Upgrading Technology at the
Firm Level
World Bank Seminar
February 18, 2004
Firm Innovation Requirements
• Improve existing product or plant
• Develop new product or process
• Staff training to absorb or develop new
technology
Sources of Technology
•
•
•
•
Supplier or Customer
In-house
Firm with capability
Technology Institution
Learning, Doing Competing
Elements
Doing
Innovation Yourself
People
Training
Machinery
Bringing in Incentives
Outside adv Education,T
Reverse
Import
Engineering
R&D
License
New
Knowledge
Problem
Solve in
company
Brainstorming,
Ideas
R&D, Seminars,
Tinkering, solving
Get help
Tax, loans
Tax, risk
loans….
Enc compet
Cust,suppli Institutions,
er,literature, education
How to Work with Companies?
•
•
•
•
It all depends
Big or small or new?
What sector?
How technologically advanced is the
company?
• Local circumstances?
For Example--1988 Indian firms
• How to get them to modernize, do more R&D, and
use the available infrastructure?
– Liberalize technology import
– Promote increased competition
– Provide appropriate incentives to use technology
infrastructure
– Build up the capability of the infrastructure to be able to
and desire to work with industry
SPREAD Program
Korea Technology Development Corp
• Sensible approach to encourage R&D in
industry and growth of small firms
• Clever Financial incentives, fund raising
• Gradual success led to hubris
– weak supn and finacially driven
– Bank ideology of privatization
– Too risk averse until privatization
% of responding firms which had used TI at least once
Use of Public TIs by Firm-size
and in-house lab/department
90
80
70
60
50
Without in house-lab
With in house-lab
40
30
20
10
0
Small (1- Medium
50)
(51-350)
Large
(531+)
* National, regional or local technology institutes, industry association
Use of TI Services by Firm Size
% of firms using a TI at least once
( Data excludes Taiwan (China))
100
90
80
70
60
50
40
30
20
10
0
Information
Training
Problem Solving
Contract R&D
Standards
Small (150)
Medium
(51-350)
Large
(351+)
Importance (1 to 5) of Services
Importance of TI Services by Sector
4.4
4.2
Information
Education &Trainig
Problem Solving
Contract R&D
Standards
4
3.8
3.6
3.4
3.2
Polymers
Autoparts
Software
Total
Support for Small Scale Industry
Questions to be Addressed
•
•
•
•
•
Institutional quality in country
Level of trust by industry in Gov’t and other firms
Can institutions attract and keep good people
Extent of corruption
How to ensure that funding achieves its purpose--eg
consultants will not raise fees.
Question-2 SSI
• How to pay for intermediary?
– Overhead charge like Steinbeis
– Industry Association--India for quality program for members
– Government
How to motivate SSI to use services--won’t unless dynamic or forced
by market
Must find way of attracting good consultants
Institutions must be free of Government interference
MODEL V
System to provide range of specific and
generic expertise
Companies
SSI 1
Small Extension
in educational
Organization
institutions US
Tech. Center 1
SSI 2
Tech. Center 2
SSI 3
Tech. Center 3
SSI 4
Tech. Center 4
MODEL VI
Facilitating particular
Technology Transfer Training
Companies Training
Program
T1
Small Industrial
Provider
Ass. Program
TQM Consulting
T2
T3
T4
ISO 9000
Training provider
MODEL VII
Japanese Business Association
Company 1
Company 2
transfer
transfer
Company 3
transfer
Company 4
transfer
Temporary
Institution
Business
Association
Tech.
Transfer
Foreign
Technology
Provider
1. Technology diffusion,
Extension
• Technology diffusion, Extension or
whatever it may be called should be a
more important component of technology
activity and support in almost every
country
– firms need and want it
– it is cheaper - more efficient - to
provide than developing new
technology
2. Government support
• Government must support
Technology in SSI by stimulating
institutional and program
development and partially financing
it.
3. Type of programs
• A range of programs built on the
needs of the industrial sector usually
provides better coverage and choice
for firms.
