Results of the Ester Project in Latvia

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Results of the Ester Project in Latvia
Valdis Avotins, LIDA Salamanca Joint Workshop,
June 23, 2005
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Agenda

• NIP
• Need Market failure
• Risk capital program
• Technology incubator seed program
• Questions

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Goals of the innovation strategy
RIS Latvia
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22 experts evaluation
Research infrastructure
Innovation Assistant
Prototype
Risk Capital FF
EMP
Tech Incubator, liaison offices, seed
CoE
IPR
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Existing/ approved Launch expected Planning
initialised in 2006/7
Entrepreneurship promotion
Market exposure
MARKET INTELLIGENCE
OTHER SUPPORT
TTO
IPR protection in start-ups
NEW PRODUCTS
BUSINESS SUPPORT
TECHNOLOGICAL INCUBATION
TFM scheme
START-UP SCHEME
VENTURE CAPITAL SAP
FINANCING
SEED SCHEME
Prototyping
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Good investment environment

• Rapid GDP growth
• Latvia is ranked among the top ten counties
  worldwide in terms of business start up time and
  length of bankruptcy procedures. Doing Business
  in 2004, World Bank
• Wall Street Journal Index of Economic Freedom
• Rank 28, Score 2.31, (Israel Rank 33, score 2.36)
• The overall tax burden of GDP is only 29.1

2000 2001 2002 2003 2004
6.9 8 6.4 7.5 8.5
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Background conditions

• Low general entrepreneurship activity
• Lowest amount of SMEs in EU (18 on 1000
  inhabitants EU average 51/1000)
• Low share of innovative enterprises
• 20 (incl. adoption) compared to EU average of
  45
• Share of high-tech products in export 6
• Employment in mid-to-high-tech is 23 of EU
  average
• Lack of appropriate financial instruments for the
  needs of high-tech/ innovative companies at early
  stage of their development

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Jaffa Oranges vs. Software(1992-2001)
Dr.Eli Opper, Chief Scientist
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A. RISK CAPITAL SCHEME
Reasonable investments in LVL 0 ...
10,000 ... 25,000 ... 50,000 ... 100,000 ...
250,000 ... 500,000 ... 1 m ... 2.5 m ... 5 m ...
BSEF, BALTCAP, NCH, BALEF 34 projects
NLBDF 33 projects
1995 First risk Capital investment 1995
2004 67 projects financed via Risk
Capital No Start-up investments No Seed
money
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Sources for Deal flow

• Heritage from USSR at the end of 90s
• 30.000 academic scientists
• 13.000 engineers involved in RD
• Large brain gain opportunities
• Higher education institutions
• Infrastructure
• 6 RD Centers of excellence
• 20 Technology and industrial parks
• EU grants

2001 2002 2003
Institutions 36 37 49
No of students 110.500 118.944 127.656

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Programs objectives

• Facilitate entrepreneurship promoting access to
  risk capital financing
• Facilitate the establishment and development of
  new venture capital funds, motivate them invest
  in SMEs by offering state aid to private
  investors
• Attract private investors to invest in Latvia

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How?

• Public Private Partnership
• Budget 14.5m (75 from ERDF)
• Public investment in a Fund
• Up to 70 (target 50/50)
• No more than 5.5m in the single Fund
• State Support to Private Investors

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Founding of VC Fund
3 new funds
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Investment Fund

• Partnerships with life cycle for 7 to 10 years
• Managed by private management company
• Business decisions made by private investors
• State support to private investors

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Selection of Fund Managers

• Open tender procedure, main criteria
• Experience and professionalism of team members
• Business plan
• Involved private investors and amount of private
  funds

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Decision-making procedure
Investment committee (representatives of all
investors, one member from FF)
Venture Capital Fund 8 ... 10 million
SME 1
SME 2
SME 10-15

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Restrictions for investment

• SMEs registered in Latvia
• Maximum investment 1m in one project
• Maximum 300k in the first investment tranche
• Time between trenches at least 12 months
• Some sector restrictions (EU regulations)

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Return Distribution Mechanism

1. Funds management expenses
2. Repay the original capital invested by private
   investors
3. Repay 25 of the original capital invested by the
   state
4. Priority return (hurdle rate) on private
   investors capital (6)
5. Repay the remaining 75 of the states invested
   capital
6. Hurdle rate return (6) on the states invested
   capital
7. Remaining profit, if any to private investors and
   FMC

