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Financing aninnovation hub

Mentoring materialContact information:Maurits Butter (TNO)+ 31 [email protected]

European Guide and Recommendations for the

Combined Funding of Large-Scale RID Initiatives

EU-GreatThis presentation is the result of the cooperation between the EU-

Great and the XS2I4MS project. The presentation combines the

insights gained during the projects, enabling both projects to

advance on their original objectives.

These project has beenco-funded by the European Union

Monique Sonnemans (BPD)+ 31 [email protected]

Financing aninnovation hub

Mentoring material

This presentation is the result of the cooperation between the EU-

Great and the XS2I4MS project. The presentation combines the

insights gained during the projects, enabling both projects to

advance on their original objectives.

These project has beenco-funded by the European Union

Contact information:Maurits Butter (TNO)+ 31 [email protected]

Monique Sonnemans (BPD)+ 31 [email protected]

This presentation is the result of the cooperation

between the EU-Great and the XS2I4MS

project. The presentation combines the insights

gained during the projects, enabling both

projects to advance on their original objectives.

European Guide and Recommendations for the

Combined Funding of Large-Scale RID Initiatives

EU-Great

Objectives of the presentation

• Objectives:– Create an overview of possible and impossible funding sources for

an innovation hub

– Create insights in the mindset of possible customers and their opportunities to pay for services and be involved in a hub

• Why:– Create a foundation of knowledge on possible funding to identify

potential sources and understand how to approach them

– Get a pragmatic and realistic view on what you can expect from your customers with relation to funding and service needs

May 8, 2017 Financing an innovation hub

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Introduction to finance


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Financing an innovation hub

Financing a hub: Customers, fundingsources and resources


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Income

Costs

Filling the gap

• Services• IPR•Conference fees•Memberships

•Equipment•Personnel• Infrastructure & housing•Raw materials

•Governmental support•Partner contribution• Sponsorships•Private capital

Financing an innovation hub

Financing a hub: Customers, fundingsources and resources


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Income

Costs

Filling the gap

• Services• IPR•Conference fees•Memberships

•Equipment•Personnel• Infrastructure & housing•Raw materials

•Governmental support•Partner contribution• Sponsorships•Private capital

Developing a hub is an evolution


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preparation initiation stabilization terminationcontinuous growth

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Four related activities, requiring different funding sources

1. Preparatory, start-up funding to develop a business plan

2. Financing infrastructure

3. Financing projects using the infrastructure

4. Operational costs

23-9-2016 Financing Digital Innovation Hubs

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Innovation hub services

May 8, 2017 Financing an innovation hub 9

Objectives Activities

Community building Scouting, brokerage, awareness creation, dissemination, ecosystem building

(Collaborative) R&D Technology concept development, proof of concept.

Skills and education Courses, workshops, offering technological infrastructure for educational purposes

Incubator/accelerator support Voice of customer, market assessment, business development, consortia building

Visioning & strategy development Market intelligence, market assessments, innovation strategy development

Testing and validation Certification, product demonstration, product qualification

Technical support on scale-up Concept validation, prototyping, small series production

Commercial infrastructure Renting for R&D, low rate commercial production

Access to finance Financial engineering, connection to funding sources, investment plans

Mentoring Training of other hubs and competence centres

Public versus private hubs

Public innovation hubs

• Basic funding from government

– Societal mission

• A spider in the web of creating ecosystem

• Connecting research to business

• Valorisation of expensive technological infrastructure

• Semi-open partnership

Private innovation hubs

• Making business

• Selling the services of somecommercial partners

• Expanding a platform, increasing itsuse

• Limited to creating the ecosystem

• Commercial activities are often a core service

• Semi-closed partnership


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Part 1: Financing a hub


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First: Start-up financing

Time

Fun

din

g(cash

and

in-kin

d)

T-1 T0T-2

• Feasibility study

• Creating consortium

• Developing business plan

• Finding financing


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Second: Financing infrastructure

T0

Fun

din

g(cash

and

in-kin

d)

T1 Tend

• Equipment

• Housing and transport infra

• ICT infrastructure

• Other facilities


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Third: Project financing

T0 T1 TendTime

• R&D and project

management personnel

• Some indirect costs

• Some depreciation of infra

Fun

din

g(cash

and

in-kin

d)


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Fourth: Financing operational activities

TimeT0 T1

Fun

din

g(cash

and

in-kin

d)

Tend

• General management

• Technicians and secretary

• Business development

• PR and communication


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Public funding principles

• Mission of governments is to:– Address Grand Challenges

– Improve the economy at large

– Do what other stakeholders can not do

• Market failures are leading

• Many governments focus on lower TRLs and expect industry to address the higher TRLs

• Bound by State Aid Rules


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Why do governments invest

• Knowledge spill-overs: Knowledge and expertise created will benefit a lot of companies

