1. APPROACHES TO ACCESS TO FINANCE
Isfandyar Z. Khan
Europe and Central Asia
World Bank
ikhan2@worldbank.org

2. CONTENT
 Universe of SMEs
 The ABC of Government Intervention
 Various programs for support
 Key Takeaways

3. COMPANY RISK, CAPITAL REQUIREMENTS AND TYPES OF
GOVERNMENT INTERVENTION
3
Companies who work with new products have a longer development horizon (high
tech segment – like life sciences, clean tech and IT)
Risk profile is high, not suitable for debt financing
Companies that have a short development timeline and may already have a product
and/or the first customers
Risk profile is low, can typically be suitable for debt financing,
.

4. A TYPICAL MARKET FOR INNOVATION
FINANCE
Financeoptions
PRE-SEED SEED EXPANSIONSTART-UP
Incubators, Accelerators, proof of
concept, etc.
Business angels, small regional funds, venture funds
Global funds

5. CONTENT
 Universe of SMEs
 The ABC of Government Intervention
 Various programs for support
 Key Takeaways

6. PUBLIC SECTOR INTERVENTIONS
APEXES AND OTHER WHOLESALE FUNDING FACILITIES
•Prioritize the development of sustainable finance providers
•Ensure the apex institution has a strong independent governance structure
•Apply a funding policy based on clear selection criteria
•Apply commercial (not subsidized) interest rates
•Ensure the capacity to evolve and adapt its mission and products
•Introduce flexible and market reactive disbursement plans
•Ensure high quality operational management and staff skills
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Preconditions for successful application of an apex model include:

7. PUBLIC SECTOR INTERVENTIONS
PARTIAL CREDIT GUARANTEE SCHEMES
Coverage ratios should ensure sufficient
protection against default risk
Fees should be risk-based and contribute
to financial sustainability
Payment rules should take into account
effectiveness of collateral and insolvency
regimes
PCGs can support the capacity (skills,
systems, products) of banks to provide SME
finance
Evaluation mechanism: to measure
outreach, additionally and sustainability.
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SME BANK
Guarantee
Program
Loan Application
Loan Disbursement,
Repayment
Allocates
Guarantees based
on lowest %
covered(bidding
process)
-Feevaries by FI, depending on loss (claim) rate
-Loss rates (default) less than 2%
-FIskeep responsibility for analysis and collection
Example:
FOGAPE, Chile

8. PUBLIC SECTOR INTERVENTIONS
SME CAPACITY, CREDITWORTHINESS
• Capacity building should customize content for specific groups of entrepreneurs
• Both public and private organizations have a role to play in capacity building
• Donor support may be needed to ensure effective data and monitoring
mechanisms in benchmarking and program evaluation
8
Capacity-building can improve SME management capacity, market
knowledge, expertise, and make SMEs more attractive to finance providers
Turk Economici Bank (private)
• Its capacity building support has resulted in a decrease in loan delinquency rates in its SME
portfolio, new client acquisition and greater customer loyalty.
•The primary goal of training is to build SME competitiveness and strategic planning capabilities,
helping SMEs to take a market-centric approach to their businesses, giving them the tools to
identify and respond to new opportunities for products and services.

9. REGULATORY AND SUPERVISORY FRAMEWORKS
ENABLING REGULATORY FRAMEWORKS FOR ALTERNATIVE SME FINANCE PRODUCTS: LEASING
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 A legislative framework for leasing should
Clarify rights and
responsibilities of
the parties to a
lease
Remove
contradictions
within the
existing
legislation
Create non-
judicial
repossession
mechanisms
Ensure tax rules
are clear and
neutral
Clarify the rights
of lessors and
lessees under
bankruptcy.

10. FINANCIAL INFRASTRUCTURE
SECURED TRANSACTIONS
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Develop simple
laws and
regulations based
on best practice
principles
Create unitary
legal ST systems,
not fragmented
Ensure a broad
scope of secured
transactions law
Allow all types of
assets to be used as
collateral
Simplify the
creation of security
interests in
movable property
Modernize
movable collateral
registries
Establish clear
priority schemes
for claims on
collateral.

