How to trigger growth of new technology based entrepreneurship planning for early stage capital and incubation support measures in Latvia Valdis Avotins, Viesturs Sosars, Dairis Calitis ESTER 1Workshop in Riga, September 23, 2005
Agenda ESTER project Organisation Risk capital program Technology incubator & seed program Future steps 2
ESTER project The project Creation of Early Stage Financing Sources for Small Eastern European Countries Following the Yozma Model with an acronym ESTER was initiated by University of Pavia and took place in 3 small Eastern European countries: Slovakia, Estonia and Latvia early stage support experts from Israel and Italy provided advice LIDA represents Latvia s side 3
Main objectives Analysis of business environment in the context of support for entrepreneurial activity, both general and technology-based Identification of real and perceived needs of potential technology-based entrepreneurs and main barriers for startingup a technology company Identification of potential financiers for early stage investments and evaluation of their perception of market needs and possible incentives Drafting of policy suggestions to the situation of early stage support in the small Eastern European countries Promotion and dissemination of these suggestions to the local and regional business and political communities and academia 4
Project stages 2003 2004 2005 Analysis of back-ground cond. Existing & potential entrepren. Supporting activities of entrepreneurship (TI) Suggestions to policy makers of entre-preneurship Potential financiers Models of early stage and VC financing 5
Institutional structure Setting of project objectives for Latvia Project partner meetings - 4 Operative Project Management Team meetings 19 Focus and discussion group meetings - 11 Coverage in mass media 8, TV& radio 2, press releases 2, presentations at conferences, seminars 14 Study visits - 2 Coverage in Excellent News - 2 http://www.unipv.it/ester/ http://www.cordis.lu/paxis/src/val_projec.htm#est Close co-operation with Ministry of Economics, WB experts, private sector and wide experts circle 6
Existing situation Dynamic growth but from low starting point, mainly based on primitive process innovations One of lowest GDP level in EU Mainly export of low processed materials with low value added Competitive advantages not fully utilised Necessity to increase commercial output of knowledge potential and knowledge usage Poor NTBC development and technology transfer capacity 7
Challenge in Israel (forecast) 3500 3000 2500 exports ($millions) 8 2000 1500 1000 500 0 1992 1993 Dr.Eli Opper, Chief Scientist 1994 1995 1996 1997 1998 1999 2000 2001 Software Citrus? Nano biotech
Financial instruments Hightech Seed capital National/ EU grants Venture capital Equity capital Collateral loans Middletech Business Angels Seed capital National/ EU grants Venture capital Collateral loans Equity capital Mezzanine/ sub.loans Collateral loans Lowtech Micro-loans Business Angels Seed capital Mezzanine/ sub.loans Collateral loans Equity capital Collateral loans Starting-up Fast growth Slow growth 9
A. RISK CAPITAL SCHEME Reasonable investments in LVL 0... 10,000... 25,000... 50,000... 100,000... 250,000... 500,000... 1 m... 2.5 m... 5 m... NLBDF 33 projects 1995 First risk Capital investment 1995 67 projects financed 2004 via Risk Capital No Start-up investments No Seed money BSEF, BALTCAP, NCH, BALEF 34 projects 10
VC Program s objectives Facilitate entrepreneurship promoting access to risk capital financing Facilitate the establishment and development of new venture capital funds, motivate them invest in SME`s by offering state aid to private investors Attract foreign private investors to invest in Latvia Risk Capital in Latvia 11
PPP: Founding of VC Fund Fund of Funds Limited by 70% or 5,0 million Private Investors At least 30% of total investment in new VC fund Budget 15.0 MEUR State Support to Private Investors Target : 50/50 Investment Fund ~ 8... 10 million Decisions Private management 7-10 years 3 new funds 12
Restrictions for investment SMEs registered in Latvia Maximum investment about 1m in one project Maximum 285k in the first investment tranche Time between trenches at least 12 months Some sector restrictions (EU regulations) 13
