Innovation tools to finance innovative SMEs WIPO-INSME Training program on the role of intellectual property in raising finance by small and medium-sized enterprises Innovation tools to finance innovative SMEs Geneva, 12.07.2006 Christian SAUBLENS EBAN

1. Foreword There is an asymmetry of information between entrepreneurs and investors; It’s not only a question of access to money but also a question of life cycle of a company and about … sales and market penetration; Investment readiness is needed; All money is not the same;

Financial Supply Chain Banks Guaranties Leasing Factoring Grants Micro-credits Other public support SME profitability Prerequisites Loans on trust Pre-seed Loans for inventors Reimbursable advance payments University spin off Proof of concept Own resources FFF BA Corporate Venturing Seed capital Mezzanine VC IPO Tools Infrastructure: business angels networks, incubators, etc. Advice: investment readiness, tutorship Expertise: professional fund managers FFF : Family, Friends, Founders BA : Business angels VC : Venture capital IPO : Initial Public Offering

The paradox of access to finance Banks Venture Capitalists Stock Exchange Have money But argue that there aren’t enough good projects What is a good project? A project which is not perceived as risky for an investor

Trial to analyse the equity paradox Supply: Is there enough money available for seed and early equity? Demand: Are entrepreneurs aware of investors aspirations/ expectations (asymmetric information; all money is not the same)? Are entrepreneurs ready to receive equity finance (Investment readiness)? Are entrepreneurs proposals/ideas really innovative for investors?

Venture capital in Europe 3878 3273 Source: EVCA

EBAN statistical sample shows: N° of active angels in the EBAN sample: 12.775 N° of projects received: 9.500 N° of deals done: 580 Size of deals: 25.000 to 250.000 € Average size: 75.000 €

New trends B.A. & B.A.N. co-funding vehicles Proof of concept loans/grants Repayable advance Mezzanine University spin out/off funds Pipeline research revenue Non-financial tools

2. Segmentation of the market Start-up phase First financial round Subsequent financial round Initial and unorthodox sources Public Support Debt finance N.B: Indirect supports Integrated actions

Start-up Phase Seed capital fund Loans without interest and/or guarantee University and research centres spin off funds Micro-credit Public or parapublic funds for creation or innovation Public grants Reimbursable loans Proof of concept

First Financial Round Business Angels Seed capital fund Banks loans/Overdraft Guarantee funds Public or parapublic investment funds Regional Public venture capital Public grants Corporate venturing

Subsequent financial round Private venture capital Bank Loans Share subscription bonus Mezzanine OTHER TYPES Leasing Factoring

Initial an unorthodox ways Entrepreneurs savings FFF Profit reinvestments Second mortgage Personal credit cards Customer advance Delay of payments Premises sharing Employing relatives at below market salaries

Debt finance Bank credits: Short term Long term Unsecured Micro Commercial debt (papers) Public/semi public loans Bonds

Public finance Grants Reimbursable advances guarantees

3. Sources of finance All money is not the same! Business angels (informal risk capital): private individuals investing part of their personal assets in businesses and contributing their managerial skills and experience. Business Angels Networks (BANs): regional platforms that match business angels with businessmen. Buyouts: existing investors’ shares in a business are bought by the latter’s own management team (MBO-Management Buy Out) or by another management team supported by a venture capital fund. Corporate venturing: venture capital supplied by existing companies for the purpose of financing innovative businesses set up by their own personnel or active in industries considered to be of strategic importance.

Development or expansion capital: financing provided for the growth and expansion of a company, which may or may not break even or trade profitably. Capital may be used to: finance increased production capacity; market or product development; provide additional working capital. Early-stage finance/Start-up: funds invested downstream of research and development, in businesses that need additional finance to start marketing their products and services. Equity: Ownership interest in a company, represented by the shares issued to investors. Expansion: growth, bridging or restructuring capital. Factoring: a technique whereby SMEs sell invoices to specialised firms. Financial package: a combination of various sources of finance.

Grants: subsidies paid - without an obligation to refund – by public authorities to companies investing in a region for the purpose of facilitating their establishment or expansion. Leasing: hire/purchase of capital goods. Loans and debt: the main sources of funding for SMEs. Mezzanine: intermediate layer of financing products (between equity and debt). Interest rates are often quite high. Proof of concept: fund provided by public bodies to a research team in order to assess the viability of a new enterprise. Quasi-equity investment instruments: instruments whose return for the holder (investor/lender) is predominantly based on the profits or losses of the underlying target company, are unsecured in the event of default and/or can be convertible into ordinary equity.

Replacement capital (also called secondary purchase): purchase of existing shares in a company from another private equity investment organisation or from another shareholder or shareholders – an investor buys another’s stake. Risk capital: equity and quasi-equity financing to companies during their early-growth stages (seed, start-up and expansion phase) in the hope of a return on investment (ROI) that is both large and speedy, on a par with the level of risk taken. It includes: informal investment by business angels; venture capital; alternative stock markets specialised in SMEs and high-growth companies.

