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Feasibility study
on proof of concept funds
May, 2011
Small Innovative Business Support Network / SIB net (EU 31398)
Contents
1
EXECUTIVE SUMMARY
3
2
INTRODUCTION
4
3
INTERNATIONAL EXPERIENCES
5
3.1
Definition, role and description of proof of concept support
3.2
International experience of proof of concept funding and support
3.2.1
Large scale proof of concept funds of national importance
3.2.2
General types of proof of concept funds
3.2.3
Proof of concept funds attached to higher education and research institutions
5
7
8
12
14
4 OVERVIEW OF SUPPLY AND DEMAND OF PROOF OF CONCEPT FUNDING AND
SUPPORT
16
4.1
Statistical overview of start-ups in the Project’s region
4.1.1
Overview of Mid-West Latvia region
4.1.2
Overview of South-Estonia region
16
16
17
4.2
Supply and demand for proof of concept funding and support at regional level
4.2.1
Supply side of proof of concept funding and support in Mid-West Latvia region
4.2.2
Demand side of proof of concept funding and support in Mid-West Latvia region
4.2.3
Supply side of proof of concept funding and support in South-Estonia region
4.2.4
Demand side of proof of concept funding and support in South-Estonia region
4.2.5
Commonalities and differences in Latvia and Estonia
19
19
25
27
30
31
5
CONCLUSIONS AND RECOMMENDATIONS
32
5.1
Conclusions on market bottlenecks
32
5.2
Recommendations
33
6
MODEL OF POC SUPPORT IN LATVIA AND ESTONIA
35
7
FUTURE TASKS AND CHALLENGES
36
8
REFERENCES
37
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1 EXECUTIVE SUMMARY
This feasibility study aimed at exploring Proof of Concept (PoC) funding and support
supply and demand in the Project’s region – Mid-West Latvia and South Estonia, and
spot the market bottlenecks and derive recommendation for covering the identified
market gaps. The relevance of this study is grounded in the topic covered – availability
and form of PoC funding and support to technology and knowledge intensive, innovative
and international growth business ideas based on sophisticated research and
development (R&D) results. Availability of PoC funding and support in the right time,
size, quality and form can be the triggering point for development of the next Skypes in
the Baltics. In turn, absence of PoC support can be the death valley to such business
ideas.
To achieve long-lasting and impacting recommendations the following research
methods were employed:
- desk research;
- data analysis;
- interviews with early stage financing and innovation industry experts from
Latvia and Estonia.
Essential for guidance in the study process, interpretation of information and data, as
well as for deriving recommendations, was analysis of international experience in PoC
funding and support instruments. Experience of the United Kingdom was analysed
representing the economy with one of the most developed entrepreneurship climates
and capital markets in Europe and, thus, being a sophisticated source for shaping PoC
support policy in Latvia and Estonia. In addition, one of the best known PoC progams in
the world – SBIR program of the U.S. was explored.
Clearly scale of this study is attributable to whole Latvia and Estonia because Mid-West
Latvia region and South Estonia region are too narrow focus for such support
instrument.
Feasibility study revealed that there is a gap in PoC funding supply in Latvia and Estonia,
namely, demand considerably exceeds supply. Moreover, the gap is not only in size of
the supply, but also type of support instruments. Currently there is a larger supply gap
in Estonia than Latvia. In turn, demand side (deal flow) of high quality PoC ideas is much
better developed in Estonia.
Feasibility study has led to recommendations that for such small-scale economies as
Latvia and Estonia PoC funding support should be integrated in existing or planned
support measures addressing seed capital stage. Authors of the feasibility study propose
that the most efficient and sustainable model is PoC funding support integrated with
technology (risk capital) incubators. Recommendations addressed also demand side of
PoC, suggesting Latvian government to undertake set of initiatives to increase
commercialisation potential of public R&D activities and the resulting deal flow.
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2 Introduction
The feasibility study on PoC funds was conducted within scope of Estonia- Latvia crossborder cooperation programme project “Small Innovative Business Promotion Network”
(SIB Net) covering South-Estonia and Mid-West Latvia regions. Project is implemented
in partnership of six partners: Riga Planning Region, Ventspils University College,
Ventspils High Technology Park, Stockholm School of Economics in Riga, Tartu Science
Park and Institute of Baltic Studies. Project’s implementation period: June, 2010 - May,
2012.
The feasibility study contributes to the overall aim of SIB Net project - to promote new
innovative high growth firms “gazelles” by encouraging entrepreneurial creativity,
providing needed support and evaluating needs for early stage risk finance.
Purpose of the feasibility study was to explore PoC funding and support supply and
demand in Mid-West Latvia and South Estonia, and spot the market bottlenecks and
derive recommendation for covering the identified market gaps.
The relevance of this study is grounded in the topic covered – availability and form of
PoC funding and support to technology and knowledge intensive, innovative and
international growth business ideas based on sophisticated research and development
(R&D) results. Availability of PoC funding and support in the right time, size, quality and
form can be the triggering point for development of the next Skypes in the Baltics. In
turn, absence of PoC support can be the death valley to such business ideas.
The feasibility study was carried out by Vidzeme Innovation and Entrepreneurship centre
which used research methods of desk research, data analysis and in-depth interviews.
The feasibility study covers the following main topics:
-
Definition and role of PoC funds and support
-
International experience of PoC funds and support
-
Scene of start-ups (birth and death rates) in the Project’s region
-
Supply and demand of PoC funding and support in the Project’s region
-
Market bottlenecks and recommendations for covering them
As a result of the feasibility study the most appropriate model of PoC funding and
support in the Project’s region is proposed.
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3 INTERNATIONAL EXPERIENCES
3.1
Definition, role and description of proof of concept support
The proof of concept funding and support is a tool aiming at helping researchers,
educational and research institutions, our their partnerships with industry to establish
commercial potential of their research activities, namely, whether research results can be
turned into products or services which are demanded by the market [ VII ].
Usually proof of concept is associated with business ideas of international growth
potential and with support of physical persons – researchers and engineers before
establishment of company.
The proof of concept stage represents innovative, technology and knowledge intensive
research results encompassing high (often unpredictable) commercialisation risk
because no industrial prototype, market potential assessment and other pre-requisites
for successful business development are at place and the idea is new (‘out of box’) to
market. Therefore usually private sector investors are not ready to invest in proof of
concept stage as it is related to high failure risk, information asymmetry (lack of
competence in the research field) and high transaction costs (small investment size;
time consuming screening of ideas etc.). As a result there exists a funding gap between
research results and commercialisation ready product or service. The gap may vary
depending on country being much smaller in countries with developed
entrepreneurship climate like the U.S. and large, often insurmountable, in developing
countries. In fact, there are also proof of concept funds in U.S. which are entirely backed
by private capital which can be explained by well-developed capital market and
entrepreneurship climate.
In order to capitalize on the possible high potential of the research results public bodies
are to step in by completely or partially covering the funding gap. Usually proof of
concept funding takes the form of a grants and subordinated loans and may range from
EUR 5 000 to EUR 100 000. There are exceptions where total proof of concept award can
reach even 625k EUR, e.g., SBIR program1 of U.S., but it is related to leading edge
research results of national importance. Larger funds are often allocated in two phases
by testing overall viability of the concept during the first phase.
The Figure 1 below depicts funding escalator for development of technology intensive
and high growth companies. Since size of funding and types of available instruments in
each funding stage may considerably differ depending on size of economy and
development level of entrepreneurship climate, the figure is to illustrate situation of
countries like Latvia and Estonia.
SBIR - Small business innovation research program. The program is described in more detail in section
3.2.1. Large scale proof of concept funds of national importance of this feasibility study.
1
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According to figure below apart from PoC funding, other potential financing sources
bridging applied R&D results with start-up capital are own resources, FFFs (friends,
family and fools) and rarely business angels, pre-seed and seed capital funds. While the
latter once are highly selective investors at PoC stage, own resources and FFFs due to
underdeveloped entrepreneurship climate and economy, and the high risk attributable
to commercialisation of sophisticated R&D results is a scarce resource in Latvia and
Estonia. Therefore, Latvia and Estonia are the countries with high probability of funding
supply gap in PoC stage.
Growth/ expansion phase (500k – 2M EUR)
VCs, equity capital funds, bank loans, loan
guarantees, profit reinvestment, development grants.
FUNDING
ESCALATOR
Early growth phase (150-500k EUR)
Venture capital funds, bank loans, loan guarantees, profit
reinvestment, lease finance, development grants
Start-up/early growth phase (50k -150k EUR)
Seed capital funds, business angels, bank loans, loan guarantees,
lease finance, development grants (product development,
investments, marketing, training), business incubators
Proof of concept phase (up to 50k EUR)
Proof of concept funding (grants, soft loans), own funds,
FFFs (family, friends, fools), business angels (rarely), seed
capital funds (rarely), pre-seed support (rarely). Usually
funding needed at least in 2 stages.
Applied R&D
Public or private funding
Figure 1.
Funding escalator for development of technology intensive and high growth
companies.2
The target awardees of PoC support are owners of research results (knowledge
intensive, technological, with international growth potential) with limited resources for
validating commercial potential of the new business ideas - individuals (inventors,
researchers) or organizations (research institutions, SMEs etc.). One of the main criteria
to applicants of PoC funds is ownership rights (existing / prospective) of intellectual
property which should be protectable.
2
Figure 1 created by the authors of the feasibility study.
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Proof of concept stage activities may include (not limited to) the following activities
leading to readiness for commercialisation:

