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The role of Venture Capital in spurring innovation

Developing a Culture for Innovation, British Council Athens, 29 March 2011. The role of Venture Capital in spurring innovation. Yannis Pierrakis Head of Investments Research National Endowment for Science, Technology and the Arts (NESTA). Current crisis. Massive public debts

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The role of Venture Capital in spurring innovation

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  1. Developing a Culture for Innovation, British Council Athens, 29 March 2011 The role of Venture Capital in spurring innovation Yannis Pierrakis Head of Investments Research National Endowment for Science, Technology and the Arts (NESTA)

  2. Current crisis • Massive public debts • Countries bailout governments • Governments bailout banks • Banks don’t invest in companies • All talking about growth! • But how? • Innovation!

  3. 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

  4. 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)

  5. 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)

  6. More empirical evidence • Companies that manage to receive VC finance are most likely to be innovative companies Source: Pierrakis 2011

  7. Companies that received VC funding

  8. 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

  9. 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

  10. Performance before and after the dotcom crisis Source: NESTA

  11. Venture capital activity in Greece

  12. 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

  13. Venture capital funding landscape in the UK Private VC Private Equity VCTs Public VC Business Angels Grants Source: NESTA

  14. Familiarity with the innovation system Source: Pierrakis 2011

  15. Examples from around the world • US (SBIC) • Israel (Yozma) • Canada • Finland • UK Source: NESTA

  16. “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

  17. 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

  18. Industry variations Source: NESTA

  19. 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)

  20. 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

  21. Thank you Yannis.Pierrakis@nesta.org.uk

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