11. •Leads to principal-agent problems such as moral hazard,
•Investors and banks are not able to correctly assess the differences
in risk adverse selection leads to “adverse selection”
•lead to market imperfections and sub-optimal allocation of
capital
ARGUMENTS FOR GOVERNMENT INTERVENTION
Asymmetric
information
•Guarantee schemes have assumed a crucial role to help maintain
the flow of credit to SMEs and support the growth of these
companies
•Avoid “dead weight” proportion of the loans which would have
bee granted anyways and constant reassessment
Credit Rationing
Experience
building
Externalities
• Completely or partially remove some of the cost of a “first-mover
disadvantage”
•Focus on maximizing the spill-over effect
•Ensure a high degree of residual of experience and knowledge. .
• Socio-economic returns to society

12. Management
teams
Invest in
companies
Companies
grow
Positive
Exits
Good track
record
Able to
raise new
funds
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Wheel of fortune for viable and sustainable
innovation finance market….
Promoting
a positive
spiral

13. ..need a right environment…
A viable and sustainable long-term market for innovation finance and a proficient
investment climate requires a strong interplay of a variety of factors:
 A healthy enabling environment often require:
 convincing regulatory framework and institutional set-up.
 contract enforcement, adequate intellectual property legislation regimes
 tax code promoting business R&D as well as entrepreneurs and investments.
 enforced limitations on institutional investors allocating capital to riskier asset
classes and capital requirements.
 Strong deal flow and commercialization of projects, promoting a strong pipeline of
high tech innovative start-ups
 A professional and well-functioning investor market often require:
 base of investors in the region that adequately address the needs of companies at the
various developmental stages
 investors with local attachment, integrated with the innovation cycle as well as
having a global network (syndication network) functioning as mentorship
 access to adequate financing to close finance gaps throughout a start-ups development
process and be able to draw on (international) syndication partners.
 strong partnership between companies and investors.
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14. 14
…...and a long term game plan
• A viable exit-market often require:
− Companies and investors require a viable exit market (exit refers to the process of an
investor exiting the investment and thereby trades an illiquid asset (shares in a private
company) for a liquid asset (e.g. cash). Exits can mainly be pursued in two forms: initial
public offering (IPO) or trade sale (merger/acquisition by a another company).
− Successful exits can ensure the financing of the next generation of innovative
companies as a positive track record is developed making more investors interested.
Without positive exits the investment cycle can be impeded and in the long run it could
result in the depletion of the eco-system.
• These above-mentioned factors are prerequisites for a comprehensive
development of a viable market for innovation finance.
• In the short run, innovative SMEs often need to resort to government
programs or if possible foreign equity markets for financing.
• When considering government intervention the entirety of the investment
cycle should be reflected.

15. CONTENT
 Universe of SMEs
 The ABC of Government Intervention
 Various programs for support
 Key Takeaways

16. 16
JEREMIE - JOINT EUROPEAN RESOURCES FOR MICRO TO MEDIUM
ENTERPRISES
•Offers EU Member States to use part of their EU Structural Funds to finance small and
medium-sized enterprises (SMEs)
• equity, loans or guarantees, through a revolving Holding Fund acting as an
umbrella fund.
•The JEREMIE Holding Fund can provide to selected financial intermediaries. SME-
focused financial instruments including guarantees, co-guarantees and counter-
guarantees, equity guarantees, (micro) loans, export-credit insurance, securitization,
venture capital, Business Angel Matching Funds and investments in Technology
Transfer funds
Flexibility: Contributions from the Operational Programmes to the JEREMIE
Holding Fund will be eligible for interim up-front payments by EU Structural Funds,
Benefits of a portfolio approach: The Holding Fund will be able to re-allocate
the resources to one or more financial products in a flexible way, depending on the actual
demand over time
Recycling of funds: The Holding Fund is of a revolving nature, receiving
repayments from the financial intermediaries for further investments in SMEs
Leverage: Engage the financial sector either at the Holding Fund level, with
additional capital from financial institutions, or at the level of financial instruments

17. 17

18. FINANCING SMES AT A REGIONAL LEVEL WITH JEREMIE-
LANGUEDOC-ROUSSILLON (FRANCE) • POPULATION: 2.5 MILLIONS • GDP :
€ 60.5 BILLION
Market failures
• Financing gaps for innovative businesses
• Difficulties for financing standard growing SMEs
 – Tangible assets / equipment
 – Commercial development
 – Working capital
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19. 19
MANUFACTURING SECTOR SMES
MAS (Manufacturing Advisory Service) – UK
• Highly skilled advisors
• Experience of both shop floor working and management skills
• Many services are free and supplemented by appropriate grant funding
Manufacturing Extension Partnership (USA)
• The nationwide network provides a variety of services, from innovation strategies to
process improvements to green manufacturing
• MEP field staff has over 1,300 technical experts –
• For every one dollar of federal investment, the MEP generates nearly $20 in new sales
growth and $20 in new client investment. This translates into $2.5 billion in new sales
annually. For every $2,100 of federal investment, MEP creates or retains one
manufacturing job.
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20. DANISH GROWTH FUND
 The Danish Growth Fund has its own legal framework. The
mission statement is as follows:
 “Promote innovation and new business solutions to secure a
greater socioeconomic return”.
 Set-up as an evergreen-fund (recirculating capital) with a
capital base of 0.5 bn USD (yet to be profitable)