Pre-production development or prototyping

Technical validation of technology

Ascertaining market demand/ readiness, including early customer interactions

First phase patenting and licensing or establishing an IP rights strategy

Building the management team

Devising a development plan
PoC not only helps to validate and reshape business potential of the research results, but
also shortens "time to market" that in some cases may be crucial.
The expected result of PoC support and related commercialisation process is creation of
a high growth enterprise or license to an existing enterprise.
Often in countries (also Latvia and Estonia) with underdeveloped entrepreneurship
climate and capital markets the proof of concept and pre-seed funds is regarded just as
terminology, not functional difference, being the same type of support instruments. For
purpose of this research and according to the overall logics of the financial capital
market PoC funds are delimited as entirely focusing on commercialisation of knowledge
intensive, often leading edge, research results and usually related to research
institutions or individuals (researchers, inventors). In turn, pre-seed funds are regarded
as broader range support instrument, funding also innovative business ideas not based
on extensive research results. As a result, PoC compared to pre-seed stage is in need of
larger and longer investment and support, meantime representing higher
commercialisation risk. [ I ]
PoC support is a good tool for minimising investment risk of seed stage investors and
respectively increasing readiness of investors to place seed capital investments in the
business idea. High growth companies (‘’gazelles”) are associated with large
investments and risk, therefore PoC support as multi-stage (at least two stages) funding
tool enables to minimise risk in step by step validation of the business idea in
proportion to allocated support and respectively business development progress.
3.2
International experience of proof of concept funding and support
During this research at least three types of PoC support schemes have been
distinguished:
1. Large scale PoC funds of national importance, focusing on projects falling
within national resarch and scientific development priorities (leading edge
technologies) and demonstrating international growth potential, e.g., SBIR
program of the U.S., SBRI program of the UK (benchmarked twin program of SBIR
of the U.S.) and PoC program of Scottish Enterprise. These support schemes are of
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national scale, granting comparatively large awards (even up to 625 kEUR) and
are directly linked with national research priorities.
2. General type PoC funds screening broader range of applicants (research
institutions, individuals, SMEs) and awarding smaller grants 10k - 100k EUR. In
UK these are usually regional funds and are partly backed by public funding, for
instance, North East Proof of Concept Fund (England) with investment capital
of 17 MEUR, backed by European Investment Bank and ERDF funding or the
Invest Growth Proof of Concept Fund (the Northern Ireland) with investment
capital of 3.4 MEUR funded by the public body Invest Northern Ireland. Usually
these funds are operated by seed capital investment companies ensuring
effective investment of public funding.
3. PoC funds that are attached to higher education and research institutions
which vary considerably by source of funding, operational model and grant size
to awardees. The funds are usually financed by government and part-financed by
EU funding, private capital and own recources. Though rarely, PoC funds of some
universities can be entirely backed by private capital (gifts and donations by
alumni, wealthy persons, industry players), especially in the U.S., for instance,
Von Liebig Center of UCSD Jacobs School of Engineering (California). Often the
PoC funds of higher educations and research institutions of the UK do not have a
regular financing source, but time after time are replenished by different
initiatives of government. Majority of the PoC funds are managed by independent
risk capital investment companies or commercialisation establishments of higher
education institutions. [ 24 ]
Further on typical cases of the three main forms of PoC funds are provided and resulting
implications derived.
3.2.1 Large scale proof of concept funds of national importance
PoC PROGRAMS OF THE U.S. - SBIR AND STTR
SBIR (small business innovation research) and STTR (small business technology
transfer) programs are managed by the Technology Program Office of U.S. Small
Business Administration (SBA). Through these two competitive programs SBA ensures
that the nation's small, high-tech, innovative businesses are a significant part of the
federal government's research and development efforts. The programs support
research results that can lead to important new technology, major breakthroughs,
innovative new products and next-generation products or processes by covering the
investment readiness and funding gap from a research-based idea to a prototype
that many industrial and venture capital companies find difficult to support. [ X XI ]
Models of the programs are similar with the main difference in implementation method
of PoC, namely, STTR must be implemented in partnership of small business and public
research institution, while SBIR can be implemented individually by a small business
company.
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SBIR was originally launched in 1982, while STTR was established in 1992 and since
then the programs have been successfully operating. Through SBIR and STTR
instruments annual funding of 1,4 billion EUR is granted to small high-tech businesses
of the U.S. In both programs awardee and the final holder of intellectual property rights
is a small business company.
While the overall managing organization of the programs is SBA, 11 federal agencies
participate in everyday operation and funding of the programs, e.g. the
Departments of Education, Commerce, Health and Human Services, Energy, the National
Aeronautics and Space Administration. In response to decree of Federal government of
U.S. the agencies set aside a portion of their extramural research and development
budget each year to fund research proposals from small science and technology-based
firms. Likewise agencies define R&D topics for calls of proposals so that applicants
would match the research topics of the federal research institutions.
SBIR and STTR model is 3-phase programs in which the first two phases are funded
by the government.
PHASE
I
Description
 Development of prototype, research on the feasibility of prototype
 6 months (SBIR), 12 months (STTR)
 100% award: up to 105k EUR (SBIR) and 70k (STTR) (grant or public
procurement contract)
Technical assistance to awardees - pilot niche assessment: identification of other
uses of technology, determining of competitive advantages, development of
market entry strategy.
II
 Full research/R&D, full-scale development of the product, research on
feasibility, usability and scalability of the product.
 2 years
 100% award: up to 750k EUR (SBIR) and 550k EUR (STTR) (grant or public
procurement contract)
Technical assistance to awardees - commercialisation assistance: business and
strategic planning, building alliances and investor partnerships.
III
 Commercialisation Stage
 Use of non-SBIR/STTR funds
Grants of the first two phases function as good leverage for attracting risk
capital or other funding sources during Phase III.
Table 1. Three phase model of SBIR and STTR [ 19 ]
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Depending on agency proposals can be submitted 1-3 times per year and submission
and evaluation cycle takes 6-9 months. Applicants in both programs should be small
business concern (not more than 500 employees) and they can submit unlimited
number of different proposals to the programs. The main difference is that within SBIR
primary employment of the principal investigator during the project should be small
business while in STTR projects it can also be research institution. Another major
difference is that within STTR program minimal research costs allocated to research
institution of the U.S. should be 40% of the award, while in SBIR projects involvement of
research institutions is not required.
A success story - 3e Technologies International (3eTI) was founded in 1996. It
specialized in secure wireless network applications and wireless condition-based
maintenance solutions. The company received 28 Phase I and 10 Phase II awards. [ 16 ]
Since 3eTI was small company, SBIR was the leading funding for it, allowing to keep
their technology fresh and on the leading edge. The majority of the firm’s
commercialisation activities were due to SBIR. Phase III allowed 3eTI to commercialize
their technology by attracting seed funding and enabled the company to build a
reputation and further develop its products that finally lead to acquisition of 3eTI in
2006 by EFJ Inc. - a leading wireless telecommunications solutions company.
PoC PROGRAM OF UK, SCOTLAND
The program is managed by a public body of Scotland - Scottish Enterprise (SE) and is
focusing on supporting projects with the potential to grow to substantial scale within
five years (i.e. achieve a turnover of 5,5 MEUR or commercial investment of 11 MEUR
within that timeframe). The program was launched in 1999 and has been financed
partly by EU and SE.
Applicants to the program can be researchers from Scotland's universities, research
institutes and NHS Boards who can receive funding and support to turn their ideas
into a global business by creating spin-out companies. Students are not eligible to apply
for this program.
The program’s funding cover 100% costs of the proof of concept, except for overhead
costs. Size of grant is decided on case by case basis, the average being 225k EUR.
According to experience above 90% of grant is spent for personnel.
The program is focusing to the projects meeting the following criteria:
1. Readiness of the idea - usually after a background patent has been filed, but
before:

A full lab-scale demonstration of the technology;

Pre-production development or prototyping;

Commercial funds for development are available.
2. Quality of the idea:
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
Potential to create Scottish companies that could achieve 5,5 MEUR turnover
or commercial investment of 11 MEUR within five years;

A clear plan for commercialisation;

Experienced R&D and commercial teams ;

Ownership of intellectual property rights;

