The ESTER Project Early Stage Finance Triggering for Eastern Regions

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The ESTER Project

Early Stage Finance Triggering for

Eastern Regions

Vittorio Modena - University of Pavia

Valdis Avotins – Latvian Investment

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Presentation Outline

PART I - Introduction

! Partnership, Objectives and General Methodology

PART II – Tangible results

! Results in Estonia and Slovakia

! VC scheme and master plan in Latvia (by Valdis Avotins)

PART III – Intangible results

! Awareness raising and dissemination activity ! Results of studies in Italy and Israel

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Presentation Outline

PART IV - European added value and value for the participants

! European added value

! Benefit to the participants

PART V– Good practices

! The Yozma programme

! The Technology Incubators programme

! The Latvian VC scheme (already mentioned)

PART VI – Wishes, Vision and Recommendations

! Regarding the ESTER project ! In general

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ESTER

Partners

_Partners

Bic Bratislava Latvian Development Agency

Connect Estonia National Agency for SMEs_Slovakia The University of Pavia

The University of Haifa

Mr. Yigal Erlich Prof. Morris Teubal

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Objectives

"# Planning for effective sources of seed and venture capital in Estonia, Latvia and the Slovak Republic

$# Submitting formal proposals for the launch of new programmes to the relevant authorities in the three countries and the EC

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General Methodology

(1/2)

"# Studying the current situation in the three Eastern European Countries, their business environment, legal framework, industrial potential and venture capital availability

.

$# Understanding the background conditions in the three countries through the interview of market actors

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General Methodology

(2/2)

3. Extrapolating the success factors from the Israeli Yozma and Technological Incubators

programmes both from IFISE and ESTER 4. Studying of the EC state-aid regulation.

5. Planning for the most suitable public schemes for the promotion of venture capital sources 6. Submitting the same to regional, national or EC

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Results in Slovakia

(1/2)

"# A first proposal for a VC scheme based on the Yozma

programme was presented last winter by the ESTER team. The proposal was rejected, but now it was revised and

negotiations are continuing this month. The Slovak team is in constant contact with the Ministry of Finance (temporary also MoE).

$# SR has converted ! 40 m that were not used from the

previous public funding schemes, and the ESTER team is proposing to create funds being based on the following structure:

• State budget: 50 % • EIF: 25 %

• Private investors 25 % • Private management

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Results in Slovakia

(2/2)

%#

A master plan for early stage financing is being

finalized.

&#

The responsible for the Slovak general plan for

innovation and the head of the National

Agency for SMEs have personally attended the

Tel-Aviv meeting and are well aware of the

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Results in Estonia

1. The concept of a VC scheme including a single “Estonian National VC Fund” (around 32m!) was started prior to the ESTER project. The ESTER team questioned the existing model and proposed to include a fund of funds programme in the scheme. “Negotiations” are still in progress and we hope to direct at least part of the allocation to a fund of funds scheme. 2. An early stage financing “master plan” is on its way including

a “proof of concept” scheme.

3. A delegation of the technology transfer offices of Estonian technical universities were dedicated a special training session led by Yeda TTO CEO.

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Results in Latvia and the Latvian

VC scheme

"# A 15m! VC scheme was designed and promoted by ESTER. It was approved by the Ministry of Economy and the EC and is managed by LGA. $# A master plan for early stage financing in Latvia %# A technology incubators programme (providing

seed funds) including a “think for a month” pre-seed programme was presented at the Riga

workshop last month and is expected to be approved before the end of the year.

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Results in Latvia and the Latvian

VC scheme

Details by Valdis Avotins of the Latvian

Development Agency

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Awareness raising and dissemination activity

(1/2)

"#

Targeted dissemination to prominent

policy makers occurred since the very

beginning of the project and will last

well beyond the end. All relevant

policy makers in the three countries

are aware of ESTER and its results.

$#

Presentation of results of the project at

various stages to more than 20

international workshops

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Awareness raising and dissemination activity

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4. More than 10 press articles

5. Two academic publications and more to

come

'#

Interest was shown from several other

“New Europe” regions (Czech republic,

Central Pomerania, Bulgaria).

