Financing an innovation hub

1. Financing aninnovation hub Mentoring material Contact information: Maurits Butter (TNO) + 31 610939947  maurits.butter@tno.nl Monique Sonnemans (BPD) + 31 611723795  m.sonnemans@brainportdevelopment.nl EU-Great These project has been co-funded by the European Union This presentation is the result of the cooperation between the EU-Great and the XS2I4MS project. The presentation combines the insights gained during the projects, enabling both projects to advance on their original objectives. European Guide and Recommendations for the Combined Funding of Large-Scale RID Initiatives

2. Financing aninnovation hub This presentation is the result of the cooperation between the EU-Great and the XS2I4MS project. The presentation combines the insights gained during the projects, enabling both projects to advance on their original objectives. Mentoring material Contact information: Maurits Butter (TNO) + 31 610939947  maurits.butter@tno.nl Monique Sonnemans (BPD) + 31 611723795  m.sonnemans@brainportdevelopment.nl EU-Great These project has been co-funded by the European Union This presentation is the result of the cooperation between the EU-Great and the XS2I4MS project. The presentation combines the insights gained during the projects, enabling both projects to advance on their original objectives. European Guide and Recommendations for the Combined Funding of Large-Scale RID Initiatives

3. Objectives of the presentation • Objectives: • Create an overview of possible and impossible funding sources for an innovation hub • Create insights in the mindset of possible customers and their opportunities to pay for services and be involved in a hub • Why: • Create a foundation of knowledge on possible funding to identify potential sources and understand how to approach them • Get a pragmatic and realistic view on what you can expect from your customers with relation to funding and service needs Financing an innovation hub

4. Introduction to finance Financing an innovation hub

5. Financing a hub: Customers, funding sources and resources Customers Resources Financinganinnovation hub • Services • IPR • Conference fees • Memberships • Equipment • Personnel • Infrastructure & housing • Raw materials Income Costs Filling the gap Funding sources • Governmental support • Partner contribution • Sponsorships • Private capital Financing an innovation hub

6. Financing a hub: Customers, funding sources and resources Customers PART 2 Resources Financinganinnovation hub • Services • IPR • Conference fees • Memberships • Equipment • Personnel • Infrastructure & housing • Raw materials Income Costs Filling the gap Funding sources PART 1 • Governmental support • Partner contribution • Sponsorships • Private capital Financing an innovation hub

7. Developing a hub is an evolution Budget Continuation Exploration Renewal Initiation Start-up Closing preparation initiation stabilization continuous growth termination Financing an innovation hub

8. Four related activities, requiring different funding sources • Preparatory, start-up funding to develop a business plan • Financing infrastructure • Financing projects using the infrastructure • Operational costs Financing Digital Innovation Hubs

9. Innovation hub services Financing an innovation hub

10. Public versus private hubs Public innovation hubs Private innovation hubs Making business Sellingthe services of some commercial partners Expanding a platform, increasingitsuse Limited tocreatingtheecosystem Commercial activities are often a core service Semi-closed partnership • Basic funding from government • Societal mission • A spider in the web of creating ecosystem • Connecting research to business • Valorisation of expensive technological infrastructure • Semi-open partnership Financing an innovation hub

11. Part 1: Financing a hub Financing an innovation hub

12. First: Start-up financing • Feasibility study • Creating consortium • Developing business plan • Finding financing Funding (cash and in-kind) Time T0 T-2 T-1 Financing Digital Innovation Hubs

13. Second: Financing infrastructure • Equipment • Housing and transport infra • ICT infrastructure • Other facilities Funding (cash and in-kind) T1 Tend T0 Financing Digital Innovation Hubs

14. Third: Project financing • R&D and project management personnel • Some indirect costs • Some depreciation of infra Customers Funding (cash and in-kind) Time T1 Tend T0 Financing Digital Innovation Hubs

15. Fourth: Financing operational activities • General management • Technicians and secretary • Business development • PR and communication Funding (cash and in-kind) Time T1 Tend T0 Financing Digital Innovation Hubs

16. Public funding principles • Mission of governments is to: • Address Grand Challenges • Improve the economy at large • Do what other stakeholders can not do • Market failures are leading • Many governments focus on lower TRLs and expect industry to address the higher TRLs • Bound by State Aid Rules Financing an innovation hub

17. Why do governments invest • Knowledge spill-overs: Knowledge and expertise created will benefit a lot of companies • Imperfect information: sharing of information will also enhance the information and expertise, again for all • Coordination/network failures: Better finding partners and support coordination will enhance success and reduce costs • Public goods: Educating/training of people is a governmental responsibility Not just a few companies, but for many Defining digital innovation hubs

18. State Aid Rules • EU28 are bound by rules to provide funding • There must be a market or system failure • Differences between SMEs, large firms and clusters • Public organizations are not bound to State Aid Rules • There is a difference between innovation and economic development Financing an innovation hub

