The Relevance of IP for Acquiring/Securing Financing: Making Intangibles More Tangible

1. The Relevance of IP for Acquiring/Securing Financing: Making Intangibles More Tangible Dr. Guriqbal Singh Jaiya Director Small and Medium-Sized Enterprises Division World Intellectual Property Organization www.wipo.int/sme

2. Managing IP Assets -Denise Raybould, Associate, BDO Kendalls

3. Stages of Technology Transfer: From Research Support to Economic Growth More in Tax Revenues Startups Federal State Research Support Inventions Disclosure Patents New Products Higher Standard of living Economic Growth Corporate Endowment Licenses New Jobs

4. IS A COMPANY READY? • Business plan? • Stage of development of the company • Type of investment? • Valuation? • Management team ready? • Has the management team enough time and energy to raise funds? • Is the team shaped to talk to investors? • Does the company know where to go?

5. Positioning for a Capital Injection PEOPLE • Strategy • Business model • Resourcing • Target investors MARKET TECHNOLOGY Valuation / Building value Capital Injection

6. Add value before raising capital • Documentation and Presentation • Government grants • Intellectual Property Protection • R&D Partners • In principle agreements • Licences • Customers

7. The “Ask and Offer” • Financial Projections • Business and IP valuation • Critical negotiating tools • Justifies assumptions • Forces in depth research • Forces decision making • Makes you strong and confident

8. SOURCES OF START-UP CAPITAL (USA) OTHERS (3,9%) GOVERNMENT LOANS (1,1%) MORTGAGED PROPERTY (4,0%) VENTURE CAPITALISTS (6,3%) FRIENDS (9,0%) EMPLOYEES / PARTNERS (12,45) FAMILY MEMBERS (12,9%) BANK LOANS (14,4%) PERSONAL SAVINGS (78,5%)

9. Other ways of raising money through IP • Licensing • Sale • Auctions • Donation • Grants

10. Methods of Valuing • Market Approach • Cost Approach • Income Approach

11. Market Approach • What are others paying for a similar IP? What is the market value? • Extensive knowledge of comparable data required

12. Cost Approach • Economic principle of substitution • Reproduction cost (Exact replica) • Replacement cost (Different form or appearance)

13. Income Approach • Present value of future income stream • Future Income Stream (Economic Income) • Duration (Life: Legal, contractual, judicial, physical, technological, functional, analytical, economic) • Risk (Uncertainty of receiving expected income; interest rates and investment climate)

14. IP Due Diligence • In order to obtain financing whether debt or equity those who are providing the financing will need to be satisfied as to whether the company is worthy of it. • Important to be “investor ready”. That is show that you have taken all possible steps to identify, protect and manage your IP assets.

15. START-UP CAPITAL • 25% start with less than $5,000 • 50% start with less than $25,000 • 75% start with less than $75,000 • Less than 5 % with $ 1,000,000 or more

16. The Paradox of Access to Finance • Banks • Venture Capitalists have money • Stock Exchange But argue that there aren’t enough good projects What is a good project?

17. A Good Project! A good project is a project presenting in the eyes of an investor: • acceptable risk profile • a good perspective of return this means: • access to market = innovation • profits

18. Source of High Risks Money Which are today these sources ? we may regroup these in 3 major groups: • Business Angels:we are basically talking here about rich private individuals who are ready to invest much needed “seed capital” at a very early stage of development of a company, i.e. for new and speculative projects. Their role is extremely important, when we talk about raising money between USD 0.5 and 2 million. • Venture capital investors: these are usually private equity funds managed by professionals. They seek to identify and finance the rapid growth of high potential young firms that embrace innovative products, processes or technologies. This way, they generate substantial rewards from successfully overtaking existing business paradigms. Note that very often, traditional finance institutions do invest a small part of their funds into alternative investments such as these V.C. funds. • Last but not least, Governments: The first computers, the first commercial jet planes were built in the U.S.A. as funded by DoD contracts. The U.S.A and Europe have set up specific programs to promote new science and technology businesses. These are key tools in helping scientists to engage into new business ventures. N.B: A business environment – laws, taxes, etc… – which encourages private and commercial investors to invest into risk taking ventures is an absolute prerequisite.

