Topic 6
Sources of finance for innovative SMEs:
Public, private, formal, informal
Bob Hodgson
Zernike (UK) Limited
Geneva
December 2010

Key thoughts
Money will find good ideas not create them
 Finance needs to be articulated to grow value
 Some systemic hypotheses and diagnoses
 Communicating potential benefits from a framework
 The best approaches provide money plus
Geneva 2010 Bob Hodgson

Risk Of Failure
HIGH LOW
Product
Development Stage Commercial
Value
> Market consolidation
> Market expansion
> Market penetration
> Product enhancement
> Sales & distribution
> Product development
> Marketing & research
> Prototyping
> Market definition
> Innovation & R&D
R&D
Tier 0
Fiscal approaches
VC/IIF
Angels
/3F’s
Tier 1
Seed
Tier 2
Sources
Of Funding
Tier 3
VC/
Expansion
IPO/MBO
/Trade Sale
Tier 4 Tier 5
Tiers 0/1 - Pre-incubation
 Direction
 Collaboration

Guidance
 Resources etc

Pre-Seed funding
Business Development Tiers
Tier 2 - Incubation
 Mentoring
 Seed funding
 Contacts

Consulting
 Clients
Tier 3 - Post-incubation
 Funding

Structuring
 Relationships etc
Tiers 4/5 - Commercial
Maturity

Challenges in commercialisation: hypothesis 1
We have great S&T and ideas for new businesses
BUT
There is no money to take them forward
SO
Lets build a venture capital industry
Geneva 2010
Bob Hodgson

Challenges in commercialisation: hypothesis 2
We have lots of money which is prepared to invest in new businesses
BUT
There are not enough good ideas coming forward from the knowledge base
SO
Lets change the orientation of the science base
Bob Hodgson
Geneva 2010

Challenges in commercialisation: hypothesis 3
We have great S&T and lots of investment money
BUT
The two communities have opposite perspectives and cannot talk to each other
SO
Lets build a shared vision and learn a common language
Bob Hodgson
Geneva 2010

IP its nature and challenges
 A legal monopoly to encourage invention
 Novel Useful Specific
 Explicit knowledge, but usually backed by tacit know how
 Complex and specialist – so costly and uncertain
Geneva 2010 Bob Hodgson

Sources of risk with new IP
 People risk: new entrepreneur and/or new team
 Technical risk: it needs more testing to prove effectiveness
 Commercial risk: unproven market without established price
 Financial risk: little recovery potential
AND
 Competitors: disruptive technology undermining value
Bob Hodgson Geneva 2010

Forms of capital: getting the mix right
 Business cash flow – treasury management
 Grants – good but beware transaction costs
 Equity injection – long term risk sharing
 Loans – for working capital and short term needs
 Guarantees – for those without collateral
 Strategic alliance – also for credibility enhancement
Geneva 2010 Bob Hodgson

Typical perspectives of funding sources
 New firms and established businesses – risk assessment
 Loans:
 duration and recovery risks
 ideally collateral backed – IP education
 Guarantees: ensure symmetrical risks and rewards
 Equity: aligned risk and reward but costly
 Strategic alliance: again symmetry and risk alignment
Geneva 2010 Bob Hodgson

Risks: real and perceived
 The benefit of collateral – tangible and tradable
 IP – an asset but of what value?
 Austin Texas – investment challenge!
 But the risks are still very real
 technical
 market/commercial
 personnel
 financial
Geneva 2010 Bob Hodgson

Communicating potential: investment readiness
 Business plan
 Market data and evidence
 Communications skills
 Differentiating the investment pitch
 Cultivation of the risk takers
Geneva 2010 Bob Hodgson

Some concrete approaches
 Turkish critical monitor firm
 Argentinean Core Security
 Armenian ICT companies
 Chilean salmon producers
 Mexican unmanned plane
Geneva 2010 Bob Hodgson

Finding the application: Gyroscope and mower
 Yachting enthusiast: new balancing equipment
 Established the IP
 Created the firm
 BUT Very small market
 Looked for help to find other markets
 Became industry standard
Geneva 2010 Bob Hodgson

Business model and revenue sources
 Selling the product
 Providing a service and support
 Replacement materials market
 Upgraded versions and revenue
GRIMREAPER
Geneva 2010 Bob Hodgson

Real Economy: innovation engines
 ARM – Advanced RISC Machines
 IP generator
 income from Licences and Royalties
 market cap - billions
 Generics Group Plc – technology solutions provider
 IP accumulator
 and commercialiser – spinning out companies
 massive P/E ratio on flotation – hope value
 Supported by specialist service provides
Geneva 2010 Bob Hodgson

Thank You
BOB HODGSON
ZERNIKE (UK) Ltd
The Grove
High Street
Sawston
Cambridge
UK
CB2 4HJ
0(044)1223 526980 bhodgson@zernikeuk.com
Geneva 2010
Bob Hodgson