SME financing tools for innovation
Angel Milev, Programme Director ARC Fund
Coordinator, Enterprise Europe Network-Bulgaria
Topics to Discuss
The presentation covers the following topics:
Funding requirements of innovative SMEs;
Different forms of finance and the implications of using them;
Role of Government in financing innovative SMEs;
Instruments for SMEs under coming Horizon 2020 and COSME.
2
Funding requirements of Innovative SMEs
Innovation – “A new idea that can generate profit”
Costs that incur before that profit appears:
•Development costs
•Intellectual Property costs
•Prototyping / Proof of Concept costs
•Marketing costs
•Manufacturing costs
•Distribution costs
3
Funding requirements of Innovative SMEs
Costs that incur before that profit appears:
•Development costs - for research (including market needs),
conceptualisation, design, simulation etc.
Usually personal efforts and time – own financing and spare time
4
Funding requirements of Innovative SMEs
Costs that incur before that profit appears:
•Development costs
•Intellectual Property costs – To IP or
Not to IP. What type of? What area?
•Prototyping / Proof of Concept costs
•Marketing costs
•Manufacturing costs
•Distribution costs
5
Funding requirements of Innovative SMEs
Costs that incur before that profit appears:
•Development costs
•Intellectual Property costs
•Prototyping / Proof of Concept costs: materials,
development, design, manufacturing;
•Marketing costs
•Manufacturing costs
•Distribution costs
6
Funding requirements of Innovative SMEs
Costs that incur before that profit appears:
•Development costs
•Intellectual Property costs
•Prototyping / Proof of Concept costs
•Marketing costs – research, strategy,
plan, channels
•Manufacturing costs
•Distribution costs
7
Funding requirements of Innovative SMEs
Costs that incur before that profit appears:
•Development costs
•Intellectual Property costs
•Prototyping / Proof of Concept costs
•Marketing costs
•Manufacturing costs – materials, manufacturing,
own production or subcontracting?
•Distribution costs
8
Funding requirements of Innovative SMEs
Costs that incur before that profit appears:
•Development costs
•Intellectual Property costs
•Prototyping / Proof of Concept costs
•Marketing costs
•Manufacturing costs
•Distribution costs – transportation, networks etc.
9
Forms of finance
Different forms of finance may be characterised according to:
 the type of financial instrument involved;
 the source of the finance;
 the implications for the SME of using that type of finance, including:
• Cost
• Relationships and obligations
• Implications of changes in business on the financing of the business
 whether they are direct or indirect.
10
Types of financial instrument
Forms of finance include:
• Grants
• Loans
• Mezzanine
• Equity Investments
In general SMEs will seek the least expensive finance first,
but cost should not be the only consideration.
11
Types of financial instrument
Forms of finance include:
• Grants - non-repayable funds disbursed by one party (grant makers), to a recipient.
In order to receive a grant, some form of "Grant Writing" often referred to as either a
proposal or an application is usually required.
• Loans
• Mezzanine
• Equity Investments
12
Types of financial instrument
Forms of finance include:
• Grants
• Loans - An arrangement in which a
lender gives money or property to a
borrower, and the borrower agrees to return
the property or repay the money, usually
along with interest, at some future point(s) in
time.
• Mezzanine
• Equity Investments
13
Types of financial instrument
Forms of finance include:
•Grants
•Loans
•Mezzanine - A hybrid of debt and equity financing that is typically used to finance the
expansion of existing companies. Mezzanine financing is basically debt capital that gives the
lender the rights to convert to an ownership or equity interest in the company if the loan is not
paid back in time and in full. It is generally subordinated to debt provided by senior lenders
such as banks and venture capital companies.
•Since mezzanine financing is usually provided to the borrower very quickly with little due
diligence on the part of the lender and little or no collateral on the part of the borrower, this
type of financing is aggressively priced with the lender seeking a return in the 20-30% range.
•Equity Investments
14
Types of financial instrument
Forms of finance include:
•Grants
•Loans
•Mezzanine
•Equity Investments - Money that is invested in a firm by its
owner(s) or holder(s) of common stock (ordinary shares) but which is
not returned in the normal course of the business. Investors recover it
only when they sell their shareholdings to other investors, or when the
assets of the firm are liquidated and proceeds distributed among them
after satisfying the firm's obligations. Also called equity contribution.
15
Types of financial instrument
Forms of finance include also:
•In the beginning: 3f (family, friends,
fools)
•Business angels
•Venture capital funds
•Etc.
16
Relationships and obligations associated with
different forms of finance
By accepting external finance the SME creates a new relationship and
obligations:
personal liability arising from providing personal security in support of a loan;
relationship between the business owner / innovator / entrepreneur and a Business
Angel investor;
ability to raise further finance in the future being linked to the existing financing
arrangement;
alignment between owner’s preferred direction for the business and exit route for equity
investor.
17
Indirect financing
Mechanisms other than direct investments:
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tax reliefs;
reductions of or exemptions from other charges;
guarantees and other risk-sharing arrangements;
procurement initiatives;
Relevant infrastructure;
Specialised support services.