21. SPECIFIC EQUITY INSTRUMENTS
EMPLOYED
 Fund-of-funds:
 Leveraging private funds alongside a syndicate of
institutional investors: often cornerstone investor; first time
teams; leveraging institutional investors
 Funding closed-end funds (10 year + 2)
• Direct Investments:
 Investing directly into early-stage companies with equity
alongside business angels and other funds; often in areas
where specialized funds are not focusing

22. LEVERAGING THE MARKET AS A FUND-OF-
FUNDS
DGF
Institutional
Investors
Private managed funds
COMPANIES
Other
Investo
r
Other
Investo
r
Other
Investo
r
Other
Investo
r
Other
Investo
r
Other
Investo
r
Other
Investo
r

23. MANAGEMENT SELECTION
Indirect funding:
The board has hired a specialized fund-of-funds team.
The team locate investment opportunities through
standard investment proposals. Investment proposals
are presented to the board for their approval.
Standard remuneration in the funds (2,5 % and a
carry split).
Direct funding:
- Shadow fund established inside the DGF. Team has
investment requirements. Capped carry. Option to
become a spin-out if they can raise private capital.

24. HIGH-TECH GRÜNDERFONDS – SEED INVESTOR IN HIGH-TECH START-UPS
„Success factors of a public-private partnership”

25.  German economy generates huge trade
surplus with high-tech products
 German industries are leading in the
world economy (machine tools,
automotive, medicine, chemicals, …)
 Long and successful tradition of small
and medium sized companies
(„Mittelstand”)
On one hand … … on the other hand
 Start-up industry under-developed in
Germany: 16 seed investments 2004
and 2005 by members of the German
VC association
 Venture Capital industry rapidly declining
/ escaping to later stages
 No start-up in DAX 30 since SAP
 But: Billions of government money spent
on technology development
The challenge in 2004: Vastly underutilized potential

26.  Founded: 2005
 Volume: 272 Mio. EUR
 Investors: German Government, KfW, BASF, Dt. Telekom, Siemens,
Daimler, Robert Bosch, Carl Zeiss
 Planned duration: 6 years investment plus 7 years disinvestment period
 Focus: Innovative high-tech companies in the seed phase (start of
operations < 12 months)
 Investment: 500.000 – 1.000.000 equity per company
lead investor
 Support: Support through local coaches
value add by High-Tech Gründerfonds team
HIGH-TECH GRÜNDERFONDS: KEY FACTS

27.  Closing of 186 investments1) / 226
commitments
 Closing of 138 follow-on investments by
third parties2)
 External capital raised: >209 million
Euro
 Thereof: 71% private capital
 Eight exits, five profitable
Operations
 Set-up of a high-number of working
partnerships
 Impact on the early stage market on
several levels (market share of 50% in
the Germany seed market)
 Number of “produced” paper millionaires:
89
 Set-up of high performance organization
 Fun
Other results
Main results
1) 4 in 2005, 52 in 2006, 40 in 2007, 42 in 2008, 34 in 2009, 14 in 2010
2) Various public and private investors

28.  Involvement of government representatives, experts with
background of public financing and private investors
 Private contribution to the fund (17m, 6,3%)
 Strong understanding of the venture capital business model
 Systematic inclusion of relevant know-how (e.g. mistakes from the
past)
 „Independent“ management company that can focus on goals („no
political influence“)
 Right timing at the bottom of the market
SUCCESS FACTORS – STRATEGIC AND CONCEPTUAL

29.  Freedom to set up management company with few restrictions (no
strings to an existing organization)
 Set-up of a high-performance organization:
- Consistent breakdown of company goals and variable pay on individual level
- High recruiting standards
- Fluctuation consistent with performance
 Significant freedom for investment managers
- Laptops, mobile phone and mobile e-mail for everyone (2005)
- no forms to allow job related travel
- Very flexible work hours, no time sheet recording
 Strong effort to build a positive performance culture
SUCCESS FACTORS – OPERATIONAL

30. 32
*Courtesy: Scott McIntyre, Phabric Development, mc@phabriq.com
CROWDFUNDING*
• Process of funding your projects by a multitude of people contributing a small
amount in order to attain a certain monetary goal:
• Donation-based transactions: shared affinities, associations, charities
• Reward-based transactions: pride, fame, access, premiums, pre-sale*
• Debt-based security: time & interest-based microloans, student loans,
lines of credit
• Revenue-based security: usually a time-limited tie to income generated
• Equity-based security*: stock, options, liquidity, transferability
• Crowd Sourcing using social media:
• Drive broader public awareness by offering friends, family and supporters
tangible
• Local and affinity/experience-based support from service professionals
• Complementary companies & sales channel to gauge consumer interest

