Presented by Olutoye Ayodeji IASP Africa 2013 WORKSHOP Presented by Olutoye Ayodeji Date: 9 April 2013

Venture capital financing of innovation, patents and intellectual property in emerging economies: A theoretical model

“Entrepreneurship is the American economy’s secret weapon “Entrepreneurship is the American economy’s secret weapon. Since 1980, fast-growing entrepreneurial companies have accounted for nearly all of the …jobs created by the U.S. economy…and have altered the ways in which we live and work…yet the role of venture capital in this dynamic process has been poorly documented and often misunderstood” -Bygrave & Timmons, 1992

Introduction Innovation, new ventures and entrepreneurship fuel the engine of the modern economy (Herbig, Golden & Dunphy, 1994). “Innovation…the carrying out of new combinations…is the key to entrepreneurial profits…[innovation is the only way to create new economic value over the long term” (Joseph Schumpeter, 1934) Innovation Pervasive issue within academic literature and policy dicourse (Malerba & Brusoni, 2007). Plays a critical role in firms strategy Fundamental issue in public policy for economic and social growth, and competitiveness.  

Introduction (Contd.) LM 1 year Forms a core aspect of Science and Technology Parks (STPs). University programmes and evolution of university systems Evolved into a major field of study Very relevant for stimulating STPs, entrepreneurship, industrial dynamics, public policy, economic growth and regional development. funding of innovation and financing of innovation process and innovative businesses is a very critical issue.

Introduction (Contd.) Small firms produce 2 ½ times as many innovations as large firms per employee Small entrepreneurial ventures bring innovation more rapidly to the market place. Govt and public agencies play a major role in funding innovation There is need to strengthen govt. Efforts Financial support is important for entrepreneurial ventures.

Objectives Identify the role of VC in the entrepreneurial process Propose a theoretical model for developing VC financing of innovation, patents & IPRs in emerging economies Proposes a theoretical model for commercialisation of innovation, patents & IPRs developed in STPs.

Theoretical framework Business is continually transformed by science & technology Innovation nations have a thriving small business culture, large business, access to VC financing, infrastructure (Heap, 2008). Innovation and enterprise are a pre-requisite for a thriving economy.

Innovation Commercialisation & University IP Research in Universities add significant value to economy and society Underpin the reason why government and business invest in public research. Recent emphasis is on market focused research Application of ideas is becoming a significant component of the mission of universities (Wellings, 2008). Increase in focus on the relationship between university research outputs and the creation of new products and services. Many studies have data on commercialisation, IP, licensing, start-up, research contracts & consultancy, skills dev. & transfer activities.

Innovation Commercialisation & University IP (Contd.) Data show very rapid change in research commercialisation activity in universities in developed countries (licensing, sale of research technology or spin-outs). Plays a major role in the National Innovation System through skilled graduates, new knowledge and research application Output from most universities in terms of commercialisation projects have global applications, knowledge transfer with local application.

Venture Capital financing of Innovation Government and funding organisations, policies encouraging greater levels of commercialisation is taking effect. 2000 – 2004 external investment funds used in formation of about 1/3 of spin-outs in the U.K. Recent research on the supply of entrepreneurial finance for business growth has focused on the venture capital industry Definition has changed over the years and varies from firm to firm and country to country Generally understood to be capital provided to new ventures

Defining VC & VCs (Contd.) “The VC industry supplies capital and other resources to entrepreneurs in business with high growth potential in hopes of achieving a high rate of return on invested funds” - Helen Soussou (in Timmons, Spinelli & Zacharakis, 2004). Venture capitalist take equity participation through stock, warrants and/or convertible securities and has an active involvement in the monitoring of each portfolio company (PFC) bringing investment, financial planning, and business skills to the PFC. - (Hisrich, Peters & Shepherd, 2004).

VC financing of innovation & patent Role of patents for VC financing examined by Haussler, Harhoff, & Muller, 2008. Positive impact of patent stock of high-tech companies on the amount of VC financing. Baum & Silverman, 2004 Mann & Sager, 2007 Hsu & Zeidonis, 2007

Venture capital models - Previous literature very diverse and numerous - Existing models are focused on developed countries Very few models for developing countries Addressed VC issues on micro (firm level) Tybjee & Bruno, 1984 (5 stage model) Bygrave & Timmons, 1985 Fried & Hisrich, 1994 Pandey, 1998 Klonowski, 2007 Emerging markets are more dynamic than western countries as business plans are often re-written as new opportunities appear.

Methodology Exploratory - extensive literature study

A theoretical model for emerging economies 5 components Government and govt. support agencies Banks, insurance and financial institutions Universities, research centres and STPs Venture capital firms Portfolio companies Variables Supply of funds, general management skills, development & monitoring Research funding Research, education, training & development Research ideas, innovative products Share equity participation Support framework, policy, operational guidelines Taxes and other statutory obligations communication

Banks , insurance and other financial institutions MACRO ECONOMY COMMUNICATION MACRO ECONOMY COMMUNICATION Support Frame Work Supply of Funds Deposit & Investment Research Funding Taxes Research, Product Innovation Govt & support Agencies Taxes Venture Capital Firm Product Research Universities of Tech & Higher Institutions of Learning Research Funding Support framework, supply of funds Funds & general Mgt, skills development / Supply of Funds Policy, operation guidelines Shares / Equity participation Support Frame Work Research Funding & commercialization of research ideas , innovative products Taxes Research, Education & Training & development Portfolio Companies COMMUNICATION COMMUNICATION MACRO ECONOMY MACRO ECONOMY

Conclusion Challenges facing emerging economies are obvious and quite numerous. Impact of entrepreneurial initiatives and ventures as engines for economic growth cannot be over-emphasised. Link exist between innovation, entrepreneurship, and new venture creation. Paper has examined the importance of VC financing Government and public funding very critical at initial stage of innovation funding Private funding very essential at growth and later stage. Model focus on emerging economies and at macro level Model highlights the various components and variables that should be in place in any emerging economy. Model highlights the connection ‘missing link’ between Universities, Research Centres, STPs, and Portfolio companies.

Thank you