Innovation Europe > News > Innovation EU Vol1-1 > Stimulating access to finance

Europe’s relatively poor performance in terms of financing innovation is well documented. Whereas Europe can hold its own with other regions worldwide in terms of research and development, the situation is not so good when it comes to turning research results into market success. Yet the innovation capability of SMEs in particular strongly depends on access to appropriate finance.

Europe INNOVA includes a number of networks that seek to improve the conditions of access to finance for innovative ventures. Starting in 2006, 10 Europe INNOVA Financing Networks have promoted a better understanding of barriers to innovation in seven industry sectors. These ranged from more traditional sectors such as textiles (NetFinTex), construction (Build-Nova), food & drink (ENFFI) and energy (EIFN), to sectors that are perceived as being highly innovative such as life sciences (AFIBIO, InJection), ICT (Gate2Start, ACHIEVE) and space (INVESaT, FinanceSpace). In total the networks reached around 2,000 SMEs.

Each network began by identifying and analysing sector-specific problems ranging from the drafting of business plans and the preparation of appropriate intellectual property (IP) strategies to the identification of the most likely sources of funding. These analyses were used to develop tailor-made, sector-specific tools and instruments, such as guides and self-assessment tools, financial and business-planning tools, and training materials. The instruments were tried and tested in many different situations and most of them proved beneficial to the development of better practices in their respective communities.

Common barriers

As one might expect, some of the barriers and issues identified were of a generic nature.

The lack of understanding and communication among the different players involved in the process of innovation financing is common to most sectors. Companies or researchers are often not aware of the possibilities for financing, whilst the investors do not always see the investment opportunities. As a result, research results are often not commercialised, projects are not “investor-ready”, nor do they reach investors with the necessary interest and experience of the sector, whilst many investors are only reaching for the “low-hanging fruit”.

All sectors suffer from a lack of sector-specific financing tools or programmes or the fact that those that do exist are ineffective. Also, early stage finance remains a problem and quality filter mechanisms, which could provide attractive spin-out companies for investors, would be helpful in most sectors.

Investing for the long-term

While some of the issues identified were common across sectors, others were sector-specific.

In biotech and energy, for example, innovations take a very long timeto- market and hence investments have a long breakeven time. To help address this, the AFIBIO network created a database of 300 biotech investors throughout Europe, of which 70 were active biotech investors. The partners also designed a guide for entrepreneurs who are looking for funding and organised joint events with other Europe INNOVA networks focusing on the biotech sector.

One of the main concerns was identifying tools and mechanisms for reducing the risk in early stage biotech investments and providing better access to later-stage financing. “Access to early stage funding is dependent on the perceived ability of the applicant to find laterstage funding. Lack of later-stage funding will create a ripple effect that can further exacerbate the vicious cycle,” explains Olivier Kitten, one of the co-ordinators of AFIBIO.

Similar issues were addressed in the EIFN network, which adapted certain tools and methodologies to meet the needs of energy innovation projects. Instead of offering traditional methodologies that are based on averages, EIFN applied more dynamic methodologies that are able to react to changes in regulatory frameworks and volatility in pricing. This flexible valuation model uses the Real Options Approach and Montecarlo methodologies together with a Budget and Net Present Value tool. EIFN tested it among some of its 500+ organisations from over 30 countries including banks, business angels, venture capitalists, corporate investors, universities, and entrepreneurs.

Market transparency

Events organised by the InJection network raised the problems facing SMEs and larger companies in the medical device and healthcare technology field. Difficulties in getting approvals and subsequent reimbursement within national health systems was found to be a particularly important issue. The drive to reduce costs and the lack of funding for truly innovative products and procedures were also highlighted.

InJection mapped the entire medical device industry in Europe and produced reports on 14 of the European national health systems. Over 60 medical device companies were profiled, including an investment readiness test based on the Gate2Growth Self Assessment Tool. InJection identified 185 investors in the medical device sector and prepared a cluster mapping with 1,737 companies.

Perfect timing

In ICT, the timing of market entry is especially crucial. Gate2Start focused on incubation schemes for academics, creating several tools for researchers who are at the initial stage of applied research in the ICT sector. The How-to Guide helps researchers to compile a summary of their research so that it is possible to evaluate the feasibility of the idea becoming a successful innovation. A Checklist outlines issues to consider when developing a sensible business case and the Self Assessment Tool gives the researcher a first picture of its market environment. The project recommended establishing a pre-incubation scheme to help academics promote their research results without taking the risk of setting up a new venture.