Return Distribution Mechanism 1. Fund s management expenses; 2. Repay the original capital invested by private investors; 3. Repay 25% of the original capital invested by the state; 4. Priority return (hurdle rate) on private investors capital (6%); 5. Repay the remaining 75% of the state s invested capital; 6. Hurdle rate return (6%) on the state s invested capital; 7. Remaining profit, if any to private investors and FMC 14
Selection of Fund Managers Open tender procedure, main criteria: Amount of management fee Experience and professionalism of team members Involvement of private investors and share of private funds Business plan Program launched by Latvian Guarrantee Agency : www.lga.lv 15
B: Background Existing market gap and low local entrepreneurial spirit results in few Investments particularly in high growth Start-ups The Need: sharing investor risk to encourage investments and increase the number of high growth start-up companies Solution: outsourced integrated service to motivated professional venture teams 16
B. The designed draft Growth4Future Scheme 1. Technology incubator grant 2. Pre-seed grant Think for month 3. Seed soft loan Management companies or Operators of TI s private companies providing space & infrastructure, management and S&M advice, basic business services and private investment structuring in exchange for equity position in the tenant company Target groups: Potential entrepreneurs from industry Potential entrepreneurs from academia Repatriating scientists and R&D personnel Regional inventors Tested in Israel, with WB experts, EU experts, local expert panels 17
New forms of Business Incubation in late 1990s has been driven to multiply the number of succesful, fast-growth, high technology businesses in US a) Its led by serial entrepreneur; b) it has its own seed fund drawn from founder s own, VCF or corporate partner s capital; c) it may have specific sector focus Conventional incubators offer heat, light and dial tone, but Smart Venture Investment claim to offer more, developing ideas and incubating them in-house as well as providing late seed capital and A, B and C round investment. Incubation today is seen as a way in which capital can be efficiently applied to support new technology businesses Gill D., Martin C., Minshall T., Rigby M. Funding Technology. Lessons from America. 2000 18
Naiot, Israel at a glance An Incubator working under Israel s OCS TIP (operational grant 1.8MUSD per 6 years; 35% of total TI budget) Acts as a VC willing to take higher development risk Fully owned by the OHTG, acquired in 1997 Makes 4 to 6 $500K investments annually, 8-10 NTBC in incubator Graduated companies raised >$140M Best Incubator Award five years in a row Hands-on management Investing in Medical Devices (70%), software (20%) and miscellaneous (10%) Seed finance: 200 kusd from Private HT matched with 300 kusd public loan 19
Technology Incubator Model Pre-seed The idea! Supporters: Self, friends and family (loans, equity and time) Incubator informally provides: -advice -contact network -seed grants (up to Ls 2,000) Experts validation INCUBATOR SIA (publicly supervised, privately managed) Seed Business plan, company formation, Business concept proof of concept or prototype Start-up R&D, customer acquisition Supporters: Self, friends and family (loans, equity and time) Supporters: Incubator (as in Seed Self, friends and family stage but with higher (loans, equity and time) intensity) Incubator formally provides: Angels (advice, coaching, -advice network, loans and equity) -coaching Banks (banking services, -training short-term loans) -contact network State and City (grants, -work space loans, g tees, indirect -financing (public and private equity) sources for loans, equity and grants) Up to 3 years Expansion Revenue and then profit Supporters: Self (loans, equity and time) Angels (advice, coaching, network, loans and equity) Venture Capital and Private Equity investors (loans, equity, advice, coaching, contact network, MIS, reporting, strategic mgt, corporate governance) Banks (banking services, short and long-term loans, leasing, trade finance, acquisition finance) State and City (grants) 20
