ESTER
Start-up Access to Finance inLatvia
Valdis Avotiņš, RIS-Latvia, ESTER coordinatorLatvian Investment and Development Agency
ESTER project Milestone Meeting
Bratislava, 15-16 July, 2004
ESTER
-12,6
-32,1
-11,4
2,2
-0,9
3,78,4
4,82,8
6,8 7,9 6,7 7,5
-35-30-25-20-15-10-505
10
1991 1993 1995 1997 1999 2001 2003*
GDP at constant prices GDP at constant prices (changes in % of previous period) (changes in % of previous period)
Price liberalizationPrice liberalization
Stabilization policyStabilization policyLVLLVL
Latvian Privatization AgencyLatvian Privatization AgencyRiga Stock ExchangeRiga Stock Exchange
Latvian Development AgencyLatvian Development Agency
FiscalFiscal andand monetarymonetary policypolicy
Privatization of large enterprisesPrivatization of large enterprises
Long-term strategy
Prof. U.OSIS
LATVIA: GROSS DOMESTIC PRODUCT
Reforms in Latvia
ESTER
INNOVATION POLICY INNOVATION POLICY (2003)(2003)Key objective - to enhance national innovation capacity :
formation of the society open to innovative activityCreation of a harmonized and innovation-friendly environment;Creation of innovative SMEs base and promotion of their further growthefficient cooperation between all elements of the innovation system
LONG TERM ECONOMIC STRATEGYLONG TERM ECONOMIC STRATEGY (2001)(2001)
• Objective : to achieve the EU average GDP per capita level in the next 20-30 years
• intensive utilization of knowledge and high technologies, transition from labour-intensive economy to knowledge-intensive economy
• by renovating traditional sectors of economy on modern technology basis and by developing new post-industrialknowledge-intensive sectors
ESTERKNOWLEDGE-BASED
ECONOMY
Source: Ministry of Education and Science
High third-level enrolment rates: 47.1 students per 1000 population
of those, 10% Engineering and technologyand 51% Business Administration and Social Sciences
University-level enrolment: 15.9 students per 1000 population
of those, 10% Engineering and technologyand 53% Business Administration
Number of students (thsd)
39,046,2
55,464,2
76,689,5
101,3110,5
0,0
20,0
40,0
60,0
80,0
100,0
120,0
1994/951995/961996/971997/981998/991999/002000/012001/02
118,8
2002/03
ESTER
Cycle of Reform
1. Identification of
problems
2. Government/
business dialogue
3.Implementation
by decision-makers
4. Monitoring and evaluation to
assess impact
Political Champion -Deputy Prime Minister •• Institutional Partners:Institutional Partners:
•• Foreign Investors Council in Foreign Investors Council in Latvia (FICIL)Latvia (FICIL)
•• Latvian Chamber of Trade and Latvian Chamber of Trade and IndustryIndustry
•• Foreign Chambers of Foreign Chambers of CommerceCommerce
•• National Economy Council National Economy Council •• Industrial Clusters (ICT)Industrial Clusters (ICT)•• Small and Medium Business Small and Medium Business
CouncilCouncil•• Other Industry Business Other Industry Business
AssociationsAssociations
UPGRADING OF INNOVATION CLIMATE (Tax Incentives)
ESTER
Barriers for SME development
0
50
100
150
200
250Corruption
Limited manufacturing power
Too low demand on the manufactured product
High manufacturing costs
Outdated machinery park
Complicated export/import procedures
Shortage of trained labour force
High interest rates of credits
Finance organizations do not support innovations
Inability to receive credits
Problems with distribution channels andwholesalers
Lack of current assets
High taxes
High competition
ESTERSupply of SME Needs
0
20
40
60
80
100
120
140
160IRC (LTC)
EIC (LIDA)
Riga Technical University
Other EC funds or programmes
Private consultants from Latvia
LTC
Ministry of Economics
Local government
Enterprise Support Centre
Foreign clients/partners
Professional associations
LIDA
LCCI
Tax consultants
Service is known Service used I will use again
ESTERR&D Institute’s sales to industry
0
5000
10000
15000
20000
25000
30000
Latvian R&D institutions Swedish R&D institutions Swedish applied R&Dinstitutes
Avots: RIS Latvia 2004, Inno, 2003
ESTERMain sources of start-up financing
9,7%
14,3%
17,0%
18,3%
64,3%
Other
Borrow ing from friends etc.