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B. The designed draft Growth4Future Scheme

1. Technology incubator grant
2. Pre-seed grant Think for month
3. Seed soft loan

Management companies or Operators of TIs
private companies providing space
infrastructure, management and SM advice, basic
business services and private investment
structuring in exchange for equity position in
the tenant company

• Target groups
• Potential entrepreneurs from industry
• Potential entrepreneurs from academia
• Repatriating scientists and RD personnel
• Regional inventors

Tested in Israel, with WB experts, EU experts,
local expert panels
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New forms of Business Incubation

• in late 1990s has been driven to multiply the
  number of succesful, fast-growth, high technology
  businesses in US
• Its led by serial entrepreneur
• it has its own seed fund drawn from founders
  own, VCF or corporate partners capital
• it may have specific sector focus

Conventional incubators offer heat, light and
dial tone, but Smart Venture Investment claim
to offer more, developing ideas and incubating
them in-house as well as providing late seed
capital and A, B and C round investment. Incubatio
n today is seen as a way in which capital can be
efficiently applied to support new technology
businesses
Gill D., Martin C., Minshall T., Rigby M. Funding
Technology. Lessons from America. 2000
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Political Goals

1. Improve the competitiveness of Latvia by
   facilitating development of high medium tech
   industries
2. Create a potential for participation in future
   technologies (prestige, future competitiveness)
3. Development of new sustainable export industries
   (Israeli Finnish experience)
4. Create economic champions / change the attitude
   of society towards technology commercialization.

High growth high-tech company establishment is more expensive and it shows remarkable return after 8-10 years longer establishment cycle specific infrastructure required specific knowledge needed.
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Background

• Existing market gap for early stage investment
  and low local entrepreneurial spirit results in
  few investments particularly in high growth
  Start-ups
• The Need sharing investor risk to encourage
  investments and increase the number of high
  growth start-up companies
• Solution outsourced integrated service to
  motivated professional venture teams

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Side measures for Deal flow

• Entrepreneurship motivation scheme - outflow of
  300 busines ideas, 100 marketing plans, 50
  business plans
• Reposition of entrepreneurial culture
• by informative seminars, work shops,
  presentations, publications in media, etc
• Awareness creation program
• Think for month (pre-seed grant)
• Innovation assistant grant scheme
• motivation scheme for inventors in universities
  and RD institutes
• Innovation courses and innovation MBA program in
  RTU
• Technology transfer centre
• Business labs and Liaison offices in
  universities
• Ventspils school of entrepreneurship (Chalmers
  model)

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1. Technology Incubator grant

• 9 year program (3x3 support periods)
• Public private partnership model
• Decisions made by TI private operators (PO)
• Grant is paid to TI operator as 30 fixed rate
  and 35 kEUR per one tenant, minimum 2 tenants are
  required, quarterly payments
• Public grant up to 75 (max. 500 k EUR) of TIs
  annual budget
• Based on Venture business not traditional
  incubation!

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2. Pre-seed TFM

• to validate a business plans before starting a
  new company and to leverage private equity
  finance in later stages
• An individual person with a business project
  entailing fast growth (turnover increase to at
  least 40-50 per year) for 0 - 24 months
• Financing covers up to 100 of eligible costs, 1
  month

Form of intervention
Performance based grants up to 3 kEuro
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3. The seed program

• Investment management TI PO
• Recipients young (lt6 month) SMEs after business
  concept validation
• max 300 K EUR soft loan, matching with private
  equity investment 7030
• converts to non-refundable grant in the case of
  failure
• Project duration 6-24 months
• when sales appear 5 from annual turnover should
  be paid back until all loan is repaid

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Return

• Return
• Number of incubators and their capacity utilized
• Number of newly created technological companies
• Number of companies graduating from TI
• Number of successful IPOs, MAs, investments in
  the next rounds
• Total private investment attracted to the
  companies

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Selection criteria

• For TIs operators
• TI management experience and professionalism of
  team members in new high growth SMEs creation
• Business plan
• Amount of offered financing
• Planned running costs per SME, share of private
  co-investment

• For SMEs
• Registrated commercial entity in LR, younger than
  6 months, planned growth over 50
• Not yet in market, IPR owner or exclusive user
• High- or medium-tech
• Explicit orientation towards global market
  (export)
• Worked out draft business or / and technology
  plan
• Manageable company
• Significant milestones for 24 months

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Thank you for attention!