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Results of the Ester Project in Latvia
Valdis Avotins, LIDA
Salamanca Joint Workshop, June 23, 2005
2
Agenda
• NIP
• Need: Market failure
• Risk capital program
• Technology incubator & seed program
• Questions
3
Goals of the innovation strategy
Inwardinvestments
Growth inexisting firms
New,technology-based firms
Inn
ova
tio
n c
ap
ab
ilit
yo
f fi
rms
En
tre
pre
ne
uri
al
cli
mat
e
Sustainable growth
Efficientinnovation-support
Ma
rke
t va
lue
ou
t o
fa
pp
lie
d R
&D
RIS Latvia
4
22 experts’ evaluation
0,0
0,5
1,0
1,5
2,0
2,5
3,0
A1 A2 A3 A4 B1 B2 B3 B4 B5 B6 B7 C1 C2 C3 C4 C5 C6 C7 C8 C9 C10C11
Weight W-Ind
EMPRisk Capital FF
Prototype
IPR
Research infrastructure
Innovation Assistant
Tech Incubator, liaison offices, seedCoE
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TECHNOLOGICAL INCUBATION
Ideas Validation Fast growth
Prototyping
TFM scheme
VENTURE CAPITAL
SAP
START-UP SCHEME
SEED SCHEME
TTO NEW PRODUC
TS
IPR protection
in start-ups
MARKET INTELLIGEN
CE
Entrepreneurship
promotion
Market exposure
FINANCING
BUSINESS SUPPORT
OTHER SUPPORT
Existing/ approved Launch expected Planning initialised in 2006/7
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Good investment environment
• Rapid GDP growth
• “Latvia is ranked among the top ten counties worldwide in terms of business start up time and length of bankruptcy procedures.” Doing Business in 2004, World Bank
• Wall Street Journal Index of Economic Freedom• Rank 28, Score 2.31, (Israel Rank 33, score 2.36)
• The overall tax burden of GDP is only 29.1%
2000 2001 2002 2003 2004
6.9 8 6.4 7.5 8.5
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Background conditions
• Low general entrepreneurship activity– Lowest amount of SME’s in EU (18 on 1000
inhabitants; EU average 51/1000)
• Low share of innovative enterprises– 20% (incl. adoption) compared to EU average of 45% – Share of high-tech products in export ~6%– Employment in mid-to-high-tech is 23% of EU
average
• Lack of appropriate financial instruments for the needs of high-tech/ innovative companies at early stage of their development
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Jaffa Oranges vs. Software(1992-2001)
0
500
1000
1500
2000
2500
3000
3500
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
exports ($millions) Citrus
Software
Dr.Eli Opper, Chief Scientist
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BSEF, BALTCAP,NCH, BALEF34 projects
NLBDF33 projects
A. RISK CAPITAL SCHEME
Reasonable investments in LVL 0 ... 10,000 ... 25,000 ... 50,000 ... 100,000 ... 250,000 ... 500,000 ... 1 m ... 2.5 m ... 5 m ...
1995 First risk Capital investment
1995 – 2004 67 projects financed via Risk Capital
No Start-up investmentsNo Seed money
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Sources for Deal flow• Heritage from USSR at the end of 90`s
• 30.000 academic scientists• 13.000 engineers involved in R&D
• Large brain gain opportunities • Higher education institutions
• Infrastructure
• 6 R&D Centers of excellence• 20 Technology and industrial parks• EU grants
2001 2002 2003Institutions 36 37 49No of students
110.500 118.944 127.656
Risk Capital in Latvia 11
Program’s objectives
• Facilitate entrepreneurship promoting access to risk capital financing
• Facilitate the establishment and development of new venture capital funds, motivate them invest in SME`s by offering state aid to private investors
• Attract private investors to invest in Latvia
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How?
