Entrepreneurship and Financing Options for Innovation


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The presentation outline is:
- Entrepreneur and Entrepreneurship in Turkey

- Financing Stages

- Financing Options (4Fs, Micro-credits, Business Angels, Corporate Venture Capital, Venture Capital, Public Capital Markets)

- Joint R&D

- Spin-Offs

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Entrepreneurship and Financing Options for Innovation

  1. 1. Entrepreneurship and Financing Options for Innovation Serdar Torun
  2. 2. Outline• Entrepreneur and Entrepreneurship in Turkey• Financing Stages• Financing Options – 4Fs – Micro-credits – Business Angels – Corporate Venture Capital – Venture Capital – Public Capital Markets• Joint R&D• Spin-Offs STPS 517 : Innovation and SMEs 2
  3. 3. References• An exploratory study of characteristics and attributes of Turkish entrepreneurs: A cross- country comparison to Irish entrepreneurs, Mehmet Turan & Ali Kara, J Int Entrepr (2007) 5:25–46• Policy Options and Instruments for Financing Innovation: A Practical Guide to Early-Stage Financing, United Nations Economic Commission for Europe, 2009• Online Resources: Geert-Hoffstede, Wikipedia, NASA STPS 517 : Innovation and SMEs 3
  4. 4. Entrepreneur• Entrepreneur; “a person who habitually creates and innovates to build something of recognized value around perceived opportunities.” *Bolton and Thompson (2000, p. 13)]• Hisrich (1990) notes that an entrepreneur is characterized as someone who demonstrates initiative and creative thinking, is able to organize social and economic mechanisms to turn resources and situations to practical account, and accepts risk and failure.• Schumpeter (1965): – the value creation is the fundamental role of entrepreneurs in a free market system, – Entrepreneurs exploit market opportunity through technical and/ or organizational innovation. STPS 517 : Innovation and SMEs 4
  5. 5. Entrepreneur• most of the entrepreneurial research can be categorized along two main lines: (1) the personal characteristics or traits of the entrepreneur, and (2) the influence of social, cultural, political and economic contextual factors (Mazzarol et al. 1999).• Entrepreneurs have been found to score higher on “need for achievement,” “internal locus of control,” “tolerance of ambiguity,” and “type A behavior.”• At a macro level, a country’s stage of economic development may influence entrepreneurial desirability and inclination. STPS 517 : Innovation and SMEs 5
  6. 6. Entrepreneurship in Turkey• Some visible changes taking place during the last decade in Turkey: – privatization, tax reform, deregulations, abolishment of anticompetitive barriers, and reduction in monopolies, agricultural reforms, and the efforts made to meet the very explicit expectations of the European Union with regards to ongoing membership talks.• Although the culture and external environment in Turkey are conducive to and advocate entrepreneurship as an acceptable path, it is argued that entrepreneurship in Turkey might be considered a necessity-based entrepreneurship (GEM 2001). STPS 517 : Innovation and SMEs 6
  7. 7. Entrepreneurship in Turkey• The average profile of Turkish SMEs is different from that of most European countries (Coskun 2004): – The average workforce and turnover are much smaller. – Due to the conditions of the financial markets, they face significantly more challenges in obtaining financing or the cost of capital is much higher for them. – Although the past decades have brought significant transitions, the share of the agricultural sector and the level of the rural population employed in agriculture in Turkey are much higher than in its European counterparts. STPS 517 : Innovation and SMEs 7
  8. 8. Entrepreneurship in Turkey STPS 517 : Innovation and SMEs 8
  9. 9. Entrepreneurship in Turkey STPS 517 : Innovation and SMEs 9
  10. 10. Entrepreneurship in Turkey STPS 517 : Innovation and SMEs 10
  11. 11. STPS 517 : Innovation and SMEs 11
  12. 12. Turkish Entrepreneurs: Summary• A family history of self-employment• Being the first child of the family• Almost half of the Turkish entrepreneurs who participated in the study had less than college education, whereas a typical Irish entrepreneur who has a high school degree or less.• Female entrepreneurs indicated that “having more a network of family and friends that are self-employed” and “relying more on their previous experience or training in the area that they establish their new venture” were very important• Previous self-employment experience is among personal reasons for new venture creation• People are more likely to exploit opportunities when they have relevant knowledge and experience from previous employment.• Future business plans: short-time oriented entrepreneurs• Lack the strategic orientation and long-term vision: less entrepreneurship education, Turkey’s long history of economic instability. STPS 517 : Innovation and SMEs 12
