the role of venture capital in spurring innovation yannis pierrakis head of investments research...

THE ROLE OF VENTURE CAPITAL IN SPURRING INNOVATION Yannis Pierrakis

Head of Investments Research

National Endowment for Science, Technology and the Arts (NESTA)

Developing a Culture for Innovation, British CouncilAthens, 29 March 2011

Current crisis

Massive public debts Countries bailout governments Governments bailout banks Banks don’t invest in companies

All talking about growth! But how? Innovation!

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

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)

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)

More empirical evidence

Companies that manage to receive VC finance are most likely to be innovative companies

Source: Pierrakis 2011

Companies that received VC funding

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

Venture Capital performance by vintage year

Poor venture returns since 2000 boom Downturn in venture activity world-wide since crisis

One year before the Dotcom

crisis

Source: NESTA

Performance before and after the dotcom crisis

 Vintage years:           

1990-1998Vintage years:            

1999-2005

US 30% -1.28%

UK 16% 0.19%

CE 21% 3.5%

Source: NESTA

Venture capital activity in GreeceVC Investment Activity in Greece since 1995 (source: EVCA) European early stage VC investment as a proportion of GDP (source: EUROSTAT)

Number of Venture Capital Investments in Greece since 1995 (source: EVCA) European later stage and expansion investment as a proportion of GDP (source: EUROSTAT)

Why should the public sector care?

Most venture capital markets were established with some sort of public support

Relatively young industry and in some counties still at very early stages

There is an equity gap Familiarity with the innovation system

Venture capital funding landscape in the UK

Grants

Business Angels

Private

Equity

Private VC

VCTs Public VC

Source: NESTA

Familiarity with the innovation system

Source: Pierrakis 2011

Examples from around the world US (SBIC) Israel (Yozma) Canada Finland UK

Source: NESTA

“Stage setting”

Tax regime – incentivise investments For individuals For investment vehicles

Ease barriers to technology transfer Provide entrepreneurship education Raise awareness of the benefits of venture

capital

How to develop an effective investments strategy? Some tips! Establish a network of deal sources Most often proposal comes from individuals

themselves so make sure they can approach you

Evaluate proposals based on their management skills and the potential

Source: Pierrakis 2011

Industry variations

Source: NESTA

Additional 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 Allow programmes to evolve and adjust Build up track records or partner with established funds

(e.g. Israel)

Where can you get funding?

Funds are very localised especially in US, however, 41% 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’ – Greece desperately needs an investments readiness programme

Contact the Hellenic Venture Capital Association

THANK YOU

Yannis.Pierrakis@nesta.org.uk