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Building a business

Building a business

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Building a business

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  1. Building a business National Board of Patents and Registration, Finland Fraunhofer TEG, Germany Hungarian Patent Office, Hungary

  2. Objectives of the Module 4B After Module 4B the participants: • Realize the importance of the intellectual property rights in the various fields of business • Understand that the intellectual property system is an integral part of everyday business • Understand the vital relationship between commercialization and intellectual property issues • Are familiar with the different tools to support business development • Are able to sketch up a business plan • Are able to seek sources of funds and are capable to assess the different credit injection opportunities • Understand the marketing importance of innovative products

  3. Content of the module • The innovation cycle • Fund raising • Equity investment • Debt or equity? • Business planning in a nutshell

  4. 1. The innovation cycle

  5. The innovation cycle • Research stage • Preparation-for-exploitation stage (development stage, start-up ) • Business exploitation phase: • the “rising star” stage • the “milking cow” stage • the “problem dog” stage • the “dead horse” stage

  6. Research stage • Problem discovered • Technical but no market based knowledge about the development • Little market contact • „One-firm show” • Internal funding (generally) Relatively small investment required • IP information search • Extremely high risk

  7. Development stage • Market survey (invented problem or real? size of market study) • The technology feasibility,prototype produced • Inventorship transforms into product development • Serious IP considerations • The funds required grow • Networking starts

  8. Development stage -from invention to product - • Inventing • Is there a good market for the invention? • Determining the legal relationship between the inventor and the owner of the invention • Completion of novelty and freedom to operate searches • Making of a model • Ensuring profitability in the market • Exploitation opportunities for inventors • Industrial property protection • Licensing

  9. Inventing Two innovation models: • Demand driven innovation • innovation brought to fulfil a defined market • less risky • Supply driven innovation • solution to a technical problem as their main aim • many disadvantages • more risky: the innovation may not cover a market need

  10. Is there a good market for the invention? Market research opportunities

  11. Determining the legal relationship (1) A comparison of service and employee invention

  12. The Intellectual Property Rights status (e.g. in Germany) Determining the legal relationship(2) • Approx. 60,000 patent application per year • More than 80% of the applications were filed by companies More than 80% of the inventions were made by employed inventors

  13. Who may claim the invention and the profit coming out of the invention? Determining the legal relationship(3) ? ? ABC Company It is the inventor's Intellectual Property The company, that pays the inventor?

  14. A solution was found Determining the legal relationship (4) • The inventor is still the owner of his invention • The company is eligible for the invention and may absorb it • The company has to compensate the employee for the usage of his invention • Normally, the compensation consists of two components • an up-front payment in return of the absorption of the invention • a revenue sharing

  15. Novelty and freedom to operate searches

  16. Making of a model

  17. Ensuring profitability in the market (1) • Keep it secret • Quickly place the invention on the market • Obtain industrial property protection for the invention

  18. Ensuring profitability in the market (2)

  19. Exploitation opportunities for inventors • Do yourself • Find a partner • take a hands onapproach • no more burden approach • exclusivity/non-exclusivity • Transfer IP rights

  20. Industrial property protection (1) • Patent protection • Utility model protection • Plant variety protection • Design protection • Trade mark protection

  21. Licensing • Selling for one off given summ • Exclusivity/non-exclusivity • Constraint of transfer of exploitation rights

  22. Start-up stage • There is a need to formulate a firm, to start business activity • Business plan writing • IP is handled and started the preparation for capitalization • Partner finding phase • The funds required grow steeply, financing needs now turn to the business exploitation and the establishment of the whole infrastructure

  23. Business exploitation stage

  24. The “rising star” stage • Initial high risk bearing financial partners exit • A new layer of non-industry specific wandering capital appear • Partners have opportunity to receive their share of the enterprise • Owners exit opportunity • New sources of finance, even banks • The accumulated profits can be used for market expansion