• Public Private Partnership– Budget 14.5m € (75% from ERDF)
– Public investment in a Fund– Up to 70% (target 50/50)
– No more than 5.5m € in the single Fund
• State Support to Private Investors
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Founding of VC Fund
Fund of FundsLimited by 70%or 5,7 million €
Investment Fund ~ 8 ... 10 million €
Private InvestorsAt least 30% of total investment
in new VC fund
Target : 50/50
3 new funds
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Investment Fund
• Partnerships with life cycle for 7 to 10 years
• Managed by private management company
• Business decisions made by private investors
• State support to private investors
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Selection of Fund Managers
Open tender procedure, main criteria:
• Experience and professionalism of team members
• Business plan
• Involved private investors and amount of private funds
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Decision-making procedure
Venture Capital Fund ~ 8 ... 10 million €
Investment committee(representatives of all investors,
one member from FF)
SME 1 SME 2 SME 10-15• • •
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Restrictions for investment
• SMEs registered in Latvia
• Maximum investment 1m € in one project
• Maximum 300k € in the first investment tranche
• Time between trenches at least 12 months
• Some sector restrictions (EU regulations)
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Return Distribution Mechanism
1. Fund’s management expenses;
2. Repay the original capital invested by private investors;
3. Repay 25% of the original capital invested by the state;
4. Priority return (hurdle rate) on private investors’ capital (6%);
5. Repay the remaining 75% of the state’s invested capital;
6. Hurdle rate return (6%) on the state’s invested capital;
7. Remaining profit, if any to private investors and FMC
19
B.B. The designed draft Growth4Future Scheme
Tested in Israel, with WB experts, EU experts, local expert panels
1. Technology incubator grant
2. Pre-seed grant – Think for month
3. Seed soft loan
Management companies or Operators of TI’s – private companies providing space & infrastructure, management and S&M advice, basic business services and private investment structuring in exchange for equity position in the tenant company
Target groups:– Potential entrepreneurs from
industry– Potential entrepreneurs from
academia– Repatriating scientists and
R&D personnel– Regional inventors
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New forms of Business Incubation
in late 1990s has been driven to multiply the number of succesful, fast-growth, high technology businesses in US
a) Its led by serial entrepreneur;
b) it has its own seed fund drawn from founder’s own, VCF or corporate partner’s capital;
c) it may have specific sector focus
Gill D., Martin C., Minshall T., Rigby M. Funding Technology. Lessons from America. 2000
Conventional incubators offer “heat, light and dial tone”, but “Smart” Venture Investment claim to offer more, developing ideas and incubating them in-house as well as providing late seed capital and A, B and C round investment.
Incubation today is seen as a way in which capital can be efficiently applied to support new technology businesses
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Political Goals1. Improve the competitiveness of Latvia by facilitating
development of high & medium tech industries;
2. Create a potential for participation in future technologies (prestige, future competitiveness);
3. Development of new sustainable export industries (Israeli & Finnish experience);
4. Create economic champions / change the attitude of society towards technology commercialization.
High growth high-tech company establishment is more expensive and it shows remarkable return after 8-10 years : longer establishment cycle; specific infrastructure required; specific knowledge needed.
22
Background
Existing market gap for early stage investment and low local entrepreneurial spirit results in few investments particularly in high growth Start-ups
The Need: sharing investor risk to encourage investments and increase the number of high growth start-up companies
Solution: outsourced integrated service to motivated professional venture teams
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Side measures for Deal flow• Entrepreneurship motivation scheme - outflow of 300 busines
ideas, 100 marketing plans, 50 business plans;• Reposition of entrepreneurial culture :
• by informative seminars, work shops, presentations, publications in media, etc;
• Awareness creation program;• “Think for month” (pre-seed grant);• Innovation assistant grant scheme;• motivation scheme for inventors in universities and R&D institutes;• Innovation courses and innovation MBA program in RTU;
• Technology transfer centre;• Business labs and Liaison offices in universities;• Ventspils school of entrepreneurship (Chalmers model)
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1. Technology Incubator grant
• 9 year program (3x3 support periods)• Public – private partnership model• Decisions made by TI private operators (PO)• Grant is paid to TI operator as 30% fixed rate
and 35 kEUR per one tenant, minimum 2 tenants are required, quarterly payments
• Public grant up to 75% (max. 500 k EUR) of TI’s annual budget
• Based on Venture business not traditional incubation!
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2. Pre-seed: TFM
Form of intervention
Performance based grants up to 3 kEuro
• to validate a business plans before starting a new company and to leverage private equity finance in later stages
• An individual person with a business project entailing fast growth (turnover increase to at least 40-50% per year) for 0 - 24 months
• Financing covers up to 100% of eligible costs, 1 month
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3. The seed program• Investment management: TI PO• Recipients – young (<6 month) SMEs after
business concept validation• max 300 K EUR soft loan, matching with
private equity investment 70%:30% • converts to non-refundable grant in the
case of failure • Project duration 6-24 months• when sales appear 5% from annual
turnover should be paid back until all loan is repaid
27
NTSMEs(tenants)
TI
Privateinvestors
BoardBusiness
ideas/concepts
Implementingagency
(comission)
Managingcompany
investment
negotiations
establisher
decisioncontrol
30% private investmentand Seed guidance
application
contract
100%operational grant
+Pre-Seed
Reports
representative
Control/ monitoring
Matching seed as soft loan 70%
Seed application
selection
Creation of company
Support + TFMpre-seed grant
28
Return
Return:
• Number of incubators and their capacity utilized
• Number of newly created technological companies
• Number of companies graduating from TI
• Number of successful IPOs, M&As, investments in the next rounds
• Total private investment attracted to the companies
29
Selection criteria
1. For TIs operators• TI management experience
and professionalism of team members in new high growth SMEs creation
• Business plan• Amount of offered financing • Planned running costs per
SME, share of private co-investment
2. For SMEs• Registrated commercial entity in LR,
younger than 6 months, planned growth over 50%
• Not yet in market, IPR owner or exclusive user
• High- or medium-tech
• Explicit orientation towards global market (export)
• Worked out draft business or / and technology plan
• Manageable company
• Significant milestones for 24 months