19. Possible funding sources Public Private Revenues (e.g. IPR) Venture capital and angel funds Memberships and sponsorships Contract research, consultancy and commercial fees Industrial partnerships Partner investments Loans • Subsidies • Grants • Taxation • Loan and loan guarantees • Innovation vouchers • Equity • Support in communication • Laws and regulation • Institutional support (universities and other public institutes) Financing an innovation hub

20. Regional funding • Why: ECONOMIC DEVELOPMENT, Jobs, image of the region, support of SMEs, ecosystem development • What: Equity, loans, project funding, grants (infrastructure) • What not: 1) TRL1-4 ; 2) Large firms, universities, RTOs; 3) Tax, laws • Examples: Financing equipment, support of incubation, conferences, housing • Remarks: • More focused on economic development then innovation • Important in initiation (infrastructure), but less important later • Opportunities to get housing • Connect to educational program • Get money from ERDF Financing Digital Innovation Hubs

21. National funding • Why: Strengthen the innovation ecosystem at large, like linking universities to industry • What: Basic research funding (institutional), project funding, infrastructure funding • What not: TRL6-9; • Examples: Institutional support, projects co-fin, vouchers, R&D tax • Remarks: • Focused on innovation and less on economic development • Get the connection to industry ready • Use the market failure terminology • Use H2020 opportunities and connect to ESIF Financing Digital Innovation Hubs

22. European funding • Why: Creating pan-European cooperation, boosting the economy and addressing Grand Challenges using innovation, excellence • What: Loans, equity, grants, co-funding large scale RDI projects and economic development, support of SMEs, individual persons, learning • What not: Small projects, national initiatives, (education), long term funding, technological infrastructure • Examples: Innovation Actions, CSAs, trans-national cooperation of governments, national loans • Remarks: • Formalized approaches • More then one country required • Use ERDF and H2020 as initiator • Get access to ERDF through regional contacts Financing Digital Innovation Hubs

23. Private funding sources Financing an innovation hub

24. Private funding principles • Mission of private investors is to make money • Low risks - high profits is leading • Focus is on the higher TRLs (TRL7-9) • It is not about R&D, but about business creation • Of limited relevance to hubs, but more relevant for its customers Financing an innovation hub

25. Possible funding sources Public Private Private equity, venture capital Loans Industrial partnerships Memberships and sponsorships Contract research, consultancy and commercial fees Partner investments • Subsidies • Grants • Taxation • Loan and loan guarantees • Innovation vouchers • Equity • Support in communication • Laws and regulation • Institutional support (universities and other public institutes) Financing an innovation hub

26. (Private) equity, venture capital • Why: Make money. That is it. • What: Provide funding in exchange of a share in the profits, high returns on investment (scalable), fund of funds • What not: High risks, complex projects, long-term • Examples: Connection to hubs to support their customers • Remarks: • Technological expertise in VCs is limited and an opportunity • Of limited use to innovation hubs (limited revenues expected) • Create indirect mechanisms with VCs to attract customers Financing Digital Innovation Hubs

27. Loans (private banks) • Why: Make money (for a hub it is addressing cash flow problems) • What: Lending capital based on collateral or sound business plan • What not: Even medium risks. No funding of activities. • Examples: Loans for housing and equipment as collateral, based on low risk commercial services (testing and validation) • Remarks: • Combination with guarantees of governments is possible • There are opportunities for a fund of funds (ESIF) • The overall business model of the hub should make money • Equipment is often a risky collateral, as depreciation is fast • Banks have limited technical expertise • Offering loans can create customers Financing Digital Innovation Hubs

28. Industrial partnerships • Why: To create participation with innovative business to create joint ventures, test their equipment, get inspiration or just reduce costs • What: Equity, expert participation, pilot equipment, commercial fees • What not: Project funding, loans • Examples: Advisors to projects, researchers on location, testing equipment, joint projects, renting equipment, small series production • Remarks: • There must be a win/win situation • It is interesting to create a partnership where equipment is tested in the hub (reduction of equipment costs) • Larger firms have more opportunities because of portfolio thinking Financing Digital Innovation Hubs

29. Memberships • Why: To get connected to a “state of the art” R&D activity • What: Structural funding to get involved • What not: Nothing in return • Examples: Collaborative research funding, contract research funding, participation in workshops/conferences, newsletters • Remarks: • Large companies are connected mid-term (collaborative research), SMEs more short term (contract research) • Three tiers are possible: 1) Mid-term, partnerships, 2) Short-term more individual, 3) Getting access to the network • Important to get involvement from industry Financing Digital Innovation Hubs

30. Partner investments • Why: To create access to the market and partnerships in RDI, as well as operationalize its societal mission as innovation partner • What: Technology/business/management experts, (technological) infrastructure • What not: Financial capital for the hub, consultancy, capital for SMEs • Examples: Location, IT infra, equipment, business developers, technical experts, HR support, staff. • Remarks: • Focus is on low TRL science & technology expertise • Often investments are reduced after a few years • Making business with business Financing Digital Innovation Hubs

