FINANCING ICT INNOVATIONS: TRENDS AND
CHALLENGES OF THE VENTURE CAPITAL MARKET IN
EUROPE - THE ROLE OF THE GOVERNMENT
Yannis Pierrakis
Head of Investments Research
National Endowment for Science, Technology and the Arts (NESTA)
FITT for Innovation
Brussels, 10 May 2011
Bank lending to business and individuals


The stock of lending to
businesses contracted in
2010, albeit at a slower
rate than during 2009
In contrast, growth in the
stock of lending to
individuals — both secured
and unsecured — was
stable, though low, over
2010 and similar to the
picture in 2009
Source: Bank of England
Lending to SMEs & Small Businesses



Annual rate of growth in lending
to SMEs has been negative since
late 2009 and fell to -3% in
February 2011 (BIS)
Growth rate of lending to small
businesses, defined as turnover
up to £1 million, stood at -6% in
December 2010, the latest (BBA)
Annual lending growth to small
businesses has been more
negative than for the SME
segment since June 2010
Source: BIS, BBA, Bank of England
Cost and availability of credit

BIS data indicates that the
value of applications by
SMEs for new term loan
and overdraft facilities in
the six months to February
was 19% lower than in the
same period a year earlier
Source: Credit conditions survey
and (3 months to March) and
Deloitte CFO Survey
Why VC is appropriate mean of finance
for growth?




The high-growth innovative firms often require significant capital
up-front and this is very hard to obtain from conventional sources of
debt finance.
They tend to have intangible assets, and show a significant delay
before generating revenue making than a high risk investment.
Innovative, high-growth firms which are essential for the innovation
system to flourish, need different kinds of support depending on
their stage of development.
Only a small proportion of businesses (3%) receives venture capital
finance
But its importance goes far beyond its size


A variety of studies suggest that venture-backed firms are
responsible for a disproportionate number of patents and
new technologies (Kortum and Lerner 2000, Mann and
Sager 2007), and they bring more radical innovations to
market faster than lower growth businesses that rely on
other types of finance (Hellmann and Puri 2000; Gompers
and Lerner 2001).
In 1998 venture funding accounted for about 14% of U.S.
innovative activity (Kortum and Lerner 2000)
More empirical evidence



Venture capital appears ~3 to 4 times more powerful than
corporate R&D
From late 70s to mid-90s, VC was only 3% of corporate
R&D, but responsible for ~10%-12% of privately funded
innovations (Kortum and Lerner 2000)
Although VC backed firms accounted for only 0.11% of
all new firms, they generated roughly 4-7% of
employment in the US in the late 1990s till 2000 (Puri and
Zarutskie 2008)
More empirical evidence
Companies that
manage to receive
VC finance are most
likely to be innovative
companies
100%
90%
80%
Proportion of investments

70%
60%
50%
Proportion of investments made
to companies with patent
40%
30%
20%
10%
0%
1
2
3
4
5
6
Funding rounds
Source: Pierrakis 2011
7
8
9
10
Companies that received VC funding
Venture capital activity


Venture Capital investments
in the US, UK and
continental Europe
Number of Venture Capital
backed companies in the US,
UK and continental Europe
Source: Thomson One
Proportion of investments
Venture capital in ICT
Source: Thomson One
45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
UK
US
Europe
Historically, the more a fund invested
in ICT the better it performed
* Base category: Biotech & Healthcare, Source NESTA
Venture Capital performance
by vintage year


50
Poor venture returns since the dotcom crash
Downturn in venture activity world-wide since crisis
40
30
20
% IRR
Mean
10
One year before
the Dotcom crisis
0
1972 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
-10
-20
Median
Why should the public sector care?





Most venture capital markets were established with some
sort of public support
Relatively young industry and in some countries still at
very early stages
Fill the equity gap
Familiarity with the innovation system
Share the inherit risk
Venture capital funding landscape in the UK
Private
VC
Private
Equity
VCTs
Business
Angel
Networks
Business
Angels
Grants
Source: NESTA
Public VC
Examples from around the world





US (SBIC)
Israel (Yozma)
Canada
UK publicly backed funds early stage investments
Finland
UK
Source: NESTA
Familiarity with the innovation system (extent of
interaction)
Universities with no flexible IP policy
Internet forums and blogs
5
Universities with flexible IP policy
4.5
4
3.5
Networking events organised by public bodies
Regional RD institutes (if not universities)
3
2.5
2
Networking events organised by private bodies
RDAs (when applicable)
1.5
1
0.5
Public VCs
0
Other public regional bodies e.g. endowments
councilsetc
IP protection bodies
Companies based in technology parks or
incubators
Regional authorities
Managers of technology parks or incubators
Law companies
Community organisations and charities
Source: Pierrakis 2011
Specialists e.g. experts in a particular technology
Private VCs
Tips for public funds







Syndication with private funds promotes innovation (13.4%)
Establish close linkages with the innovation community –
become the conduit of information between private funds
and other bodies of the innovation communities
Avoid multiple objectives
Be able to follow up investments
Have appropriate size
Set up evaluation frameworks for programmes and
managers
Build up track records or partner with established funds (e.g.
Israel)
Tips for entrepreneurs


Most often proposal comes from individuals themselves
so make yourself known
Funds evaluate proposals based on the team
management skills and the potential
Management team expertise
95.74%
Costumers and market potential
70.21%
Great products/services
46.81%
Business model scalability
31.91%
Defensible I.P.
29.79%
Financial track records
14.89%
Remarkable value proposition
10.64%
0%
10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Source: Pierrakis 2011
Where can you get funding?




Funds are very localised especially in US, however,
around 40% of UK based funds invest in continental
Europe
Approach funds directly – but be well prepared, the
competition is very tough
You need to be ‘investments ready’ – Europe
desperately needs an investments readiness programme
Contact the European Venture Capital Association and
the European Business Angel Association
THANK YOU
Yannis.Pierrakis@nesta.org.uk