31. 33
CROWDFUNDING HISTORY
1600s: early book printers would fund via honorable mentions inside cover
1885: Joseph Pulitzer finances the Statue of Liberty’s foundation using
Crowdfunding
1930s: SEC restricts entrepreneurs from advertising stock offerings
1990s: Internet revolution spawns Microfinancing, leading to institutional
Crowdfunding
1997: Marillion UK band tour and album financed by fans
2009: BuyaBeerCompany.com raises nearly $300million from 5 million people to
buy Pabst Blue Ribbon--SEC squashes deal, brand tycoon later purchases for
$250million, validating Crowdfund valuation
2012: $2.8billion Crowdfunding raised. Projected $6billion 2013 50% increase/yr.
since 2009.
• Portals growing from niche to general
• Kickstarter, WeFunder, Believers Fund, Quirky, IndieGoGo,

32. 34
ENABLING REGULATORY LANDSCAPE
Small business investment bill (USA)
• Legislation to help startup companies raise capital by reducing some federal
regulations
 The legislation combines six smaller bills that change Securities and Exchange
Commission rules so small businesses can attract investors and go public with less
red tape and cost. It eases rules on advertising and permits startups to use the
internet and other social media to solicit a large number of small-scale investors.
The centerpiece of the bill is a measure to reduce costs for companies seeking
to go public by phasing in over five years SEC regulations that apply to
“emerging growth companies.” That status would be in effect for companies
with annual gross revenue of less than $1 billion.
The measure would remove SEC regulations preventing small businesses from
using advertisements to solicit investors, raise from 500 to 2,000 the number of
shareholders a company or community bank can have before it must register
with the SEC, and allow smaller companies to sell up to $50 million in shares,
compared with $5 million now, without filing some SEC paperwork.

33. 35
 Limited to accredited
investors
 Entities with at least $ 5
m in assets
 Individuals with over $1
million in assets or over
$200K in annual income
 Does not allow general
solicitation or mass
advertisements
 Limits # of investors
 Requires registration
with SEC and do an IPO
 Or qualify for exception
 Anyone can invest in
Crowdfunding
 Token: Rewards, donations
 Equity Crowdfunding, when SEC
defines parameters, lower
accreditation restriction are
expected
 Advertisements anywhere are
permitted
 No limits on # of shareholders
 Regulations balancing economic
growth and investor protections
 CF portal/Intermediaries required
to register and self regulate
 Strict background check and
disclosure for issuers and investors
 Limits to annual amounts
raised/issued
 Limits to amount
invested/investors
Current Law Under JOBS Act

34. 36

35. 37
Kickstarter: 60,000 plus projects launched, $260M raised, 44% success rate
Industry: 540 plus CF portal expected by year end, $ 2.8 B expected global funds
raised, $ 6 B mkt size expected
Map courtesy of crowdfunding.org

36. WHY CROWDFUNDING’S TIMING IS GOOD FOR ALL
 Unlocks Capital for Small Businesses and Spreads the Wealth
• Mistrust of public stock exchanges cause people to save in banks at very low interest rates. Investors
will now be able to invest in small, local and friends’ businesses in addition to the traditional stock
market, all while holding the power in their hands to affect growth directly.
•Generates Broader Economic Prosperity, Not Just in Urban Centers
• Because Crowdfund investing is done via the internet, entrepreneurs anywhere can get funding, not
just Silicon Valley and major metros.
Levels Playing Field Against Socioeconomic Discrimination
• Individuals/SMEs from wealthier backgrounds find it easier to raise funds than those in more
challenging circumstances. Now, anyone with a great concept and some initiative can find support for
their dreams based on the merit of their ideas.
Increases success rates for Small Businesses
• Crowdfund investors are motivated supporters. Crowdfund investors with skin in the game have been
shown more willing to participate in business development and marketing. Reduces the failure rate of
small because the wider knowledge base and human network is an obvious advantage for a small
business–particularly in the age of social media.
• Existing Customers can become investors.
• Existing Suppliers can become investors. Again, self-interest dictates that a supplier wants his
buyers to remain solvent.
38

37. CONTENT
 Universe of SMEs
 The ABC of Government Intervention
 Various programs for support
 Key takeaways

38. KEY TAKEAWAYS
Age
Appropriate
interventions
Flexible
regulations to
allow new
markets
Menu of
instruments
S
M
E
s
 Each stage of company
growth needs a tailored
solution
 Well run professional
management for any
government intervention
program is a must &
private sector leveraging
 Peer to Peer (p2p) lending
and crowd funding will
challenge current
regulation.
 Balancing act between
growth and investor
protection key

39. 41
Thank You