Yannis Pierrakis Head of Investments Research

1. FITT for Innovation Brussels, 10 May 2011 Financing ICT Innovations: Trends and Challenges of the Venture Capital Market in Europe - The Role of the Government Yannis Pierrakis Head of Investments Research National Endowment for Science, Technology and the Arts (NESTA)

2. Bank lending to business and individuals • The stock of lending to businesses contracted in 2010, albeit at a slower rate than during 2009 • In contrast, growth in the stock of lending to individuals — both secured and unsecured — was stable, though low, over 2010 and similar to the picture in 2009 Source: Bank of England

3. Lending to SMEs & Small Businesses • Annual rate of growth in lending to SMEs has been negative since late 2009 and fell to -3% in February 2011 (BIS) • Growth rate of lending to small businesses, defined as turnover up to £1 million, stood at -6% in December 2010, the latest (BBA) • Annual lending growth to small businesses has been more negative than for the SME segment since June 2010 Source: BIS, BBA, Bank of England

4. Cost and availability of credit • BIS data indicates that the value of applications by SMEs for new term loan and overdraft facilities in the six months to February was 19% lower than in the same period a year earlier Source: Credit conditions survey and (3 months to March) and Deloitte CFO Survey

5. Why VC is appropriate mean of finance for growth? • The high-growth innovative firms often require significant capital up-front and this is very hard to obtain from conventional sources of debt finance. • They tend to have intangible assets, and show a significant delay before generating revenue making than a high risk investment. • Innovative, high-growth firms which are essential for the innovation system to flourish, need different kinds of support depending on their stage of development. • Only a small proportion of businesses (3%) receives venture capital finance

6. But its importance goes far beyond its size • A variety of studies suggest that venture-backed firms are responsible for a disproportionate number of patents and new technologies (Kortum and Lerner 2000, Mann and Sager 2007), and they bring more radical innovations to market faster than lower growth businesses that rely on other types of finance (Hellmann and Puri 2000; Gompers and Lerner 2001). • In 1998 venture funding accounted for about 14% of U.S. innovative activity (Kortum and Lerner 2000)

7. More empirical evidence • Venture capital appears ~3 to 4 times more powerful than corporate R&D • From late 70s to mid-90s, VC was only 3% of corporate R&D, but responsible for ~10%-12% of privately funded innovations (Kortum and Lerner 2000) • Although VC backed firms accounted for only 0.11% of all new firms, they generated roughly 4-7% of employment in the US in the late 1990s till 2000 (Puri and Zarutskie 2008)

8. More empirical evidence • Companies that manage to receive VC finance are most likely to be innovative companies Source: Pierrakis 2011

9. Companies that received VC funding

10. Venture capital activity • Venture Capital investments in the US, UK and continental Europe • Number of Venture Capital backed companies in the US, UK and continental Europe Source: Thomson One

11. Venture capital in ICT Source: Thomson One

12. Historically, the more a fund invested in ICT the better it performed * Base category: Biotech & Healthcare, Source NESTA

13. Venture Capital performance by vintage year • Poor venture returns since the dotcom crash • Downturn in venture activity world-wide since crisis One year before the Dotcom crisis

14. Why should the public sector care? • Most venture capital markets were established with some sort of public support • Relatively young industry and in some countries still at very early stages • Fill the equity gap • Familiarity with the innovation system • Share the inherit risk

15. Venture capital funding landscape in the UK Private VC Private Equity VCTs Public VC Business Angel Networks Business Angels Grants Source: NESTA

16. Examples from around the world • US (SBIC) • Israel (Yozma) • Canada • Finland • UK UK publicly backed funds early stage investments Source: NESTA

17. Familiarity with the innovation system (extent of interaction) Source: Pierrakis 2011

18. Tips for public funds • Syndication with private funds promotes innovation (13.4%) • Establish close linkages with the innovation community – become the conduit of information between private funds and other bodies of the innovation communities • Avoid multiple objectives • Be able to follow up investments • Have appropriate size • Set up evaluation frameworks for programmes and managers • Build up track records or partner with established funds (e.g. Israel)

19. Tips for entrepreneurs • Most often proposal comes from individuals themselves so make yourself known • Funds evaluate proposals based on the team management skills and the potential Source: Pierrakis 2011

20. Where can you get funding? • Funds are very localised especially in US, however, around 40% of UK based funds invest in continental Europe • Approach funds directly – but be well prepared, the competition is very tough • You need to be ‘investments ready’ – Europe desperately needs an investments readiness programme • Contact the European Venture Capital Association and the European Business Angel Association

21. Thank you Yannis.Pierrakis@nesta.org.uk