31. Someconclusions onfinancing a hub Financing an innovation hub

32. Innovation hub services Financing an innovation hub

33. Developing a hub is an evolution • Limited fundingopportunities • Many in-kind partner contributions • EU andregionalfunding are core Budget Continuation Exploration Renewal Initiation Start-up Closing preparation initiation stabilization continuous growth termination Financing an innovation hub

34. Developing a hub is an evolution • Initialfundingforinfrastructure is needed • Partner contributions are crucial • Tocreatethe project portfolio public funding is required • High costs on “advertisement” Budget Continuation Exploration Renewal Initiation Start-up Closing preparation initiation stabilization continuous growth termination Financing an innovation hub

35. Developing a hub is an evolution • Increase of business developersandincrease of staffcosts • Partner contributions are reduced, theinitiativeinstitutionalized • Membershipscreate a steady income Budget Continuation Exploration Renewal Initiation Start-up Closing preparation initiation stabilization continuous growth termination Financing an innovation hub

36. Developing a hub is an evolution • New equipment is needed • New marketsexploredandinitiated • New personnel (experts) needed Budget Continuation Exploration Renewal Initiation Start-up Closing preparation initiation stabilization continuous growth termination Financing an innovation hub

37. Developing a hub is an evolution 80% Public funding 70% Private funding Budget Continuation Exploration Renewal Initiation Start-up 30% Closing 10% preparation initiation stabilization continuous growth termination Financing an innovation hub

38. Concludingremarks on financing a hub • Financing is patchwork. Createthiscombination of funding • Withinthe EU27, thespecificsituationdiffersfrom country to country • A viable hub business requires multiple business modelsandmaximizinguse of infrastructure • Creation of the business funnelemphasizestheneedfor community building, althoughthe RDI is thecore business • Long-term viabilityrequires long-term public funding Financing an innovation hub

39. Part 2: The customer side:Financial needs and funding possibilities for customers DIH Financing an innovation hub

40. Financial needsandfundingpossibilitiesforcustomers DIH • Understanding (financial) needs of thecustomers of the DIH • Understanding thecustomers, Company Life cycle (evolution), Financial needs • Possible funding sources • Funding sources, Life Cycle Funding • Understanding needs and potential services DIH to different customers: Start-ups, SMEs and corporates • Understanding needs and which services to provide as a DIH; How to support them with funding these activities; Examples services DIH to support SMEs with funding

41. Understanding thecustomers Tobeabletosellyour services as a DIH tothecustomers: • Be veryclearwhich services you offer as a DIH to a company • Customer wants toknow: What do I get? What does itcost? (How fast?) How much money can I earnwithit? • How much “hassle” is it (what do I have to do forit) • Youneedtounderstandandspeakthesamelanguage • Conditional: local, trust, accessible • Understanding of the business andwhat a company needs => company life cycle

42. Company Life Cycle Venture Phase Business Creation Established Business Business management / Operations

43. Financial needsCompany life cycle Costst Revenue Net Cash pool position Valey of death

44. Possibilities in funding Categories of finance • Donations/sponsors • 1. Grants/subsidies • Repayment: debt? • 2. Debt • Conversion (in good/bad times): equity • 3. Equity

45. Possibilities in funding 1. Grants / subsidies

46. Possibilities in funding 2. Debt • Bank debt • Leasing • Bonds • Suppliers • Short term loans (one time, line of credit) • Term loans (monthlyinstallments, bulletloans) • Securedandunsecured

47. Possibilities in funding Ad2. How banks look at you(r customer) • 4C’s: credit history, character, capacity, collateral • CEO is not Cash ExtractionOfficer • How are yougoingtorepaythedebt? • Business plan instead of collateral -> ratios • Realizable assets • Accounts Receivable • Inventory • Personal guarantees

48. Possibilities in funding • Track record of the VC team • Compatibility culture, personalities • Experiencewithsimilar types of investments • Are therecompetitors in the portfolio? • Capacityto make follow-on investments • Value added: strategy, network, executive search 3. Equity Selecting a Venture capitalist • Financing stage • Sector preference • Geographical focus • Amount of investment • Hands on or hands off • Evergreen or closedended funds

49. Possibilities in funding A venture capitalist selectingyour customer based on: • Management skills and track record • Novelty of theidea • Technologicalaspects are important (“disruptive”) • Market andgrowthpotentialvs niche • Quality of business plan • Financial attractivenessandliquidity • Synergywithotherinvestements in the portfolio

50. Possibilities in funding VC • Management team • Uniquenessproposition • Market andgrowthpotential • Quality business plan • Financial attractiveness (IRR) • Synergyotherinvestments in portfolio • Scalability Selectionby a finance company Bank • Management team • Credit history • Pay back capacity • Positive cash flow • Quality business plan • Ratios (solvency) • Collateral • Personal guarantees