1 Results of the Ester Project in Latvia Valdis Avotins, LIDA Salamanca Joint Workshop, June 23, 2005

2 Agenda NIP Need: Market failure Risk capital program Technology incubator & seed program Questions

3 Goals of the innovation strategy RIS Latvia

4 22 experts’ evaluation EMP Risk Capital FF Prototype IPR Research infrastructure Innovation Assistant Tech Incubator, liaison offices, seed CoE

5 TECHNOLOGICAL INCUBATION IdeasValidationFast growthPrototyping TFM schem e VENTURE CAPITAL SAP START-UP SCHEME SEED SCHEM E TTO NEW PRODUCT S IPR protection in start-ups MARKET INTELLIGENC E Entrepreneurship promotion Market exposure FINANCING BUSINESS SUPPORT OTHER SUPPORT Existing/ approvedLaunch expected Planning initialised in 2006/7

6 Good investment environment Rapid GDP growth “Latvia is ranked among the top ten counties worldwide in terms of business start up time and length of bankruptcy procedures.” Doing Business in 2004, World Bank Wall Street Journal Index of Economic Freedom Rank 28, Score 2.31, (Israel Rank 33, score 2.36) The overall tax burden of GDP is only 29.1%

7 Background conditions Low general entrepreneurship activity –Lowest amount of SME’s in EU (18 on 1000 inhabitants; EU average 51/1000) Low share of innovative enterprises –20% (incl. adoption) compared to EU average of 45% –Share of high-tech products in export ~6% –Employment in mid-to-high-tech is 23% of EU average Lack of appropriate financial instruments for the needs of high-tech/ innovative companies at early stage of their development

8 Jaffa Oranges vs. Software ( ) exports ($millions) Citrus Software Dr.Eli Opper, Chief Scientist

9 BSEF, BALTCAP, NCH, BALEF 34 projects NLBDF 33 projects A. RISK CAPITAL SCHEME Reasonable investments in LVL , , , , , , m m... 5 m First risk Capital investment 1995 – projects financed via Risk Capital No Start-up investments No Seed money

10 Sources for Deal flow Heritage from USSR at the end of 90`s academic scientists engineers involved in R&D Large brain gain opportunities Higher education institutions Infrastructure 6 R&D Centers of excellence 20 Technology and industrial parks EU grants Institutions No of students

Risk Capital in Latvia11 Program’s objectives Facilitate entrepreneurship promoting access to risk capital financing Facilitate the establishment and development of new venture capital funds, motivate them invest in SME`s by offering state aid to private investors Attract private investors to invest in Latvia

12 How? Public Private Partnership –Budget 14.5m € (75% from ERDF) –Public investment in a Fund –Up to 70% (target 50/50) –No more than 5.5m € in the single Fund State Support to Private Investors

13 Founding of VC Fund Fund of Funds Limited by 70% or 5,7 million € Investment Fund ~ million € Private Investors At least 30% of total investment in new VC fund Target : 50/50 3 new funds

14 Investment Fund Partnerships with life cycle for 7 to 10 years Managed by private management company Business decisions made by private investors State support to private investors

15 Selection of Fund Managers Open tender procedure, main criteria: Experience and professionalism of team members Business plan Involved private investors and amount of private funds

16 Decision-making procedure Venture Capital Fund ~ million € Investment committee (representatives of all investors, one member from FF) SME 1SME 2SME 10-15

17 Restrictions for investment SMEs registered in Latvia Maximum investment 1m € in one project Maximum 300k € in the first investment tranche Time between trenches at least 12 months Some sector restrictions (EU regulations)

18 Return Distribution Mechanism 1.Fund’s management expenses; 2.Repay the original capital invested by private investors; 3.Repay 25% of the original capital invested by the state; 4.Priority return (hurdle rate) on private investors’ capital (6%); 5.Repay the remaining 75% of the state’s invested capital; 6.Hurdle rate return (6%) on the state’s invested capital; 7.Remaining profit, if any to private investors and FMC