(#

Cooperation with X Network for early

stage financing, joint workshops,

cooperation with TRANSACT etc.

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Insights from Israel

(1/2)(1/2)

Incubators Programme

- Evolution and privatization of the Incubators Programme

- Entrepreneurs appreciate the Technological Incubators

Programme especially for: 1. Initial capital 2. marketing knowledge (still not enough) 3. contacts and business negotiation with foreign entities

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Insights from Israel

(2/2)(2/2) -

VC/start-ups co-evolution

- The Israeli innovation system

- Other Israeli success stories (such as

the Yeda of the Weizmann institute

and Naiot incubator)

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Insights from Italy

(1/2)

The desirability of different public incentives

- Different kind of investors are attracted by different kind of incentives

- Small countries are not well known among far investors

- Exit is a primary concern (lack of secondary markets does not help)

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Insights from Italy

(2/2)

The different potential in the Automotive and

Software – entrepreneurs’ perspective

- Automotive firms are less likely to be interesting for VC investors

-Automotive firms managers know less and are less interested in VC

-The Software sector in general seems to be more attractive than the Automotive and its manager more interested in VC

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PART IV - European added value and benefit for

the participants

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1. A methodology for early stage planning in eastern regions

2. Models of early stage master plans and VC scheme involving

public-private partnership

3. A VC scheme likely to be suitable to several NMS regions European Added Value

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-The eastern countries: Team making, process of planning and promoting with all market actors -Coordinator: excellent experience for project

methodology and interaction with other programmes -Israeli team: further insights into their mature

innovation system

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•

•No Venture Capital FundsNo Venture Capital Funds

•

•Success in R&D - Failure in MarketingSuccess in R&D - Failure in Marketing

•

•Few IPOsFew IPOs, No , No M&AsM&As

•

•Lack of international involvementLack of international involvement

•

•~60 Venture Funds~60 Venture Funds

•

•$10B raised by VCs$10B raised by VCs

•

•$21B M&A deals$21B M&A deals

•

•#3 in Nasdaq#3 in Nasdaq

•

•Cisco, IBM, Intel, Microsoft…Cisco, IBM, Intel, Microsoft…

•

•American & ROW VCsAmerican & ROW VCs

1992

2005

VC

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Mission

•

• To create the venture capital market in IsraelTo create the venture capital market in Israel

Method

•

• To entice the private sector and foreign investors to set up newTo entice the private sector and foreign investors to set up new VC funds

VC funds

•

• To participate in the inv. Committee in the new VC funds To participate in the inv. Committee in the new VC funds •

• To secure an obligation of the new VC funds to invest in start- To secure an obligation of the new VC funds to invest in up companies in Israel

up companies in Israel Accomplished through

Accomplished through

•

• Establishment of a $100M investment companyEstablishment of a $100M investment company

Use of proceeds

•

• Establishment of 10 drop down funds together with strategicEstablishment of 10 drop down funds together with strategic partners.

partners.

•

• 15 Direct investments 15 Direct investments

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Basic principles

•

• Investment of $8M in each drop-down fundInvestment of $8M in each drop-down fund (minority position)

(minority position)

•

• A 5 year option to A 5 year option to YozmaYozma’’ss partners to buy out the partners to buy out the Government

Government’’s share at predetermined conditionss share at predetermined conditions

Results

•

• 8 out of the 10 drop-down funds have exercised8 out of the 10 drop-down funds have exercised their option and bought out the Government

their option and bought out the Government

•

• 9 out of the 15 companies Yozma Venture Capital has9 out of the 15 companies Yozma Venture Capital has invested in directly, went public or have been acquired

invested in directly, went public or have been acquired

•

• The Israel Venture Capital industry has been The Israel Venture Capital industry has been established

established

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Yozma Drop-down Funds

FUND CAPITAL MANAGED ($MM)

Original size Today

• •EurofundEurofund 2020 90 90 • •GeminiGemini 2525 550 550 • •InventechInventech 2020 40 40 • •JPVJPV 2020 675 675 • •MedicaMedica 2020 130 130 •

