•Mezzanine - A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing is basically debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. It is generally subordinated to debt provided by senior lenders such as banks and venture capital companies. •Since mezzanine financing is usually provided to the borrower very quickly with little due diligence on the part of the lender and little or no collateral on the part of the borrower, this type of financing is aggressively priced with the lender seeking a return in the 20-30% range.

•Equity Investments


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Forms of finance include:•Grants•Loans•Mezzanine•Equity Investments - Money that is invested in a firm by its owner(s) or holder(s) of common stock (ordinary shares) but which is not returned in the normal course of the business. Investors recover it only when they sell their shareholdings to other investors, or when the assets of the firm are liquidated and proceeds distributed among them after satisfying the firm's obligations. Also called equity contribution.


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Forms of finance include also:•In the beginning: 3f (family, friends, fools)•Business angels•Venture capital funds•Etc.


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By accepting external finance the SME creates a new relationship and obligations:

personal liability arising from providing personal security in support of a loan;relationship between the business owner / innovator / entrepreneur and a Business Angel investor;ability to raise further finance in the future being linked to the existing financing arrangement;alignment between owner’s preferred direction for the business and exit route for equity investor.

Relationships and obligations associated with different forms of finance

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Mechanisms other than direct investments:

tax reliefs; reductions of or exemptions from other charges; guarantees and other risk-sharing arrangements; procurement initiatives; Relevant infrastructure; Specialised support services.

This type of mechanisms are usually applied by the Government.

Indirect financing

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SME tools in the future Horizon2020

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What is Horizon 2020

The EU framework programme for Research and Innovation:

Commission proposal for a 80 billion euro research and innovation funding programme (2014-20)• Part of proposals for next EU budget, complementing

Structural Funds, education, etc.• A core part of Europe 2020, Innovation Union & European Research

Area:• Responding to the economic crisis to invest in future jobs and growth• Addressing peoples’ concerns about their livelihoods, safety and

environment.• Strengthening the EU’s global position in research, innovation and

technology

What’s new

• A single programme bringing together three separate programmes/initiatives

• More innovation, from research to retail, all forms of innovation

• Focus on societal challenges facing EU society, e.g. health, clean energy and transport

• Simplified access, for all companies, universities, institutes in all EU countries and beyond.

*The 7th research Framework

Programme (FP7), Competitiveness

and Innovation FP (CIP), European

Institute of Innovation and

Technology (EIT)

Present and coming FPs

Priority 1 Excellent science 31,70%

Why:

• World class science is the foundation oftomorrow’s technologies, jobs and wellbeing

• Europe needs to develop, attract and retainresearch talent

• Researchers need access to the best infrastructures

Proposed funding (million euro, 2014-20)

European Research Council 13.095Frontier research by the best individual teams

Future and Emerging Technologies 2.696Collaborative research to open new fields of innovation

Marie Curie actions* 6.162Opportunities for training and career development

Research infrastructures (including e-infrastructure) 2.488Ensuring access to world-class facilities

Priority 2 Industrial leadership 23,11%

Why:

• Europe needs more innovative SMEs to create growthand jobs

• Strategic investments in key technologies (e.g. micro-electronics) underpin innovation across existing and emerging sectors

• Europe needs to attract more private investment inresearch and innovation

Proposed funding (million euro, 2014-20)Leadership in enabling and industrial 13. 557technologies (ICT, nanotechnologies, materials,

biotechnology, manufacturing, space)

Access to risk finance 2. 842Leveraging private finance and venture capital for

research and innovation

Innovation in SMEs 616Fostering all forms of innovation in all types of SMEs

Priority 3 Societal challenges 40,91%

• EU policy objectives (climate, environment, energy,transport etc) cannot be achieved without innovation

• Breakthrough solutions come from multi-disciplinarycollaborations, including social sciences & humanities

• Promising solutions need to be tested, demonstratedand scaled up

Proposed funding (million euro, 2014-20)

SMEs in Horizon 2020

SMEs will be encouraged to participate across Horizon 2020 programmes through a new dedicated SME instrument.

It aims to fill gaps in funding for:• early-stage, high-risk research and innovation by

SMEs;• stimulating breakthrough innovations.


It is expected that through this integrated strategy around €6.8 billion, of the total combined budgets of the 'Tackling societal challenges' Specific Programme and the 'Leadership in enabling and industrial technologies' objective will be devoted to SMEs.


A new dedicated SME instrument

• Similar to the SBIR model (http://www.sbir.gov). It will provide easy access with simple rules and procedures. It will be used across all societal challenges and the enabling and industrial technologies. The new instrument will encourage SMEs to put forward their most innovative ideas with an EU dimension. It will target highly innovative SMEs showing a strong ambition to develop, grow and internationalise, regardless of whether they are high-tech and research-driven or non- research conducting, social or service companies.


• Only SMEs will be able to apply for funding, even single company support will be possible to ensure market relevance and to increase commercialisation of project results. SMEs can decide how to organise the project and with whom to collaborate, including subcontracting tasks if they lack in-house capabilities.


