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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 2 Small Innovative Business Support Network / SIB net (EU 31398) 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. 3 Small Innovative Business Support Network / SIB net (EU 31398) 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. 4 Small Innovative Business Support Network / SIB net (EU 31398) 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 5 Small Innovative Business Support Network / SIB net (EU 31398) 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. 6 Small Innovative Business Support Network / SIB net (EU 31398) 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 7 Small Innovative Business Support Network / SIB net (EU 31398) 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. 8 Small Innovative Business Support Network / SIB net (EU 31398) 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 ] 9 Small Innovative Business Support Network / SIB net (EU 31398) 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: 10 Small Innovative Business Support Network / SIB net (EU 31398) 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; 11 Small Innovative Business Support Network / SIB net (EU 31398) - 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 12 Small Innovative Business Support Network / SIB net (EU 31398) 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. 13 Small Innovative Business Support Network / SIB net (EU 31398) 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 14 Small Innovative Business Support Network / SIB net (EU 31398) 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. 15 Small Innovative Business Support Network / SIB net (EU 31398) 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 16 4737 873 Small Innovative Business Support Network / SIB net (EU 31398) 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 17 Small Innovative Business Support Network / SIB net (EU 31398) 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 18 Small Innovative Business Support Network / SIB net (EU 31398) 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 19 Small Innovative Business Support Network / SIB net (EU 31398) 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 20 Small Innovative Business Support Network / SIB net (EU 31398) 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. 21 Small Innovative Business Support Network / SIB net (EU 31398) (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: 22 Small Innovative Business Support Network / SIB net (EU 31398) 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. 23 Small Innovative Business Support Network / SIB net (EU 31398) 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). 24 Small Innovative Business Support Network / SIB net (EU 31398) 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 25 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 26 Small Innovative Business Support Network / SIB net (EU 31398) 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. 27 Small Innovative Business Support Network / SIB net (EU 31398) 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), 28 Small Innovative Business Support Network / SIB net (EU 31398) 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, 29 Small Innovative Business Support Network / SIB net (EU 31398) 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; 30 Small Innovative Business Support Network / SIB net (EU 31398) 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: 31 Small Innovative Business Support Network / SIB net (EU 31398) 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 32 Small Innovative Business Support Network / SIB net (EU 31398) 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. 33 Small Innovative Business Support Network / SIB net (EU 31398) 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. 34 Small Innovative Business Support Network / SIB net (EU 31398) 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. 35 Small Innovative Business Support Network / SIB net (EU 31398) 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. 36 Small Innovative Business Support Network / SIB net (EU 31398) 8 References Internet recourses__________________ 1. 2. 3. 4. http://asi.ee/ http://labaca.org www.ajujaht.ee/english/ www.bis.gov.uk/policies/science/knowledge-transfer/earlierschemes/university_challenge_seed 5. www.eas.ee 6. www.enterprise.cam.ac.uk/seedfund.php?subsubsub=136 7. www.etf.ee 8. www.facebook.com/occriga 9. www.gla.ac.uk/colleges/scienceengineering/research/knowledgetransferaccount /ktasupport/fundingmechanisms/ 10. www.isis-innovation.com/researchers/UCSF-1.html 11. www.juc.lv 12. www.liaa.gov.lv 13. www.liaa.gov.lv/lv/par_liaa/starptautiskie_projekti/josefin/ 14. www.lidere.lv 15. www.londonproofofconcept.net 16. www.ncbi.nlm.nih.gov/books/NBK32841/ 17. www.nispofunds.com/investgrowthfundpoc.html 18. www.nordea.lv/Par%2bNordea/Sponsor%c4%93%c5%a1ana/Biznesa%2bskola/ 1435942.html?vanity=www.nordea.lv/biznesaskola 19. www.sbir.gov 20. www.scottish-enterprise.com/start-your-business/proof-of-conceptprogramme.aspx 21. www.sseriga.edu/en/about/partners/business-development-lab/businessdevelopment-laboratory.html 22. www.sseriga.edu/en/about/partners/mentor-club/mentor-club.html 23. www.startupleadersclub.com/ 24. www.vonliebig.ucsd.edu/about/partners.shtml 25. www.biopark.ee Publications, private communications__________________________ I “ALL MONEY IS NOT THE SAME!” (SME access to finance) , Cristian Saublens, Eurada, November 2007 II Article “London proof of concept funds” III Avotiņš, Valdis, private communication on 14 May, 2011 37 Small Innovative Business Support Network / SIB net (EU 31398) IV “Feasibility study on technology incubators and new types of business incubators” ,Ltd. 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