• The variety include:
a) generic technology/productivity
support
b) industry specific expertise
c) institutional sources
d) private consultant sources
• The particular mix will depend on the
4. Cost sharing
• Firm should pay a significant
share of the cost, but a
subsidy is also required.
5. Linkages and
competition
• Clients should have choices
but multiple linkages.
• Similarly among institutions
and programs.
6. Funding Technology
Providers
• They require (whether private
or public) a portion roughly
1/3 to build expertise,
develop new technology
access.
Growing technology companies-Start-ups and young
• Equity finance and seed finance
• Venture Capital
Ideal Conditions for Venture
Capital to Succeed
• People
–
–
–
–
Entrepreneurs
Technical talent
Financial capability
Some trained/
experienced private
equity investors
• Stable Macro and
Political Environment
• Business environment
– History of good
business practice
– Appropriate regulatory
framework--IPR,
contract law, courts…
– Stock market(s) that
works fairly
– Exit routes for smaller
companies
How does VC Get Going?
• It seems to always need a kick-start
• Need a positive environment for
entrepreneurial endeavor
• Need an environment favorable to capital
investment
• Is there a public sector role?
Government Role for building an
environment for VC?
Regulatory Framework
– Effective capital markets
– Contracts and intellectual property
– Financial Sector
Encouragement of Venture Capital
Promoting technology development
Good quality education and training
particularly technical
India--Prognosis for VC in 1988
The Advantages
•
•
•
•
Entrepreneurial
Lots of good engineers
Resources available within big groups
Financing available from development and
commercial banks for industrial growth projects
• Existence of contract law, legal system and 100
year old stock market
India--Prognosis for VC in 1988
Issues
•
•
•
•
•
Government industry licensing rules stifling
Inadequate trading volume of most stocks
IPO price determined by MOF
Legal system slow, difficult to enforce contracts
Entrepreneurs wanted to pass on company to
children--exit difficult
• Not clear that there were enough good ideas
• Even software/pharma success stories were not
state-of-the-art; no likely Microsoft
Getting VC Going
• ICICI Experimentation
• World Bank help
– 6 VC Schemes, 9 funds, total of $180 million
for 350 investments
– Approved first 5 investments in each fund
– Regular supervision
– Internship of 18 vc executives at vcs in US/UK
Regulatory guidelines change to facilitate VC
Creation of new stock markets, training
Initial Experience
•
•
•
•
•
•
Separate Management Companies
Experience, risk taking, exit planning
Bankers are not good venture capitalists
Tax pass through important
Average returns must exceed interest rates
Threshhold IRRs must be substantially higher
Problems Encountered
• Start-ups (and most companies) require:
– lots of nurturing and hand holding
– Much more time than anticipated
• VC staffing --business skill, industry know-how with
resourcefulness, commitment and brains
• Staff mobility--Incentives and work environment
• Due diligence-- must also be done on foreign partner or
provider
• Exit must be planned
Examples--Early Learning
•
•
•
•
•
•
Photovoltaics--Success followed by failure
Water filter--Success less than potential
Hotel Software--Need strategic partner
Shrimp and Flowers--fads, risky, know-how
Dosa King--Part of Risk
Blast freeze drying for vegetable/fruit export-advanced process tech--VC role
Fads
•
•
•
•
•
•
Technology
Pre-IPOs--bought-out deals
Invest across sectors
Invest overseas
Software
Internet
Sector-wise Distribution of VC and
Private Equity Investments 1998
(Rs. [mil])
Industrial products (24%)
Computer software (20%)
1865.09
2956.67
Consumer related (11%)
Medical (7%)
229.56
426.06
Computer hardware (6%)
448.77
Food and Food Processing (6%)
471.89
Tel/Communications (4%)
718.56
2508.87
735.41
Biotech (4%)
Other Electronics (3%)
817.48
1381.49
Energy related (2%)
Other (15%)
ICICI Software Fund--A success
• $ 7 million invested in 1996/97 worth about $50
million early 2001.