19. Government First: U.S.A. The U.S. example – the Small Business Innovation Research program • SBIR awards take the form of contracts for the development of technologies required by agencies of the US Government. They provide 100% of the funding needed plus a small profit element. The “norm” is USD 850 K for each project. Small business can win and run multiple projects in parallel. The SBIRanalysis below is done for the UK Government in an attempt to copy and adapt it:

20. Government First: U.S.A. The U.S. example – the Small Business Innovation Research program • Established in 1982, it is the World’s largest seed capital program for science and technology business. • The law stipulates that 2.5% of all federal agencies’ external R&D research must be done through SBIR. Furthermore, the US has established a very large set of policies to favor small US businesses in government procurement.

21. Government First: The European Union The first program in Europe: COST – an international framework for European Co-operation in the field of Basic Scientific and Technical Research ( www.cost.esf.org ) • Established in 1971, COST allows the co-ordination of nationally funded research by maximising European synergy and raising the level of scientific interaction at the scale of Europe. Its budget for the period of 2002-2006 was of 1.5 Billion Euro. • COST Actions cover basic and pre-competitive research. Ukraine as a Non-COST country took part in 15 actions. • From March 2006, Ukraine initiated consultation to discuss potential full membership.

22. Government First: The European Union EUREKA – an international framework for European Co-operation in the field of Marketable Scientific and Technical Research ( www.eureka.be ) • The primary goal of EUREKA has always been to raise the productivity and competitiveness of European industry and national economies through its ‘bottom-up’ approach to technological innovation. Since its inception in 1985, substantial public and private funding has been mobilized to support the research and development carried out within the EUREKA framework. • Through its flexible and decentralized Network, EUREKA offers project partners rapid access to a wealth of knowledge, skills and expertise across Europe and facilitates access to national public and private funding schemes. • The internationally recognized EUREKA label adds value to a project and gives participants a competitive edge in their dealings with financial, technical and commercial partners. • Through a EUREKA project, partners develop new technologies for which they agree the Intellectual Property Rights and build partnerships to penetrate new markets. • Ukraine was granted full membership on 9 June 2006. Currently a total of 15 projects have been developed with Ukrainian participants for a total of 1.1 M. Euro.

23. Public Interventions Mix of non-financial and financial support services This means that intermediaries have to (1) provide value-added services; and (2) become more professional

24. Finding Innovation Funding Innovation25 April 2007 Access to finance for West Midlands SMEs Patrick Palmer – Head of Access to Finance at Advantage West Midlands

25. What sort of initiatives are there? • Demand side initiatives • Provision of better information of what is available; • Investment Readiness programmes. • Supply side initiatives • Grants to support Research and Development and certain “Proof of Concept” activity; • The Research and Development Tax Credit; • Grants for capital investment in certain areas; • A range of venture capital funds; • Encouragement of Business Angel activity; • Small Firms Loan Guarantee Scheme; • Community Development Finance Institutions.

26. Demand Side Actions • Better information • www.westmidlandsfinance.com; • Investment Readiness programmes • Route to Investment (R2i); • CONNECT / InvoRed.

27. R2i • Provided through the Business Link network and funded by Advantage West Midlands and the ERDF • Comprising four stages: • Increasing Awareness of funding sources; • Education of businesses in funders’ requirements; • Developing applications and businesses to ensure they are “investment ready” (Complex Development); • Post Investment Support. • Access through Business Link West Midlands Telephone 0845 113 1234 website www.businesslinkwm.co.uk

28. InvoRed • A tailored programme delivered across the West Midlands that helps technology based businesses from pre-incorporation to 2nd or 3rd stage funding: • Get ‘Investor-ready’; • Understand finance options ; • Make the pitch; • Find investment • Flexible programme with 2 streams Amber Stream – for early stage companies Green Stream - Fast-track grooming for later stage companies

29. Supply Side Actions - Grants • DTI Grants operated by AWM –Selective Finance for Investment in England and Grant for Research and Development • Grants available through Business Link – Diversification, Accelerate • Mercia Spinner, Technology Transfer Fund

30. Grant for Research and Development • Grant is available under four categories: • Micro projects; • Research projects; • Development projects; • Exceptional development projects. • Grant is only available to SMEs; • Available throughout the West Midlands; • AWM have secured ERDF money to support this grant scheme.

