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Sources of Financing for Innovative SMEs:Public Sector Funds, Banks, Business Angels
and Seed Funds, Venture Capitalists,Luigi Amati – CEO META Group
THIRD WIPO-INSME INTERNATIONAL TRAINING PROGRAM: FINANCING YOURBUSINESS WITH INTELLECTUAL PROPERTY
December 1 and 2, 2010, WIPO Headquarters, Geneva, Switzerland
INTERNATIONAL NETWORK For SMALLAND MEDIUM-SIZED ENTERPRISES
SMEs main value resides intheir intellectual capital value;but …
… there are lots of difficultiesfor the valuation of such rightsby banks and investors.
Intellectual property assets can takedifferent forms:• trade secrets• copyrights• industrial designs• trade marks and brands• patents.
intangible assets provide SMEs withsome competitive advantages bycreating economic value through:• increased revenues generated bynew products and/or licensing thetechnology• raised barriers to competitors• stronger market position.
enterprises with strong intangibleassets are able to generate higher
added value than others but …
intangible assets are generallyriskier than monetary or tangible
assets and therefore have toprovide investors with more returns
Intellectual capital and enterprises life cycle
<---------------------------------------------- People ----------------------------------------->
All money is not the same!INITIAL & UNORTHODOX SOURCES OF
FUNDINGS
EQUITY
DEBT FINANCE
COMBINATION OF EQUITY AND DEBT :MEZZANINE
PUBLIC FINANCE
INITIAL & UNORTHODOX SOURCES OF FUNDINGS:
O entrepreneurs savings;O profit reinvestments;O friends and family savings;O second mortgage;O personal credit cards;O customer advance;O delay of payments;O premises sharing;O employing relatives at below market salaries.
EQUITY:
O pre-seed and seed capital;O business angels;O venture capital;O corporate ventures;O IPO and post IPO.
DEBT FINANCE:
O bank credits: short or long term loan, unsecuredor micro loans;
O commercial debt;O public/semi-public loans;O bonds;O factoring – leasing – franchising;
COMBINATION OF EQUITY AND DEBT : MEZZANINEPUBLIC FINANCE:
O grants;O reimbursable advances;O guarantees.
BANKS
o Availability of guarantees or collateralo Perceived ability to repay the loano Company track recordo Ratingo Good managemento Repayable short-term loanso Innovative nature of business projectso Business plan qualityo Management team
Family, Friends and Fools
o Personal relationship based on trust
Proof of concept
o Innovationo Management teamo Entrepreneurshipo Commercialisation of intellectual property
Business angels (bas) or informal investorsand Spin-off corporate venturing
o Meeting or matching of individualentrepreneurs with baso Atmosphere of trust between individualso Credible business plan in the eyes of theBusiness Angelo Good management teamo Fiscal incentiveso Market knowledge of the entrepreneuro Availability of exit routeo Return on investment (capital gain)
Seed capital funds
o Business plan qualityo Perception of the innovative nature of the projecto Intellectual propertyo High growth potentialo Government tax policies
Venture capital and Financial corporateventuring
o Business plan credibilityo Business plan with patent technologyo Track record (over previous years)o Ability to grow fast and deliver quick ROIo Management team quality
Public funding
o New jobso Investment in productive tools
Guarantees
o Stamina as well as technical and financial skills/abilitieso Unsecured free of interest loanso Business plan credibilityo Readiness to cooperate with a tutor
Corporate venturing
o Innovative nature of the project in relation to thecompany’s core businesso Industry-specific usefulness of the project, inparticular from a technological standpointo Business plan qualityo Good managemento Tax incentives
Institutional investors
o Business plano Intellectual Property (IP)o High growtho Good managemento Tax incentives from government
New capital markets
o Viability and consolidationo At least three years in existenceo Positive results at least once within twelve months prior to applicationo More than €1.5 million in shareholder’s equityo Ability to publish quarterly resultso Public recommendation by analysto Positive media attentiono Government tax policieso Capable and experienced management teamo Prominent Boardo Experienced team of financial, legal and underwriter adviserso New business concepto Large market shareo Record of high growth or high growth potential
Intellectual Capital and Risk finance
o “Grants” for assessing exploitation of research results
o Proof of concept (pre seed - FFF)
o Seed (PPP Funds or Angel Groups)
o Start up (PPP and Private Funds)
o Expansion (Private funds)
Intellectual Capital and Risk finance
An impossible marriage? …
No but they need to know each other much better
Pre-seed up to0,2€ Mln
Seed up to1/2€ Mln
Start up2/5€ Mln
Expansion Capital10/50€ Mln
Turnover
Cumulative Cash Flow
Business Angels
Venture Capital
ProductdefinitionNo turnover
ProductCompletion
Initialcommercialfeedback
Venture Capital
ProductConsolidation
Structuring ofcommercialchannels
StrategicPartnerships
Continuousideas/concepts/products innovationConsolidation of theorganisation
Partnerships andacquisitions
EARLY STAGE + VENTURE CAPITAL
Proof of conceptfunds
Seed funds
Second Round10/12€ Mln
• Venture Capital Funds tend to lower the risk associated and begininvesting in the start up phase
• Exploitation related Grants are resource driven and not marketdriven
Pre-Seed Seed
“Funding”
Gap
€ 200.000 to
€ 1.500.000
Start up Expansion
EntrepreneurFFFF
PoC fundsVenture Capital Funds
€ 1.500.000
to € 10.000.000
€ 20.000
to € 100.000
the Financing Food Chain
Grants
Cultural
Gap
€ 50.000 to
€ 300.000
“Grants” for assessing application of research results
o Potentially plenty of: VII FP, National, Regional Schemes
o Not used for Exploring application
o Tick boxing rather than true market reserach
“Business Angels and Seed Funds”
o Growing in number and investmente capacity
o Still limited knowledge of Intellectual Capital
o Valuation still more based on other parameters (market,cost, multiples) than IC
InkSpin1
Aventiv NV (Ltd.)
MichelsonDiagnostics
500k€500k€Investment per round
186k€200k€Investment per round
200200Estimate n of earlystage funds
EU USNetworks 400 300
For profit 1/3 1/2
Estimate n of angels 75k 250k
Total estimateinvested annually
4 billion€ 20 billion€
Early stage fundsInvestments
4 billion€ 20 billion€
SUMMARY OF INDUSTRY STATISTICS – EBAN 2010
Source: 1 - ACA 2008 and 2 - BBAA 2009
Angel investing IRR
US 27%
UK 22%
Early stage in Europe
Data Elaborated by META Group Innovation Policy Research Unit ® - source: AIFI; BVCA; AFIC; ASCRI; BVK; 2008
Red - total amount (€ Mln) seed and start up operations in Europe in 2008
Green – total number of operations
Seed Financing
FundPPP: public private partnershipEarly stage investments: 0,1 – 1,5 ml €KICs: intangible based, fast growing
Italy, Slovenia, Poland …
20 Yr10 Yr5 Yr3 Yr1 Yr
13.712.86.8-3.623.4All Private Equity
9.67.65.92.018.1Mezzanine
12.48.12.60.128.8All Buyouts
15.726.022.0-13.315.7All Venture
14.117.17.1-6.938.0Later Stage VC
13.620.817.5-9.420.5Balanced VC
19.137.947.1-19.8-2.9EARLY/SEED VC
% ReturnFund Type
Source: Innovation Philadelphia (2005)
Seed vs Other Investment Returns