Bank loans
Company business partners
Personal or family savings
Total figure of % overcome 100% as several sources were mentioned
Source: SKDS 2002
ESTERMain start-up problems by year of
foundation
SKDS, 2002
21%23%
32%
24%
14%
25%
21%
33%
18%20% 19%
21%
0%
5%
10%
15%
20%
25%
30%
35%
1991 1992-1995 1996-1999 2000
S hortage of working capital Lack of s tart-up capital Lack of finance for inve s tme nt
ESTER
Knowledge and usage of financial services
0
20
40
60
80
100
120
140
160
180
Hansabank
Unibank
LHZB
Regional funds
Other Latvian banks
Export financial support scheme
(LIDA)
Exhibition support fund (LIDA)
BASF (EBRD)
Other international programmes
Parex bank
EC 5th Framework programme
Environmental investment fund
Agricultural and rural development
programmes
Ministry of Education and Science
support (TOP)
Local government funds
Latvian Science Council funding
Energoeffectivity fund
Norwegian-Latvian AF
Service is known Service used
RIS Latvia, 2004
ESTER
SMEs future plans
Do you consider to use the following finance instruments?
17
17
31
35
39
57
129
142
171
0 20 40 60 80 100 120 140 160 180
To attract new shareholders
To attract risk capital
To use export guarantee scheme
To rise private funds
To attract capital of current shareholders
Attraction of f inancial investor
To use f inances of state support
To take credit
To use EC f inancial support
CompaniesRIS Latvia, 2004
ESTER
> Market consolidation> Market expansion> Market penetration> Product enhancement> Sales & distribution> Product development> Marketing & research> Prototyping> Market definition> Innovation & R&D
Tier 0 Tier 1 Tier 3 Tier 4 Tier 5Tier 2
Product Development Stage
The Commercialisation CycleRisk Of Failure
HIGH LOWCommercial
Value
R&D / Precomm.
Angels/3F’s
Seed
VC/IIF
VC/ loansExpansion
IPO/MBO/Trade Sale
loans
SourcesOf Funding
Tier 3 - Post-incubationFundingStructuringRelationships etc
Tiers 4/5 - CommercialMaturity
Business Development TiersTiers 0/1 - Pre-incubation
DirectionCollaborationGuidanceResources etcPre-Seed funding
Tier 2 – Start-up phase -Incubation
MentoringSeed fundingContactsConsultingClients
Based on Zernike Group Expertise, 2003
Market gaps
ESTERMapping “innovative finance”
R&D incentive, depreciation scheme, largeinvestment tax credit, training relief
>10 Venture and equity funds (over 0.5-1 MLVL)
Loans, overdrafts, credit-lines, leasing, guarantees
Export marketing scheme; Exhibition support fund, Sappard, SAP for new product and technology development; new SAP for consultancies and export marketing , SAP for business and technology infrastructure, all SAPsfrom June, 2004
Large companies
R&D incentive, depreciation scheme, training relief
3 Venture and equity funds (up to 0,3 MLVL), NLBDF, FKC (LHZB), MVKAF, Eko Investors Newrisk capital fund as new SAP from 2004
Loans, leasing, guarantees
BAS Consultancy scheme Export marketing scheme, Exhibition support fund, Sappard, new SAP for new product and technology development; new SAP for consultancies and export marketing , SAP for business and technology infrastructure,
Expansion of existing companies
SME incentive, agriculture / farms related incentives
Limited access (6 projects by NLBDF), EkoInvestors
Micro credits, New SME loans, Guarantee agencies (limited access)
New companies (“without a balance sheet”)
Micro credits (limited access)Market oriented R&D grantsEntrepreneurs,
start-ups
Fiscal incentivesRisk Capital ventures
Banking sectorSupport schemes
ESTERDemand for equity
Businesspersons: four types of barriers raising equity:1) cultural reluctance when it comes to opening their
companies to outsiders (shareholders and managers);2) difficulties in presenting themselves or their business plan
in a way that accommodates the priorities and management requirements of equity suppliers;
3) project investment readiness: certain credit and venture capital tools are not adapted to the needs of all businesses at all stages of their development;
4) difficulties to follow requirements of venture capital and credit providers. Such requirements include information on projects as well as financial and managerial data (corporate governance). Downstream of investment, businesses should also recognise the importance of regular, properly formatted reporting to investors.