Prospected project costs.
3. Compliance with the pre-defined (by SE) fourteen key industries (having the
most potential of commercialisation and market).
In addition, eligible are only proposals which have been approved and endorsed by the
principal/ director of the institution and the commercialisation office of the institution
employing the researcher/-s. Likewise before submitting the proposal the applicant
needs to contact the SE expert of the target key industry to get validation whether idea
has commercialisation potential. Only projects receiving approval of the industry expert
can be submitted.
Proposals for the program’s funding can be submitted all year round and funding can
be expected in 6 months after submitting application. The minimum duration of the
proof of concept is six months, while usually it takes 18 – 24 months.
All IPR created during the project vests exclusively in the university, research institute
or NHS Boards or jointly with the collaborators on the project.
The main results of the program (from 1999 to 2009):
-
Over 970 applications submitted;
-
235 projects funded, awarding over 53 MEUR, on average 225k EUR per project;
-
Over 500 knowledge-intensive jobs created in universities;
-
Over 300 jobs created in new Scottish companies;
-
50 new high-tech companies (spin-outs) formed;
-
57 license deals signed;
-
Over 273 MEUR post proof of concept investment leveraged.
By direct evaluation of investment size in the companies per job place created (around
400k EUR per job place) the programme may seem inefficient. However, SE uses
different evaluation metrics according to which the PoC progam is a success because
total socio-economic benefits of the Scottish economy exceed the costs of the program.
The metrics take into account the total added value of the program, e.g., financial market
gaps covered, number of high-growth and high turnover companies created, number of
research results commercialised (spin-outs and licence agreements) etc.
Critical success factors of the program:
-
Resources for substantial funding per project;
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-
Tough due diligence with commercial focus;
-
Commercialisation support from SE, e.g. by putting the entrepreneur in touch
with pivotal players in commercial networks;
-
Project management groups, technology entrepreneurs, advisory boards with
industry experts;
-
Integrated with other Scottish support mechanisms for commercialisation,
innovation and investment, e.g. SE Investment Funds (incl. High Growth Start-up
Unit), funding programs (SMART, R&D);
-
Involvement of universities and research institutes to put forward qualified
candidates. [ 20 ] [ XII ].
Implications derived

National scale PoC fund focusing on leading edge technologies and international
growth projects is feasible if strong and qualitative guidance on research topics on
national scale is provided, as well as target industry experts are available in
validating commercial prospect of the project ideas (before and after submission of
proposals).

Commercialisation of knowledge intensive and high growth technologies is time
consuming and therefore multi-stage support, up to 2-3 years assistance, as well as
substantial size of grant is crucial for success.

Not only research institutions, individuals and nascent entrepreneurs should be
targets of PoC capital, but also probably established small and medium size
business companies, working on new knowledge intensive technologies based on
research results.

Private sector expertise (industry experts, technology entrepreneurs, network of
key sectoral experts, e.g. GlobalScots network) in due diligence of the project and
advising commercialisation is crucial for successful commercialisation of research
results.

PoC should form a part of integrated and well functioning national innovation
system covering all stages for creation of companies of scale, including receiving
high quality and volume deal flow and being followed by seed capital and later
stage investments.

Practice of Scottish Enterprise in pre-screening of research results by key industry
experts before accepting proposals could be an appropriate method for efficient
use of resources (economy of resources of potential applicants in preparing
proposals; economy of resources of SE in evaluation of proposals).
3.2.2 General types of proof of concept funds
The Invest Growth Proof of Concept Fund was set up as a pre-commercial grantawarding fund which is financed by Invest Northern Ireland and managed by an
investment company E-Synergy. There is a total fund of 3,4 MEUR to be allocated over
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2009-2014 to enable individuals, start-ups, micro-enterprises and SMEs to establish the
commercial potential of a concept resulting from in-house research and ideas. [ 17 ]
E-Synergy is one of the most experienced and successful investment teams specializing
in early stage businesses in the UK, alongside managing also venture capital fund, and it
has strong business development expertise. Awardees of the program receive also high
expertise support in business development, e.g., mentoring, IP and copyright protection
and advice.
Grants are distributed in two forms:
Mini Grant – up to 11k EUR
1.
Main focus: ascertaining market demand/ readiness, assessing the competitiveness of
initial business concepts and establishing an IP rights strategy.
Typical outputs: market research reports, initial business case reports and concept
development work, and a pre-commercialisation plan.
2.
Standard Grant – up to 45k EUR
Main focus: later stage proof of concept activities, e.g., prototype development, first
phase patenting and licensing, devising a development plan, building the management
team, early customer interactions and start-up or spin-out incorporation.
Major outputs: industrial prototype, business plan, growth action plan and business
development team.
Standard grants are awarded to candidates who have been selected by the Fund
Assessment Panel that meets at least three times a year and evaluate proposals and
pitch presentations of the candidates. Applications of Mini grants are granted on regular
basis and according to simplified evaluation procedure.
Implications derived

Two-stage approach of PoC funding is used to ensure complete readiness of the
project for the seed phase funding;

Management of PoC fund is entrusted to private investment company, ensuring
effective screening, due diligence and advising of the business ideas. Private
investment company evaluates projects taking into account prospects of getting
seed and later stage investment;

Private sector investors usually do not enter PoC stage due to high failure risk, low
potential of return and high transaction costs. There are at least two reasons
motivating E-Synergy to engage in management of this PoC fund, firstly, 100%
public backed funding, secondly, developed entrepreneurship and research climate
of the UK guaranteeing high quality and sufficient volume deal flow and, in turn,
high potential investment cases for later stage funds of E-Synergy.
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3.2.3 Proof of concept funds attached to higher education and research
institutions
There has not been a regular and constant UK government support in providing PoC
funding to education and research sector but it has been provided through different
initiatives time after time.
In 1999 and 2001 the University Challenge Seed Fund (UCSF) Scheme was
introduced by creating in total 19 seed funds valued 67,5 MEUR and providing 57
institutions with access to seed funding. The contributors to the Scheme were charities
(Wellcome Trust and Gatsby Charitable Foundation) and government, as well as each
recipient university had to provide 25% of the total fund from its own resources. The
largest universities like University of Oxford, University of Manchester, Imperial College
(London) were awarded separate funds, while other funds were awarded to
partnerships of 2-5 universities and research institutions. The aim of the Scheme was to
fill a funding gap in the UK in the provision of finance for bringing university research
discoveries to a point where their commercial usefulness can be demonstrated and the
first steps taken to ensure their utility. The funds were utilized for financing access to
managerial skills, securing or enhancing intellectual property, supporting additional
R&D, constructing of prototype, preparation of business plan, covering legal costs [ 4 ].
University of Oxford within UCSF was awarded 4,5 MEUR in 1999 which was fully
committed until 2003 by investing in 71 project with grant ranging 2,8k - 280k EUR.
Since the investments were fruitful the Oxford UCSF has been replenished and currently
is open to applications. It is an ‘ever green’ fund. Right after 2003 the university made a
further 1,1 MEUR available to continue to finance UCSF type activities. In 2004
additional two year PoC fund was created following a successful collaborative bid by the
Universities of Oxford, Cambridge, Imperial College, and University College of London to
the Government’s Higher Education Innovation Fund. The total fund size was 2 MEUR, of
which 510k EUR was allocated to projects from Oxford University. This fund has now
been fully committed. Funding was granted to awardees in open competition.
Management of the majority of UCSF are separated from universities by entrusting it to
commercial organization of the universities, e.g. Isis Innovation Limited (business unit of
University of Oxford responsible for commercialisation of intellectual property,
technology transfer etc.) or Cambridge Enterprise, or independent fund management
investment companies, thus, ensuring effective investment policy. [ 10 ]
Another interesting initiative was London PoC funds, initiated by London Development
Agency by awarding PoC funds to five partnerships in total involving 30 universities
plus several non-university partners, including NHS Innovations London and National
Physical Laboratory. Overall value of the five funds was 14,5 MEUR, 48% being financed
by London Development Agency and the rest from other public and private sources. The
funds were committed during 2006 - 2008. Each partnership had different methods of
funds management, including involvement of private investment companies, technology
centers of institutions etc. Overall coordination of the funds was ensured by pan London
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Conceptual Oversight Group. The funds have been invested in at least 180 projects,
maximum grant being up to 80k EUR. [ 15 ] [ II ]
Another interesting initiative is Knowledge Transfer Accounts (KTA) program of
Engineering and Physical Sciences Research council (EPSRC) (the main UK
government agency for funding research and training in engineering and the physical
sciences). EPSRC values knowledge (research results) transfer to private sector just as
much as generation of the original research results because only then investment in
research is effective. For this purpose resources through KTA scheme are available for
2009-2011 to 12 universities of the UK. Allocation of KTA grants range from 2,25 MEUR
to 9 MEUR per university. KTA resources are allocated through different instruments
facilitating technology transfer, including PoC grants. KTA program works with more
than 100 collaborators from industry, including eight strategic partners of EPSRC: Arup,
AstraZeneca, BAE Systems, British Energy, Dstl, Mobile VCE, NPL and QinetiQ. [ 9 ] [ IX ]
There are also initiatives of universities to develop PoC funds entirely backed by private
funding, e.g. in 2007/ 2008 Cambridge Enterprise established University of Cambridge
Discovery Fund to be financed from donations of alumni and ‘friends’. The Discovery
Fund is an ‘ever green’ fund, providing a critical resource for proof of concept, prelicence, pre-seed and seed investments, enabling the transfer of University related
technologies for the benefit of society. [ 6 ]
Implications derived

There is a wide variety of PoC funding schemes attached to universities of UK
changing time after time. Typically the largest universities maintain PoC funds
independent of availability of public support schemes by funding it from different
sources: donations (alumni, friends), budget of universities, public support
schemes.

Universities of the UK have received substantial inflow of PoC and seed funding
from government time after time, e.g. University Challenge Seed Fund, that is a
solid ground for proving its success and receiving further support from
stakeholders.

PoC funding is typically an integral part of other measures facilitating applied
research activities and technology transfer of universities.