• Imperfect information: sharing of information will also enhance the information and expertise, again for all

• Coordination/network failures: Better finding partners and support coordination will enhance success and reduce costs

• Public goods: Educating/training of people is a governmental responsibility

23-9-2016 Defining digital innovation hubs

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State Aid Rules

• EU28 are bound by rules to provide funding

• There must be a market or system failure

• Differences between SMEs, large firms and clusters

• Public organizations are not bound to State Aid Rules

• There is a difference between innovation and economic development


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Possible funding sources

Public

• Subsidies

• Grants

• Taxation

• Loan and loan guarantees

• Innovation vouchers

• Equity

• Support in communication

• Laws and regulation

• Institutional support (universities and other public institutes)

Private

• Revenues (e.g. IPR)

• Venture capital and angel funds

• Memberships and sponsorships

• Contract research, consultancy and commercial fees

• Industrial partnerships

• Partner investments

• Loans


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Regional funding

• Why: ECONOMIC DEVELOPMENT, Jobs, image of the region, support of SMEs, ecosystem development

• What: Equity, loans, project funding, grants (infrastructure)• What not: 1) TRL1-4 ; 2) Large firms, universities, RTOs; 3) Tax, laws• Examples: Financing equipment, support of incubation, conferences,

housing• Remarks:

– More focused on economic development then innovation

– Important in initiation (infrastructure), but less important later

– Opportunities to get housing

– Connect to educational program

– Get money from ERDF


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National funding

• Why: Strengthen the innovation ecosystem at large, like linking universities to industry

• What: Basic research funding (institutional), project funding, infrastructure funding

• What not: TRL6-9;• Examples: Institutional support, projects co-fin, vouchers, R&D tax• Remarks:

– Focused on innovation and less on economic development

– Get the connection to industry ready

– Use the market failure terminology

– Use H2020 opportunities and connect to ESIF


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European funding

• Why: Creating pan-European cooperation, boosting the economy and addressing Grand Challenges using innovation, excellence

• What: Loans, equity, grants, co-funding large scale RDI projects and economic development, support of SMEs, individual persons, learning

• What not: Small projects, national initiatives, (education), long term funding, technological infrastructure

• Examples: Innovation Actions, CSAs, trans-national cooperation of governments, national loans

• Remarks:

– Formalized approaches

– More then one country required

– Use ERDF and H2020 as initiator

– Get access to ERDF through regional contacts23-9-2016 Financing Digital Innovation Hubs

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Private funding sources


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Private funding principles

• Mission of private investors is to make money

• Low risks - high profits is leading

• Focus is on the higher TRLs (TRL7-9)

• It is not about R&D, but about business creation

• Of limited relevance to hubs, but more relevant for its customers


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Possible funding sources

Public

• Subsidies

• Grants

• Taxation

• Loan and loan guarantees

• Innovation vouchers

• Equity

• Support in communication

• Laws and regulation

• Institutional support (universities and other public institutes)

Private

• Private equity, venture capital

• Loans

• Industrial partnerships

• Memberships and sponsorships

• Contract research, consultancy and commercial fees

• Partner investments


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(Private) equity, venture capital

• Why: Make money. That is it.• What: Provide funding in exchange of a share in the profits, high

returns on investment (scalable), fund of funds• What not: High risks, complex projects, long-term• Examples: Connection to hubs to support their customers• Remarks:

– Technological expertise in VCs is limited and an opportunity

– Of limited use to innovation hubs (limited revenues expected)

– Create indirect mechanisms with VCs to attract customers


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Loans (private banks)

• Why: Make money (for a hub it is addressing cash flow problems)• What: Lending capital based on collateral or sound business plan• What not: Even medium risks. No funding of activities.• Examples: Loans for housing and equipment as collateral, based on

low risk commercial services (testing and validation)• Remarks:

– Combination with guarantees of governments is possible

– There are opportunities for a fund of funds (ESIF)

– The overall business model of the hub should make money

– Equipment is often a risky collateral, as depreciation is fast

– Banks have limited technical expertise

– Offering loans can create customers23-9-2016 Financing Digital Innovation Hubs

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Industrial partnerships

• Why: To create participation with innovative business to create joint ventures, test their equipment, get inspiration or just reduce costs

• What: Equity, expert participation, pilot equipment, commercial fees• What not: Project funding, loans• Examples: Advisors to projects, researchers on location, testing

equipment, joint projects, renting equipment, small series production• Remarks:

– There must be a win/win situation

– It is interesting to create a partnership where equipment is tested in the hub (reduction of equipment costs)

– Larger firms have more opportunities because of portfolio thinking


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Memberships

• Why: To get connected to a “state of the art” R&D activity• What: Structural funding to get involved• What not: Nothing in return• Examples: Collaborative research funding, contract research funding,

participation in workshops/conferences, newsletters• Remarks:

