1. PAXIS JOINT WORKSHOP - Salamanca, June 2005 The attitude and the potentiality of VC in Italian small firms: a comparison of a traditional and a new sector Ugo Fratesi Politecnico di Milano and University of Pavia and Vittorio Modena The University of Pavia

2. Ugo Fratesi - ESTER project - PAXIS Salamanca, June 24, 2005 Objectives of the work  To compare a new and a traditional sector on:  Knowledge and attitudes towards VC investment  Potentiality of VC to induce growth  Case study: Italy  Small and medium enterprises

3. Ugo Fratesi - ESTER project - PAXIS Salamanca, June 24, 2005 Traditional sector: automotive  Capital intensity  Mass customization and “Lean production” method  Production is pulled by demand (just in time)  Production is a continuous flow  Production localised close to the final markets  Economies of scale at network level  Shrinking but long life-cycle of products

4. Ugo Fratesi - ESTER project - PAXIS Salamanca, June 24, 2005 Traditional sector: automotive (2)  Outsourcing and global sourcing  First tier manufacturers (OEM) are also multinationals  Stricter ties with suppliers  Importance of co-location  High costs of R&D  SMEs tend to be low tier suppliers

5. Ugo Fratesi - ESTER project - PAXIS Salamanca, June 24, 2005 New sector: software  Classified as services  Not all software is sold in the market  Immaterial imputs and outputs  “Experience good”  Role of knowledge (external and internal)  Role of R&D  “craft” activity

6. Ugo Fratesi - ESTER project - PAXIS Salamanca, June 24, 2005 New sector: software (2)  Reproducible products  2 types of firms: 1. Software producers High fixed costs, low marginal costs 2. Software services Lower fixed costs, higher marginal costs

7. Ugo Fratesi - ESTER project - PAXIS Salamanca, June 24, 2005 Italian consistency of sectors

8. Ugo Fratesi - ESTER project - PAXIS Salamanca, June 24, 2005 Italian consistency of sectors

9. Ugo Fratesi - ESTER project - PAXIS Salamanca, June 24, 2005 Geographic location (automotive)

10. Ugo Fratesi - ESTER project - PAXIS Salamanca, June 24, 2005 Geographic location (software)

11. Ugo Fratesi - ESTER project - PAXIS Salamanca, June 24, 2005 Methodology  Face to face interviews: Semi-structured questionnaire involving 6 topics:  General data, economic activity, growth, innovativeness, financial aspects, attitude towards VC  Interviews with informed persons

12. Ugo Fratesi - ESTER project - PAXIS Salamanca, June 24, 2005 Results (1) Automotive components  Sector in crisis  Automation as answer to competition  Perceived advantage of quality Software  Sector in a “consolidation” period  M&A  Perceived advantage of quality

13. Ugo Fratesi - ESTER project - PAXIS Salamanca, June 24, 2005 Results (2) Automotive comp.  No business plan  Very small quota of market  Adaptive behaviour  Low innovativeness  Minimum prices and low margins  Standardized products Software  Few business plan  Self-limited market  Small quota / niche  High innovativeness  Reasonable prices and customer assistance

14. Ugo Fratesi - ESTER project - PAXIS Salamanca, June 24, 2005 Results (3) Financing Automotive comp.  Negative attitude towards banks  Self-financing  Incremental investment Software  Negative attitude towards banks  Self-financing  Low initial invesment  Higher needed investment above a ceiling

15. Ugo Fratesi - ESTER project - PAXIS Salamanca, June 24, 2005 Results (4) VC awareness Automotive comp.  VC normally not known  Superficial knowledge Software  VC normally known  Knowledge normally superficial (confused)  No knowledge of international VC  No knowledge of mechanisms

16. Ugo Fratesi - ESTER project - PAXIS Salamanca, June 24, 2005 Results (5) VC attitude Automotive comp.  Normally no willingness to lose control  Lacking ambition  Low managerial abilities  Who will take control? Software  Less problems in giving up control with guarantees  Higher ambition  Low managerial abilities (perceived)  Search of an industrial partner

17. Ugo Fratesi - ESTER project - PAXIS Salamanca, June 24, 2005 Results (6) VC potentiality Automotive comp. LOW  Market is conservative  Price concurrence already very high  Difficult for SMEs to introduce innovations Sotware MEDIUM  Market is (less) conservative  Quality difficult to detect  Difficult to reach the markets even with new and better products

18. Ugo Fratesi - ESTER project - PAXIS Salamanca, June 24, 2005 Results (6) VC potentiality Automotive comp. LOW  Incremental investments  Difficult to get high returns investing in this sector Sotware MEDIUM  Set-up of market structure  Possibility of good returns  Firms don’t search VC because they feel to be too small

19. Ugo Fratesi - ESTER project - PAXIS Salamanca, June 24, 2005 Results (7) VC potentiality Automotive comp. LOW  Need of structural change Sotware MEDIUM  Need of structural change  Products in pipeline  Products with wider applications  Difficulties to hire managers  Overestimated advantage?

20. Ugo Fratesi - ESTER project - PAXIS Salamanca, June 24, 2005 Conclusions  More and better information is needed both in traditional and new sectors  Need of “learning” mechanisms?  Lack of investments in the range 200,000 to 800,000 Euro  VC alone not enough: need to assist firms/entrepreneurs with managerial expertise

21. Ugo Fratesi - ESTER project - PAXIS Salamanca, June 24, 2005 Thank you ! Ugo Fratesi Università degli Studi di Pavia and Politecnico di Milano P.zza Leonardo da Vinci, 32, I-20133 Tel. +39-02-2399-3966 ugo.fratesi@polimi.it http://www.unipv.it/ester/index.html