Lecture 5.pptx

INNOVATION
FINANCE
ESB
BS6701 Innovation 2017/18

• The Global Innovation Index 2016 (GII) (9th edition);
• Co-published by Cornell University, INSEAD, and the
World Intellectual Property Organization (WIPO, an
agency of the United Nations);
• The core of the GII Report consists of a ranking of
world economies’ innovation capabilities and
results.
https://www.globalinnovationindex.org/gii-2016-report
Global Innovation Index 2016

WORLD LEADERS 2016
1. Switzerland
2. Sweden
3. United Kingdom
4. United States of America
5. Finland
6. Singapore

• Innovation requires continuous investment.
• Before the 2009 crisis, research and development (R&D)
expenditure grew at an annual pace of approximately 7%.
• GII 2016 data indicate that global R&D grew by only 4% in 2014.
• This was a result of slower growth in emerging economies.
• And tighter R&D budgets in high-income economies.
World Intellectual Property Organisation www.wipo.int/pressroom/en/articles/2016/article_0008.html

Why aren’t British businesses investing in R&D?
• Since the financial crisis of 2008, economic
turbulence has caused the purse strings of many
businesses to tighten.
• For example the closure of Pfizer’s R&D centre in
Kent in 2012, and the closure of the Cambridge
centre in 2015 signalled a downturn in R&D
spending within the pharmaceutical industry.
http://www.exemplas.com/news/businesses-should-invest-in-research-and-development/
http://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/researchanddevelopmentexpenditure/bulletins/businessenterpri
seresearchanddevelopment/2014

• At the same time, the world’s top engineers within
manufacturing are calling for a protection over R&D
funding, calling on global governments to preserve
education and Research and Development (R&D)
spending across their respective countries.
• They have argued that by protecting this
investment, engineers will be empowered to solve the
world’s greatest challenges.

Aligning the Organization for its Digital Future (Kane et al. 2016)

• It is clear that senior decision makers are questioning the
research and development practices in both the private
and public sectors.
• This is also reflected in this research which reveals that a
fifth (20 per cent) of senior decision makers at large
corporations believe that new products and services are
held back due to an inability to secure senior buy-in.

• The results from the YouGov survey shows that there are three key
areas where British companies can transform their businesses to
improve research and development efficiencies.
First, British businesses are using outdated data collection models.
The research a large proportion are relying on customer/client
meetings (50 per cent), outgoing calls (30 per cent) and feedback
forms (28 per cent).
• Only a quarter (25 per cent) use digital customer relationship
management for gathering data from customers to inform R&D
processes.

• If businesses do not automate and digitise feedback they run the risk
of losing valuable information on how to better their products and
services, or at worst they risk building a business strategy which is
not accurately informed.
• Second, British businesses need to improve the ways in which they
use IT to bring their products to market quicker, and in turn
demonstrating the importance of continual innovation.

• According to the research, many British businesses
don’t currently use IT software within the product
development processes.
• Only a tenth believe IT software tools are accelerating
the testing of new products “very effectively”, while
nearly a quarter (22 per cent) characterize the use of
these tools as not very or not at all effective.

• Third, UK businesses need to put aside more revenue to
invest in research and development processes.
• Of the large businesses surveyed, almost a quarter (24
per cent) of them believe legal or legislative concerns are
a major barrier to R&D, with 23 per cent agreeing that
lack of financial investment impedes product
development.

Start-up Investment in Singapore:
https://e27.co/singapore-creating-us718m-innovation-fund-will-invest-us107m-startup-
20170426/
Proctor & Gamble in Singapore:
http://www.straitstimes.com/business/economy/procter-gamble-to-invest-us100m-in-
singapore-digital-innovation-centre-its-first
Can you find other examples of investment in
innovation in Singapore?
Singapore Investment in Innovation

How Amazon was Funded
Dec-97
Loan &
Boand Issue
$326m bond issued
May-97 IPO 3 million shares are offered, raising $49.1m
Jun-96
Venture
Capitalists
2 VC funds invest a total of $8m
May-96 Family Founder's siblings invest $20,000
Dec-95
Angel
Syndicate
20 angels invest $46,850 each on average, for a total of
$937,000
Aug-95
Business
Angels
2 angels invest a total of $54,408
Feb-95 Family Founder's father and mother invest a combined $245,000
Jul-94 Founder Jeff Bezos starts Amazon.com, he invests $10,000

