TREND IN INNOVATION FINANCE IN THE EUMarc Schublin, Head of Division,

European Investment FundCoordination – General Affairs – Advisory Services

Knowledge Economy Forum IV, Istanbul, 23 March 2005

2

Finance for innovation = the EU side

EIF as EU Fund of Funds

Venture Capital: a difficult market

The limits of Venture Capital in supporting innovation

New Initiatives throughout the EU

Towards new financial instruments and concepts

Summary

3

EIF at a glance

Institutional set-up : Shareholders: European

Investment Bank (60%) – European Commission (30%) – 31 banks 10%)

Contribute to Community objectives (entrepreneurship, research and innovation, regional development, etc …)

Ensure an appropriate return on its own resources

Important role in the context of Lisbon Strategy / 3% target (Innovation – Employment)

EIF products – Venture capital / “Risk Capital Arm” of EIB

SME Portfolio guarantees

… and Advisory services / Technical assistance

4

VC investments: EIF’s role

Biggest European early-stage Fund of Funds (EUR 3bn in 200 Funds)

Participates as a pari-passu cornerstone investor (always commercial terms)

Long-term committed and pro-active investor

Know-how helps in structuring a fund / best practice

Widespread network in European venture capital industry which may help to attract co-investors

Neutral, supranational investor

Investments based on own resources and mainly on behalf of EIB VC mandate, EC Seed Capital scheme and ERP Facility (early stage in Germany)

Investment activity only in EU and Acceding Countries

5

The innovation cycle covered by EIF

Future coverage

Later-stage

Buy-out

IPOs

Tech

Transfer

Incubators

Pre-Seed

Business

Angels

Expansion /

Dev.

Capital

Early StageSeed

* Currently covered by EIF advisory services (Technology Transfer Accelerator)

ADVISORY

« VENTURE CAPITAL » « PRIVATE EQUITY »

Future extended coverage *

6

0

50

100

150

200

250

300

350

400

450

1990

1992

1994

1996

1998

2000

2002

No

. fir

ms/

fun

ds

0.00

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

35,000.00

40,000.00

US

D m

illio

ns

No. Firms

No. Funds

Sum cap (USD millions)

European VC Funds Raised 1990 to 2003: few investors stay on board

Source: EVCA / Thomson Financial / PricewaterhouseCoopers

7

VC is a Risky Business

Pooled IRR - December 31, 2003:

Early stage : 1.9% (Top Quarter: 14.8%)

All Venture : 7.2% (Top Quarter: 23.9%)

best performing funds are in the segment of €100-250m = 9.2% or 12.8% over a 10-year period

All Private Equity : 9.9% (Top Quarter: 24.3%)

Source: European Venture Capital Association (EVCA)

8

Constraints and limits of VC in supporting Innovation

High risk; very qualified management teams needed

Balance public/private investors?

Good VC funds governance (independence of managers vs investors, transparence, etc.)

Management costs, long maturity

Critical mass

Seed-early stage especially efficient near important “technological clusters” (Heidelberg, Cambridge, Finland, etc…)

In the EU, about 15 000 companies supported by VC (compared to a total SME population of 14 million)

9

Constraints and limits of VC in support of Innovation: some lessons learnt

Mainly recent public initiatives through appropriate use of budget funding (Research, SME)

Critical mass, grouping of energies, system approach necessary (national vs regional?)

Legal, tax issues are key (No European patent!)

10

How to support seed? Interesting initiatives (private, public, financial, political)

IP2IPO (UK) = example GBP 20m loan to Oxford Chemistry Department repaid through 50% of IPR during 15 years

KAROLINSKA (S) = pooling of spin-offs sold to VCs

France = merger of Public Innovation Agency ANVAR (managing grants) and SME Development Bank

creation of “pôles technologiques” (super clusters)

+ UK, B, NL, ITA, etc Appropriation of “Lisbon Strategy” by EU Member States

11

EIF’s role in this context

Be proactive (EU summit 23 March 2005) on the investment side =

1. Side funds with Business Angels (BA) (if structured as BA networks) (Specific EU funding under the Competitiveness & Innovation Programme)

2. Common approach with EIB, generation of hybrid instruments (Loan – Equity – Mezzanine)

Develop Advisory Services and Technical Assistance

12

Advisory Services

Complement the 2 main product lines, EIF as a “Multilateral Development Bank” committed to provide technical assistance and advisory services

Objective is to provide financial engineering to organisations active in the field of VC and SME Guarantees

Fee based activity

Two domains of intervention

Creation, growth and development of SMEs VC, seed capital, guarantee schemes, business angel networks, tech transfer, etc. for

regional and national authorities / Agencies

Complex financial structures: for the European Commission

13

Advisory Services

TTA : Avoid fragmentation, incentive Research Centres to work together, bridge the gap between Research and Market

CDTI project : public Innovation Fund of Funds, with targeted support to Tech SMEs (Spain)

14

TTA 1

Cluster Size

Cambridge UK

Munich Boston

Researchers 23,5509,200 6,300

Publications 38,000

15,000 10,000

Number of public companies created

>38>11 >4

Number of biotechcompanies located in cluster

>200>110 >60

Bay Area

N/A

29,500

>44

>190

Large clusters necessary to build self-sustaining ecosystem

Source: European Innovation Scoreboard, BCG Cluster Report 2001, EIF analysis and interviews

15

TTA 1

Licensing Revenues2002

Licensing activity too small to create

any noticeable effects

US Europe

University Revenues [m€] University Revenues [m€]

Columbia Univeristy 115.4

65.3Stanford University 50.0University of New York 49.9

43.3University of Rochester 33.5

31.4MIT 30.2

25.6Florida University 25.2

University of California

City of Hope National

University of Wisconsin-Madison

Sloan Kettering Institute for Cancer Research

Pasteur 32.6

University of Edinburgh 4.5

Utrecht* 4.0

Cambridge 3.1

INRIA* 3.0

VIB* 2.7

LMU Munich 0.2

Note: *Includes other forms of revenuesSource: European Innovation Scoreboard, BCG Cluster Report 2001, EIF analysis and interviews

16

TTA 2: Focus of TTA funding: Types of SPVs funded by the TTA

R&DTech transfer / Proof-of-concept

Marketable product

«Techno-logy» IP

«Prototype » IP

LAB

« Licensing » SPVs

« Spin off » SPVs

« Hybrid » SPVs

Licensing to corporation

Sale to corporation

Purchase / investment by other investors

IPO

Potential exits for the SPV projects

Investment focus of TTA

17

CDTI 1

Fund of

Funds

Parallel supplementary

vehicle

The CDTI/EIF Spanish Venture Capital Investment Programme

EIF Programme

Manager/Advisor

CDTI

Programme

technology partnerYoung Fund

Window

Generalist

fundsTech /

Innovation funds

Foreign

tech funds

Tech SMEs Generalist SMEs Tech SMEs Tech SMEs Tech SMEs

Co-invests 1:1