  25. The “milking cow” stage • Utilising the low levels of risk, position the enterprise within the capital markets in such a way as to use the success of the product to make the enterprise successful • Find the way to keep the sales indicators at their peak for the maximum amount of time • Reinvest the accumulated profits in such a way as to make the most of new rising business opportunities

  26. The “problem dog” stage (1) • Profitability rate starts to shrink • Launch time of further developed products • Business risk increases again • Panic exit might call bankruptcy

  27. The “dead horse” stage • Utilising the low levels of risk, position the enterprise within the capital markets in such a way as to use the success of the product to make the enterprise successful • Find the way to keep the sales indicators at their peak for the maximum amount of time • Reinvest the accumulated profits in such a way as to make the most of new rising business opportunities

  28. 2. Fund raising – an overview -

  29. Fund raising sources • Founders and Entrepreneurs • 3F • Informal Investors or Business Angels • Venture Capitalists • Banks • Public Sector

  30. Founders and Entrepreneurs • Minimal financial background • Sweat equity • Investors demand high rate of contribution

  31. 3F: Friends, Family, Fools • A ''helping hand'' rather than a serious Investment • Cannot be relied upon for follow-up finance • May not have useful commercial contacts • Generally less than about EURO 10.000

  32. Informal Investors or Business Angels • Individuals ''of high net worth'‘ • 75% invest between 15'000 and 150'000 EURO and up to EURO 250'000 when co-financing with others (''syndicated'' investments) • Usually invest locally and in projects they understand • Quick decisions • Likely to take a ''hands on'' approach to their investment

  33. Venture Capitalists • Seek investments in firms with high-growth possibilities • Not usually interested below EURO 250.000 • Slow decisions but very thorough • Add value, not just financial assistance • No outflow of cash in interest on loans or dividends to investors before exit

  34. Banks (1) • Provide the usual banking services • Loans and loan guarantees from a few thousand to millions of EURO • Investment services • Quick decisions • Risk averse, not invest in equity • High interest, low tolerance

  35. Banks (2) The role of the banks • Investment banks • not for small business • might be handling innovation funds to help Start-up. • Retail banks • anyone can turn for credit. • loans • overdraft • financial services

  36. Public sector • Grants • Awards • Investment support schemes • European Investment Fund (loan guarantees and investments in venture funds)

  37. 3. Equity Investment–role of venture capital -

  38. Role of venture capital • Participation in equity • Option to convert loan to equity • High risk compensated with possibility of high rate of return • Invest in industries with high growth potential • High risk bearing capability

  39. Who are we? • Private Investors • Fund Management Companies • Public Sector Funds

  40. Private investors (business angels) (1) • Wealthy individuals, ex-managers • May invest alone or in groups • Invest locally, industry specific • Around EUR 50.000 investment each • Quick decision, more biased

  41. Fund management companies • Manages funds of its shareholders • Have specific investment focus (seed, start-up funds, mgmt buy-out, etc.) • Invest from a few million euros • Timely decision, careful due diligence • Require many additional management and administration tasks from supported institution

  42. Public sector funds • EU, national, regional sources • Nowadays require private fund share (30% for less developed, 50% for developed member states for the 7th framework program) • Social targets (job creation, regional development) • Available in less developed areas

  43. 4. Choosing the right package- debt or equity? -

  44. Debt: banks (1) SME loan application characteristics: • Tech based start-ups considered high-risk, no bank loan! • Try government backed subsidy schemes! • SME Loan Guarantee (UK) • SOFARIS (FR) • GVOP (HUN),…

  45. Debt: banks (2) Borrow just in case of: • A positive Cash Flow, • Requesting minimal amount, • For a short term

  46. Debt: banks (3) The banks want to know: • Will the Company be able to pay back the loan? • What can be done to recover the money if the Company finds itself unable to repay the loan (i.e. what is the security for the loan?)

  47. Debt: banks (4) Analysis of credit application: • Confidence in client • Tracked financial records • Other

  48. Equity • Analysis of credit application: • confidence in client • tracked financial records • other

  49. Equity: advantages/disadvantagesFor master only

  50. Choosing the right package- debt or equity? -