There is a tendency that management of PoC funds of universities is entrusted to
commercial organization of the universities, e.g. Cambridge Enterprise, or
independent fund management investment companies, thus, ensuring effective
investment policy.

Knowledge Transfer Accounts program of Engineering and Physical Sciences
Research council of the UK could be a good tool to facilitate technology transfer –
the council as provider of funding for fundamental and applied research sets aside
small portion of budget for commercialisation initiatives of the research results,
including PoC funding.
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None of the above described PoC forms in UK and U.S. are directly transferrable to the
Project’s region. First of all, Latvian and Estonian governments are not ready for large
scale PoC funds of national importance because of limited financial resources, low
capacity of research management on a national scale and rather low research capacity of
research and higher education institutions. Secondly, the deal flow of PoC ideas in
Estonia and Latvia are too small for launching a separate PoC fund operated by private
investment company. Thirdly, research capacity of research and higher education
institutions is too low for running separate small-scale PoC funds attached to separate
universities.
Instead in Estonia and Latvia small-scale nation-wide PoC support instruments are
suitable with strongly devoted and motivated management in promoting the support
instrument and facilitating deal flow from research and educational institutions, as well
as industry and from abroad. Due to considerable additional management costs the
support instrument should be integrated in existing/ planned support structures, e.g.,
technology (risk capital) incubators and/ or pre-seed support instruments.
4
OVERVIEW OF SUPPLY AND DEMAND OF PROOF OF CONCEPT
FUNDING AND SUPPORT
4.1
Statistical overview of start-ups in the Project’s region
4.1.1 Overview of Mid-West Latvia region
According to former administrative division the Mid-West region of Latvia includes the
following districts: Talsi, Ventspils, Saldus, Kuldīga and Liepāja (Kurzeme Planning
Region). As well as Tukums, Rīga, Ogre and Limbaži (Riga Planning Region).
District
2007
Birth Death
rate
rate
126
51
40
21
139
80
78
53
413
213
135
92
8011 7857
237
115
63
33
2008
2009
Birth Death Birth Death
rate
rate
rate
rate
88
38
60
37
29
19
31
24
85
63
76
62
82
35
68
51
316
152
271
197
136
36
94
41
6113 2908 5162 3500
165
51
132
37
55
20
40
24
Talsi
Ventspils
Saldus
Kuldīga
Liepāja
Tukums
Rīga
Ogre
Limbaži
Latvia
14208 11186 11347
total
4764
9228
5715
2010
2011
Birth Death Birth Death
rate
rate
rate
rate
112
58
34
11
37
32
16
4
72
65
29
11
90
60
33
9
341
364
102
51
102
47
46
6
7864 5585 2737
397
186
85
55
4
64
35
22
7
13421
8835
Table 2 Enterprises death and birth rates in Mid-West Latvia 2007-2011/ Source:
www.lursoft.lv/lursoft-statistika
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On average the table shows birth rates are higher than death rates, it shows positive
tendency for the regions. Essentially different data can be noticed in 2009 when the
balance between previous and next year are different. It can be explained by the fact that
after the registered decrease of newly created companies in 2009, when the number was
lowest in the last six years, a positive trend has been noticed in 2010 – the number of
newly created companies has reached the level of previous years. The gathered
information by Lursoft shows that last year 13 421 new companies have been
registered, that is by 31.24% more than in 2009, still, the number of liquidated
companies has increased (+35,31%).
Lursoft statistics shows that highest number of new registered business is limited
liability companies and sole traders. Both of these entrepreneur forms every year reach
level of several thousand. For example, sole trader start-ups range from 1245 up to
2104, and the number of Limites liability companies start to noticeably increase from
year 2009, now reaching 4423 level (data from 2011).
Almost for a half of small-capital limited liability companies fixed capital is LVL 1.
Starting from the beginning of May, 2010, there is an opportunity to register a smallcapital limited liability company in Latvia, including those with fixed capital LVL 1, and
as the Lursoft data have shown, in eight months of 2010 a great number of
entrepreneurs have seized this opportunity, because 43.53% or 5,179 of all limited
liability companies registered last year, have been with diminished fixed capital. Of all
registered small-capital limited liability companies the vast majority are the ones with
fixed capital of LVL 1 (44.56%), but those with fixed capital between LVL 2 to 10 form
26.85% of all small-capital companies. Collected data over years shows that a smallcapital limited liability company usually is founded by one or two physical entities.
Nearly every second, who has founded a small-capital limited liability company last year,
has never been an owner or a co-owner of a company, which means that an opportunity
to register a limited liability company with a diminished fixed capital has encouraged
people, who for some reason have maybe delayed their business conception, to engage
in entrepreneurship.
According to Avotins (2011) there are almost no high-growth technology based
companies in West-Latvia region (Kurzeme region) which would be targets of PoC, preseed, business angels’ and risk capital funding. That is related with low concentration of
research and development capacity in the region which is still being developed in
Ventspils University College. Instead there have been companies with high growth
scores in traditional sectors, e.g., supermarkets, woodworking etc. In Mid-Latvia region
the situation is much better where due to concentration of research institutions in Riga
is a potential for development of ‘gazelle’ type (high growth) companies based on
technologies [ III ].
4.1.2 Overview of South-Estonia region
In the framework of this project the region of South- Estonia includes following counties:
Hiiu, Jōgeva, Lääne, Pōlva, Pärnu, Saare, Tartu, Valga, Viljandi and Vōru. There are
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located about 27% of newly born enterprises (data from year 2008). Newly born
enterprises by county and year are presented in Figure 2. Comparison data with Latvia
shows that during year 2008 the amount of newly born enterprises is higher in Latvia by
43%.
Figure 2 Newly born enterprises / Source: statistics Estonia
In Figure 3 is given data about dead enterprises in South-Estonian region. The
data shows that in year 2008 there was a sharp increase of dead enterprises.
Figure 3 Dead enterprises / Source: statistics Estonia
One of the main problems faced by entrepreneurs in pre-seed and seed phase is lack of
available financial resources. This phase for organizations is difficult to overcome, it is
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based on fact, that organizations are not able to create enough money when business
development needs investment and costs are higher than revenue. Fortunately, still,
birth rates exceed death rates, although in 2008 the difference was rather small. This
could be caused by the severe global economic crises which influenced also Estonian
economy.
Statistic Estonia provides data on company demographics starting from 2004 until 2008,
unfortunately there has been no particular focus on start-ups with innovative idea so far.
According to the available data, the highest business demography is found in Tartu
County, where in 2008 the amount of newly born enterprises reach 678 and against
that- dead enterprises 550.
Taking into account high concentration of research competence in Tartu city, there is
good soil for development of high-growth technology based companies in South Estonia
region (Avotins, 2011) [ III ].
4.2
Supply and demand for proof of concept funding and support at
regional level
4.2.1 Supply side of proof of concept funding and support in Mid-West
Latvia region
PoC funding
support
Description
Imprimatur
Capital Seed
Fund
Funding
 Seed capital, including proof of concept capital, an investment in equity of
the business concern.
 Size of fund to be invested until 2013 in Latvia – 3 MEUR, 100% funded by
EU and government of Latvia through JEREMIE initiative of European
Investment Fund
 Maximal investment size in seed stage – up to 100k EUR, while average
investment size in PoC stage 7-15k EUR
 Screening and investments made on daily basis
 Seed capital investment is committed to a specific investee at the
investment decision, but typically it is paid out only in 10-12 months
according to pre-set milestones. In case of failure of some milestone unpaid
investment is to be decommitted.
 Alongside Imprimatur Capital Latvia is managing start-up fund of 4,2 MEUR
size, co-funded (65-70%) through JEREMIE initiative which may function as
later stage investments amounting to around 400k EUR. Currently only 1
investment has been made in Latvia.
Target investees
 Technological global growth companies, also at PoC stage
 Industries: new type materials, laser, nano, medical, IT and communication
technologies, energy sector
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 Investment in PoC provided only after concept is validated in laboratory or
small scale prototype is available.
PoC support provided
 Cooperation with University of Latvia, Riga Technical University, Riga
Stradina University, Ventspils University College and couple of research
institutes. Only 1 PoC investment (unsuccessful) in Latvian University made.
Cooperation (expertise, screening of ideas) with LIDA within scope of preseed support instrument and match-making event Commercialisation
Reactor.
 To date 5 seed capital commitments of 100k EUR are made which are
currently being invested according to pre-set milestones.
Gaps not covered by the fund
 Covers only specific industries, other industries not considered;
 Selective investment policy, investment in 5 out of 100 screened cases;
proposals with low investment readiness and insufficient global growth
potential not considered. Selective policy pushes the fund to source for ideas
also abroad of Latvia to be developed in Latvia;
 The fund focuses basically on seed stage instead of pre-seed and PoC stage.
Therefore grant is awarded to registered companies not to research teams
like in PoC cases [ VIII ]
LIDA preseed support
instrument
Funding
 Pre-seed/ PoC capital, financed by EU and government.
 One call for proposals in 2008 and 2009, expected also in 2011-2013
 100% grant
 In 2008 and 2009 grant per applicant up to 7k EUR
 In 2011-2013 planned grant per applicant up to 14k EUR; the planned size
of instrument per year 142k EUR, funding on average 15 projects.
Support
Workshop for guidance on preparation of proposals for the support
instrument. Free of charge mentoring and business development support
(network of experts, team building), training on relevant topics (also
international experts involved). Introduction to potential investors.
Target investees
 Unique, technology and knowledge intensive ideas with international
growth potential.
 Ideas can be in as early stage as PoC.
PoC/ pre-seed support provided
 In 2008 - 14 out of 78 proposals approved; in 2009 - 16 out of 109 proposals
approved;
 Around 45% of approved proposals originated from scientific research
community being PoC cases, 55% originated from business community
being pre-seed cases;
 Training workshops for scientists and business idea authors provided
before each competition;
 Follow-up monitoring and support ensured;
 At least 5 approved proposals are being developed in business incubators of
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Latvia.
Gaps not covered by the instrument
 Awardees have hard time in attracting follow-up PoC or seed capital
investments because private capital investors are very cautious.
Sophisticated research results may need larger and multi-stage investment
to be ready for seed capital financing;
 Evaluation of proposals may be subjective because there is scarcity of
neutral experts in Latvia by some narrowly focused fields of expertise;
therefore more international expertise desirable in evaluation of proposals
and mentoring;
 Support is irregular (unpredictable), thus, discouraging deal flow of wellprepared proposals. [ XIV ]
Business
incubators:
8 BIs with
branches in
24 towns of
Latvia,
including 4
BIs with
branches in 9
cities of MidWest Latvia.
Business incubators currently operating in Latvia are entirely financed by EU
and government funding through support program “Business incubators”
managed by LIDA. Each incubator during 2010-2014 receives annual EU
support of around 570k EUR major part of which is awarded to nascent
entrepreneurs as co-funding in development activities.
Technology
incubator
program
Currently the Ministry of Economics of Latvia is working on development of
technology incubators support program. The support instrument is expected
to be launched in two years. One of the potential funding sources of the
instruments could be EEA and Norwegian financing mechanism where 72
MEUR are to be committed to Latvia until 2015.
One or two technology incubators in Latvia are expected. These instruments
will be for profit oriented and will make investment in equity of the investees.
The incubators will focus on technology intensive global growth companies
and are expected to actively screen research institutions of Latvia in
identifying suitable business concepts. It is expected that the incubators will
devote considerable resources for creating fruitful environment and high
expertise in pre-incubation/ PoC stage and will greatly contribute to
improving PoC support supply in Latvia. However, taking into account strong
for profit drive and international growth orientation also technology
incubators could be rather selective and leave out some part of sustainable
high growth PoC business cases.
Coinvestment
fund
It is planned that until end of 2011 European Investment fund through
JEREMIE initiative will introduce co-investment fund in Latvia which will be
2-stage risk capital fund and is to be managed by one investment company
The incubators can provide potential entrepreneurs with co-financing (up to
85%) in development of prototype and carrying out other PoC stage
activities. However, since the incubators have limited expertise capacity in
validating international commercialisation potential of sophisticated
research results and funding is granted to validated sustainable business
ideas, financial support for PoC activities are exceptionally rare or nonexistent. The incubators are more oriented to seed stage and rarely to preseed stage funding. Besides existing regional business incubators of Latvia
due to limited regional deal flow are more focused on facilitating overall
entrepreneurial activity of the region, not on creating ‘gazelle’ (fast growth)
type companies.
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(to be attracted through public procurement procedure). Total planned size
of both funds (stages) is 12 MEUR, including private capital comprising 50%
of the 2nd stage investment fund while 1st stage fund will be 100% publicly
financed. The investment company will decide the fund size of each stage
taking into account that the planned upper limit for the 1st stage investment
fund is 5 MEUR. These funds will have to be invested until 2013 (most
probably to be extended to 2015).
The planned investment size (in equity) in the 1st stage is up to 200k EUR per
investee, while there are no precise indication of the 2nd stage (start-up)
investment size limits. Co-investment fund is almost twin model to
Imprimatur Capital Seed and Start-up funds, but the aim of this instrument is
to address broader scope of ideas, not only focusing on global growth
technology intensive ideas, but on high growth potential ideas as such in need
of seed and start-up capital.
There is a hope that co-investment fund could address PoC funding needs of
some high growth potential business projects, however meantime there is a
possibility that it will focus more on post-PoC stages for the purpose of
ensuring more efficient use of time and management resources.
Table3. Supply of PoC funding in Mid-West Latvia region.
There are several funding sources which were not included in PoC support because they
fall within pre-seed or seed stage support (ideas are not based on sophisticated research
results), namely program START (high accessibility bank loans for start-ups) managed
by Mortgage and Land bank of Latvia and co-financed by EU, grant program ”Atspēriens”
for start-ups organized by Riga city council and Swedbank, competition of business ideas
”Idea cup” organized by LIDA, and business angels.
According to Imprimatur Capital and LIDA representatives, currently there is a sufficient
supply of PoC funding in Latvia in their funding target segment, namely, there are no
pro-active PoC ideas holders with high commercialisation potential which would not
receive support from either of the players. However, presumably business ideas (based
on sophisticated research results) with low investment readiness being in need of PoC
funding do not get support from either of the sources – Imprimatur Capital and LIDA.
Referring to Avotins (2011) one of the major gaps for PoC ideas originating from
research and higher education institutions in Latvia is lack of expertise and financial
assistance to validate the market. According to the field work carried out by students of
Stockholm School of Economics in Riga within which they visited research institutes and
sourced for ideas, every third researcher has some idea that could be validated for
commercialisation potential [ III ].
Apart from the funding opportunities (combined with expertise and advice) described
above there are several advice, mentoring and/ or coaching support initiatives at early
stage business development in Latvia:
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1) SSE Riga business development lab, providing pre-incubation services to students
of Stockholm School of Economics in Riga [ 21 ];
2) SSE Riga Mentor Club, financed by EU through mentoring program administered
by LIDA (on procurement basis). The mentor club is to provide advice to 20-30
business development teams per year. Experts of the club are mainly graduates of
SSE Riga [ 22 ];
3) “Līdere” (Leader) a network of established business women and business angels
providing mentoring to nascent entrepreneurs - women of Latvia. Līdere is
operating more as mentoring structure not network of active business angels
[14];
4) Centre of Young Entrepreneurs established just in 2010 providing mentoring and
expertise in development of nascent entrepreneurs [ 11 ];
5) Nordea bank business school providing training, mentoring, coaching and matchmaking with potential investors (once per year) [ 18 ];
6) JOSEFINE support instrument providing innovative and high growth potential
businesses with funding to buy coaching expertise (100 astronomic hours per
awardee). Open competition organised once per year [ 13 ];
7) Labaca (Latvian American Business Association of California) – business angel
network, representative office in Silicon Valley, business plan screening,
mentoring in capital attraction [ 2 ].
8) OpenCoffee Club Riga - Informal meetings for networking, training in capital
attraction and technology start-up management [ 8 ].
9) LIDA entrepreneurship specialists starting by 2009 have been individually
working with state research institutions to screen and identify research results of
State research program (2006-2009) with potential for commercialisation. On
average 2 cases per quarter are screened. Currently LIDA specialists are working
with 6 research results identified as commercially potential by providing
(buying) them with expertise (mentoring, specific sector related expertise) and
training, and introducing them to the existing PoC and seed stage funding sources
of Latvia [ 12 ].
Presumably only part of the above listed advice, mentoring and/ or coaching
organisations/ initiatives are able to provide qualitative expertise for scaling
internationally PoC stage business based on sophisticated research results. This kind of
expertise is essential in guiding nascent entrepreneurs in effective spending of the
limited development resources (private, pre-seed instrument, other) to get to the next
stepping stone for accessing further PoC or seed capital funding.
Conclusions

