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InnovationandPPPfinancingProductiveandcounter‐productivemeasuresfrompublicpolicies
PierreKladny,ManagingPartneratValleyRoadCapitalandPresidentSECAforFrenchspeaking
SwitzerlandFebruary2014©
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Topics
1. InnovativeStartupsandSMEsinSwitzerland,whatistheproblem?
2. CurrentstatusofSwissgovernmentalsupportforinnovation.
3. Majorhurdlesandconstraintsaheadandhowtoaddressthem.
4. Isthe(current)non‐interventionistapproachacceptable?
5. Whatareinvestmentprofessionalspromotingandhowtobepragmaticaboutit?
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InnovativecompaniesinSwitzerland
• Switzerlandisforyearsontopoftheinnovationbest‐in‐classlist.
• Withonly3.6%ofyoungpeopleunemployed,Switzerlandenjoysaverycomfortableposition.
• Theentrepreneurialratio(6%)isslightlyhigherthanEuropeanaverage(5.4%)butnotsignificantly.
• Withnearly2%ofGDPinvestedinacademicR&D(CHF9bn/year),Switzerlandenjoysastronggovernmentalsupportforinnovationatacademiclevel.
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InnovativecompaniesinSwitzerland(2)
• Innovativeentrepreneurscreateeveryyearabout2’000companies,whichcanbeclassifiedas“high‐tech”.
• Thedepletionrateisroughly50%after5yearsofexistence.
• Theaveragenumberofemployeesislow(5).
• ThecompoundcontributiontoGDPofyounginnovativecompaniesislow(~1%).
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Whatistheproblem?
• OnlyahandfulofinnovativecompaniesreceiveVCfinancing(<2%).
• Veryfewinnovativecompanieseverreachmorethan100employees(<0.5%).
• Serialentrepreneursarealmostnon‐existent.
• Exitvaluationsarelow.• Taxationcanbearealdeterrent(>90%taxrates).
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CurrentstatusofCHgovernmentalsupport
• SupportisgrantedatFederalandCantonallevels.• MainFederalprogram:CTI(CHF150m/year)tofinanceR&Dinpartnershipwithacademia.
• SomemarginalprogramsinthefinancingofGreentechnology.
• Cantonalprogramsareverydiversebutareessentiallyintheformofsmallamounts(CHF50k‐100k)grantedasloanstoearlystageinnovativecompaniesorestablishedinnovativeSMEs.AverageamountperCanton:CHF25m/year.
• TotalyearlyamountisapproximatelyofCHF600m.
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Howdoesthiscompare?
USAhasthebulk(0.35%ofGDP)andEUislaggingbehind(0.06%).SwitzerlandisslightlybetterthanEU(0.1%ofGDP).ButthisisnotthecasewithacademicR&Dbudgets!
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Boulevard of Broke Dreams, J. Lerner©
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EntrepreneurialattitudeinCH
• Notinvolvedinentrepreneurialactivity,buthaveapositiveperceptionoftheirownentrepreneurialcapacityandtheopportunitieswheretheylive–>18%.
• Seegoodopportunitytostartafirmintheareawheretheylive‐>33%.
• Theyhavetheskillsrequiredandknowledgetostartabusiness‐>37%.
• Fearoffailure‐>36%.• Entrepreneurialintention‐>7%
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Majorhurdlesandconstraints
1. TransformationofacademicR&Dintofastgrowingenterprises.
2. Taxationofinvestors.3. Stockmarketforinnovativestartups(exit).4. Relaunchearly‐stageVCactivity
(ecosystemandperformance).5. Reducecostoffailure(bothfinancialand
social).
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AcademicR&Dtoinnovativebusiness
• WithinALLuniversitiesteachandencourageentrepreneurialactivity(sabbaticals,endowmentfunds,programs).
• CreateeffectiveandbusinessfriendlyIPtransferframeworks.
• Fundincubatorsandaccelerators.• Invitesuccessfulalumnaetospeakandencouragewould‐beentrepreneurs.
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Taxationofinvestors
• Thecurrenttaxationregimeforcapitalgainsis0%...But!
• Regular,businessangel‐typeinvestorsaretaxedasprofessionalsandpayupto48%taxesoncapitalgains.
• Thisdifferentiationisappliedarbitrarilyex‐post,creatingastronguncertaintyandfear.
• InvestorsALWAYSreasonintermsofrisk/rewardratioAFTERtax.
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StockmarketforEuropeanIPO’s
• TheaverageUSVCIRRis17.9%,whiletheaverageEuropeanVCIRRis1.06%.
• Themaincausesare:– Screeningskills(longerexperienceintheUS).– Useofconvertibleinstruments(higherleverageonvaluation).
– Replacementrateofmanagingfounders(manager‐shareholderagencyproblem).
– Exitvaluations(NoNASDAQinEurope).
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Source: RECAF 2003
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Early‐stageVCactivitytopromote
• Becauseoftheperformanceissuesdescribed,institutionalmoneyhasdriftedawayfromEUVCactivity.
• Iftheplayersintheeco‐systemimprovetheirperformance,investorswillreturn,butitwilltaketime.
• Thegovernmentcanplayanactiveroleinfosteringsuchecosystemwiththerightdosageofsupportandfinancing.
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Reducecostoffailure
• Bankruptcylawispunitiveandoverlyfavorabletocreditors.
• Personalresponsibilityofboardmembersbecomescommonplace.
• Publiccondemnationoffailureisstillthenormandfailedentrepreneursareostracized.
• Bank’s“blacklistsarestillthenorm”.• Thishasaverynegativeimpactonentrepreneurialactivity,bothinconversionratesandrecyclingofentrepreneurialexperience.
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Isnon‐interventionismacceptable?
• TheSwissgovernmentisnotoriousforavoidinganyinterventionintheprivateeconomy,whichcouldskewcompetitionrulesamongbusinesses.
• ThishassometimesdriventodogmaticapproachesofinnovationfinancingandaclearimbalancebetweenacademicR&Dbudgetsandtransformationrates.
• Cross‐overfinancing(fromacademiatobusiness)shouldbesupportedbytheState.
• Legalframeworkshouldbeamendedtoaddressweaknessesofcurrentsystem.
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Proposals
Therearefourmajortopicstoaddress:1. Getthelawsright(especiallybankruptcylawsandadmincosts).
2. Ensureaccesstocutting‐edgetechnology(reduceIPfriction).
3. Createtax‐incentivesandremovebarriers.
4. Trainpotentialentrepreneurs
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Majorcommonerrors
• FieldofDreams:“Builditandtheywillcome”• Timing:Mostcommonmistakeistohaveprogramswhicharetoolongortooshort.
• Sizing:Understandthesizeoftheproblemandthenumberofcompanies(tomuchmoneywillbeasbadasnotenough).
• Badimplementation:Civilservantsarenotventurecapitalists.
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Bestpractice:Fundoffundstructure
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Boulevard of Broke Dreams, J. Lerner©
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Bridgingthegap…
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Without breakingthebridge!
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Thankyou!
Contactdetails:[email protected]+41229061020
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