1. Third WIPO/INSME International Training Program Financing your business with intellectual property Topic 6 Sources of finance for innovative SMEs: Public, private, formal, informal Bob Hodgson Zernike (UK) Limited Geneva December 2010 ZERNIKE (UK)

2. Money will find good ideas not create them Key thoughts Finance needs to be articulated to grow value Some systemic hypotheses and diagnoses Communicating potential benefits from a framework The best approaches provide money plus Bob Hodgson Geneva 2010

3. > Market consolidation > Market expansion > Market penetration > Product enhancement > Sales & distribution > Product development > Marketing & research > Prototyping > Market definition > Innovation & R&D Tier 0Tier 1Tier 3Tier 4Tier 5Tier 2 Product Development Stage The Commercialisation Cycle Tier 3 - Post-incubation Funding Structuring Relationships etc Tiers 4/5 - Commercial Maturity Business Development Tiers Risk Of Failure HIGH LOW Commercial Value R&D Angels /3Fs Seed VC/IIF VC/ Expansion IPO/MBO /Trade Sale Sources Of Funding Tiers 0/1 - Pre-incubation Direction Collaboration Guidance Resources etc Pre-Seed funding Tier 2 - Incubation Mentoring Seed funding Contacts Consulting Clients Fiscal approaches

4. ZERNIKE (UK) Challenges in commercialisation: hypothesis 1 We have great S&T and ideas for new businesses BUT There is no money to take them forward SO Lets build a venture capital industry Bob Hodgson Geneva 2010

5. ZERNIKE (UK) Challenges in commercialisation: hypothesis 2 We have lots of money which is prepared to invest in new businesses BUT There are not enough good ideas coming forward from the knowledge base SO Lets change the orientation of the science base Bob Hodgson Geneva 2010

6. ZERNIKE (UK) Challenges in commercialisation: hypothesis 3 We have great S&T and lots of investment money BUT The two communities have opposite perspectives and cannot talk to each other SO Lets build a shared vision and learn a common language Bob Hodgson Geneva 2010

7. ZERNIKE (UK) IP its nature and challenges A legal monopoly to encourage invention Novel Useful Specific Explicit knowledge, but usually backed by tacit know how Complex and specialist – so costly and uncertain Bob Hodgson Geneva 2010

8. ZERNIKE (UK) Sources of risk with new IP People risk: new entrepreneur and/or new team Technical risk: it needs more testing to prove effectiveness Commercial risk: unproven market without established price Financial risk: little recovery potential AND Competitors: disruptive technology undermining value Bob Hodgson Geneva 2010

9. ZERNIKE (UK) Forms of capital: getting the mix right Business cash flow – treasury management Grants – good but beware transaction costs Equity injection – long term risk sharing Loans – for working capital and short term needs Guarantees – for those without collateral Strategic alliance – also for credibility enhancement Bob Hodgson Geneva 2010

10. ZERNIKE (UK) Typical perspectives of funding sources New firms and established businesses – risk assessment Loans: duration and recovery risks ideally collateral backed – IP education Guarantees: ensure symmetrical risks and rewards Equity: aligned risk and reward but costly Strategic alliance: again symmetry and risk alignment Bob Hodgson Geneva 2010

11. ZERNIKE (UK) Risks: real and perceived The benefit of collateral – tangible and tradable IP – an asset but of what value? Austin Texas – investment challenge! But the risks are still very real technical market/commercial personnel financial Bob Hodgson Geneva 2010

12. ZERNIKE (UK) Communicating potential: investment readiness Business plan Market data and evidence Communications skills Differentiating the investment pitch Cultivation of the risk takers Bob Hodgson Geneva 2010

13. ZERNIKE (UK) Some concrete approaches Turkish critical monitor firm Argentinean Core Security Armenian ICT companies Chilean salmon producers Mexican unmanned plane Bob Hodgson Geneva 2010

14. ZERNIKE (UK) Finding the application: Gyroscope and mower Yachting enthusiast: new balancing equipment Established the IP Created the firm BUT Very small market Looked for help to find other markets Became industry standard Bob Hodgson Geneva 2010

15. ZERNIKE (UK) Business model and revenue sources Selling the product Providing a service and support Replacement materials market Upgraded versions and revenue Bob Hodgson Geneva 2010 GRIMREAPER

16. ZERNIKE (UK) Real Economy: innovation engines ARM – Advanced RISC Machines IP generator income from Licences and Royalties market cap - billions Generics Group Plc – technology solutions provider IP accumulator and commercialiser – spinning out companies massive P/E ratio on flotation – hope value Supported by specialist service provides Bob Hodgson Geneva 2010

17. ZERNIKE (UK) Thank You Bob Hodgson Geneva 2010 BOB HODGSON ZERNIKE (UK) Ltd The Grove High Street Sawston Cambridge UK CB2 4HJ 0(044)1223 526980 bhodgson@zernikeuk.com