INSME's Interviews

Innovation tools to finance innovative SMEs

INSME: Could you explain what EURADA’s main activity is, and in which way it is linked to the issue of funding innovative SMEs?

Mr. Saublens: EURADA has 5 main objectives. The first one is to lobby the European administration, the second is to promote the exchange of experiences among its members, the third is to encourage joint projects, the fourth is to promote the concept of development agencies in countries where the notion is not well understood yet, the fifth is to be in the forefront of new ideas in economic development, or in managing RDAs.

We know since 5-10 years that the competitiveness of European regions is based on SMEs. Big companies don’t produce jobs any longer and Europe can attract fewer foreign direct investments than in the past. That is where the link with innovative SMEs is.

Moreover, we also notice that there is a big market failure in the financial market. Indeed, SMEs cannot access the proper financial means that help them to develop. That is why in the last 10 years EURADA has focused a great part of its work on access to finance for SMEs. In 1995, I think, we were the first in Europe to organise and to provide a follow-up to a seminar about business angels networks. Of course, we have also organised seminars on seed capital, venture capital, micro loans, guarantee schemes, as well as on investment readiness.

INSME: Are you also directly involved in EBAN [European Business Angels Network] and what’s your role?

Mr. Saublens: I’m also the director of EBAN. EBAN is a spin off of EURADA. We created EBAN as a legal entity so that the network can have a better visibility. EBAN is pursuing similar objectives as those mentioned for EURADA. Thanks to our awareness campaigns, we managed to show the crucial role of business angels in funding SMEs.

INSME: In your presentation at the INSME International Conference in Montevideo you have listed a number of tools to finance innovative SMEs - business angels, seed capital, mezzanine, venture capital, IPO – but above all you have insisted on a new concept of integrated finance. Can you tell us what it is about and why it is so important?

Mr. Saublens: EURADA members have understood that, at regional or national level, there is a need to build a financial supply chain with the right range of instruments in place to face the requirements in the different stages of a company life cycle. One instrument at a certain stage prepares for the next. Of course some companies will never access IPO [Initial Public Offering] and others don’t need micro-credit because the founder has already the money. But normally, if you want to have a system in place at regional or national level, you should have all these components in place.

EURADA members have also realised that this system is not made up only of financial tools. For instance we have found that coaching is very important. You don’t just give the money to the entrepreneur but you coach him in order to be sure that his skills will improve and ensure a better return on your investment.

INSME: Can you mention the most important tools and tell us in what sense they are beneficial to and useful for innovative entrepreneurs?

Mr. Saublens: Investment coming from business angels is very important. In Europe we have seen a quick development of business angels networks in the last 10 years. In 2004, we were able for the first time to record that there were more deals from business angels members of EBAN than from the seed capital industry member of EVCA [European Private Equity and Venture Capital Association]. This is good news because it proves that business angels have come back to the market after the slow down of the Internet bubble market of 2000-2001. It is also good news for us because it means that more people are aware of the concept of business angels.

Another important instrument is mezzanine funding, a combination of loans and equity. You can do it on a rather small regional scale, but is also done by big VCs.

INSME: Who are the providers of these mezzanine loans?

Mr. Saublens: The VCs for the big deals but we have also seen that, at regional level, for instance in Germany, public banks provide mezzanine funding; in the UK some regional development agencies that have a financial arm (for instance the West Midlands Finance) do so too. Of course the amount is bigger in the case of a pure VC than if it is a regional development organisation.

I have just learned about another new way of creating a financial supply chain for very innovative enterprises in Scotland, where they created a vertical sectorial approach named “from research to revenue pipeline”. For many years local authorities have promoted clusters. These are horizontal clusters, classical Michael Porter clusters. Some EURADA members, mainly from Scotland, Wales, Emilia Romagna and Catalunia, prefer now to support sectorial, vertical supply chain, where entrepreneurship and access to finance play an important role. They detect innovative ideas in Universities. Then they provide support in the form of entrepreneur fellowship (the potential entrepreneur will get a grant for one year to start his business) and also some coaching. They have also grants to test the prototype and after that come the relations with business angels or VCs. It seems that this is now the direction for research-oriented clusters. In other words, it is a combination of a entrepreneurship supply chain and of a sectorial cluster approach, which seems to be very efficient for supporting the fast growing companies and university spin offs.

INSME: You have just mentioned Scotland, Wales, Emilia Romagna and Catalunia. Are these “bests in class” in Europe as far as the use of these innovation tools is concerned?

Mr. Saublens: I don’t like using expressions like “best in class” or “best practices”. Those regions are just trying to find new ways of financing innovative companies. So they are probably pioneers in this field for the moment. At EURADA, not long ago we had a meeting during which this model was explained for the first time. We have to evaluate it in a longer period of time to see what the results will be, but it is clearly a move away from the classical cluster model of providing funding and support to regional SMEs.