– Large companies are connected mid-term (collaborative research), SMEs more short term (contract research)

– Three tiers are possible: 1) Mid-term, partnerships, 2) Short-term more individual, 3) Getting access to the network

– Important to get involvement from industry


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Partner investments

• Why: To create access to the market and partnerships in RDI, as well as operationalize its societal mission as innovation partner

• What: Technology/business/management experts, (technological) infrastructure

• What not: Financial capital for the hub, consultancy, capital for SMEs• Examples: Location, IT infra, equipment, business developers,

technical experts, HR support, staff.• Remarks:

– Focus is on low TRL science & technology expertise

– Often investments are reduced after a few years

– Making business with business


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Some conclusions onfinancing a hub


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Innovation hub services

May 8, 2017 Financing an innovation hub 32

Objectives Public Private

Community building H2020, national/regional funding on

networking

Brokerage fees, conference fees,

memberships

(Collaborative) R&D H2020, national programs, SMEs Contract research, large firms, IPR,

memberships

Skills and education Regional funding, ESF, Workshop/training fees, memberships

Incubator/accelerator support National/regional programs, ERDF Co-funding of SMEs

Visioning & strategy development H2020, National/regional programs

Testing and validation Loans, commercial fees

Technical support on scale-up H2020, national/regional funding Contract activities

Commercial infrastructure Initial funding from regions Commercial fees

Access to finance Consultancy

Mentoring H2020



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Exp

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Exp

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n• Initial funding for infrastructure is

needed• Partner contributions are crucial• To create the project portfolio

public funding is required• High costs on “advertisement”



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Exp

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increase of staff costs• Partner contributions are reduced,

the initiative institutionalized• Memberships create a steady

income



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Exp

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n• New equipment is needed• New markets explored and initiated• New personnel (experts) needed



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30%

70%

80%

10%

Concluding remarks on financing a hub

• Financing is patchwork. Create this combination of funding

• Within the EU27, the specific situation differs from country to country

• A viable hub business requires multiple business modelsand maximizing use of infrastructure

• Creation of the business funnel emphasizes the need forcommunity building, although the RDI is the core business

• Long-term viability requires long-term public funding


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Part 2: The customer side:Financial needs and funding

possibilities for customers DIH


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Financial needs and funding possibilities forcustomers DIH

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• Understanding (financial) needs of the customers of the DIH

– Understanding the customers, Company Life cycle (evolution), Financial needs

• Possible funding sources

– Funding sources, Life Cycle Funding

• Understanding needs and potential services DIH to different customers: Start-ups, SMEs and corporates

– Understanding needs and which services to provide as a DIH; How to support them with funding these activities; Examples services DIH to support SMEs with funding

Understanding the customers

To be able to sell your services as a DIH to the customers:

• Be very clear which services you offer as a DIH to a company – Customer wants to know: What do I get? What does it cost? (How fast?) How much

money can I earn with it?

– How much “hassle” is it (what do I have to do for it)

• You need to understand and speak the same language– Conditional: local, trust, accessible

– Understanding of the business and what a company needs => company life cycle

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researchproof of concept

pre-seed seed Early stage Growth MaturityDecline (or reinvent)

Venture PhaseBusiness Creation

Established BusinessBusiness management / Operations

Company Life Cycle

Financial needsCompany life cycle

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Costst

Revenue

Net Cash pool position

Valley of death

Possibilities in fundingCategories of finance

• Donations/sponsors

• 1. Grants/subsidies– Repayment: debt?

• 2. Debt– Conversion (in good/bad times): equity

• 3. Equity

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Possibilities in funding

1. Grants / subsidies

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Advantages Disadvantages

Low cost of capital Complex process

No dilution to shareholders Time and cost to apply

External validation Adherence to grant guidelines

Documentation / reporting

To much focus on grants

Matching


2. Debt

• Bank debt

• Leasing

• Bonds

• Suppliers

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Short term loans (one time, line of credit)

Term loans (monthly installments, bullet loans)

Secured and unsecured

Possibilities in fundingAd2. How banks look at you(r customer)

• 4C’s: credit history, character, capacity, collateral

• CEO is not Cash Extraction Officer

• How are you going to repay the debt?– Business plan instead of collateral -> ratios

• Realizable assets– Accounts Receivable

– Inventory

• Personal guarantees

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3. Equity

Selecting a Venture capitalist

• Financing stage

• Sector preference

• Geographical focus

• Amount of investment

• Hands on or hands off

• Evergreen or closed ended funds

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• Track record of the VC team

• Compatibility culture, personalities

• Experience with similar types of investments

• Are there competitors in the portfolio?

