1. International Convention on Intellectual Property and Competitiveness of Micro, Small and Medium sized Enterprises (MSMES) Accessing Finance: Intellectual capital readiness of Entrepreneurs and MSMES Bob Hodgson Zernike (UK) Limited Rome December 2009 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 Rome 2009

3. 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 Rome, 2009

4. ZERNIKE (UK) Supply side perspectives The inventor: the idea that will change the world – huge hope value and make me rich The research institution: an output in its own right with weak commercial perspective The commercial licence provider: revenue generating expectations tempered with restriction of own potential action Alignment of risks and rewards clarity and competence of owners capacity to pay and to exploit position in market Bob Hodgson Rome, 2009

5. > 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

6. 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 Rome 2009

7. 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 Rome 2009

8. 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 Rome 2009

9. 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 Rome 2009

10. ZERNIKE (UK) Forms of capital: getting the mix right Business cash flow Equity injection Loans Guarantees Strategic alliance Bob Hodgson Rome 2009

11. 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 Rome 2009

12. 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 Rome 2009

13. ZERNIKE (UK) Valuation: the unresolved challenge Easy – when there is a revenue stream But even then worries about sustainability Before the revenue stream it is much more uncertain And is characterised by information asymmetries inventor knows the technology entrepreneur knows the market investor needs to independently evaluate both and then to reach a deal! Bob Hodgson Rome 2009

14. ZERNIKE (UK) The starting point: has it potential value Who will buy it? What will they pay? How many potential customers are there? What will it replace? Will it work and how much will it cost to make? Is it likely to be profitable? Bob Hodgson Rome,2009

15. 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 Rome,2009

16. ZERNIKE (UK) Business model and revenue sources Selling the product Providing a service and support Replacement materials market Upgraded versions and revenue Bob Hodgson Rome 2009 GRIMREAPER

17. 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 Rome 2009

18. 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 Rome,2009

19. ZERNIKE (UK) Some additional limitations IP system is not always applicable advanced engineering around F1 racing accumulated tacit knowledge Commercial perspectives can cripple business Pro fit and its American licensee defence costs can overwhelm revenues all but a few USA universities spend more on IP than they receive Bob Hodgson Rome 2009

20. ZERNIKE (UK) Making the market work Bob Hodgson Rome 2009 Stimulating the supply side Stimulating interest among MSMEs Training brokers and agents Educating fund managers Ensuring quality implementation Building the history

21. ZERNIKE (UK) Thank You Bob Hodgson Rome 2009 BOB HODGSON ZERNIKE (UK) Ltd The Grove High Street Sawston Cambridge UK CB2 4HJ 0(044)1223 526980 bhodgson@zernikeuk.com