This type of mechanisms are usually applied by the Government.
18
•
SME tools in the future Horizon2020
19
What is Horizon 2020
The EU framework programme for
Research and Innovation:
Commission proposal for a 80 billion euro research and innovation
funding programme (2014-20)
•
•
Part of proposals for next EU budget, complementing
Structural Funds, education, etc.
A core part of Europe 2020, Innovation Union & European Research
Area:
• Responding to the economic crisis to invest in future jobs and growth
• Addressing peoples’ concerns about their livelihoods, safety and
environment.
• Strengthening the EU’s global position in research, innovation and
technology
What’s new
• A single programme bringing together
three separate programmes/initiatives
• More innovation, from research to retail,
all forms of innovation
• Focus on societal challenges facing EU
society, e.g. health, clean energy and
transport
• Simplified access, for all companies,
universities, institutes in all EU countries
and beyond.
*The 7th research
Framework
Programme (FP7),
Competitiveness
and Innovation FP
(CIP), European
Institute of
Innovation and
Technology (EIT)
Present and
coming FPs
Priority 1 Excellent science
Why:
• World class science is the foundation of
tomorrow’s technologies, jobs and wellbeing
• Europe needs to develop, attract and retain
research talent
• Researchers need access to the best
infrastructures
31,70%
Proposed funding (million euro, 2014-20)
European Research Council
13.095
Frontier research by the best individual teams
Future and Emerging Technologies
2.696
Collaborative research to open new fields of innovation
Marie Curie actions*
6.162
Opportunities for training and career development
Research infrastructures (including e-infrastructure)
2.488
Ensuring access to world-class facilities
Priority 2 Industrial leadership
23,11%
Why:
• Europe needs more innovative SMEs to create growth
and jobs
• Strategic investments in key technologies (e.g.
micro-electronics) underpin innovation across existing
and emerging sectors
• Europe needs to attract more private investment in
research and innovation
Proposed funding (million euro, 2014-20)
Leadership in enabling and industrial13. 557
technologies (ICT, nanotechnologies, materials,
biotechnology, manufacturing, space)
Access to risk finance
2. 842
Leveraging private finance and venture capital for
research and innovation
Innovation in SMEs
Fostering all forms of innovation in all types of SMEs
616
Priority 3 Societal challenges
40,91%
• EU policy objectives (climate, environment, energy,
transport etc) cannot be achieved without innovation
• Breakthrough solutions come from multi-disciplinary
collaborations, including social sciences & humanities
• Promising solutions need to be tested, demonstrated
and scaled up
Proposed funding (million euro, 2014-20)
SMEs in Horizon 2020
SMEs will be encouraged to participate across
Horizon 2020 programmes through a new
dedicated SME instrument.
It aims to fill gaps in funding for:
• early-stage, high-risk research and innovation by
SMEs;
• stimulating breakthrough innovations.
SMEs in Horizon 2020
It is expected that through this integrated strategy
around €6.8 billion, of the total combined budgets
of the 'Tackling societal challenges' Specific
Programme and the 'Leadership in enabling and
industrial technologies' objective will be devoted to
SMEs.
SMEs in Horizon 2020
A new dedicated SME instrument
• Similar to the SBIR model (http://www.sbir.gov). It will provide
easy access with simple rules and procedures. It will be used
across all societal challenges and the enabling and industrial
technologies. The new instrument will encourage SMEs to put
forward their most innovative ideas with an EU dimension. It will
target highly innovative SMEs showing a strong ambition to
develop, grow and internationalise, regardless of whether they
are high-tech and research-driven or non- research conducting,
social or service companies.
SMEs in Horizon 2020
• Only SMEs will be able to apply for funding, even single
company support will be possible to ensure market relevance
and to increase commercialisation of project results. SMEs can
decide how to organise the project and with whom to
collaborate, including subcontracting tasks if they lack in-house
capabilities.
SMEs in Horizon 2020
A new dedicated SME instrument
• The new instrument will integrate the specific SME
measures of FP7 in one comprehensive, simple and easily
accessible scheme. It covers the possibility to outsource
research and development critical to the innovation
projects of non- research intensive SMEs, currently
supported under 'Research for the Benefit of SMEs'.
SMEs in Horizon 2020
How it works
Support is provided in three different stages covering the
whole innovation cycle (similar to the US SBIR model –
Small Business Innovation Research http://www.sbir.gov):
• A feasibility part will allow an assessment of the
technological and commercial potential of a project;
SMEs in Horizon 2020
How it works
Support is provided in three different stages covering the
whole innovation cycle (similar to the US SBIR model –
Small Business Innovation Research http://www.sbir.gov):
• А main grant will be provided to undertake research and
development with the emphasis on demonstration and
market replication;
SMEs in Horizon 2020
How it works
Support is provided in three different stages covering the
whole innovation cycle (similar to the US SBIR model –
Small Business Innovation Research http://www.sbir.gov):
• The commercialisation phase will be supported indirectly
through simplified access to debt and equity financial
instruments as well as other measures, for example on IPR
protection. Successful completion of one stage will allow
an SME to move on to the next.