A new dedicated SME instrument • The new instrument will integrate the specific SME

measures of FP7 in one comprehensive, simple and easily accessible scheme. It covers the possibility to outsource research and development critical to the innovation projects of non- research intensive SMEs, currently supported under 'Research for the Benefit of SMEs'.

SMEs in Horizon 2020 How it works

Support is provided in three different stages covering the whole innovation cycle (similar to the US SBIR model – Small Business Innovation Research - http://www.sbir.gov):

• A feasibility part will allow an assessment of the technological and commercial potential of a project;



• А main grant will be provided to undertake research and development with the emphasis on demonstration and market replication;



• The commercialisation phase will be supported indirectly through simplified access to debt and equity financial instruments as well as other measures, for example on IPR protection. Successful completion of one stage will allow an SME to move on to the next.


How it works • Relying on existing SME support networks (Enterprise

Europe Network), a mentoring and coaching scheme shall be provided to beneficiaries so as to accelerate impact from funding under the SME instrument.

• SME Associations may continue to assist and to support their member companies in a European project as part of an SME-led consortium formed under the SME instrument. Such Associations will thus be able to play an important role in the dissemination of project results.


Support for research intensive SMEs • A specific action will promote market-oriented innovation of

R&D-performing SMEs, building on the Eurostars Joint Programme.

• SMEs will be able to participate in other parts of Horizon 2020, such as the Marie Curie Actions or the activity on Future and Emerging Technologies.


Financial instruments (equity and debt) will support SMEs

• € 3.5 billion is budgeted for financial instrument facilities, and accompanying measures, for research and innovation At least one-third of this amount will be dedicated to SMEs and small mid-caps.

• A leverage of up to 5 is envisaged, meaning that for every Euro provided through the financial instruments, additional finance of up to 5 Euro will be generated.


• A debt facility providing loans, guarantees and other forms of debt finance to entities of all forms and sizes, including research and innovation-driven SMEs

• An equity facility providing finance for early- and growth-stage investments, with a particular focus on early-stage SMEs with the potential to carry out innovation and grow rapidly.


• These Horizon 2020 facilities will be operated in conjunction with the financial instrument facilities of COSME, the Programme for the Competitiveness of Enterprises and SMEs, where €1.4 billion has been allocated to debt and equity financing in support of SMEs.

SMEs in COSME

COSME

Strengthening the competitiveness and sustainability of the Union’s enterprises, particularly SMEs

Encouraging an entrepreneurial culture and promoting the creation and growth of SMEs

• €2,3 billion for 2014 – 2020 • (current prices)

SMEs in COSME

COSME’s 2 financial instruments:

• Equity facility for Growth (EFG) to invest in SMEs in expansion phase

• Loan guarantee facility (LGF) to provide guarantees to cover loans for SMEs for up to 150 000 EUR

Budget 2014: € 134.100.000

Horizon 2020 & COSME financial instruments

Equity instruments

• Equity Facility for R&I (H2020)

• Equity Facility for Growth of SMEs (COSME)

Debt instruments

• SMEs & Small Midcaps Guarantee Facility for R&I (H2020)

• Loan Guarantee Facility for SMEs (COSME)

Rules for Participation: what’s new? 1. A SINGLE SET OF RULES

Adapted for the whole research and innovation cycle

Aligned to the Financial Regulation, coherent with other new EU Programmes.

2. ONE PROJECT - ONE FUNDING RATEMaximum of 100% of direct costs (except for actions close to market, where a 70% maximum will apply)Indirect eligible costs: a flat rate of 25 % of direct eligible costs

Covering all research programmes and funding bodies

Rules for Participation: what’s new?

3. SIMPLE EVALUATION CRITERIA Excellence - Impact - Implementation (Excellence only, for the ERC)

4. NEW FORMS OF FUNDING Aimed at innovation: pre-commercial procurement, inducement prizes, dedicated loan and equity instruments.

5. INTERNATIONAL PARTICIPATION: Facilitated but better protecting EU interests.

Rules for Participation: what’s new? 6. SIMPLER RULES FOR GRANTS:

Broader acceptance of participants accountingPractices for direct costs, flat rate for indirect costs, no time-sheets for

personnel workingFull time on a project, possibility of output-based grants.

7. FEWER, BETTER TARGETED CONTROLS AND AUDITS

Lowest possible level of requirements for submission of audit certificates without undermining sound financial management;

Audit strategy focused on risk and fraud prevention.

Broader access

• For SMEs - dedicated SME projects to address societalchallenges and enabling technologies

• For all regions - tailored support to policy learning, twinning,

networking, complementing Structural Funds• For international partners - broad access to Horizon 2020• For all forms of innovation - social innovation, services,pilots, stimulating demand through public procurement,standard setting

BUSINESS COACHING

Next steps

By the end of 2013: Adoption of legislative acts by Parliament andCouncil on Horizon 2020

11/12/2013: Horizon 2020 starts; launch of first call

Find out more:

www.ec.europa.eu/research/horizon2020

http://ec.europa.eu/enterprise/cosme

Thank you for your attention!

Angel MilevProgramme Director, ARC Fund

tel.: 02/ 973 3000, fax: 02/ 973 3588 [email protected]

www.arcf.net

sme financing tools for innovation angel milev, programme director arc fund coordinator, enterprise...

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