  13. 13. Turkish Entrepreneurs: Summary• Achievement oriented, highly responsible, impatient, and self confident, have high self-esteem, possess an internal locus of control (they do not give up easily), and like to work on their own.• Highly involved with the control of the operations of their businesses.• Relatively high levels of stress and cope with this stress by working hard.• Major challenges they faced were: – “greater responsibility,” – “inability to obtain financial loans for start-up,” – “inability to acquire location for the enterprise,” – “inability to spend enough time with family,” and – “stress due to hard work.”• These challenges were all consistent with the results of other studies that examined the profile of entrepreneurs (Young and Welsch 1993). STPS 517 : Innovation and SMEs 13
  14. 14. Geert Hofstede™ Cultural Dimensions STPS 517 : Innovation and SMEs 14
  15. 15. Financing Options• The main financing options are: – 3F: Founder, Family Friends (in some sources +Fools) – Government Supports – Business Angels – Venture Capital Funds – Bank Loans – Public Stock Markets STPS 517 : Innovation and SMEs 15
  16. 16. Financing Stages• The seed stage covers the initial research and development of a commercial idea or business concept, focused on determining its technical feasibility, market potential and economic viability.• The start-up stage covers the development of a product prototype; initial market research and market-reach activities, and the establishment of a formal business organization.• The early-growth stage pertains to small-scale commercialization and growth as well as to the development of the pillars for the scalability of the business.• The expansion stage covers the substantial growth in the scale and market impact of the business. STPS 517 : Innovation and SMEs 16
  17. 17. Cash Flow Pattern STPS 517 : Innovation and SMEs 17
  18. 18. Sources of Funds for High-Growth Firms STPS 517 : Innovation and SMEs 18
  19. 19. Finance for the Early Development Stages of Innovative Enterprises.• The emergence and development of innovative companies requires promising opportunities, financial resources and access to operational, marketing, financial and managerial expertise.• Given the negative cash flow and high risk of failure at their early stages of development, innovative enterprises ideally need forms of financing that do not seek guaranteed repayment. – Merit-based Awards (e.g. Grants) • TeknoGirişim, KOSGEB İşlik, … – External Equity • Etohum, Galata Business Angels, Horn Horn Ventures, KobiAŞ, Dragon’s Den, … STPS 517 : Innovation and SMEs 19
  20. 20. Ideas to Start-Ups• Micro-credits• Business Angels• Corporate Venture Capital STPS 517 : Innovation and SMEs 20
  21. 21. Starting-Up Questions• Potential Entrepreneurs – How can I conceive / polish my idea? – Does my idea have potential? – What to do with my idea? – What expertise do I need to successfully launch the idea? – When and where to find money?• Potential Financers – Is this a good, promising idea? – How much money does the project need? And when? – What is the intended use of the funds? – Will the entrepreneur be committed to the project? – What are the risks associated with the project? Are there contingency plans in place? STPS 517 : Innovation and SMEs 21
  22. 22. Starting-Up Grants• Feasibility Grants policies need to include: – Structure of the decision making process – Decision criteria – Positive or negative certification? – Monitoring and support of selected projects. – Proper programme evaluation measures – Ensuring quality deal flow• SBIR Programme in USA• START Programme in Russian Federation STPS 517 : Innovation and SMEs 22
  23. 23. Relations with Public R&D Institutions• European Paradox• Commercialization of cutting edge scientific knowledge• Education of faculty and researchers on possible entrepreneurial opportunities• Provision of information to market constituents and entrepreneurs• Granting technical and financial support for the early exploration of ideas• Facilitating technical, managerial and financial support for the incubation of promising enterprises STPS 517 : Innovation and SMEs 23