SMEs in Horizon 2020
How it works
• Relying on existing SME support networks (Enterprise
Europe Network), a mentoring and coaching scheme shall
be provided to beneficiaries so as to accelerate impact
from funding under the SME instrument.
• SME Associations may continue to assist and to support
their member companies in a European project as part of
an SME-led consortium formed under the SME instrument.
Such Associations will thus be able to play an important
role in the dissemination of project results.
SMEs in Horizon 2020
Support for research intensive SMEs
• A specific action will promote market-oriented innovation of
R&D-performing SMEs, building on the Eurostars Joint
Programme.
• SMEs will be able to participate in other parts of Horizon
2020, such as the Marie Curie Actions or the activity on
Future and Emerging Technologies.
SMEs in Horizon 2020
Financial instruments (equity and debt) will support
SMEs
• € 3.5 billion is budgeted for financial instrument facilities,
and accompanying measures, for research and innovation
At least one-third of this amount will be dedicated to SMEs
and small mid-caps.
• A leverage of up to 5 is envisaged, meaning that for every
Euro provided through the financial instruments, additional
finance of up to 5 Euro will be generated.
SMEs in Horizon 2020
• A debt facility providing loans, guarantees and other
forms of debt finance to entities of all forms and sizes,
including research and innovation-driven SMEs
• An equity facility providing finance for early- and growthstage investments, with a particular focus on early-stage
SMEs with the potential to carry out innovation and grow
rapidly.
SMEs in Horizon 2020
• These Horizon 2020 facilities will be operated in
conjunction with the financial instrument facilities of
COSME, the Programme for the Competitiveness of
Enterprises and SMEs, where €1.4 billion has been
allocated to debt and equity financing in support of SMEs.
SMEs in COSME
COSME
 Strengthening the competitiveness and sustainability of the
Union’s enterprises, particularly SMEs
 Encouraging an entrepreneurial culture and promoting the
creation and growth of SMEs
• €2,3 billion for 2014 – 2020
• (current prices)
SMEs in COSME
COSME’s 2 financial instruments:
• Equity facility for Growth (EFG) to invest in SMEs in
expansion phase
• Loan guarantee facility (LGF) to provide guarantees to
cover loans for SMEs for up to 150 000 EUR
Budget 2014: € 134.100.000
Horizon 2020 & COSME financial instruments
 Equity instruments
• Equity Facility for R&I (H2020)
• Equity Facility for Growth of SMEs (COSME)
 Debt instruments
• SMEs & Small Midcaps Guarantee Facility for R&I (H2020)
• Loan Guarantee Facility for SMEs (COSME)
Rules for Participation: what’s new?
1. A SINGLE SET OF RULES
Adapted for the whole research and innovation cycle
Covering all research programmes and funding bodies
Aligned to the Financial Regulation, coherent with other new EU
Programmes.
2. ONE PROJECT - ONE FUNDING RATE
Maximum of 100% of direct costs (except for actions close to
market, where a 70% maximum will apply)
Indirect eligible costs: a flat rate of 25 % of direct eligible costs
Rules for Participation: what’s new?
3. SIMPLE EVALUATION CRITERIA
Excellence - Impact - Implementation (Excellence only, for the
ERC)
4. NEW FORMS OF FUNDING
Aimed at innovation: pre-commercial procurement, inducement
prizes, dedicated loan and equity instruments.
5. INTERNATIONAL PARTICIPATION:
Facilitated but better protecting EU interests.
Rules for Participation: what’s new?
6. SIMPLER RULES FOR GRANTS:
Broader acceptance of participants accounting
Practices for direct costs, flat rate for indirect costs, no time-sheets for
personnel working
Full time on a project, possibility of output-based grants.
7. FEWER, BETTER TARGETED CONTROLS AND AUDITS
Lowest possible level of requirements for submission of audit certificates
without undermining sound financial management;
Audit strategy focused on risk and fraud prevention.
Broader access
• For SMEs - dedicated SME projects to address societal
challenges and enabling technologies
• For all regions - tailored support to policy learning, twinning,
networking, complementing Structural Funds
• For international partners - broad access to Horizon 2020
• For all forms of innovation - social innovation, services,
pilots, stimulating demand through public procurement,
standard setting
BUSINESS COACHING
Next steps
By the end of 2013: Adoption of legislative acts by Parliament and
Council on Horizon 2020
11/12/2013: Horizon 2020 starts; launch of first call
Find out more:
www.ec.europa.eu/research/horizon2020
http://ec.europa.eu/enterprise/cosme
Thank you for your attention!
Angel Milev
Programme Director, ARC Fund
tel.: 02/ 973 3000, fax: 02/ 973 3588
angel.milev@online.bg
www.arcf.net