19 B. B. The designed draft Growth 4 Future Scheme Tested in Israel, with WB experts, EU experts, local expert panels 1.Technology incubator grant 2.Pre-seed grant – Think for month 3.Seed soft loan Management companies or Operators of TI’s – private companies providing space & infrastructure, management and S&M advice, basic business services and private investment structuring in exchange for equity position in the tenant company Target groups: –Potential entrepreneurs from industry –Potential entrepreneurs from academia –Repatriating scientists and R&D personnel –Regional inventors

20 New forms of Business Incubation in late 1990s has been driven to multiply the number of succesful, fast-growth, high technology businesses in US a)Its led by serial entrepreneur; b)it has its own seed fund drawn from founder’s own, VCF or corporate partner’s capital; c)it may have specific sector focus Gill D., Martin C., Minshall T., Rigby M. Funding Technology. Lessons from America Conventional incubators offer “heat, light and dial tone”, but “Smart” Venture Investment claim to offer more, developing ideas and incubating them in-house as well as providing late seed capital and A, B and C round investment. Incubation today is seen as a way in which capital can be efficiently applied to support new technology businesses

21 Political Goals 1.Improve the competitiveness of Latvia by facilitating development of high & medium tech industries; 2.Create a potential for participation in future technologies (prestige, future competitiveness); 3.Development of new sustainable export industries (Israeli & Finnish experience); 4.Create economic champions / change the attitude of society towards technology commercialization. High growth high-tech company establishment is more expensive and it shows remarkable return after 8-10 years :  longer establishment cycle;  specific infrastructure required;  specific knowledge needed.

22 Background Existing market gap for early stage investment and low local entrepreneurial spirit results in few investments particularly in high growth Start-ups The Need: sharing investor risk to encourage investments and increase the number of high growth start-up companies Solution: outsourced integrated service to motivated professional venture teams

23 Side measures for Deal flow Entrepreneurship motivation scheme - outflow of 300 busines ideas, 100 marketing plans, 50 business plans; Reposition of entrepreneurial culture : by informative seminars, work shops, presentations, publications in media, etc; Awareness creation program; “Think for month” (pre-seed grant); Innovation assistant grant scheme; motivation scheme for inventors in universities and R&D institutes; Innovation courses and innovation MBA program in RTU; Technology transfer centre; Business labs and Liaison offices in universities; Ventspils school of entrepreneurship (Chalmers model)

24 1. Technology Incubator grant 9 year program (3x3 support periods) Public – private partnership model Decisions made by TI private operators (PO) Grant is paid to TI operator as 30% fixed rate and 35 kEUR per one tenant, minimum 2 tenants are required, quarterly payments Public grant up to 75% (max. 500 k EUR) of TI’s annual budget Based on Venture business not traditional incubation!

25 2. Pre-seed: TFM Form of intervention Performance based grants up to 3 kEuro to validate a business plans before starting a new company and to leverage private equity finance in later stages An individual person with a business project entailing fast growth (turnover increase to at least 40-50% per year) for months Financing covers up to 100% of eligible costs, 1 month

26 3. The seed program Investment management: TI PO Recipients – young (<6 month) SMEs after business concept validation max 300 K EUR soft loan, matching with private equity investment 70%:30% converts to non-refundable grant in the case of failure Project duration 6-24 months when sales appear 5% from annual turnover should be paid back until all loan is repaid

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28 Return Return: Number of incubators and their capacity utilized Number of newly created technological companies Number of companies graduating from TI Number of successful IPOs, M&As, investments in the next rounds Total private investment attracted to the companies

29 Selection criteria 1.For TIs operators TI management experience and professionalism of team members in new high growth SMEs creation Business plan Amount of offered financing Planned running costs per SME, share of private co- investment 2.For SMEs Registrated commercial entity in LR, younger than 6 months, planned growth over 50% Not yet in market, IPR owner or exclusive user High- or medium-tech Explicit orientation towards global market (export) Worked out draft business or / and technology plan Manageable company Significant milestones for 24 months

30 Thank you for attention!