  24. 24. Relations with Public R&D Institutions• Specialized information intermediaries – Technology Transfer Offices, Cooperation Networks• Professionalization of technology transfer – EXIST Programme of Germany• Specialized service intermediaries – The TechnoPartner Programme of Netherlands• Technology incubators or innovation accelerators – Technology Incubators Programme of Denmark – Incubator Programme of Russian Federation STPS 517 : Innovation and SMEs 24
  25. 25. Business Support Services• Awareness Raising• Networking• Match-making – PreSeed Programme of Finland• Training• Coaching – Canadian Community Investment Plan – TULI Programme of Finland STPS 517 : Innovation and SMEs 25
  26. 26. Microcredits• Provision of small loans, usually smaller than €25,000, to support entrepreneurial activity• By specialized microfinance institutions• Many MFI also provide business advice and support, help with developing a business plan, and facilitated support after granting a loan.• Overall, microlending is more compatible with the pursuit of non-economic goals such as social inclusion or regional development.• Aide Programme of France• Microloan Programme of Slovakia• Community Investment Tax Relief of UK STPS 517 : Innovation and SMEs 26
  27. 27. Business Angels• Individuals that make equity investments in high potential ventures and provide their time/expertise/network of contacts to the entrepreneurial team.• As a rule business angels only invest amounts that they can afford to lose.• The source of their wealth is the sale of businesses that they had founded and operated• Dynamic entrepreneurial environment is an important pre-requisite for the emergence of business angels STPS 517 : Innovation and SMEs 27
  28. 28. Business Angels – Characteristics• Invested Amounts (2007 EU mean is €170K)• Value Added: Capital + Expertise + Network• Types: Active – Passive, Novice – Experienced• Key Decision Criterias: – Is this opportunity presented through a referral or is it unsolicited? – Does the business idea have solid fundamentals? – Is this person capable of running the business? Is this a person I can trust and deal with? – Does the business operate in a familiar area? Is it close geographically to allow for face-to-face interaction? – Can the Business Angel invest enough funds to develop the project to the next level? STPS 517 : Innovation and SMEs 28
  29. 29. Business Angel Networks• Flow of information between business angels and entrepreneurs: business angels are hard to find and so are high-quality entrepreneurs• Business Angel Networks (BAN)• Some key characteristics of BAN: – Scope of Operation – Advantages to Individual Angels – Organization – Key Services• CIDEM of Catalonia• EBAN – European Business Angels Network STPS 517 : Innovation and SMEs 29
  30. 30. Corporate Venture Capital• Equity or equity-type investments by non-financial corporations (established companies that invest in innovative enterprises)• May be less concerned with financial returns and more with the strategic value• To encourage to invest in innovative enterprises: – Tax incentives for investments in private, innovative enterprises. – Public-private partnerships that involve substantial financial participation. – Establishment of administrative structures that facilitate the incubation of new ideas. STPS 517 : Innovation and SMEs 30
  31. 31. Corporate Venture Capital Examples• Corporate Venturing Scheme of UK• High-Tech Start-Up Fund Initiative of Germany• Industry Incubator Programme of Norway STPS 517 : Innovation and SMEs 31
  32. 32. Early Stage Growth• As innovative companies grow, their financing needs increase, which requires access to larger pools of capital.• Venture capital (VC) - patient capital - financing provides professionally managed capital to promising enterprises in exchange for equity stakes, with the anticipation of selling those stakes at substantial premiums.• Professionally managed capital to promising enterprises in exchange for equity stakes, with the anticipation of selling those stakes in five to seven years STPS 517 : Innovation and SMEs 32
  33. 33. Venture Capital• Act as intermediaries channeling funds from institutional investors to high-potential enterprises• Investors provide companies with strategic and managerial advice, network contacts and play an active role in the recruitment and professionalization of management• VC financing cycle has four main stages: – Fund-raising, – Investing, – Managing/value adding, and – Exiting STPS 517 : Innovation and SMEs 33
