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The role of Venture Capital in spurring innovation

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					FINANCING ICT INNOVATIONS: TRENDS AND
CHALLENGES OF THE VENTURE CAPITAL MARKET IN
EUROPE - THE ROLE OF THE GOVERNMENT
Yannis Pierrakis
Head of Investments Research
National Endowment for Science, Technology and the Arts (NESTA)

FITT for Innovation
Brussels, 10 May 2011
Bank lending to business and individuals
     The stock of lending to
      businesses contracted in
      2010, albeit at a slower
      rate than during 2009
     In contrast, growth in the
      stock of lending to
      individuals — both secured
      and unsecured — was
      stable, though low, over
      2010 and similar to the
      picture in 2009
                                   Source: Bank of England
    Lending to SMEs & Small Businesses
   Annual rate of growth in lending
    to SMEs has been negative since
    late 2009 and fell to -3% in
    February 2011 (BIS)
   Growth rate of lending to small
    businesses, defined as turnover
    up to £1 million, stood at -6% in
    December 2010, the latest (BBA)
   Annual lending growth to small
    businesses has been more            Source: BIS, BBA, Bank of England
    negative than for the SME
    segment since June 2010
Cost and availability of credit
     BIS data indicates that the
      value of applications by
      SMEs for new term loan
      and overdraft facilities in
      the six months to February
      was 19% lower than in the
      same period a year earlier



       Source: Credit conditions survey
       and (3 months to March) and
       Deloitte CFO Survey
Why VC is appropriate mean of finance
for growth?
   The high-growth innovative firms often require significant capital
    up-front and this is very hard to obtain from conventional sources of
    debt finance.
   They tend to have intangible assets, and show a significant delay
    before generating revenue making than a high risk investment.
   Innovative, high-growth firms which are essential for the innovation
    system to flourish, need different kinds of support depending on
    their stage of development.
   Only a small proportion of businesses (3%) receives venture capital
    finance
But its importance goes far beyond its size

   A variety of studies suggest that venture-backed firms are
    responsible for a disproportionate number of patents and
    new technologies (Kortum and Lerner 2000, Mann and
    Sager 2007), and they bring more radical innovations to
    market faster than lower growth businesses that rely on
    other types of finance (Hellmann and Puri 2000; Gompers
    and Lerner 2001).
   In 1998 venture funding accounted for about 14% of U.S.
    innovative activity (Kortum and Lerner 2000)
More empirical evidence
   Venture capital appears ~3 to 4 times more powerful than
    corporate R&D
   From late 70s to mid-90s, VC was only 3% of corporate
    R&D, but responsible for ~10%-12% of privately funded
    innovations (Kortum and Lerner 2000)
   Although VC backed firms accounted for only 0.11% of
    all new firms, they generated roughly 4-7% of
    employment in the US in the late 1990s till 2000 (Puri and
    Zarutskie 2008)
More empirical evidence

   Companies that                                        100%


    manage to receive                                     90%

                                                          80%
    VC finance are most


                              Proportion of investments
                                                          70%

    likely to be innovative                               60%

                                                          50%
    companies                                             40%
                                                                                                                     Proportion of investments made
                                                                                                                     to companies with patent
                                                          30%

                                                          20%

                                                          10%

                                                           0%
                                                                 1   2    3    4      5     6       7   8   9   10
                                                                                   Funding rounds


                                                           Source: Pierrakis 2011
Companies that received VC funding
    Venture capital activity
   Venture Capital investments
    in the US, UK and
    continental Europe



   Number of Venture Capital
    backed companies in the US,
    UK and continental Europe



    Source: Thomson One
Venture capital in ICT




                                                  45.00%




                      Proportion of investments
                                                  40.00%
                                                  35.00%
                                                  30.00%
                                                  25.00%
                                                  20.00%
                                                  15.00%   UK
                                                  10.00%
                                                   5.00%   US
                                                   0.00%
                                                           Europe




Source: Thomson One
Historically, the more a fund invested
in ICT the better it performed




* Base category: Biotech & Healthcare, Source NESTA
         Venture Capital performance
         by vintage year
             Poor venture returns since the dotcom crash
  
        50
              Downturn in venture activity world-wide since crisis

        40




        30




        20
                                                                                                                                                                           Mean
% IRR




                                                                                                                                                                           Median
                                                                                                                                   One year before
        10
                                                                                                                                   the Dotcom crisis



         0
              1972 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007



        -10




        -20
Why should the public sector care?
   Most venture capital markets were established with some
    sort of public support
   Relatively young industry and in some countries still at
    very early stages
   Fill the equity gap
   Familiarity with the innovation system
   Share the inherit risk
          Venture capital funding landscape in the UK


                                                       Private
                                                         VC
                                                                 Private
                                                                 Equity
                                    VCTs
                                           Public VC

                         Business
                          Angel
                         Networks


                         Business
                          Angels
                Grants


Source: NESTA
Examples from around the world
   US (SBIC)
   Israel (Yozma)
   Canada       UK publicly backed funds early stage investments

   Finland
   UK




                        Source: NESTA
    Familiarity with the innovation system (extent of
    interaction)
                                                                            Universities with no flexible IP policy
                                                                                           5
                                                Internet forums and blogs                                             Universities with flexible IP policy
                                                                                         4.5

                                                                                           4

           Networking events organised by public bodies                                  3.5                                            Regional RD institutes (if not universities)
                                                                                           3

                                                                                         2.5

                                                                                           2
Networking events organised by private bodies                                            1.5                                                        RDAs (when applicable)

                                                                                           1

                                                                                         0.5
                                                                                                                                                                                                     Public VCs
                                                                                           0
                                                                                                                                                                                                     Private VCs
                                                                                                                                                      Other public regional bodies e.g. endowments
                       IP protection bodies
                                                                                                                                                                        councilsetc




          Companies based in technology parks or
                                                                                                                                               Regional authorities
                       incubators




                    Managers of technology parks or incubators                                                                  Law companies


                                              Community organisations and charities                        Specialists e.g. experts in a particular technology


                                                                 Source: Pierrakis 2011
Tips for public funds
   Syndication with private funds promotes innovation (13.4%)
   Establish close linkages with the innovation community –
    become the conduit of information between private funds
    and other bodies of the innovation communities
   Avoid multiple objectives
   Be able to follow up investments
   Have appropriate size
   Set up evaluation frameworks for programmes and
    managers
   Build up track records or partner with established funds (e.g.
    Israel)
Tips for entrepreneurs
   Most often proposal comes from individuals themselves
    so make yourself known
   Funds evaluate proposals based on the team
    management skills and the potential
                         Management team expertise                                                     95.74%

                      Costumers and market potential                                          70.21%

                             Great products/services                                 46.81%

                           Business model scalability                       31.91%

                                       Defensible I.P.                     29.79%

                               Financial track records            14.89%

                        Remarkable value proposition            10.64%

                                                         0%   10% 20% 30% 40% 50% 60% 70% 80% 90% 100%


                                                          Source: Pierrakis 2011
Where can you get funding?
   Funds are very localised especially in US, however,
    around 40% of UK based funds invest in continental
    Europe
   Approach funds directly – but be well prepared, the
    competition is very tough
   You need to be ‘investments ready’ – Europe
    desperately needs an investments readiness programme
   Contact the European Venture Capital Association and
    the European Business Angel Association
THANK YOU

Yannis.Pierrakis@nesta.org.uk

				
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