Sources & uses of finance
Equity
 Personal, family & friends
investment
 Angel finance
 Venture finance
Long & medium term loans
 Bank
Lease & Hire Purchase
Crowdfunding (equity or loan)
Seasonal fluctuations in
working capital
 Stock
 Debtors (net creditors)
Bank overdraft
Short term loans
 Bank
Fixed assets
 Land & buildings
 Plant, machinery &
equipment
 Vehicles
 Computers, & furniture
Permanent working capital
 Stock
 Debtors (net creditors)
Source of finance Use of finance
Short
term
Long &
medium
term
Burns, P. (2016) Entrepreneurship & Small Business: Palgrave

What are the advantages &
disadvantages of using
factoring?
Softcat
Softcat Burns, P. (2016) Entrepreneurship & Small Business: Palgrave

 Trade sale
 Management buy-out (MBO)
 Management buy-in (MBI)
 Floating the company & selling shares
 Off Exchange (OFEX)
 Alternative Investment Market (AIM)
 Stock Exchange Main Market
 Initial Public Offering (IPO)
Harvest options

CASE STUDY
EXERCISE

Equity finance:
Personal, family & friends
Advantages
 Dividends may be
expected
 Selling shares to outsiders
dilutes stake in the
business & may lead to
loss of control
 Outsiders providing equity
may want to interfere
Disadvantages
 Good, secure long term
finance
 No interest or capital
repayment
 Can be used to lever
further loan finance

Angel finance
Advantages
 Only really available to
growth businesses
 A proportion of profits &
capital growth go to angels
expected
 Angels will sell-on their
investment in the future
 Angels may be seen as
interfering
Disadvantages
finance
 Small amounts of equity
available
 Based on business plan
not security
 Investment usually for 5 to
10 years
 Hands-on expertise

Venture finance
Advantages
 Only for businesses with
very significant growth
prospects n
 A proportion of profits &
capital growth go to
investor
 Dividends expected
 Investors will want to sell-
on in the future usually
through a stock market
floatation
 Requires very detailed
information disclosure
 Takes time
Disadvantages
finance
 Larger amounts – often
used as second stage
 Based on business plan not
security
 Not involved day-to-day
 Usually for 5 to 10 years
 Can offer longer-term
strategic advice
 Aid with additional loans
 No interest or capital
repayments
Dragons Den pitch

 Risk & return – Typically 30% to 60% p.a.
return as a capital gain, depending on
perceived risk (equivalent to multiplying their
investment by 4 to 6 times in 5 years)
 Exit route (liquidity event) – Typically
liquidation of investment within 5 to 10 years
What investors are looking for

 Buy-back
 Trade sale
 Management buy-out
 Management buy-in
 Second-stage finance
 Stock market floatation
(OFEX or AIM leading to IPO
on main market)
Exit opportunities

Crowdfunding: Term loans
Advantages
 Usually secured against
business or personal
assets
 Can be refused because of
lack of security
 Requires good cash flow to
pay interest & repay
capital
 Crowdfunding website
charge fee based on funds
raised
Disadvantages
 Term of loan is fixed –
usually not repayable on
bank demand
 Capital repayments fixed &
known in advance
 Interest rate can vary or be
fixed & is usually lower
than an overdraft
Crowdfunding Burns, P. (2016) Entrepreneurship & Small Business: Palgrave

Crowdfunding equity
Advantages
 Investors will need to see
an exit route (liquidity
event
expected
 Crowdfunding website
charge fee based on funds
raised
Disadvantages
finance
 Small amounts of equity
available
 Based on business plan
not security

1. Why has Kickstarter been so successful?
2. Compare and contrast the opportunities and
threats facing Kickstarter & Hamijoo. Can
Hamijoo survive in the longer term?
Kickstarter & Hamjoo
Top 5 Burns, P. (2016) Entrepreneurship & Small Business: Palgrave

What are the issues surrounding the
funding of new technology & how did
Lontra overcome them?
Lontra
Technology explained Burns, P. (2016) Entrepreneurship & Small Business: Palgrave

FinTech UK
http://www.fintechinnovationlablondon.co.uk/

• The Aviation Strategy is a milestone initiative to generate growth
for European business, foster innovation and let passengers
profit from safer, cleaner and cheaper flights, while offering
more connections.
• Investments in innovative projects are fundamental for the
efficiency of the EU Single Sky.
• Unleashing the potential of the drone market by setting up EU-
wide rules to ensure safe drone operations for all airspace users,
to protect citizens' privacy, and to offer legal certainty.
http://ec.europa.eu/transport/modes/air/aviation-strategy/innovation_en
Innovation, investment and digital technologies

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