Entrepreneurship and Financing Options for Innovation

Entrepreneurship and Financing
Options for Innovation

Serdar Torun

Outline
• Entrepreneur and Entrepreneurship in Turkey
• Financing Stages
• Financing Options
– 4Fs
– Micro-credits
– Business Angels
– Corporate Venture Capital
– Venture Capital
– Public Capital Markets
• Joint R&D
• Spin-Offs

STPS 517 : Innovation and SMEs 2

References
• An exploratory study of characteristics and
attributes of Turkish entrepreneurs: A cross-
country comparison to Irish entrepreneurs,
Mehmet Turan & Ali Kara, J Int Entrepr (2007)
5:25–46
• Policy Options and Instruments for Financing
Innovation: A Practical Guide to Early-Stage
Financing, United Nations Economic Commission
for Europe, 2009
• Online Resources: Geert-Hoffstede, Wikipedia,
NASA


Entrepreneur
• Entrepreneur; “a person who habitually creates and
innovates to build something of recognized value around
perceived opportunities.” *Bolton and Thompson (2000, p.
13)]
• Hisrich (1990) notes that an entrepreneur is characterized
as someone who demonstrates initiative and creative
thinking, is able to organize social and economic
mechanisms to turn resources and situations to practical
account, and accepts risk and failure.
• Schumpeter (1965):
– the value creation is the fundamental role of entrepreneurs in a
free market system,
– Entrepreneurs exploit market opportunity through technical
and/ or organizational innovation.


Entrepreneur
• most of the entrepreneurial research can be
categorized along two main lines: (1) the personal
characteristics or traits of the entrepreneur, and (2) the
influence of social, cultural, political and economic
contextual factors (Mazzarol et al. 1999).
• Entrepreneurs have been found to score higher on
“need for achievement,” “internal locus of control,”
“tolerance of ambiguity,” and “type A behavior.”
• At a macro level, a country’s stage of economic
development may influence entrepreneurial
desirability and inclination.


Entrepreneurship in Turkey
• Some visible changes taking place during the last
decade in Turkey:
– privatization, tax reform, deregulations, abolishment of
anticompetitive barriers, and reduction in monopolies,
agricultural reforms, and the efforts made to meet the
very explicit expectations of the European Union with
regards to ongoing membership talks.
• Although the culture and external environment in
Turkey are conducive to and advocate
entrepreneurship as an acceptable path, it is argued
that entrepreneurship in Turkey might be considered a
necessity-based entrepreneurship (GEM 2001).

• The average profile of Turkish SMEs is different from
that of most European countries (Coskun 2004):
– The average workforce and turnover are much smaller.
– Due to the conditions of the financial markets, they face
significantly more challenges in obtaining financing or the
cost of capital is much higher for them.
– Although the past decades have brought significant
transitions, the share of the agricultural sector and the
level of the rural population employed in agriculture in
Turkey are much higher than in its European counterparts.


Turkish Entrepreneurs: Summary
• A family history of self-employment
• Being the first child of the family
• Almost half of the Turkish entrepreneurs who participated in the study
had less than college education, whereas a typical Irish entrepreneur who
has a high school degree or less.
• Female entrepreneurs indicated that “having more a network of family
and friends that are self-employed” and “relying more on their previous
experience or training in the area that they establish their new venture”
were very important
• Previous self-employment experience is among personal reasons for new
venture creation
• People are more likely to exploit opportunities when they have relevant
knowledge and experience from previous employment.
• Future business plans: short-time oriented entrepreneurs
• Lack the strategic orientation and long-term vision: less entrepreneurship
education, Turkey’s long history of economic instability.


Turkish Entrepreneurs: Summary
• Achievement oriented, highly responsible, impatient, and self confident,
have high self-esteem, possess an internal locus of control (they do not
give up easily), and like to work on their own.
• Highly involved with the control of the operations of their businesses.
• Relatively high levels of stress and cope with this stress by working hard.
• Major challenges they faced were:
– “greater responsibility,”
– “inability to obtain financial loans for start-up,”
– “inability to acquire location for the enterprise,”
– “inability to spend enough time with family,” and
– “stress due to hard work.”
• These challenges were all consistent with the results of other studies that
examined the profile of entrepreneurs (Young and Welsch 1993).

Geert Hofstede™ Cultural Dimensions


Financing Options
• The main financing options are:
– 3F: Founder, Family Friends (in some sources
+Fools)
– Government Supports
– Business Angels
– Venture Capital Funds
– Bank Loans
– Public Stock Markets


Financing Stages
• The seed stage covers the initial research and development of
a commercial idea or business concept, focused on
determining its technical feasibility, market potential and
economic viability.
• The start-up stage covers the development of a product
prototype; initial market research and market-reach activities,
and the establishment of a formal business organization.
• The early-growth stage pertains to small-scale
commercialization and growth as well as to the development
of the pillars for the scalability of the business.
• The expansion stage covers the substantial growth in the
scale and market impact of the business.