31. Grant for Research and Development

32. Grant for Research and Development Key criteria are: • Technologically innovative; • Technical risks and R & D challenge; • Commercial potential and market need; • Exploitation prospects; • Management and project team abilities; • Commercial and financial viability; • Intellectual property secure; • Additionality; • Wider aspects – sustainability and design considerations.

33. Technology Transfer Fund • Available in the Central Technology Belt, but extending its area of activity; • Provides proof of concept funding (ranging from £5k - £25k) for new start-ups and existing SMEs; • Currently confined to medical technologies and advanced materials technologies; • Delivered by Birmingham Research and Development Ltd with AWM and ERDF funding

34. Supply side actions Small Firms Loan Guarantee Scheme • Provides Government guarantees on loans from private sector providers to small firms under 5 years old with viable business proposals but insufficient security for conventional finance; • Loans may range from £5,000 to £250,000 and for periods from 2 to 10 years; • Guarantee is for 75% of the loan; • Operated through commercial banks and administered by the Small Business Service; • “Small” = less than 200 employees, turnover less than £5 million (non-manufacturing £3 million)

35. Supply side actions - Loan Funds/Community Development Finance Institutions (CDFIs)

36. Regional Financial and Equity Value Chain Public funding • - Grants - Loans • - Micro-credits - Loans on trust • Guarantees - Reimbursable advance • Proof of concept Entrepreneur’s own resources and reinvestment capacities Equity FFF Pre-seed University spin off Business Angels Corporate Venturing, Seed capital VC IPO Mezzanine Private funding - Banks - Factoring - Guarantees - Micro-credits - Leasing - Export credits Prerequisites Human capital: professional fund managers, state aids experts Risk taking investors: private, public Infrastructure: business angels networks, incubators, etc. Intermediaries: advice, investment readiness, tutorship FFF : Family, Friends, Founders; BA : Business angels; VC : Venture capital; IPO : Initial Public Offering

37. L O C A L F U N D I N G R E Q U I R E M E N T S S C A L E €300,000+ €300,000 to €45,000 €45,000 to €15,000 €15,000 to €7,500 TRAINING – ADVICE- SUPPORT FINANCING « Venture Capital » (National or International) (Sudinnova, Siparex Venture, Banexi, Partech) Incubators CREALYS GRENOBLE PROJECTS High-tech (strong potential) INNOEXPERT (CCI Lyon) « Seed capital » - National (thematic) (I Source, Emertec, BioAm,…) - Regional (Amorçage Rhône Alpes) ANVAR BUSINESS CENTRE (EM Lyon) BUSINESS INCUBATORS (NOVACITES FRAC CREATION) INDUSTRY AND INDUSTRIAL SERVICES (product- or process-based innovation) Business Angels Sup. de Co. Grenoble « Business development venture capital » Rhône-Alpes Création Banque Pop., Crédit Agricole Rhône-Dauphiné Développement Business development and reception service (CCI) SMALL INDUSTRIES (CAPACITY SUBCONTRACTING) SERVICES AND TRADE (traditional, moderately innovative activities) « RéseauEntreprendre » (Loans on trust + Sponsorship) « ARJE » (Regional repayable short-term loans for new businesses—1-5 years) Sponsorship Local platforms « Local platforms » (Loans on trust) Local initiative platform ADIE Entreprendre en France Banks + Comité Sofaris CCI + professionals Chartered accountants (ATEN) MICRO BUSINESSES TRADE CRAFTS « P.C.E. » (BDPME loans) « MilleetUnTalents » (Regional grants) « 3 hours – 3 days » DEVELOPMENT TYPES Regions and Access to Finance Case Study of the Rhône-Alpes (France) Source: RHONE-ALPES CREATION