Need for finance management skills training!
ESTERThe paradox of access to finance
• Banks• Venture Capitalists have money • Private persons
But
• existing business environment, grant schemes and fiscal incentives doesn’t create motivation for knowledge holders to commercialise their competence;
• there is lack of realistic and attention worth ideas being offered by start-ups;
• High ownership concentration within economy and SMEs. Usually one owner has controlling stake and is not willing to start listing operations in RSE
ESTERState Aid
EU State Aid Scoreboard Report [1] highlights that Candidate countries and Latvia in particular spend less aid per capita (expressed in PPP standards) than the EU member states. The component for state aid to manufacturing in Latvia is 129 EUR / employee in 2000 compared to EU average 790 EUR / employee, 571 in Hungary and 288 in Slovenia.
Conclusions• There is strong dominance of rescue and restructuring
type state aid. Schemes focused to SMEs, R&D are weak and has limited resources.
• Even existing programs has too little orientation towards industry, innovations and transfer of competence from universities to private sector.
[1] European Commission. State Aid Scoreboard, 27.11.02. pp.44,45.
ESTERPlanned SAP financing for private
sector support, MLVL
111,98950,39550,39511,199Total
4,5212,0342,0340,452Pre-start up consultancy and employment program
10,0464,5214,5211,005Support to training, retraining and post-diploma education
11,5825,2125,2121,158Risk capital aid program
47,68921,46021,4604,769Support to modernisation of new business / technology infrastructure (only shared infrastructure, fit to EU standards)
10,2734,6234,6231,027Support for development of new products and innovations (only prototypes)
27,87812,54512,5452,788Support to consultations, participation in external exhibitions and trade missions
Total200620052004
FinancingState aid program
ESTERPilot actions / RIS Latvia
- Region’s innovation plan, incl. definitions, action plan for improvalof business environment,
- Design of pilot business concept of incubator and industry park
Creation of conducive regional environment
- implemented within the framework with Riga Region Innovation plan development.
- Set up thematic groups; Organise and carry out meetingsInnovation dialogue groups
Model description on a bases of EU experience;Students bridging universities and companies
Feasibility study - provide model description and promote the idea in a written report;
Latvia Technology Transfer Centre
- Raise commitment - introduce the key persons to the concept- Establish a Think tank for technology commercialisation
Technology comercializationmotivation program
- Involve into partnership with other institutions in providing lecturers
- Providing knowledge of of business plan competition- Develop the outline for seminar and organize seminar on this
subject
Entrepreneurship motivation
- Planning of foresight excursive, Creating consensus- Organising foresight conference in October, 2004Strategic planning exercise
Expected achievement within the RIS projectPilot action
ESTEREQUITY GAP
• Banks look for collateral (intangible assets are not security)
• Venture Capital investing in higher amounts
⇒ Gap in the start-up and seed phase⇒ Missing Business Angel / university spin-
off financing⇒ Not sufficient VC market for early stage
ESTER
Knowledge commercialisation and
entrepreneurship motivation scheme
AppliedandbasicR&D
ideas
Entrepreneurshipeducation, training
Ideastimulation / businessideaformulation
Marketanalysis
ProductProtectionDevelopmentValueCompetitioncooperation
Businessplan
Dev.plansMarket planOrganisationplanFinancialplanprospect
Licensing
IPRCommercialprotectionMarketingRoyaltyagreement
License to existingcompany
Formingnew start-upFundingEquityregistration Incubator
company
Operationalcompany
Real estateIncubatorPremisesIndustrial networksBasic daily servicesProfessionalservices
Asset managementEarly stageSeed capitalRisc capitalCompetentmanagement
Technology transfer
Entrepreneurship motivation
OutflowofMaster, PhD
Fiscalincentive, PIT
Business cultureSocial attitudesUnderstanding offailuresGrrenhousesBusiness labspreanalysis
Pre-seed Seed fund
TechnologyIncubator’s Program
ESTERLATVIAN INVESTMENT & DEVELOPMENT AGENCY
Ministry ofEconomyBrivibas 55, RigaLV 1519, Latviawww.em.gov.lv
Perses iela 2, Riga, LV 1442, LatviaPhone: +371 7039400Fax: +371 7039401 E-mail: [email protected]://www.liaa.gov.lv