INSME: A statements in your presentation at the INSME Annual Meeting stroke me: “it’s more and more difficult for start ups to access finance”. What do you mean? That nowadays it’s more difficult compared to the past?

Mr. Saublens: It has always been difficult, but there are signs that difficulties have increased. There are two main reasons for that. The first one is access to credit: with Basel II, banks will have to develop ranking and systems of their client’s portfolio it’s difficult to rank innovative SMEs because we don’t know if their innovativeness will be brought to the market and what the market acceptance will be. Second, the VCs are looking for big deals to cover their due diligence costs and they prefer to invest in later stages.

This is a general issue. And then if you consider the sectorial issue, there is even a worst situation. For instance in the biotech sector, the length of investment in now 10 years.  We have seen in France and Belgium in the last 12-15 months that biotech companies looking for 25-30 million euro financing couldn’t find it in Europe and they were bought by USA companies.

So it’s not only a question of access to finance but also a question of development. You probably remember that Skype was bought by an American company and when the founder decided to sell it, they received no offer from European companies (they said they preferred to give priority to a European partner).

Moreover in Europe exits are difficult to achieve. Each year there are 60-70 IPOs in Europe (letting out privatisation of utilities enterprises). Every investor is stuck with his money for longer than expected. For what we know from our members, the average length of an investment is currently 7 years. A few years ago the expectation was to stay 3-4 years. So if you do not exit, you can’t make a capital gain and you can’t reinvest in another new start-up.

There are also too few public instruments to act counter-cycle.

INSME: You have talked so far about the financial supply chain. But what about the demand for funding? What are the problems on this side of the coin?

Mr. Saublens: You’re right; the supply chain is only a part of the question. The other part is that the projects that arrive to the investors are not of good quality. What would be a good project? It is one for which the investor believe it is a good risk. There are a lot of asymmetries in this evaluation. For an entrepreneur his project is good because it is his own project of course. The investor perspective is different. Whatever financial instrument you look at, the rate of success is 1 out of 10. And when you say 10, it means they have been scanned by an intermediary and then sent back for approval to a financial committee. Before the selection of those 10, there are 20 maybe 30 projects that are rejected. There is a need for intermediary bodies to improve the quality of the business proposals made by entrepreneurs to investors.

It is also a matter of investment readiness. There is also a need to teach entrepreneurs how to improve their capacity to present their projects. This has to do not only with the business plan but also with the management capacity. It is part of the investment readiness scheme to make entrepreneurs aware of the different investment criteria linked to the different financial tools. Indeed, some investors look at past records, some look at growth potential. This must be reflected in the entrepreneur’s business plan or presentation. More and more investors tell us that before they invest they look at the management team. Well, if you were born entrepreneur, you can be taught to be a good manager. That’s why in our approach we insist on mentoring, coaching and having the right people in place in order to secure the attention of an investor.

INSME: Based on your international experience, how would you compare the US innovative SMEs funding system with that in Europe?

Mr. Saublens: I believe they have the same difficulties that we have. The difference is the critical mass. For instance, in 2004 the 3 most promising start ups in the photovoltaic sector in California received as much money in seed capital as all European companies received in seed capital. That’s the difference. We have the same tools, but we have a problem of critical mass.

Moreover, Europeans also have a different culture of risk taking and suffer from delay in time to catch the US new practices: for instance, France and the UK are copying now some mechanisms of the small business investment scheme adopted by the US some 10-15 years ago. I’m afraid it is too late because the US administration is already moving to other instruments. So European stakeholders need to jump to these new instruments if they want to be modern immediately and not running, as usual, after the US.

INSME: As a participant at the INSME International Conference 2006, what's the contribution of this conference to inspiring your future action-taking within your organisation? What have you learned from this experience with INSME?

Mr. Saublens: When I go to international conferences like this, I always hope to learn something and come back with new ideas or at least to be assured that EURADA members are on the right track. We are in a knowledge economy. So the more you can learn from your colleagues, the better it is. The diffusion of information is also important so that other people can find new ideas to better perform.

INSME: What do you think could be done by INSME so that participants at its international conference can fully benefit from this event?

Mr. Saublens: What I usually miss when I go to this kind of conference is having more time to spend with one or two of the speakers, because generally we hear them talking only for 10-15 minutes. In addition, when we attend site visits, it would be nice to have a sort of peer review discussion afterwards: you put together people in a room to analyse and comment on what they have seen or the problems face by the organisation visited. It is interesting both for the people who receive the advice and for the people who give the advice because they have to put themselves and their ways of doing things into question.

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