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Research and Development
Financial tools to support
start-up growth
Nabylah Abo dehman
Growth Economics
2015/2016
+ Research & Development
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Investigative activities that a business or the government chooses to
conduct with the intention of making a discovery that can either
lead to the development of new products or procedures, or to
improvement of existing products or procedures
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Most investments in R&D are made by the private sector, public
and/or governmental bodies, and universities
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It is one of the means by which business can experience future
growth by developing new products or processes to improve and
expand their operations – or by which a State can improve its
country’s economic development and growth
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On average, most companies spend only a small percentage of their
revenue on R&D (usually under 5%). However, pharmaceuticals, and
software companies tend to spend quite a bit more
•
Countries’ commitment to R&D (both public and private) has more
often than not been correlated to economic growth (EU 2020
objective of 3% of GDP to be invested in R&D is considered likely to
boost EU competitiveness)
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R&D and Innovation
When a State, a company or a person conducts R&D, whether to
create a new product or service or update an existing one, the
desired end result is always innovation
Innovation is value creation in the sense that it converts research
into economic value and creation of specialized jobs
“Capitalism is based on a process of continuous revolution based on
technological innovation through phases in which new structures
emerge and old ones are destroyed. This process of 'creative
destruction' is the fundamental fact of capitalism”
Joseph Schumpeter
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Innovation
ü Constitutes a discontinuity in traditional knowledge, and know-how. This
discontinuity increases overall productivity and labour productivity: with the same
amount of resources, we can produce more goods (development) or with less
resources we can produce the same amount of goods (sustainability)
ü Development and sustainability are linked to technology diffusion, production
processes, and quality of life (income increase or more spare time) and to the
environment (improved usage of finite resources)
According to modernism, innovation is novelty, it is in rupture with the past.
However, in the case of sustainable innovation, sometimes the best
innovation will be a rediscovery, a re-elaboration of the past
(creative development rather than creative destruction)
a sort of conservative innovation:
a challenge to human creativity in re-elaborating things we have been doing
forever but in drastically changed circumstances
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Startup
A startup is a company just beginning to develop
Usually small and initially financed and operated by a handful of founders
or one individual
Offering a product/a service not currently being offered elsewhere in the
market, or that is being offered in an inferior manner
In the early stages:
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Startup companies’ expenses tend to exceed their revenues as they
work on developing, testing and marketing their idea
As such they require financing
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They may be funded by traditional small-business loans (from banks or
credit unions), by government-sponsored small business administration
loans from local banks, or by grants from non-profit organization and
state governments. Incubators can also provide startups with both
capital and advice while friends/family may offer loans or gifts
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Financing startup companies’ growth
Startups – as newly born companies or ventures with limited operating
history – lack access to capital markets and thus to traditional source of
financing. Furthermore they cannot raise funds by issuing debts.
R
I
S
K
«Lab-pure»
Research
Base Research
Market Test
100% financed by Public Institutions
( Incentives, contributions, scholarships,…)
Applied Research
Patents and
Licences
Prototype
Private-public sector partnership
(Equity Capital, Loans, guarantees)
Produce and Put the
innovative product on
the market
Venture Capital
Hi-tech investments
(Private sector)
Risk
High
Medium
Low
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Stages of startups’ financing resources
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Pre-seed financing: typically involved in the analysis and
evaluation of the idea
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Seed financing: It intervenes in the testing phase of the innovative
idea. The idea is often channeled into paths of incubation to
determine the product, the technical validity and the target market
•
Start up financing: It occurs at an advanced stage of the idea. The
idea became a prototype that must be checked for commercial
validity
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Venture Capital
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It is part of the class of alternative assets that have been developing in
the last decade to complement investor’s traditional portfolios (as VC
is uncorrelated to the market)
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Most VC come from group of wealthy investors, investment banks and
other financial institutions that pool such investments and partnership
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It is the money provided by investors to startup firms and small
businesses with perceived long-term growth potential
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The potential for higher returns compensate higher risks such as
illiquidity, uncertainty of expected growth and other risks due to the
small size of each company
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It can also include managerial and technical expertise
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The downside for entrepreneurs is that venture capitalists usually get a
say in the company’s decision in addition to a portion of the equity
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Business Angels
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Non-institutional investors also called angel investors (often
individuals with considerable financial resources) that provide
new-born startups and microenterprises with either direct
investment, managerial support or both
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They give more favorable terms than other investors/lenders
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They provide startups with investment at an early stage – which
could be considered as a bet
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Notwithstanding a strong risk attitude, they take a limited equity
capital investment in companies with high growth potential and
they provide important management and financial consulting
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Conclusions
Spin-offs and start-ups are the best way to create value from applied
research and to diffuse innovation.
In order to favour such a process we need:
ü
Support activities (e.g.: how to incorporate a company, how to
manage it, market analysis, business plan, procedure quality
control, patenting)
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Laboratories and offices (Innovation parks)
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Coordination with selected partners in the homecountry and
abroad
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Preferential credit lines for research and innovation activities