Seed capital: capital required for the purpose of financing projects upstream of product or service marketing. Seed capital is often essential for hi-tech projects in order to allow businesses to study, research and develop prototypes of the products that later come to constitute heir core business. Start-up capital: financing provided to companies for product development and initial marketing. Companies may be in the process of being set up or may already exist, but have not sold their product or service commercially and are not yet generating a profit. Venture capital: assets temporarily invested as stock by specialised firms expecting return on investment that is both fast and very substantial, i.e. commensurate with the level of risk. Such specialised investors play a role during both start-up and development.

4. Priorities for equity and loan providers Equity providers Eligibility Criteria Family, Friends and Fools Personal relationship based on trust Business angels or informal investors and Spin-off corporate venturing Meeting or matching of individual entrepreneurs with business angels Atmosphere of trust between individuals Credible business plan in the eyes of the Business Angel Good management Fiscal incentives Market knowledge of the entrepreneur Availability of exit route Return on investment (capital gain) Banks Availability of guarantees Perceived ability to repay the loan Company track record Rating

Repayable short-term loans Innovative nature of business projects Business plan quality Management team Venture capital and Financial corporate venturing Business plan credibility Business plan with patent technology Track record (over previous years) Ability to grow fast and deliver quick ROI Management team quality Public funding New jobs Investment in productive tools Guarantees Stamina as well as technical and financial skills/abilities

Loans on trust Business plan credibility Readiness to cooperate with a tutor Seed capital funds Business plan quality Perception of the innovative nature of the project Intellectual property High growth potential Government tax policies Corporate venturing Innovative nature of the project in relation to the company’s core business Industry-specific usefulness of the project, in particular from a technological standpoint Good management Tax incentives

Institutional investors Business plan Proprietary technology (IP) High growth Good management Tax incentives from government Proof of concept Innovativeness Entrepreneurial spirit Team IPR – Valorisation of research results

New capital markets Viability and consolidation At least three years in existence Positive results at least once within twelve months prior to application More than €1.5 million in shareholder’s equity Ability to publish quarterly results Public recommendation by analyst Positive media attention Government tax policies Capable and experienced management team Prominent Board Experienced team of financial, legal and underwriter advisers New business concept Large market share Record of high growth or high growth potential

Examples of new trends

Proof of concept AIM: helping innovative enterprises to develop their products or services until their introduction to the market. Average of amount provided: 40 to 400.000 € Mixture of grants and equity

Pre-commercial support to university To prove “market potential” for research idea/invention Delivery format Up to £200k per award (max 2 years) University team includes academics and commercialisation practitioners University owns IP generated Only pre-commercial activity permitted £28m spent to date Programme performance to date 85 projects completed 400 jobs created to date 17 companies formed 22 licensing deals £22m investment into companies Funded in part with ERDF support from the EU Source: Scottish Enterprise

Mezzanine AIM: to improve the balance sheet of an enterprise by a combination of subordinated loans or participating loans and equity. The loans might be either reimbursed or transformed in shares at a given moment. Average size of deals: at regional level: 100.000 to 350.000 € in Wales (UK) up to 2.225.000 € in Berlin (D) at private equity level: 20 to 50.000.000 € N° of deals in Europe: ± 100/year

University spin out/off funds AIM: to support universities staff & students to start their own businesses. Good tool to support the commercialisation of research results. Size of funds: in Belgium between 5 and 15 mio €.

All money is not the same Start-ups are funded from different sources Ex.1: SuperSonic Imagine (F) creation date: 2005 n° of staff members: 15 founder investment: 50.000 € 1st Round: VC (Auriga Partners) = 500.000 € Sponsorship from: - National awards = 450.000 € - Regional grants = 550.000 € 2nd Round: 4 investors = 10.000.000 € - Crédit agricole Private Equity - Auriga Partners - NB6I Ventures - BioAm

Ex.2: MeilleurMobile.com Creation: 2004 Turnover: 1 mio € 1st Round: Founder + BAs 220.000 € 2ndRound: Grants from Regional Innovation Agency 50.000 € 3rd Round: Loan on trust 20.000 € 4th Round: Loan on trust 20.000 € 5th Round: V.C. (Galileo Partners) 1.000.000 € (March 2006)

Non-financial tools Investment readiness schemes Aim: improve the quality of Business plan and business presentation in order to attract the attention of potential investors (B.A. – V.C. – …) Content: - business plan review - knowledge of funding sources - understanding timing and amounts to be expected - needs & expectations of the various potential investors - how to submit a business proposal. BA academy Aim: helping potential B.A. to become active angels Content: - enterprise evaluation - taxation - exit route

Research to Revenue - Pipeline Investment/co-investment Success in marketplace National High Growth Start Up Unit Enterprise Fellowship Proof of concept Commercial Pre-commercial Idea/Invention based on research output Source: Scottish Enterprise

Christian SAUBLENS EBAN For more information Christian SAUBLENS EBAN Avenue des Arts 12 Bte 7 1210 BRUSSELS – BELGIUM www.eban.org - info@eban.org