1. Financing Entrepreneurship: Rationale, Strategies and Practices for Eastern European Countries Vittorio Modena The University of Pavia Prepared for the European Day of the Entrepreneur held in Sofia on November 4-5,2004

2. Vittorio Modena - EDE -Sofia, November 5, 2004 Presentation Outline Part I –General policy for early stage financing Part II – Selected policy principles for the creation of seed and venture capital sources (from the Israeli experience) Part III - The ESTER project and the Latvian Scheme for the creation of venture capital funds

3. Vittorio Modena - EDE -Sofia, November 5, 2004 Part I – General Policy for Early Stage Financing in SMEs

4. Vittorio Modena - EDE -Sofia, November 5, 2004 Fostering Innovation Diffusion (as opposed to innovation creation) Enabling farmers to buy their tractors may be more important may be more important than discoverying a new satellite system ! than discoverying a new satellite system !

5. Vittorio Modena - EDE -Sofia, November 5, 2004 New Innovative Firms: Two Rationales for Two Courses of Action (1/3) 1. 1. The SMEs account for a large part of the employment and the new ones allow innovativeness and competitiveness 2. 2. The fastest growing firms were VC backed

6. Vittorio Modena - EDE -Sofia, November 5, 2004 New Innovative Firms: Two Rationales for Two Courses of Action (2/3) 1. 1. Easy access to finance must be available for new entries so as “not to lose any opportunity for new firms”. more direct help to firms. 2. 2. An effective and private Venture Capital Industry should be in place so as not to lose the opportunity for “high- growth” firms. more help to new funds

7. Vittorio Modena - EDE -Sofia, November 5, 2004 New Innovative Firms: Two Rationales for Two Courses of Action (3/3) In conclusion: the two actions are strongly needed and one cannot compensate for the other

8. Vittorio Modena - EDE -Sofia, November 5, 2004 Part II – Selected planning principles for the creation of seed and venture capital sources

9. Vittorio Modena - EDE -Sofia, November 5, 2004 Seed (and pre-seed) vs. Start-up capital Both need strong initial public support Start-up sources just need triggering, seed sources need continuous support

10. Vittorio Modena - EDE -Sofia, November 5, 2004 Research-Intensive vs. “generally innovative” Firms Different schemes are needed for different kinds of firms: Research-intensive firms are more risky and need more help and infrastrucutre Venture Capital and private equity also deal with traditional sectors

11. Vittorio Modena - EDE -Sofia, November 5, 2004 Sectoral Neutrality Neutral seed funds (or incubators) appear to succeed as much as sectoral, so: If you don’t have a very good reason to impose sectorality or neutrality, don’t ! Biotech is different as it requires different infrastructures, size of funds, development time.

12. Vittorio Modena - EDE -Sofia, November 5, 2004 Deal Flow: A “critical mass” problem Making a programme attractive is not only about incentives Deal flow may be a problem for new technology based deals and/or for small regions (or countries) Low deal flow=>more flexible schemes not limited to small regions or specific sectors

13. Vittorio Modena - EDE -Sofia, November 5, 2004 Example: Italian high-tech potential vs. Structural funds

14. Vittorio Modena - EDE -Sofia, November 5, 2004 Expert Foreign Partner Involvement For expertise, networking and reputation. At the start strategic partners are more likely to join Encouraging/requiring such partnerships is a way to help the industry work.

15. Vittorio Modena - EDE -Sofia, November 5, 2004 Part III – The ESTER Project and the Latvian Venture Capital Scheme

16. Vittorio Modena - EDE -Sofia, November 5, 2004 The ESTER Project (1/2) Objectives 1. Planning for effective sources of seed and venture capital in Estonia, Latvia and the Slovak Republic 2. Submission of formal proposals for the launch of new programmes to the relevant authorities in the three countries and the EC

17. Vittorio Modena - EDE -Sofia, November 5, 2004 The ESTER Project (2/2) Basic Methodology 1. Inspiration from the Yozma and Technological Incubators programmes in Israel 2. Thorough study of the Innovation system in Estonia, Latvia and Slovakia 3. Thorough study of EC regulations 4. Planning with world experts 5. Submission of proposals to the relevant authorities

18. Vittorio Modena - EDE -Sofia, November 5, 2004 Latvia Venture Capital Scheme The programme "Aid to the risk capital of small and medium-sized commercial companies “ promoted by Latvian Development Agency financed by Ministry of Economy and ERDF.

19. Vittorio Modena - EDE -Sofia, November 5, 2004 Latvia Venture Capital Scheme – Outline (1/2) 18 Milion Euros for the period 2004-2006 will be provided by the Ministry of Economy in Latvia and the European Regional Development Fund to match private funds. The task is to ensure the creation and functioning of at least 2 risk capital funds for SMCC (Small and Medium Commercial Companies). Latvian Development Agency will manage the scheme

20. Vittorio Modena - EDE -Sofia, November 5, 2004 Latvia Venture Capital Scheme – Outline (2/2) Funds will be managed by private management companies Investment may be made up to Euro 735,000 in each company Investments are to be made in two instalments

21. Vittorio Modena - EDE -Sofia, November 5, 2004 Latvia Venture Capital Scheme (Strategy) Detected SituationDecision Uncertain high-tech deal flow Flexible scheme Limited amount of available public monies Two funds (ensuring right size) Scarce presence of skilled management Strong incentive to investors and management company

22. Vittorio Modena - EDE -Sofia, November 5, 2004 Contacts/references Email: vmodena@libero.itvmodena@libero.it IFISE Project http://ifise.unipv.ithttp://ifise.unipv.it ESTER Project http://www.unipv.it/ester/index.htmlhttp://www.unipv.it/ester/index.html