Upgrading Technology at the Firm Level

World Bank SeminarFebruary 18, 2004

Firm Innovation Requirements

• Improve existing product or plant• Develop new product or process• Staff training to absorb or develop new

technology

Sources of Technology

• Supplier or Customer• In-house• Firm with capability• Technology Institution

Learning, Doing Competing

Elements Innovation

Doing Yourself

Bringing in Incentives

People Training Outside adv Education,T

Machinery Reverse Engineering

Import Tax, loans

New Knowledge

R&D License Tax, risk loans….

Problem Solve in company

Get help Enc compet

Ideas Brainstorming, R&D, Seminars,Tinkering, solving

Cust,supplier,literature,

Institutions, education

How to Work with Companies?

• It all depends• Big or small or new?• What sector?• How technologically advanced is the

company?• Local circumstances?

For Example--1988 Indian firms

• How to get them to modernize, do more R&D, and use the available infrastructure?– Liberalize technology import– Promote increased competition– Provide appropriate incentives to use technology

infrastructure– Build up the capability of the infrastructure to be able

to and desire to work with industry

SPREAD Program

Korea Technology Development Corp

• Sensible approach to encourage R&D in industry and growth of small firms

• Clever Financial incentives, fund raising• Gradual success led to hubris

– weak supn and finacially driven – Bank ideology of privatization– Too risk averse until privatization

Use of Public TIs by Firm-size and in-house lab/department

010203040506070

8090

Small (1-50)

Medium(51-350)

Large(531+)

Without in house-labWith in house-lab

* National, regional or local technology institutes, industry association

% o

f res

pond

ing

firm

s w

hich

had

use

d TI

at l

east

onc

e

Use of TI Services by Firm Size( Data excludes Taiwan (China))

0102030405060708090

100

Small (1-50)

Medium(51-350)

Large(351+)

InformationTrainingProblem SolvingContract R&DStandards

% o

f firm

s us

ing

a TI

at l

east

onc

e

Importance of TI Services by Sector

3.2

3.4

3.6

3.8

4

4.2

4.4

Polymers Autoparts Software Total

InformationEducation &TrainigProblem SolvingContract R&DStandards

Impo

rtanc

e (1

to 5

) of S

ervi

ces

Support for Small Scale IndustryQuestions to be Addressed

• Institutional quality in country• Level of trust by industry in Gov’t and other firms• Can institutions attract and keep good people• Extent of corruption• How to ensure that funding achieves its purpose--eg

consultants will not raise fees.

Question-2 SSI

• How to pay for intermediary?– Overhead charge like Steinbeis– Industry Association--India for quality program for members– GovernmentHow to motivate SSI to use services--won’t unless dynamic or forced

by marketMust find way of attracting good consultantsInstitutions must be free of Government interference

MODEL VSystem to provide range of specific and

generic expertise

Small Extension in educational

Companies Organization institutions US SSI 1

SSI 2

SSI 3

SSI 4

Tech. Center 1

Tech. Center 2

Tech. Center 3

Tech. Center 4

MODEL VIFacilitating particular

Technology Transfer Training

Companies Training Small Industrial Provider

Program Ass. Program

T1

T2

T3

T4

TQM Consulting

ISO 9000Training provider

MODEL VIIJapanese Business Association

Company 1

Company 2

Company 3

Company 4

TemporaryInstitutionBusiness

Association

ForeignTechnology

Provider

Tech.

Transfer

transfer

transfer

transfer

transfer

1. Technology diffusion, Extension

• Technology diffusion, Extension or whatever it may be called should be a more important component of technology activity and support in almost every country

– firms need and want it– it is cheaper - more efficient - to

provide than developing new technology

2. Government support

• Government must support Technology in SSI by stimulating institutional and program development and partially financing it.

3. Type of programs

• A range of programs built on the needs of the industrial sector usually provides better coverage and choice for firms.

• The variety include:a) generic technology/productivity supportb) industry specific expertisec) institutional sourcesd) private consultant sources

• The particular mix will depend on the institutional culture and industrial structure of the country.

4. Cost sharing

• Firm should pay a significant share of the cost, but a subsidy is also required.

5. Linkages and competition

• Clients should have choices but multiple linkages.

• Similarly among institutions and programs.

6. Funding Technology Providers

• They require (whether private or public) a portion roughly 1/3 to build expertise, develop new technology access.

Growing technology companies-- Start-ups and young

• Equity finance and seed finance• Venture Capital

Ideal Conditions for Venture Capital to Succeed

• People– Entrepreneurs– Technical talent– Financial capability– Some trained/

experienced private equity investors

• Stable Macro and Political Environment

• Business environment– History of good

business practice– Appropriate regulatory

framework--IPR, contract law, courts…

– Stock market(s) that works fairly

– Exit routes for smaller companies

How does VC Get Going?

• It seems to always need a kick-start• Need a positive environment for

entrepreneurial endeavor• Need an environment favorable to capital

investment• Is there a public sector role?

Government Role for building an environment for VC?