Also in the ICT sector, ACHIEVE built a network of 22 ICT business incubators across six EU countries and associated a further 11 incubators through its training activities.

“The most obvious success has been the way in which ISMA 360, our strategic marketing planning tool, has been introduced to a series of early stage ICT companies,” notes Peter Hiscocks of Cambridge University, co-ordinator of ACHIEVE. “By using this tool, enterprises have achieved a range of positive results. In one case, a Swedish company raised €3m, which accelerated company growth. In another, a company raised €2.5m, which produced a dramatic increase in its sales and revenue and subsequently led to its acquisition by a major international player.”

The higher the risk, the more difficult it can be to get finance, which presents a particular barrier for emerging markets such as space applications

Emerging markets

The higher the risk, the more difficult it can be to get finance, which presents a particular barrier for emerging markets such as space applications. The FinanceSpace project was concerned with commercialising space technology in non-space applications and services. Four roundtables were organised to validate the tools and reports produced by its project team and the resulting CD was widely distributed to young entrepreneurs.

One of the beneficiaries was iOpener, a real-time games company. This ESA spin-off received €4.1m from the Triangle Venture Capital Group to start up its operations. Using technology developed by the European Space Agency (ESA), iOpener has developed a way to map real-world competitions, such as Formula 1 races, to an artificial world.

By transmitting data from many moving objects into the game’s virtual world, gamers are able to participate in the race virtually and in real time. ESA has also set up its own venture capital fund, with €40m, to encourage the transfer and commercialisation of space technology in Europe.

Also focusing on space, INVESaT developed a set of “Golden Rules” to train incubator coaches from the European Space Incubators Network (ESINET). This network supports and develops business plans for start-ups in the complex and challenging environment of satellite applications stemming from Europe’s Global Monitoring for Environment and Security (GMES) and the Global Navigation Satellite System (GNSS) initiatives. The training material complements the incubator’s business case selection process by ranking, comparing and improving business plans and by guiding the incubation process.

Overcoming conservatism

Traditional sectors tend to have conservative innovation cultures, low R&D investment levels and, consequently, a lack of knowledge about state-of-the-art innovation finance. In the construction sector, BUILD-NOVA organised business forums to raise awareness and understanding amongst the different actors. These attracted over 600 participants from the construction industry, research organisations, public bodies, investors and others.

The network also developed a Funding Map and adapted a Business Plan Guide for the construction sector that enables SME managers to present more convincing business cases to investors.

At policy level, BUILD-NOVA noted that public authorities could be major innovation players in the construction sector, but their involvement is weak.

“With its large-scale infrastructure projects, the public sector is one of the main movers and potential innovation shakers in the built environment,” explains Build-Nova’s Carlos Peña. “Contracts for such projects should help to accelerate the entry of innovative products and services to the market by only specifying needs in terms of performance or functional requirements, as this would allow enterprises to apply new technology to the solutions they propose.”

In the food and drink sector, only a small degree of specialisation among investors was observed. Following its analysis, the ENFFI network developed a map linking investor preferences with the financing needs of food SMEs. In addition, the partners developed an ENFFI toolbox to help entrepreneurs in assessing their business models and their innovation performances; it contains some 50 different tools, guidelines and business plans already in use at EU level.

In terms of its policy objectives, the project proposed that additional professional mentoring and other advisory services should be made available to help SMEs to approach investors with profitable innovative projects.

Working in another traditional sector, textile and clothing, NetFinTex developed a “one-stop shop” as a permanent source of information on financing opportunities. It comprises databases of experts, intermediaries, funding schemes and fund providers.

The project also developed guidance for entrepreneurs on sector-specific issues such as intellectual property rights (IPR) and innovation financing. A network of financial experts in textile and clothing was established which is expected to form the basis of a “textile innovation angels” network.

At policy level, BUILD-NOVA noted that public authorities could be major innovation players in the construction sector, but their involvement is weak

For more information, see: www.europe-innova.eu/archive/financingnetworks