There is considerably high supply of expertise, advice and coaching support in
Latvia for development of PoC stage business ideas. Presumably if PoC idea holder
is pro-active, he can get high quality guidance on business development.
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
Currently as the only full-scale PoC funding and support provider in Latvia can be
regarded Imprimatur Capital Seed Fund since it has high expertise in developing
technology and knowledge intensive businesses on international arena and
provides multi-stage funding, merging PoC and seed capital funding up to 100k
EUR. However, Imprimatur Capital has very selective investment policy and
therefore many sustainable, high growth, ineligible by industry and/ or immature
PoC stage business ideas are neglected. Moreover, the fund basically focuses on
seed stage investments.

Additional support structure for funding PoC stage ideas in Latvia is Pre-seed
instrument of LIDA. However, it is short on providing multi-stage PoC funding
which could be crucial for many technology intensive business ideas, and is
irregular, thus, discouraging deal flow.

Business incubators are considered as another potential PoC stage funding source
in Latvia. However, they are focused on seed stage funding, rarely on pre-seed
stage and exceptionally rarely on PoC projects.

Launch of two new funding instruments is expected in Latvia – Technology
incubators support program and Co-investment fund which could considerably
improve PoC funding supply. Still there is a risk that the first will also pursue
selective investment policy, while the second will focus on seed funding phase.