Political Goals 1. Improve the competitiveness of Latvia by facilitating development of high & medium tech industries; 2. Create a potential for participation in future technologies (prestige, future competitiveness); 3. Development of new sustainable export industries (Israeli & Finnish experience); 4. Create economic champions / change the attitude of society towards technology commercialization. High growth high-tech company establishment is more expensive and it shows remarkable return after 8-10 years : longer establishment cycle; specific infrastructure required; specific knowledge needed. 21
1. Technology Incubator grant 9 year program (3x3 support periods) Public private partnership model Decisions made by TI private operators (PO) Grant is paid to TI operator as 30% (150 k EUR) fixed rate and 35 keur per one tenant, minimum 2 tenants are required, quarterly payments Public grant up to 100% (max. 500 k EUR) of TI s annual budget Based on Venture business not traditional incubation! 22
2. Pre-seed: TFM to validate a business plans before starting a new company and to leverage private equity finance in later stages To provide confidence An individual person with a business project entailing fast growth (turnover increase to at least 40-50% per year) for 0-24 months Fellowship financing covers up to 100% of eligible costs, 1 month Form of intervention Performance based grants up to 3 keuro 23
3. Seed I Proof of Concept soft loan Investment management: TI PO To reduce risk of seed investment To provide early stage finance to NTBC to validate business concept, study market and produce prototype Max soft-loan is 14 000 LVL if statutory capital is paid 100% publicly financed, monthly payments duration is up to 6 months Forms integral part of seed II soft loan later 24
3. The seed program - II Investment management: TI PO Recipients young (<6 month) SMEs after business concept validation max soft loan 280 K EUR, matching with private equity investment 70%:30%, incl. seed I soft loan (total budget 400 k EUR) converts to non-refundable grant in the case of failure Project duration 6-24 months when sales appear, 5% from annual turnover should be paid back until all loan is repaid Would you apply as TI PO? - 5 from 10 would apply: 2F and 3 Local! 25
Outcomes 6 Years Integrated system of NTBC support created 2 TIs with 80% capacity operational and experienced, side policy measures implemented (TTC, EMP etc.) No of approved projects in TI - 86 No of successful NTBC - 46 No of NTBC graduates from TI 36 Survivals NTBC (70% from grad) - 25 No of high growth companies created - 14-16 Number of successful IPOs, M&As, investments in the next rounds 14 Private investment during incubation 4.0 MEUR Total private investment in next rounds 12 MEUR Sales reached (av 0.5x16) 12 MEUR Jobs created 150 Export volume reached (80% from sales) 9 MEUR 26
Selection criteria 1. For TIs operators TI management experience and professionalism of team members in new high growth SMEs creation Businessplan Amount of offered financing Planned running costs per SME, share of private coinvestment 2. For SMEs Registrated commercial entity in LR, younger than 6 months, planned growth over 50% Not yet in market, IPR owner or exclusive user High- or medium-tech Explicit orientation towards global market (export) Worked out draft business or / and technology plan Manageable company Significant milestones for 24 months 27
Existing/ approved Launch expected Planning initialised in 2006/7 OTHER SUPPORT Entrepreneurship promotion TTO IPR protection in start-ups Market exposure MARKET INTELLIGENCE NEW PRODUCTS BUSINESS SUPPORT FINANCING TFM scheme SEED SCHEME TECHNOLOGICAL INCUBATION START-UP SCHEME VENTURE CAPITAL SAP Ideas Validation Prototyping Fast growth 28
Side measures for Deal flow Entrepreneurship motivation scheme - outflow of 300 business ideas, 100 marketing plans, 50 business plans; Reposition of entrepreneurial / innovation culture : by informative seminars, work shops, presentations, publications in media, etc; Awareness creation program; Think for month (pre-seed grant); Innovation assistant grant scheme; motivation scheme for inventors in universities and R&D institutes; Entrepreneurship / innovation courses and innovation MBA program in RTU; Technology transfer centre; Business labs and Liaison offices in universities; Ventspils school of entrepreneurship (Chalmers model) 29
30 Thank you for attention!