• Capacity to make follow-on investments

• Value added: strategy, network, executive search


A venture capitalist selecting your customer based on:

• Management skills and track record

• Novelty of the idea

• Technological aspects are important (“disruptive”)

• Market and growth potential vs niche

• Quality of business plan

• Financial attractiveness and liquidity

• Synergy with other investements in the portfolio

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Selection by a finance company

Bank• Management team• Credit history• Pay back capacity• Positive cash flow• Quality business plan• Ratios (solvency)• Collateral• Personal guarantees

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VC

• Management team

• Uniqueness proposition

• Market and growth potential

• Quality business plan

• Financial attractiveness (IRR)

• Synergy other investments in portfolio

• Scalability

Life cycle funding

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Stock Market Or Private Equity

Venture Fund

InformalInvestors

SeedFund

Subsidies and grants

Pre-SeedFund

Friends, FamilyFools

A

B C

A = Average Start upB = Fast groing Start up (e.g. ICT/software)C = High Tech Start up with high R&D spenditure (e.g. Biotech)

Life cycle fundingFunding facilities

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FounderFamily / Friend

Business angels

Seed Fund

Venture FundInstitutional Equity

Loans / Bonds

Private

Re

gion

al&N

ation

alEU

NWO/STW Fund

MIT

TKI

WBSO

TO2SMO

Innovation loan

Future fund

ERFO

ROMS

H2020: ERC / EIT

H2020: RIA / CSA

Interreg

EFSI / EIB / EIF

Funding support to customers by DIH

• Understanding needs and potential services DIH to different customers

– Start-ups

– SMEs

– Corporates

• Examples services DIH to support customers with funding their activities

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Innovation Hub Services - customers

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Objectives Services Start-ups Services SMEs Services Corporates

Community building ++ Network, brokerage + Brokerage, conferences +++ Membership

(Collaborative) R&D +++ Contract research +++ Collaborative R&D

Skills and education ++ Expertise ++ Workshop/training +++ Membership

Incubator/accelerator

support

+++ Incubator program +++ Accelerator program

Visioning & strategy dev. ++ Support

Testing and validation + 1 project ++ 1 project +++ Clusters

Technical support on

scale-up

++ contract act. +++ contract act.

Commercial infrastructure ++

Access to finance +++ support +++Business plan voucher

Mentoring +++ support business dev. +

Innovation Hub Services Start-ups55

Objectives Services Start-ups Prepared to pay for it?

Community building ++ Network, brokerage no

(Collaborative) R&D

Skills and education ++ Expertise ?


support

+++ Incubator program ?, small % of stake

Visioning & strategy dev.

Testing and validation + 1 project – innovation

voucher

yes, but mentoring and

access to finance needed


scale-up

Commercial infrastructure

Access to finance +++ support no

Mentoring +++ support business dev. no

Examples services DIH to support start-ups with funding

How to fund these kind of services for Start-ups

As Start-ups cannot pay for these kind of services themselves a DIH can try to set up programms/projects to accelerate the regional start-up ecosystem.

Funding sources for these kind of activities:

• public funding: regional/national

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• www.Brightmove.nl

• www.high-tech-gruenderfonds.de

• ......

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Other examples:

• Vouchers for innovation

• Vouchers for businessplan

• ...

Examples regional services DIH to support start-ups with funding

http://www.brightmove.nl/

http://www.high-tech-gruenderfonds.de/

Innovation Hub Services SMEs

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Objectives Services SMEs Prepared to pay for it?

Community building + Brokerage, conferences no or not much

(Collaborative) R&D +++ Contract research Yes

Skills and education ++ Workshop/training Yes


support

+++ Accelerator program ...if convinced

Visioning & strategy dev.

Testing and validation ++ 1 project - innovation

voucher

Yes


scale-up

++ contract act. yes

Commercial infrastructure

Access to finance +++Business plan voucher Not really

Mentoring +

Examples services DIH to support SMEs with funding

How to fund these kind of services for SMEsIt is a mix of private and public funding.Especially for SMEs who are reluctant to invest because of not understanding the long term view and potential for new business, you need services to help them to make thefirst steps. For example:- Innovation vouchers- Business plan vouchers

For these kind of services a DIH can try to set up programms/projects to accelerate theregional business ecosystem. Funding sources for these kind of activities: public funding: regional/national

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www.enerprise-ireland.com

Innovation Hub Services corporates

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Objectives Services Corporates Prepared to pay for it?

Community building +++ Membership yes

(Collaborative) R&D +++ Collaborative R&D yes

Skills and education +++ Membership yes


support

Visioning & strategy dev. ++ Support yes

Testing and validation +++ Clusters yes


scale-up

+++ contract act. yes

Commercial infrastructure ++ yes

Access to finance

Mentoring

Any questions?


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