According to analysis, all pro-active PoC ideas holders with high
commercialisation potential can get funding support in Latvia, at least early-stage
PoC support from pre-seed instrument of LIDA. However, according to experience
of the UK PoC ideas typically are in need of multi-stage funding to completely
prove functionality and marketability of the concept, and thus be ready for seed
funding. Currently government of Latvia has been very cautious in granting preseed support instrument funding due to limited resources and unwillingness to
take risk. There is no clear range of the necessary maximum PoC investment size
per case in Latvia, but it could be up to 30k - 50k EUR, excluding exceptionally
research and knowledge intensive cases. Therefore, as the current market gap of
the PoC funding supply of Latvia can be identified the later stage (at least 2nd) PoC
funding to ideas which do not qualify for criteria (industry, potential) of the highly
selective investors, e.g. Imprimatur Capital Seed Fund. This is approved by risk
capital expert Mr. Sosārs, stating that if a technology intensive company has to
bootstrap, its feasibility and survival chances goes down sharply (longer time to
market, loss of momentum). To ensure effective use of PoC funding it should be
combined with high level mentoring expertise [ XIV ]

Since pre-seed support policy is only developing in Latvia, and there is no clear-cut
PoC support policy, the current PoC funding supply and expertise support is
fragmented and inconsistent (e.g. LIDA pre-seed funding has been irregular) in
Latvia. It has detrimental effect on R&D institutions, and respective deal flow
because R&D players don’t have perception of a clear and reliable road map in
commercialisation of R&D results in Latvia. The resulting effect – less focus in R&D
on commercialisation. Therefore presumably there is latent unexposed PoC
funding demand from R&D sources and therefore as another market gap is
irregularity of PoC funding and insufficient total volume of funding (also for the
initial stage of PoC ideas).
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4.2.2 Demand side of proof of concept funding and support in Mid-West
Latvia region
Estimate of annual deal flow - PoC ideas with sufficient commercialisation potential for
support in Latvia are described in the table below. Estimates are based on the current
results of PoC funding providers in Latvia, ESTER project team and subjective judgment
of authors of the research.
Support structure
LIDA pre-seed instrument
Qualitative PoC
ideas per year
7
Imprimatur Capital Seed Fund
5
Regional business incubators
of whole Latvia
3
Technology incubators (to be
established), currently
unexposed or partly exposed
ideas
5
None
5
TOTAL
Justification
45% of the approved projects in
LIDA pre-seed support instrument
Based on existing results, size of
Seed Capital fund, and estimate of
representative of Imprimatur Capital
Assumption, taking into account that
BIs operate as important regional
support structures, closely
interlinked with higher education
institutions. Subjective assumption
of authors.
Estimates of Ester project team in
2005 of potential clients of
technology incubators – 10 cases per
year, including 5 cases from
industries not covered by
Imprimatur Capital.
Currently latent, unexposed ideas
due to fragmentation of the PoC
funding and support in Latvia.
Potential holders of ideas –
engineers, middle and top level
managers of technology intensive
companies in Latvia.
25
Table 4 Estimate of PoC stage deal flow. [ IV, VIII, XIV ]
Assuming that the average funding for complete PoC of the research results would be
around 40k EUR, the total demand for PoC funding per year in Latvia amounts to 1
MEUR. Currently, around 75k EUR (around 15k EUR per project) of the demand is
covered by Imprimatur Capital Seed Fund, 65k EUR by LIDA pre-seed instruments and
presumably 30k EUR by business incubators, and 150k EUR is to be covered by
technology incubators. Arithmetically the PoC funding gap in Latvia is around 680k EUR
(830k EUR if the planned program of technology incubators is not included) and this is
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Small Innovative Business Support Network / SIB net (EU 31398)
the gap where government should step in because private sector is not ready to cover it
due to different reasons (insufficient prospects of international growth and readiness of
idea, industry focus etc.). The gap is partly comprised of demand for later stages of PoC
and partly of currently latent/ unexposed demand due to fragmented and inconsistent
support to PoC ideas.
The estimate provided here should not be taken as granted (may be over/underestimated), but just give a feeling of the overall situation in Latvia. Probably the
PoC funding gap is even larger.
The overall statement of PoC and seed capital providers in Latvia is that there is
insufficient deal flow of high growth potential business ideas in Latvia and that there are
several ways to facilitate demand, including PoC stage, for instance:

Improving/ reshaping work of Technology transfer contact points of universities
which currently operate merely as information points, but not as effective
communication channel between scientists and private sector and funding
providers.

Intensification of work in absorbing R&D results with commercial potential from
CIS countries (match-making events, other methods), analogy with
Commercialisation Reactor already being successfully organised in Latvia. It is
suggested [ IV ] that 40-60% of deal flow of technology incubators (by essence
representing PoC stage) would come from abroad. In contrast, Gullander and
Napier (2003, 13) estimate that in Sweden 60-80% of ideas come from the
domestic research and business sector. The difference is attributable to lower
domestic R&D capacity and less developed innovation culture in Latvia.

Intensifying work with R&D potential of Latvia abroad, namely with established
scientists who have emigrated from Latvia and students studying abroad.

Consistency in PoC funding and support policy on a governmental level that in
longer term would results in R&D sector more focused on commercialisation.

Introducing of engineering management master’s degree programs in higher
education system of Latvia within which students would study engineering
sciences combined with knowledge of markets, product development and
business management. As a result engineers with more focus on
commercialisation would be prepared and they would be the future innovators
and owners of technology companies. Such study programs are widespread in
Scandinavian countries.

Consistent work with research and higher education institutions, and society in
facilitating innovation and entrepreneurial culture, int.al., direct work with
researchers, application of creativity methods in generation of new ideas,
training courses etc.
Likewise, a need for commercialisation success stories was emphasized which would
function as a role model for R&D individuals and institutions.
Conclusions
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
According to approximate estimate the demand for PoC in Latvia could exceed
supply 3 - 6 times. The gap is basically attributable to PoC cases not funded by
private sector and is gap where government should step in. Moreover, the gap is
partly comprised of demand for later stages of PoC and partly of currently latent/
unexposed demand due to fragmented and inconsistent support to PoC ideas.

The overall view of the PoC funding providers is that there is insufficient deal flow
of high growth potential ideas in Latvia and that apart from strengthening overall
capacity of fundamental and applied research in Latvia, there are number of
initiatives to facilitate deal flow, e.g. events for absorbing R&D results of CIS
countries (Commercialisation Reactor etc.).
4.2.3 Supply side of proof of concept funding and support in South-Estonia
region
PoC funding
support
Description
Innovation
voucher grant
program of
Enterprise
Estonia
 100% funding for SMEs to buy innovation services from higher education
and research institutions, patent offices and certified labs.
 Grant up to 3200 EUR per SME
 Total assignment for 2009-2013 – 2,9 MEUR
In 2009 supported number of project – 149, funds allocated – 0,55 MEUR.
Opportunity to fund small fraction of PoC stage costs of new R&D results of
SMEs.
Gaps not covered by instrument
 Insufficient funding to cover later stage PoC costs
 Funding unavailable to individuals or research institutions, the instruments
is focused on SMEs [ 5 ].
Business incubators currently operating in Estonia are co-funded by
Enterprise Estonia, except for Tartu Biotechnology Park (further - TBP)
incubator which to large extent is funded by private capital and stands out as
risk capital incubator (taking equity position in incubatees). Due to the
narrow focus of TBP on the biotechnologies, medicine and veterinary
medicine and close cooperation with educational and research institutions
and the market players, it has high expertise in commercialization of projects
in the target industries and therefore provides funding also to proof of
concept projects in biotechnologies, medicine and veterinary medicine. TBP
was launched in 2005, having currently around 8-10 companies in
incubation. TBP takes equity in the new companies of the business incubator
(seldom majority) and actively participates in the management process of the
start-ups during the first years of operation.
12 business
incubators
in Estonia,
including 5
BIs in SouthEstonia
region
Alike in Latvia other business incubators can provide potential entrepreneurs
with co-financing in development of prototype and carrying out other PoC
stage activities but have limited expertise capacity (apart from TBP) in
validating international commercialisation potential of sophisticated
research results. Therefore financial support for PoC activities are (if at all)
exceptionally rare. The incubators are more oriented to business type project
and pre-seed and seed stage funding.
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Competition
of business
ideas
“Ajajuht”
(Brain hunt)
The largest competition of business ideas in Estonia organized since 2007 (on
average once per year) and receiving as much as 1700 ideas in 2010. The
total award fund of 96k EUR in 2011. The winners receive 5k – 15k EUR
award. Presumably some of the winners are to be qualified as PoC type
projects. [ 3 ]
Table 5. Supply of PoC funding in South Estonia region.
There are four risk capital funds operating in Estonia which do not exclude investing in
early stage development of technology intensive ideas, namely, Ambient Sound
Investment, Estonian Development Fund, Martinson Trigon Venture Partners and WNB
Project. [ XIII ]
However, in reality only Ambient Sound Investment (ASI) has made investment in as
early stage as PoC/ seed stage, which also operates its own business incubator where
their own ideas are developed in-house (currently 3 companies in incubation).
Nonetheless, ASI is prone to invest in established companies with formulated business
plan, product and core team in place. Average investment size is 500k EUR, taking
around 25% equity share of investee (50% in investing in incubator project). ASI risk
capital investment company was established in 2006 by owners of Skype after sale of the
business to eBay. Capital size of ASI fund is 100 MEUR. Since ASI operates with own
capital, it is very flexible regarding investment policy (investment stage and size,
industries, regions, length of stay in investees). However, it has highly selective
screening for early-stage technology firms (preferably ICT sector) with excellent growth
potential, qualifying for the following criteria:

