Third WIPO/INSME International Training Program Financing your business with intellectual property

1. ZERNIKE (UK) Third WIPO/INSME International Training Program Financing your business with intellectual property Topic 6 Sources of finance for innovative SMEs: Public, private, formal, informal Bob Hodgson Zernike (UK) Limited Geneva December 2010

2. ZERNIKE (UK) Key thoughts Money will find good ideas not create them • Finance needs to be articulated to grow value • Some systemic hypotheses and diagnoses • Communicating potential benefits from a framework • The best approaches provide money plus Bob Hodgson Geneva 2010

3. The Commercialisation Cycle Risk Of Failure LOW HIGH Product Development Stage CommercialValue > Market consolidation > Market expansion > Market penetration > Product enhancement > Sales & distribution > Product development > Marketing & research > Prototyping > Market definition > Innovation & R&D IPO/MBO /Trade Sale VC/ Expansion Fiscal approaches VC/IIF Seed SourcesOf Funding Angels/3F’s R&D Tier 0 Tier 1 Tier 2 Tier 3 Tier 4 Tier 5 Business Development Tiers • Tier 2 - Incubation • Mentoring • Seed funding • Contacts • Consulting • Clients • Tier 3 - Post-incubation • Funding • Structuring • Relationships etc • Tiers 4/5 - Commercial Maturity • Tiers 0/1 - Pre-incubation • Direction • Collaboration • Guidance • Resources etc • Pre-Seed funding

4. ZERNIKE (UK) Challenges in commercialisation: hypothesis 1 We have great S&T and ideas for new businesses BUT There is no money to take them forward SO Lets build a venture capital industry Bob Hodgson Geneva 2010

5. ZERNIKE (UK) Challenges in commercialisation: hypothesis 2 We have lots of money which is prepared to invest in new businesses BUT There are not enough good ideas coming forward from the knowledge base SO Lets change the orientation of the science base Bob Hodgson Geneva 2010

6. ZERNIKE (UK) Challenges in commercialisation: hypothesis 3 We have great S&T and lots of investment money BUT The two communities have opposite perspectives and cannot talk to each other SO Lets build a shared vision and learn a common language Bob Hodgson Geneva 2010

7. ZERNIKE (UK) IP its nature and challenges • A legal monopoly to encourage invention • Novel Useful Specific • Explicit knowledge, but usually backed by tacit know how • Complex and specialist – so costly and uncertain Bob Hodgson Geneva 2010

8. ZERNIKE (UK) Sources of risk with new IP • People risk: new entrepreneur and/or new team • Technical risk: it needs more testing to prove effectiveness • Commercial risk: unproven market without established price • Financial risk: little recovery potential AND • Competitors: disruptive technology undermining value Bob Hodgson Geneva 2010

9. ZERNIKE (UK) Forms of capital: getting the mix right • Business cash flow – treasury management • Grants – good but beware transaction costs • Equity injection – long term risk sharing • Loans – for working capital and short term needs • Guarantees – for those without collateral • Strategic alliance – also for credibility enhancement Bob Hodgson Geneva 2010

10. ZERNIKE (UK) Typical perspectives of funding sources • New firms and established businesses – risk assessment • Loans: • duration and recovery risks • ideally collateral backed – IP education • Guarantees: ensure symmetrical risks and rewards • Equity: aligned risk and reward but costly • Strategic alliance: again symmetry and risk alignment Bob Hodgson Geneva 2010

11. ZERNIKE (UK) Risks: real and perceived • The benefit of collateral – tangible and tradable • IP – an asset but of what value? • Austin Texas – investment challenge! • But the risks are still very real • technical • market/commercial • personnel • financial Bob Hodgson Geneva 2010

12. ZERNIKE (UK) Communicating potential: investment readiness • Business plan • Market data and evidence • Communications skills • Differentiating the investment pitch • Cultivation of the risk takers Bob Hodgson Geneva 2010

13. ZERNIKE (UK) Some concrete approaches • Turkish critical monitor firm • Argentinean Core Security • Armenian ICT companies • Chilean salmon producers • Mexican unmanned plane Bob Hodgson Geneva 2010

14. ZERNIKE (UK) Finding the application: Gyroscope and mower • Yachting enthusiast: new balancing equipment • Established the IP • Created the firm • BUT Very small market • Looked for help to find other markets • Became industry standard Bob Hodgson Geneva 2010

15. ZERNIKE (UK) Business model and revenue sources • Selling the product • Providing a service and support • Replacement materials market • Upgraded versions and revenue GRIMREAPER Bob Hodgson Geneva 2010

16. ZERNIKE (UK) Real Economy: innovation engines • ARM – Advanced RISC Machines • IP generator • income from Licences and Royalties • market cap - billions • Generics Group Plc – technology solutions provider • IP accumulator • and commercialiser – spinning out companies • massive P/E ratio on flotation – hope value • Supported by specialist service provides Bob Hodgson Geneva 2010

17. ZERNIKE (UK) Thank You BOB HODGSON ZERNIKE (UK) Ltd The Grove High Street Sawston Cambridge UK CB2 4HJ 0(044)1223 526980 bhodgson@zernikeuk.com Bob Hodgson Geneva 2010