38. Case Study Wales (United Kingdom) The region of Wales (UK) re-organised all its financial services around a single organisation called Finance Wales (www.financewales.co.uk) to provide the following financial services and products: • Community loans amounting to US$ 10.000 to US$ 100.000 for the social economy • Xenos: its business angels network • Spinout: unsecured loans without interest of up to US$ 50.000 for university spinouts • Venture capital: up to US$ 1.500.000 per financial pool and US$ 3.000.000 in total • Mezzanine: US$ 20.000 to US$ 800.000 • Loans: from micro-credit of US$ 2000 to US$ 20.000 to loans of up to US$ 1.200.000

39. Roadmap to Financing Options Founders Sweat equity On Spec Licensing Partnerships IP sale Federal Science for Hire Corporations Debt Family, friends Personal credit banks Businessangels Equity Fed,State loans VentureCapital Profit Corporations Referral network Accountants Attorneys Successful entrepreneurs, etc Investment banker

40. Financing Options as a Function ofApplication & Resources Required A lot • Spin-off • Joint venture • Equity investment • Joint R&D • Licensing • Strategic alliance • Equity investment $ REQUIRED • Bootstrap • Angel investment • Debt financing • Partnerships • Licensing • Angel investment A little Few Many APPLICATIONS

41. THE ENTERPRISE FINANCING PROCESS

42. Corporate Fund and Venture Capital Commercial and Savings Banks THE ENTERPRISE FINANCING PROCESS Efforts made by financiers Cash flow Risk Time Innovation Seed Capital Funds and Public funding Private Investors and Business Angels Transfer Idea Start-Up Market introduction Growth Maturity

43. THE ENTERPRISE FINANCING PROCESS Stage in Cycle R&D Start-up Early growth Accelerating growth Sustaining growth Maturity growth Proof of Concept Funding Seed Corn First Round Second Round Development Capital Replacement Capital MBO / MBI Development Capital Type of Funding Public Sector Founders, family and friends Business angels Source of Funding Venture capital funds Corporate venturing Public listing / IPO

44. Investment Continuum Angel market addresses the $500K investment gap between love money and serious money Founder, friends and family High Business Angels Level of Investment Risk Assumed by Investor Venture Capitalists Corporate VC Equity Markets Commercial banks Low Seed Start-Up Early Growth Established * “Angel Investing” Osnabrugge & Robinson

45. VENTURE CAPITAL (Formal & Informal) • Institutional operators (formal venture capital) • Private subjects • Banks • Insurance • Corporate venture capital • Non-institutional operators (informal venture capital) • Business Angels

46. FORMAL AND INFORMAL EQUITY PROVIDERS * Source: van Osnabrugge, 1998, p.2

47. FORMAL AND INFORMAL EQUITY PROVIDERS • VC • Easy to find via directories • Your request is only one among many hundred a VC receives • Can often via syndication provide large investment • Thorough and formal due diligence and investment process • Exit route very important • BA • Difficult to find • Request often strong personal involvement • Limited amount to invest • Investment decisions often quick and less formal • Syndication more and more usual • Exit route less in focus

48. BUSINESS ANGEL (BA) - Definition “A Business Angel is a middle aged male with reasonable net income, personal net worth, previous start up experience, who makes one investment a year, usually close to home or office, prefers to invest in high technology and manufacturing ventures with an expectation to sell out in three to five years time”. (Kelly and Hay, 1996) ”Business angels (informal investors, independent investors) are investors who provide risk capital directly to new and growing businesses in which they have no prior connection”.(Harrison and Mason, 1996)

49. BUSINESS ANGEL (BA) Attitudes, behaviour and characteristics: • male, rarely female • successful experience as an entrepreneur or manager • high net worth individual and / or sophisticated investor • have a declared propensity to invest and to risk in a start-up firm • invest their own money (around 50K – 250K euro) (part of their cash capital: 20 - 30 %) • Seeking profit, but also fun (seeking minimum 20% return) • are willing to share their managerial skills and their enterprise background • often invest in their region of residence • make one investment a year • prefer high-technology and manufacturing • take a minor participation – medium term investment • are willing to wait for an exit for 3-5 years

50. ANGEL’S – Success Stories