Have R&D at the core of their nature;

Be built by people who want to be global leaders in their field;

Be based in Eastern Europe, Russia or Asia, and demonstrating global ambition;

Own intellectual property in their core technology area;

Seed or early stage growth phase.
So far ASI has made at least 28 investments (Europe – 21, Asia – 4, USA – 3), including at
least 17 investments in Estonia. Clearly AMI is to cover minor fraction of PoC funding
demand in Estonia due to highly selective investment policy. [ 1 ]
Significant governmental (Estonian Technology Agency) initiative facilitating
commercialisation of R&D results of higher education and research institutions in
Estonia is SPINNO program. Although it does not provide proof of concept funding,
since 2001 it has been greatly contributing to commercialisation of public R&D results.
For time period 2007 - 2013 government is to allocate through the program 5,4 MEUR to
the 7 project, respectively project of Tartu University of Technology, Estonian Maritime
Academy, Estonian Academy of Arts, Tallinn College of Engineering, Tartu University
(partners also Tartu Science Park and the Estonian University of the Life Sciences),
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Tallinn University and BIOSPINNO partnership (8 institutions). The main directions of
support are:

Development of legal or administrative framework within universities and R&D
institutions, which influence application of research results in business and
creation of favourable business environment in universities and R&D institutions;

Creation of spin-off enterprises, patenting, licensing policy development,
financing and access to (international) capital markets;

Enhancing the contract research and R&D-related cooperation improvement of
exchange of information and co-operation between local and international
partners.
According to the evaluation of the program in 2007, it had been rather successful in
facilitating increase in income from R&D contracts to business, number of patents and
licenses, and established spin-off businesses. As one of the recommendations of Impact
Evaluation of Spinno Programme in 2001–2006 report for improving commercialisation
process of R&D results was provision of proof of concept funding which should be an
integral part or interlinked to SPINNO program as it has high recognition among public
R&D sector. The need was emphasized by participants of the program. Still there is no
proof of concept funding instrument developed and operating in Estonia. [ V-VI ]
Below are listed several advice, mentoring and/ or coaching support initiatives to early
stage business development in Estonia:
1) Enterprise Estonia (EE) which is running development centre in each county of
the South Estonia region providing free counselling services for nascent
entrepreneurs. Likewise EE is open to individual work in helping nascent
entrepreneurs, int.al. buying expertise of specialized consulting companies
(Advisio, BDA consulting etc.) [ 5 ].
2) ETNA non-governmental organization supporting nascent entrepreneurs-women
by training, networking and mentoring.
3) Estonians Start-up Leaders club formed in 2009, sharing experiences and best
practices on managing early-stage start-ups, also inviting experienced guest
speakers in their organized events [ 23 ];
4) GARAGE48 foundation established in 2010 in Estonia, organizing business ideas
generation and development sessions.
There is a high expertise support structure in Estonia - SeedBooster (Estonian
Development fund) which is a virtual business incubator whose objective is to unleash
the international potential of ambitious business projects and develop them further until
they are mature for venture capital financing. However, it focuses on start-up phase of
business development.
Conclusions

While there are couple of players that provide PoC funding in Estonia (Ambient
Sound Investment, Enterprise Estonia with Innovation voucher instrument,
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business incubators, especially Tartu Biotechnology park business incubator), the
PoC funding supply is irregular, fragmented and of insufficient size. The
exceptually good example is business incubator of Tarty Biotechnology Park,
which operates as risk capital incubator, taking part in equity and management of
the start-ups, meanwhile providing proof of concept funding. However, it has too
narrow industry focus and needs of proof of concept project of other industries in
Estonia may not be met.

Apart from SPINNO program, ”Ajajuht” competition, Innovation voucher and
business incubators, there is no governmental policy developed in Estonia
regarding PoC funding and support. In fact, although according to
recommendations of Evaluation of Spinno Programme in 2001–2006 report PoC
funding is necessary and demanded among R&D institutions, government has not
yet introduced measures covering PoC funding gap.

Estonian early stage business development financing market is similar to Latvia’s
market having the same main PoC stage market gaps – total supply size of PoC
funding is too small and non-existent later stage (at least 2nd) PoC funding to ideas
which do not qualify for criteria (industry, potential) of the highly selective
investors, e.g. Ambient Sound Investment. Presumably PoC investment size per
case in Estonia is similar to Latvia, being 30k - 50k EUR. According to experience of
UK, the government should step in and cover the PoC funding gap.
4.2.4 Demand side of proof of concept funding and support in SouthEstonia region
Since currently there are almost no PoC funding structures operating in Estonia it is
hard to judge about deal flow volumes. Likewise no researches estimating demand size
for PoC funding have been identified. Therefore, estimated demand for PoC of Latvia was
used as benchmark and comparative position and respectively demand in Estonia was
estimated. Weighting comparative strengths and weaknesses of R&D sectors of Estonia
and Latvia suggests that there could be larger demand for PoC funding in Estonia. Latvia
is comparatively larger by population size and slightly larger by total number of
scientists, while Estonia outperforms Latvia in the following aspects:

larger spending for R&D both as percentage (Estonia 1,42%, Latvia 0,46% of GDP,
Eurostat, 2011) of GDP and in absolute numbers [ IV ];

around 2,5 time more scientists working in private sector in Estonia than in Latvia,
respectively 1986 (for comparison 953 scientists in 2003) and 750 (for
comparison 702 scientists in 2003) (Eurostat, 2011) presumably resulting in more
commercialisation of R&D. The large difference could be attributable to higher
influence of Scandinavian mentality in management of Estonian companies and
thus larger focus on innovative entrepreneurship [ IV ];

Estonia has success story - Skype - positively impacting mentality and focus of
researches;

Estonian government has been implementing since 2001 SPINNO program
focusing on raising commercialisation of public R&D results;
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
Estonian Science Foundation has been implementing support programs ERMOS
and MOBILITAS for facilitating top researchers and postdoctoral researches to
work in research institutions of Estonia and abroad (to gain esperience), e.g. top
researchers who come from abroad to work in an Estonian R&D institution to
create their own research group in the first priority area of Estonia, are awarded
grant for 3-4 years. [ 7 ].
Taking into account the comparison above, it would be reasonable to assume that
demand for the PoC funding in Estonia could be higher than in Latvia. For prudence
reasons it is assumed that demand for PoC in Estonia is the same as in Latvia,
respectively around 1 MEUR. Presumably currently around 90k EUR of the potential
demand is covered by ASI, 30k EUR by business incubators and 45k EUR by Ajajuht
competition. The resulting PoC funding gap is around 835k EUR, being larger than in
Latvia, and a question can be posed - whether there is considerable latent/ unexposed
demand for PoC or there are other sources for funding PoC stage, e.g. partly through
SPINNO program.
Conclusions

According to approximate estimate the demand for PoC in Estonia could exceed
supply around 6 times. Presumably there could be rather high latent/ unexposed
demand for PoC support.

The support initiatives of Estonian government to the public R&D (SPINNO,
ERMOS, MOBILITAS programs, funding size devoted to R&D) and innovation
climate (success story of Skype, high employment of researchers in private sector)
forms a promising ground for generating deal flow with high commercialisation
potential.
4.2.5 Commonalities and differences in Latvia and Estonia
Commonalities of both countries:
 Fragmented and inconsistent supply of PoC funding and support.
 Lack of clear-cut governmental policy regarding support to PoC which is
perceived as pre-seed by essence and not emphasized as significant step in
commercialisation of public R&D results.
 Existing PoC funding provided by the private sector is of sufficient size per
investee, but the support is very selective, while funding provided by
government (grants) are rather small per awardee and do not cover the later
stages of PoC.
 Demand for PoC funding exceeds supply in both countries and presumably there
is considerable latent/ unexposed demand for PoC funding in both countries.
Differences:
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 Latvia seems to be ahead of Estonia in supply of PoC funding, namely, there are
initiatives backed by public financing which can clearly be identified as PoC
support – Imprimatur Capital Seed Fund and LIDA pre-seed instrument, and
prospective support program of Technology incubators. In Estonia only the
competition of business ideas “Ajajuht” can be partly regarded as PoC type
support.
 Estonia, in turn, is ahead of Latvia in facilitating demand (high quality deal flow)
for PoC funding by implementing SPINNO, ERMOS and MOBILITAS programs,
devoting considerable budget resources to public R&D, as well as having better
general settings (success story of Skype, large involvement of researchers in the
private sector, higher prestige of science sector among the prospective young
scientists). Nothing of this is present currently in Latvia.
5
Conclusions and recommendations
5.1
Conclusions on market bottlenecks
Supply side bottlenecks are similar in both countries, being larger in Estonia:

PoC funding and support is not distinguished as a separate support direction in
governmental policy and funding market, thus, there is inefficient demand-supply
relations (both flow of information and of deals and funding), including
fragmentation and inconsistency of supply.

Insufficient supply of PoC funding for ideas which do not qualify for highly
selective investment policies of Imprimatur Capital and Ambient Sound
Investment in Estonia.