• Nine investments
• Summary of performance
– Other companies with potential still too early to tell are a software
hospitality product company; a services company with strong links and
capability to the insurance sector; and a software product company with
an advanced inventory management and maintenance software for process
industries. There are no failures as yet.
Success Stories
• SQL Star: 2 businesses
• a) authorized (certified) training centers including Oracle and IBM
• b) software services with strong capability in the insurance sector. IPO one
year ago. TDICI realized more than double the entire fund for less than ten
percent of the fund investment.
• Kale Consultants:
specializes in work for the airline industry. Has core technology in revenue sharing
among airlines. Sought after by midsize airlines. Flagship account is with Air New
Zealand. Second area is banking/financial sector. Successful IPO. Expected to grow
rapidly based strong IPR position.
• Planet Asia:
web services and high end website design. Offshoot of web services of successful
software services company Microland. One half the shares sold back to the
company after a little over one year at 2.7 times initial price.
• Ruksun:
Specializes in internet software development. Contracts with software product
companies, eg Microsoft for email, imap protocol. Second round financing
obtained after 18 months at valuation of 23 times the first round investment.
Company has strong IPR.
Changes in VC Climate
management
companies
instruments
exit
entrepreneur
industries
returns
1990
2000
public financial
inst
conditional
loans
difficult, gov’t
control
family, long
term
Every sector,
autoparts,
consumer…
< 10% in $, 2030% in Rs
foreign JVs
equity
IPO, buyout
Techno; temporary
Software, IT pharma
Very high some >
100%
Results of VC Experience
•
•
•
•
•
•
•
•
Returns--can be highly profitable
Examples and professionalism
Growth in demand
Range of VC Operations--different cultures
IT originally under-invested--now the fad
Huge inflow of foreign VC
Becoming an entrepreneur is now the pinnacle of success
Fund availability slowed since late 2000
Stages in India VC Development
Herd?
•
•
•
•
•
•
Technology emphasis
Quick buck pre-IPO
General industry
Invest in Silicon Valley
Software, Internet, dotcom
Beginning to mature
•
•
•
•
•
•
VC’s Key Questions for
Investment Decision
Does the business proposition make sense?
Can we work with the management?
Is the management totally ethical?
Does the company have the drive to grow?
Do we have the capability to add value?
How and when will we exit?
Where Improvement is Needed
• Screening quickly
• Management--turnover, incentives, hierarchy
• Due diligence--international markets and partner,
risk assessment (banking mentality)
documentation
• Investment phase--Knowing to cut losses, taking
control, dealing with troubling cases
• Markets--some liquidity for small companies in
good times. OTCEI
Basic elements for successful
VC--mini-checklist
•
•
•
•
Entrepreneurs with Drive and Know-how
Business environment fostering growth
Exit Mechanisms that Function
Venture capitalists with business/industry
experience who understand start-up prob.
• Patient and risk taking investors
• Technical education and R&D infrastructure
Lessons for Building a VC Industry
• For Early Stage Technology VC
– It should be driven by local institutions and money
– Government should stimulate VC, not run it
– Ensure level playing field for local and foreign money
– Financial institutions should initiate and be involved but not be
the sole body or run it by themselves
– VC should be run by entrepreneurs, risk takers and business
developers
– Develop Exit Mechanisms
• Stock exchange needs to be friendly to SMEs
• encourage buy-backs and buy-outs
Thoughts for Building a
Successful VCC
Build overseas links
• with VCCs
• with expertise in markets and technologies
Gather team with business and domain expertise
Build focused investment strategy based on market
needs and your own capabilities
Do not follow herd
Beyond VC
• There is a need to build new models of
equity and quasi equity hands-on finance
for the vast majority of potentially
successful companies that will achieve
modest IRRs and for which exit is tough:
– 3Is model with income/dividend earnings
– Start-up funds with clever buy-back provisions