Regulatory Framework– Effective capital markets– Contracts and intellectual property – Financial Sector Encouragement of Venture CapitalPromoting technology developmentGood quality education and training

particularly technical

India--Prognosis for VC in 1988The Advantages

• Entrepreneurial• Lots of good engineers• Resources available within big groups• Financing available from development and

commercial banks for industrial growth projects• Existence of contract law, legal system and 100

year old stock market

India--Prognosis for VC in 1988Issues

• Government industry licensing rules stifling• Inadequate trading volume of most stocks• IPO price determined by MOF• Legal system slow, difficult to enforce contracts• Entrepreneurs wanted to pass on company to

children--exit difficult• Not clear that there were enough good ideas• Even software/pharma success stories were not

state-of-the-art; no likely Microsoft

Getting VC Going

• ICICI Experimentation• World Bank help

– 6 VC Schemes, 9 funds, total of $180 million for 350 investments

– Approved first 5 investments in each fund– Regular supervision– Internship of 18 vc executives at vcs in US/UK Regulatory guidelines change to facilitate VCCreation of new stock markets, training

Initial Experience

• Separate Management Companies• Experience, risk taking, exit planning• Bankers are not good venture capitalists• Tax pass through important• Average returns must exceed interest rates• Threshhold IRRs must be substantially higher

Problems Encountered• Start-ups (and most companies) require:

– lots of nurturing and hand holding– Much more time than anticipated

• VC staffing --business skill, industry know-how with resourcefulness, commitment and brains

• Staff mobility--Incentives and work environment• Due diligence-- must also be done on foreign partner or

provider• Exit must be planned

Examples--Early Learning

• Photovoltaics--Success followed by failure• Water filter--Success less than potential• Hotel Software--Need strategic partner• Shrimp and Flowers--fads, risky, know-how• Dosa King--Part of Risk• Blast freeze drying for vegetable/fruit export--

advanced process tech--VC role

Fads

• Technology• Pre-IPOs--bought-out deals• Invest across sectors• Invest overseas• Software• Internet

Sector-wise Distribution of VC and Private Equity Investments 1998

(Rs. [mil])

2956.67

2508.87

1381.49817.48

735.41

718.56

471.89

448.77

426.06229.56

1865.09

Industrial products (24%)

Computer software (20%)

Consumer related (11%)

Medical (7%)

Computer hardware (6%)

Food and Food Processing (6%)

Tel/Communications (4%)

Biotech (4%)

Other Electronics (3%)

Energy related (2%)

Other (15%)

ICICI Software Fund--A success

• $ 7 million invested in 1996/97 worth about $50 million early 2001.

• Nine investments• Summary of performance

– Other companies with potential still too early to tell are a software hospitality product company; a services company with strong links and capability to the insurance sector; and a software product company with an advanced inventory management and maintenance software for process industries. There are no failures as yet.

Success Stories• SQL Star: 2 businesses

• a) authorized (certified) training centers including Oracle and IBM• b) software services with strong capability in the insurance sector. IPO one year

ago. TDICI realized more than double the entire fund for less than ten percent of the fund investment.

• Kale Consultants: specializes in work for the airline industry. Has core technology in revenue sharing

among airlines. Sought after by midsize airlines. Flagship account is with Air New Zealand. Second area is banking/financial sector. Successful IPO. Expected to grow rapidly based strong IPR position.

• Planet Asia: web services and high end website design. Offshoot of web services of successful

software services company Microland. One half the shares sold back to the company after a little over one year at 2.7 times initial price.

• Ruksun: Specializes in internet software development. Contracts with software product

companies, eg Microsoft for email, imap protocol. Second round financing obtained after 18 months at valuation of 23 times the first round investment. Company has strong IPR.

Changes in VC Climate1990 2000

managementcompanies

public financialinst

foreign JVs

instruments conditionalloans

equity

exit difficult, gov’tcontrol

IPO, buyout

entrepreneur family, longterm

Techno; temporary

industries Every sector,autoparts,consumer…

Software, IT pharma

returns < 10% in $, 20-30% in Rs

Very high some >100%

Results of VC Experience• Returns--can be highly profitable• Examples and professionalism• Growth in demand• Range of VC Operations--different cultures• IT originally under-invested--now the fad• Huge inflow of foreign VC• Becoming an entrepreneur is now the pinnacle of success• Fund availability slowed since late 2000

Stages in India VC Development Herd?

• Technology emphasis• Quick buck pre-IPO• General industry• Invest in Silicon Valley• Software, Internet, dotcom• Beginning to mature

VC’s Key Questions for Investment Decision

• Does the business proposition make sense?• Can we work with the management?• Is the management totally ethical?• Does the company have the drive to grow?• Do we have the capability to add value?• How and when will we exit?

Where Improvement is Needed

• Screening quickly• Management--turnover, incentives, hierarchy• Due diligence--international markets and partner,

risk assessment (banking mentality) documentation

• Investment phase--Knowing to cut losses, taking control, dealing with troubling cases

• Markets--some liquidity for small companies in good times. OTCEI

Basic elements for successful VC--mini-checklist

• Entrepreneurs with Drive and Know-how• Business environment fostering growth• Exit Mechanisms that Function• Venture capitalists with business/industry

experience who understand start-up prob.• Patient and risk taking investors• Technical education and R&D

infrastructure

Lessons for Building a VC Industry• For Early Stage Technology VC

– It should be driven by local institutions and money– Government should stimulate VC, not run it– Ensure level playing field for local and foreign money– Financial institutions should initiate and be involved but not

be the sole body or run it by themselves– VC should be run by entrepreneurs, risk takers and business

developers– Develop Exit Mechanisms

• Stock exchange needs to be friendly to SMEs• encourage buy-backs and buy-outs

Thoughts for Building a Successful VCC

Build overseas links• with VCCs• with expertise in markets and technologies

Gather team with business and domain expertiseBuild focused investment strategy based on market

needs and your own capabilitiesDo not follow herd

Beyond VC

• There is a need to build new models of equity and quasi equity hands-on finance for the vast majority of potentially successful companies that will achieve modest IRRs and for which exit is tough:– 3Is model with income/dividend earnings– Start-up funds with clever buy-back provisions