To date the provided public grants for PoC within LIDA pre-seed instrument are
up to 14k EUR which typically according to international experience is
insufficient to cover complete PoC and the idea holders afterwards are having
hard times in overcoming the funding gap to seed phase capital.
The common demand side bottleneck not separately analysed within this research is
mentality and reluctance of nascent entrepreneurs and researchers to give away share
of company to investor. That could be partly related to fear of losing their intellectual
property as approved by numerous surveys (e.g. LIAA, 2010 (2)) indicating that
entrepreneurs in Latvia are afraid of having their intellectual property stolen (e.g.,
breach of patent). Also Mr. Illing, expert from Tartu Science Park admits that,
predictably, Estonian start-up companies are reluctant to issue new equity and rather
bootstrap or take loans. [ V ]
While Estonian government has been making significant contribution to facilitating
commercialisation of public R&D over the last 10 years that is expected to result in
higher PoC deal flow, in this aspect Latvia has a far way ahead. Development and
implementation of support measures like SPINNO program would be necessary in
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Latvia. In fact, SPINNO program is similar to technology transfer points program in
Latvia but implemented in more long-term and effective way.
5.2
Recommendations
Taking into account the small size of Latvia and Estonia and the limited potential of the
domestic R&D capacity, it is reasonable to argue that there is no place for such large
scale PoC initiatives as SBIR of the U.S. or PoC program of Scottish Enterprise, or such
narrowly focused PoC initiatives as separate PoC investment funds (independent or
attached to specific higher education and research institution). Instead focus should be
on efficient use of the existing/ planned support structures by applying good practice
principles of the UK. Moreover, PoC funding structures should be of national scale in
order to offset high running costs of such instruments.
Authors of the research suggest the following guiding principles in improving PoC
support in Latvia and Estonia while in the chapter No 6 “Model of PoC support in Latvia
and Estonia” the model of PoC support for the Project’s regions is proposed:
 If governments find it reasonable to delimit PoC from pre-seed funding then
elaboration of a separate policy support direction for PoC, most probably being an
integral part of commercialisation policy of public R&D results, could pay off. In
case of Estonia it could be linked with SPINNO program. The resulting effect would
be consistency and uniformity of PoC support and R&D institutions and individuals
would have clear and united perception of commercialisation roadmap of their
R&D results.
 PoC support initiatives/ models should be promoted by institutions/ agencies with
the most interest in successful investment of the later stage capital (seed phase
funding etc.). In Latvia it would be the Ministry if Economics (including
subordinates agencies – LIDA and Latvian Guarantee Agency), while in Estonia it
could be the Ministry of Economic Affairs and Communications (including
subordinated agency - Enterprise Estonia). Moreover, benchmarking of UK
practice could be considered, involving the financier of public R&D (the Ministry of
Education and Science in Latvia, the Ministry of Education and Research in
Estonia) in part-financing of PoC funding. That could have a positive long-term
impact on the way the ministries are planning development of and support to
public R&D. For example, in Finland commercialisation policy of public R&D
results is entrusted to joint technology agency TEKES of the Ministry of
Employment and Economics and the Ministry of Education and Culture. In case of
Latvia and Estonia creation of joint permanent working group could be considered.
 To fill the PoC funding supply gap in Latvia and Estonia the governments should
develop support instrument providing at least 2-stage PoC funding (in total
amounting to at least 30k – 50k EUR per project). Assuming that the new
instrument would replace to large extent the existing public PoC funding sources,
the governments should inject in the economy at least 830k EUR of PoC funding
annually in each country.
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 Since PoC ideas are knowledge intensive and global growth projects, PoC support
instrument in Estonia and Latvia should definitely be implemented by team
comprising risk capital industry experts with knowledge in international scaling of
technology businesses and have sufficient management budget for active screening
of PoC cases - consistent work with R&D sources of Latvia and Estonia, as well as
CIS countries. Involvement of external expertise, e.g., Oxford innovation, could be
considered.
 There is a set of initiative which the Ministry of Economics of Latvia should
undertake in cooperation with the Ministry of Education and Science in order to
facilitate commercialisation of public R&D results and increasing PoC deal flow,
including but not limited to:
- Improving/ reshaping work of Technology transfer contact points of
universities. Attraction of international expertise in running such contact
points/ centres would be necessary, e.g., Yeda Research and Development
Company Ltd. (the Technology Transfer Company of the Weizmann Institute of
Science) in Israel;
- Intensification of work in absorbing R&D results with commercial potential
from CIS countries (match-making events, other methods), analogy with
Commercialisation Reactor already being successfully organised in Latvia;
- Intensifying work with R&D potential of Latvia abroad, namely with
established scientists who have emigrated from Latvia and students studying
abroad;
- Consistency in PoC funding and support policy on a governmental level that in
longer term would results in R&D sector more focused on commercialisation;
- Introducing of engineering management master’s degree programs in higher
education system of Latvia within which students would study engineering
sciences combined with knowledge of markets, product development and
business management. As a result engineers with more focus on
commercialisation would be prepared and they would be the future innovators
and owners of technology companies. Such study programs are widespread in
Scandinavian countries;
- Consistent work with research and higher education institutions, and society
in facilitating innovation and entrepreneurial culture, int.al., direct work with
researchers, application of creativity methods in generation of new ideas,
training courses etc.
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6 Model of PoC support in Latvia and Estonia
PoC support should be developed as a part of publicly backed funding instrument
investing in seed stage of technology intensive global growth companies. Involvement of
seed stage investor is crucial for ensuring effective sourcing and development of PoC
projects. Meantime the managing company should not have too narrow focus of
industries, thus, excluding high quality PoC projects of other industries. Therefore, the
managing body should be either seed capital investment fund with wide range of target
industries (uncommon practice in the risk capital market) or organizations like
technology (risk capital) incubators. Government agencies of Latvia and Estonia are not
recommended as managing body of PoC support instrument due to high level of
bureaucracy, slow reaction to market signals, insufficient level and capacity in sourcing
PoC ideas and low capacity in dealing with risk capital projects.
In the table below the key elements of proposed PoC funding support model in Latvia and
Estonia are described.
PoC funding size per project
At least 30k – 50k EUR per project
granted in at least two stages
Form of PoC funding
Grant or soft loan
Total amount of PoC
At least 830k EUR per year in each
funding per year
country
Type of support instrument An integral part of technology (risk
capital) business incubators. At least
two incubators in each country, thus,
ensuring wide enough coverage of target
industries meantime specialization by
each of the incubators
Management team of the
Management team should have experts
technology incubators
from risk capital industry and probably
expertise from abroad, e.g., Oxford
innovation
Table 6. PoC funding support model in Latvia and Estonia.
The technology incubators should have considerable funding to the management team
for active sourcing of PoC ideas from national and CIS countries’ R&D sources. The
sourcing should be aligned with the governments’ economic, educational and science
policy in promoting commercialization of R&D results – cooperation in organizing
training, events and marketing to facilitate deal flow of PoC projects and to establish
technology incubators as a roadmap for commercialization of R&D results. Combination
of technology incubators and PoC support instruments could be positioned as the
national technology gazelles’ support policy. Moreover, funding to the management team
will be necessary to ensure tailored assistance in preparing PoC projects for investment
readiness which is time and resource consuming work.
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7 Future tasks and challenges
Currently the Ministry of Economics of Latvia is already working on development of
technology incubators support program. The support instrument is expected to be
launched in two years. One of the potential funding sources of the instruments could be
EEA and Norwegian financing mechanism where 72 MEUR are to be committed to Latvia
until 2015. Therefore the proposed PoC funding support model within this research
should be promoted to the Ministry of Economics of Latvia which would be interested in
improving the model of technology business incubators. The promoting bodies of PoC
funding support model should be research institutions and government agencies
(Latvian Guarantee agency, Latvian Investment and Development Agency) of Latvia in
alliance with the social partners, e.g., Latvian Venture Capital Association.
In Estonia, however, technology incubators is completely new concept and therefore
introduction of integrated technology business incubators and PoC funding support
could require more time. The promoter of the model should be Estonian Technology
agency (managing SPINNO program) and Enterprise Estonia in alliance with the social
partners. The model should be promoted to the Ministry of Economic Affairs and
Communications of Estonia
When the ministries would be ready to embark on such initiatives, the standard process
of elaboration and implementation of the support measure is to be taken by the
ministries (preparation and passing of regulations, organisation of procurement
procedure).
The main factor of sustainability and efficiency of the proposed PoC funding support
model will be integration with seed capital investment support structures (technology
incubators), thus, ensuring continuity of PoC funding.
One of the major challenges for the government of Latvia and Estonia would be to
ensure complementarity of the proposed model of technology incubators and PoC
funding with the other support measures in the market, namely, pre-seed funding
support (Ajajuht and business incubators in Estonia, LIDA pre-seed support instrument,
Cup of Ideas and business incubators in Latvia), R&D commercialisation support
(SPINNO program in Estonia, technology transfer points in Latvia) and seed capital
investment funds (Imprimatur Capital Seed fund and Co-investment fund in Latvia).
The largest risk associated with introduction of PoC support instruments would be the
necessary transition time for change in mentalities and perceptions of R&D sources,
increase in deal flow and efficient use of PoC funding entrusted to technology
incubators. That could require at least mid-term political commitment since immediate
positive results may be missing.
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8 References
Internet recourses__________________
1.
2.
3.
4.
http://asi.ee/
http://labaca.org
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IV “Feasibility study on technology incubators and new types of business incubators”
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