Cash Flow Pattern


Sources of Funds for High-Growth Firms


Finance for the Early Development
Stages of Innovative Enterprises.
• The emergence and development of innovative
companies requires promising opportunities, financial
resources and access to operational, marketing,
financial and managerial expertise.
• Given the negative cash flow and high risk of failure at
their early stages of development, innovative
enterprises ideally need forms of financing that do not
seek guaranteed repayment.
– Merit-based Awards (e.g. Grants)
• TeknoGirişim, KOSGEB İşlik, …
– External Equity
• Etohum, Galata Business Angels, Horn Horn Ventures, KobiAŞ,
Dragon’s Den, …


Ideas to Start-Ups
• Micro-credits

• Business Angels

• Corporate Venture Capital


Starting-Up Questions
• Potential Entrepreneurs
– How can I conceive / polish my idea?
– Does my idea have potential?
– What to do with my idea?
– What expertise do I need to successfully launch the idea?
– When and where to find money?
• Potential Financers
– Is this a good, promising idea?
– How much money does the project need? And when?
– What is the intended use of the funds?
– Will the entrepreneur be committed to the project?
– What are the risks associated with the project? Are there
contingency plans in place?


Starting-Up Grants
• Feasibility Grants policies need to include:
– Structure of the decision making process
– Decision criteria
– Positive or negative certification?
– Monitoring and support of selected projects.
– Proper programme evaluation measures
– Ensuring quality deal flow
• SBIR Programme in USA
• START Programme in Russian Federation

Relations with Public R&D Institutions
• European Paradox
• Commercialization of cutting edge scientific knowledge
• Education of faculty and researchers on possible
entrepreneurial opportunities
• Provision of information to market constituents and
entrepreneurs
• Granting technical and financial support for the early
exploration of ideas
• Facilitating technical, managerial and financial support
for the incubation of promising enterprises


Relations with Public R&D Institutions
• Specialized information intermediaries
– Technology Transfer Offices, Cooperation Networks
• Professionalization of technology transfer
– EXIST Programme of Germany
• Specialized service intermediaries
– The TechnoPartner Programme of Netherlands
• Technology incubators or innovation accelerators
– Technology Incubators Programme of Denmark
– Incubator Programme of Russian Federation


Business Support Services
• Awareness Raising
• Networking
• Match-making
– PreSeed Programme of Finland
• Training
• Coaching
– Canadian Community Investment Plan
– TULI Programme of Finland

Microcredits
• Provision of small loans, usually smaller than €25,000, to
support entrepreneurial activity
• By specialized microfinance institutions
• Many MFI also provide business advice and support, help
with developing a business plan, and facilitated support
after granting a loan.
• Overall, microlending is more compatible with the pursuit
of non-economic goals such as social inclusion or regional
development.
• Aide Programme of France
• Microloan Programme of Slovakia
• Community Investment Tax Relief of UK


Business Angels
• Individuals that make equity investments in high
potential ventures and provide their
time/expertise/network of contacts to the
entrepreneurial team.
• As a rule business angels only invest amounts
that they can afford to lose.
• The source of their wealth is the sale of
businesses that they had founded and operated
• Dynamic entrepreneurial environment is an
important pre-requisite for the emergence of
business angels

Business Angels – Characteristics
• Invested Amounts (2007 EU mean is €170K)
• Value Added: Capital + Expertise + Network
• Types: Active – Passive, Novice – Experienced
• Key Decision Criterias:
– Is this opportunity presented through a referral or is it
unsolicited?
– Does the business idea have solid fundamentals?
– Is this person capable of running the business? Is this a person I
can trust and deal with?
– Does the business operate in a familiar area? Is it close
geographically to allow for face-to-face interaction?
– Can the Business Angel invest enough funds to develop the
project to the next level?


Business Angel Networks
• Flow of information between business angels and
entrepreneurs: business angels are hard to find and so
are high-quality entrepreneurs
• Business Angel Networks (BAN)
• Some key characteristics of BAN:
– Scope of Operation
– Advantages to Individual Angels
– Organization
– Key Services
• CIDEM of Catalonia
• EBAN – European Business Angels Network


Corporate Venture Capital
• Equity or equity-type investments by non-financial
corporations (established companies that invest in
innovative enterprises)
• May be less concerned with financial returns and more
with the strategic value
• To encourage to invest in innovative enterprises:
– Tax incentives for investments in private, innovative
enterprises.
– Public-private partnerships that involve substantial
financial participation.
– Establishment of administrative structures that facilitate
the incubation of new ideas.


