FINANCING ICT INNOVATIONS: TRENDS AND CHALLENGES OF THE VENTURE CAPITAL MARKET IN EUROPE - THE ROLE OF THE GOVERNMENTYannis Pierrakis

Head of Investments Research

National Endowment for Science, Technology and the Arts (NESTA)

FITT for InnovationBrussels, 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 negative than for the SME segment since June 2010

Source: BIS, BBA, Bank of England

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 manage to receive VC finance are most likely to be innovative companies

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 EuropeSource: Thomson One

Venture capital in ICT

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 Downturn in venture activity world-wide since crisis

One year before the Dotcom

crisis

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 Venture capital funding landscape in the UKthe UK

Grants

Business Angels

Private

Equity

Private VC

VCTs Public VC

Source: NESTA

Business Angel

Networks

Examples from around the world US (SBIC) Israel (Yozma) Canada Finland UK

UK publicly backed funds early stage investments

Source: NESTA

Familiarity with the innovation system (extent of interaction)

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

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