  34. 34. Venture Capital• Institutional investors lack the expertise to select and develop innovative enterprises• VC firms provide a specialized function: – Identify, develop, add-value to high-potential enterprises, – In turn, provide attractive returns to institutional investors.• Private Equity – Venture Capital – European Venture Capital Association STPS 517 : Innovation and SMEs 34
  35. 35. Venture Capital Examples• Silicon Valley of USA• Competitiveness and Innovation Programme of EU• JEREMIE Initiative of EU – Joint European Resources for micro to medium Enterprises• Dachfonds of Germany• Russian Venture Company of Russian Federation• Yozma Programme of Israel STPS 517 : Innovation and SMEs 35
  36. 36. Public Capital Markets• Importance of stock exchanges for innovative companies: – Provide both fresh capital for their large-scale expansion and new product development – Opportunity for the seed and early-stage investors to trade their stakes, realize capital gains (or losses), and ultimately redeploy their capital into new investment opportunities.• Due to innovative companies challenges, traiditonal stock exchanges are not suitable; more flexible regulations needed.• NASDAQ: plays an instrumental role in the US & Israel.• IPO – Initial Public Offering• Secondary Market STPS 517 : Innovation and SMEs 36
  37. 37. Public Capital Markets• Capital markets for small and medium-size business that are innovative and growth- oriented: – NASDAQ OMX – TSX Venture Exchange – NYSE Alternext – Entry Standard STPS 517 : Innovation and SMEs 37
  38. 38. Summary overview of the generic modes of market intervention STPS 517 : Innovation and SMEs 38
  39. 39. Joint R&D• Knowledge creation, circulation, exploitation• Flow of knowledge, codified of embodies in people , important for R&D and innovation systems• Globalisation and access to knowledge generated in other R&D / innovation systems• European Research Area / Fifth Freedom STPS 517 : Innovation and SMEs 39
  40. 40. Joint R&D - EUFP• European Union Framework Programmes’ Instruments:• Integrated Project – IP – Medium- to large-sized, minimum 3 partners from 3 different countries, 3-5 years – no upper limit, budgets are several tens of millions of euros – Addressing the major needs of society• Network of Excellence – NoE – Medium sized, minimum 3 partners from 3 different countries, max.7 years, budget around €1-6M. – Strengthen scientific and technological excellence – Contribute to the clarification of concepts• Specific Targeted Research Projects – STReP – Medium sized, minimum 3 partner form 3 different countries, 2-3 years, budget around €2M. STPS 517 : Innovation and SMEs 40
  41. 41. Joint R&D – An Example• Israel-Italy Joint Innovation Program for Industrial, Scientific and Technological Cooperation in R&D• Qualifications: – Partners may be industrial entity and/or non-industrial entity, – Partners must express the will to cooperate, on a balanced basis, towards the development of a new product, industrial process or service, – The product, process or service must be innovative and there must be a technological risk involved, – The project must be equally significant for participants from both countries – The participants are required to have preliminarily signed a partnership agreement on the commercialization of the product, process or service once the phase of research and developmenthas been completed and the ownership and use of knowhow and IPR settlements (“Partnership Agreement”) STPS 517 : Innovation and SMEs 41
  42. 42. Spin-Offs• Government Spin-Off – Civilian goods which are the result of military or governmental research. • When commercialization is possible – http://www.sti.nasa.gov/tto/ – http://en.wikipedia.org/wiki/NASA_spin-off – LEDs, Infrared ear thermometers, fire resistant equipments, non-sticky fabrics, etc. – Internet, a project of DARPA. STPS 517 : Innovation and SMEs 42
  43. 43. Spin-Offs• Corporate Spin-Off – A division of company becomes and independent business – Shareholders of the parent company receive equivalent shares in the new company; buy or sell later – Parent company offers support as: • İnvensting equity in the new firm • Being the first customer – help to create cash flow • Provide incubation space • Provide services – legal, finance, technology, etc. STPS 517 : Innovation and SMEs 43
  44. 44. Spin-Offs• Research/University Spin-Off – Commercialization of a technology developed in university laboratories – University can claim Intellectual Property Rights• Spin-off process: – Develop a proof of concept – Develop a fully functional prototype – Attract start-up funding – Develop a business model – Acquire customers STPS 517 : Innovation and SMEs 44
  45. 45. Questions ? Remarks ?STPS 517 : Innovation and SMEs 45