•NitzanimNitzanim-Concord-Concord 2020 280 280 • •PolarisPolaris 2020 945 945 • •StarStar 2020 900 900 • •VERTEXVERTEX 2020 250 250 • •WaldenWalden 2525 175 175 210210 4,035 4,035

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The Technological Incubators Programme (1/2) - Located all over Israel, including Periphery

- Some of them are situated near Academic Institutes

- Built an infrastructure to exploit entrepreneurial resources - $300K for 2 years / project

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The Technological Incubators Programme (2/2) - 24 incubators, 13 of them privatized

- Around 1000 projects incubated since 1991

- 50% of projects continue after incubation period -5-6 projects in each incubator every year

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Recommendations

•

Involve decision makers in the

project from the beginning

•

Transfer and adapt principles, not

entire programmes

•

Interact with other programme

(e.g. structural funds)

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Wishes & Visions (ESTER)

-Continue the ESTER project for one more year to cover the planning period of

structural funds until the end of 2006 (continuity is important for any good project)

-Extend the methodology to other regions in Europe

-Extend the scope of the project to technology transfer offices

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Wishes & Visions (General)

-Directing more structural funds to R&D and innovation

-Public sources of seed funding available for any good initiative in Europe

-Create few, but strong secondary markets in Europe.

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Thanks to

…

-The ESTER partners…

-The European Commission…

-Our three officers…

-All those who were involved one

way or another…

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Contact

Vittorio Modena

Università degli studi di Pavia Sportello Università-Imprese Via Mentana 4, Pavia

Tel. +39-335-7428951

http://www.unipv.it/ester/index.html http://ifise.unipv.it

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How to trigger growth of new

technology based entrepreneurship – planning for

early stage capital and incubation support

measures in Latvia

Valdis Avotins, ESTER Project Manager Edinburgh, October 7, 2005

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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

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Risk Capital in Latvia 39

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

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PPP: Founding of VC Fund

Fund of Funds

Limited by 70% or 5,0 million !

Investment Fund

~ 8 ... 10 million !

Private Investors

At least 30% of total investment in new VC fund Target : 50/50 3 new funds Budget 15.0 MEUR State Support to Private Investors Decisions Private management 7-10 years

Maximum investment about 1m ! in one project Maximum 285k ! in the first investment tranche

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Return Distribution

Mechanism

"

#Fund’s management expenses;

$#Repay the original capital invested by private investors;

%#Repay 25% of the original capital invested by the state;

&#Priority return (hurdle rate) on private investors’ capital

(6%);

)#Repay the remaining 75% of the state’s invested capital;

'#Hurdle rate return (6%) on the state’s invested capital;

(

#Remaining profit, if any to private investors and FMC

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B.

B. The designed draft

Growth

4 Future Scheme

Tested in Israel, with WB experts, EU experts, local expert panels

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

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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

Gill D., Martin C., Minshall T., Rigby M. Funding Technology. Lessons from America. 2000

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

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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

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2. Pre-seed: TFM

Form of intervention

Performance based grants up to 3 kEuro

• 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 4050% per year) for 0 -24 months

• Fellowship financing covers up to 100% of eligible costs, 1

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3. The seed program – I &II

• Investment management: TI PO

• Recipients – young (<6 month) SMEs after business concept validation

• I stage – proof of concept fund: to validate business concept, study market and produce prototype; max soft-loan is 20 kEUR if

statutory capital is paid; 100% publicly financed

• 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 1-6 / 6-24 months

• when sales appear, 5% from annual turnover should be paid back until all loan is repaid

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TECHNOLOGICAL INCUBATION

Ideas Validation Prototyping Fast growth

TFM schem e VENTURE CAPITAL SAP START-UP SCHEME SEED SCHEME TTO NEW PRODUCTS IPR protection in start-ups MARKET INTELLIGENCE Fast growth entrepreneurship promotion Market exposure FINANCING BUSINESS SUPPORT OTHER SUPPORT

Existing/ approved Launch expected Planning initialised in 2006/7

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