Corporate Venture Capital Examples
• Corporate Venturing Scheme of UK

• High-Tech Start-Up Fund Initiative of Germany

• Industry Incubator Programme of Norway


Early Stage Growth
• As innovative companies grow, their financing needs
increase, which requires access to larger pools of
capital.
• Venture capital (VC) - patient capital - financing
provides professionally managed capital to promising
enterprises in exchange for equity stakes, with the
anticipation of selling those stakes at substantial
premiums.
• Professionally managed capital to promising
enterprises in exchange for equity stakes, with the
anticipation of selling those stakes in five to seven
years


Venture Capital
• Act as intermediaries channeling funds from
institutional investors to high-potential enterprises
• Investors provide companies with strategic and
managerial advice, network contacts and play an active
role in the recruitment and professionalization of
management
• VC financing cycle has four main stages:
– Fund-raising,
– Investing,
– Managing/value adding, and
– Exiting


Venture Capital
• Institutional investors lack the expertise to
select and develop innovative enterprises
• VC firms provide a specialized function:
– Identify, develop, add-value to high-potential
enterprises,
– In turn, provide attractive returns to institutional
investors.
• Private Equity – Venture Capital
– European Venture Capital Association


Venture Capital Examples
• Silicon Valley of USA
• Competitiveness and Innovation Programme of
EU
• JEREMIE Initiative of EU
– Joint European Resources for micro to medium
Enterprises
• Dachfonds of Germany
• Russian Venture Company of Russian Federation
• Yozma Programme of Israel


Public Capital Markets
• Importance of stock exchanges for innovative companies:
– Provide both fresh capital for their large-scale expansion and
new product development
– Opportunity for the seed and early-stage investors to trade their
stakes, realize capital gains (or losses), and ultimately redeploy
their capital into new investment opportunities.
• Due to innovative companies challenges, traiditonal stock
exchanges are not suitable; more flexible regulations
needed.
• NASDAQ: plays an instrumental role in the US & Israel.
• IPO – Initial Public Offering
• Secondary Market


Public Capital Markets
• Capital markets for small and medium-size
business that are innovative and growth-
oriented:
– NASDAQ OMX
– TSX Venture Exchange
– NYSE Alternext
– Entry Standard


Summary overview of the generic
modes of market intervention


Joint R&D
• Knowledge creation, circulation, exploitation
• Flow of knowledge, codified of embodies in
people , important for R&D and innovation
systems
• Globalisation and access to knowledge
generated in other R&D / innovation systems
• European Research Area / Fifth Freedom


Joint R&D - EUFP
• European Union Framework Programmes’ Instruments:
• Integrated Project – IP
– Medium- to large-sized, minimum 3 partners from 3 different
countries, 3-5 years – no upper limit, budgets are several tens of
millions of euros
– Addressing the major needs of society
• Network of Excellence – NoE
– Medium sized, minimum 3 partners from 3 different countries, max.7
years, budget around €1-6M.
– Strengthen scientific and technological excellence
– Contribute to the clarification of concepts
• Specific Targeted Research Projects – STReP
– Medium sized, minimum 3 partner form 3 different countries, 2-3
years, budget around €2M.


Joint R&D – An Example
• Israel-Italy Joint Innovation Program for Industrial, Scientific and
Technological Cooperation in R&D
• Qualifications:
– Partners may be industrial entity and/or non-industrial entity,
– Partners must express the will to cooperate, on a balanced basis,
towards the development of a new product, industrial process or
service,
– The product, process or service must be innovative and there must be
a technological risk involved,
– The project must be equally significant for participants from both
countries
– The participants are required to have preliminarily signed a
partnership agreement on the commercialization of the product,
process or service once the phase of research and developmenthas
been completed and the ownership and use of knowhow and IPR
settlements (“Partnership Agreement”)


Spin-Offs
• Government Spin-Off
– Civilian goods which are the result of military or
governmental research.
• When commercialization is possible
– http://www.sti.nasa.gov/tto/
– http://en.wikipedia.org/wiki/NASA_spin-off
– LEDs, Infrared ear thermometers, fire resistant
equipments, non-sticky fabrics, etc.
– Internet, a project of DARPA.

Spin-Offs
• Corporate Spin-Off
– A division of company becomes and independent
business
– Shareholders of the parent company receive
equivalent shares in the new company; buy or sell
later
– Parent company offers support as:
• İnvensting equity in the new firm
• Being the first customer – help to create cash flow
• Provide incubation space
• Provide services – legal, finance, technology, etc.


Spin-Offs
• Research/University Spin-Off
– Commercialization of a technology developed in
university laboratories
– University can claim Intellectual Property Rights
• Spin-off process:
– Develop a proof of concept
– Develop a fully functional prototype
– Attract start-up funding
– Develop a business model
– Acquire customers


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