P bli Public venture financing fi i Esperanza Lasagabaster Service Line Manager of Innovation and Entrepreneurship Service Line Manager of Innovation and Entrepreneurship Innovation, Technology & Entrepreneurship Practice Seoul, April 2013 The World Bank Group
Agenda g • Why focus on start ups? • Financing innovative start ups • Lessons from past public interventions • What is the potential of crowdfunding? • Conclusions 2
Which firms create jobs? • Traditionally, public policy focused on all SMEs but …. • Increasing number of studies on developed and developing countries suggest that young firms create a disproportionate high number of net jobs number of net jobs ‐ Haltiwanger et al. (2010) in the United States ‐ Deschryvere on Finland Deschryvere on Finland ‐ Iavocone (2010) on Indonesia ‐ Freund (2012) on Morocco • Young firms are more volatile with higher rates of job creation and destruction. • Importance of focusing on both the entry process and the subsequent post ‐ entry dynamics (first 10 years) 3
• Entrepreneurial growth comes from a complex venture ecosystem …. Regulations Finance Entrepreneur Access to Ideas and world inventions markets markets Skills, Risk taking g t l talent, t culture expertise 4
Agenda g • Why focus on start ups? • Financing innovative start ups • Lessons from public interventions • What is the potential of crowdfunding? • Conclusions 5
Financing innovative start ups Financing innovative start ups • Financing of start ups and its subsequent growth needs to be considered as a continuum. • Investors are needed in all stages. Gaps along they way can stifle growth or lead to closure—valley of death. There can ifl h l d l ll f d h Th be more than one “valley of death”. • Start ups cannot take off on flimsy business plans or too weak financial foundation, as there will be limited capital in l t later rounds. d
A typical market for innovative start ups A typical market for innovative start ups Exit through IPO or trade sale Global funds options Finance o Business angels, venture funds Incubators, Accelerators, , , proof of concept, etc. PRE ‐ SEED SEED START ‐ UP EXPANSION Higher Risk Declining Risk Public finance Public finance Private Finance Private Finance
Financing innovative entrepreneurs: is there a rationale for government intervention? f i i ? • Information asymmetries are more “acute” for innovative start ups y p o Innovation projects are riskier than physical investment projects—both commercial and technological risk. o Private actors do not have “perfect information” about technological or P i t t d t h “ f t i f ti ” b t t h l i l production frontier. o Technological development can take a long time and resources (e.g., g p g ( g biotechnology) before product is market ready o Reluctance of innovative entrepreneur to share the idea with potential investor due to appropriability problem investor due to appropriability problem • Difficulty of using intangible assets (Intellectual Property) as collateral collateral • Experience building o “First mover” disadvantage “Fi t ” di d t • Counter cyclical role 8
Agenda g • Why focus on start ups? • Financing innovative start ups • Lessons from public interventions • What is the potential of crowdfunding? • Conclusions 9
Lessons from public interventions to spur Venture Capital • Entrepreneurship does not occur in a vacuum p p o Need to foster the entire ecosystem (e.g., Singapore) o Often too much emphasis on finance but the “deal flow” is equally or more important o Enabling regulatory framework needs to be in place o Entrepreneurial programs for university students and at earlier stages can be developed o Mechanisms to facilitate commercialization of research o Intellectual property o Technology transfer offices o Incubation 10
Lessons from public interventions to spur Venture Capital • What is the evidence on the performance of VC funds? • Financial returns have been typically lower for public funds yp y p o Various studies on Canada o Lerner et al. (2011) showed a private ‐ public gap in return for US and UK funds, but the gap has narrowed over time o Publicly ‐ backed funds in the pre ‐ bottom bubble period heavily underperformed private funds (returns were 20 percentage points lower in the UK) suggesting that in later years design improved (e.g., reduction in th UK) ti th t i l t d i i d ( d ti i restrictions) o Differences in public ‐ private performance remain after controlling for stage of financing, industry and investor hubs. Such differences could be due to constraints imposed on managers or inability to retain the most talented ones constraints imposed on managers or inability to retain the most talented ones 11
Lessons from public interventions to spur Venture Capital • What is the evidence on the performance of VC funds (part II)? • Financial returns are not the only or most relevant performance indicator. • Other public policy objectives (e.g., value creation) are more important. Evidence on these indicators is more scarce and mixed. o Evidence on UK publicly ‐ backed VC funds suggest that recipients would not have undertaken their investments without public support o A World Economic Forum study (2010) found that companies with moderate public VC support outperformed in terms of value and patent creation those with just private support or heavy public support. h h bl o An analysis by Brander et al (2009) on Canada’s VC industry suggests that o An analysis by Brander et al. (2009) on Canada s VC industry suggests that privately ‐ backed funds outdid publicly ‐ sponsored ones in terms of value creation and patents. 12
Lessons from public interventions to spur Venture Capital • Balancing the supply push with the demand pull g pp y p p o Let the market provide direction o Yozma program (Israel): used matching private funds to determine where public support should go and also relied on private fund managers bli t h ld d l li d i t f d • Align incentives Ali i ti o Transactions on commercial terms o Share risks and losses with private investors o Share risks and losses with private investors o Might subsidize the upside but not the downside 13
Lessons from public interventions to spur Venture Capital • Long lead times g o Programs should have the time horizon necessary to prove merits and not focus on short ‐ term returns o Venture fund has a life of about 10 years and a vibrant VC industry will V t f d h lif f b t 10 d ib t VC i d t ill typically take longer • Problems with too large or small initiatives • Problems with too large or small initiatives o Too large could crowd out rather than leverage private financing or too many funds chasing few “deals” o Too small undercapitalized funds tend to underperform o Relative high overhead and insufficient funds to back companies through development (e g evidence from UK public funds) development (e.g., evidence from UK public funds) o Changed strategy of Danish Growth Fund 14
Lessons from public interventions to spur Venture Capital • Do not micromanage o Excessive restrictions on VC funds or entrepreneurs could affect the firms’ and VC’s performance (e g on geographical locations) VC’s performance (e.g., on geographical locations) o Evidence from Lerner et al. (2011) • Exit strategies are critical to successful VCs • Exit strategies are critical to successful VCs • Big returns are typically done through IPOs not trade sales • Development of capital markets Development of capital markets • Evaluation of initiatives o Monitoring and evaluation can reduce “principal ‐ agent” problems o Monitoring and evaluation can reduce principal agent problems o Compare publicly supported firms and venture funds to peers (financial performance, revenues, job creation) o Consider randomization or regression discontinuity to understand impact 15
What is the potential of crowdfunding? p g • Why focus on start ups? • Financing innovative start ups • Lessons from public interventions • What is the potential of crowdfunding? • Conclusions 16
What is the potential of crowdfunding? p g Crowdfunding: raising funds for a project through small to • medium investments from several other people medium investments from several other people Types of crowfunding: yp g • o For profit: equity or lending o Not for profit: reward or donation Crowfunding portals or platforms act as intermediaries • b between investors and entrepreneurs i d 452 crowfunding platforms (April 2012) mainly in the US and 452 crowfunding platforms (April 2012), mainly in the US and • • Western Europe Estimated US$2.8 billion raised in 2012 • 17
More than 450 platforms are active worldwide Crowdfunding Platforms by Country 250 250 200 191 ber of CFPs 150 Numb 100 44 50 29 28 21 20 18 17 12 6 6 6 6 6 0 0 April 2012 Crowdfunding Industry Report April 2012 ‐ Crowdfunding Industry Report 18
Growth in worldwide funding Total Funding through CFPs 3000 3000 US$2,806 US$2 806 (estimate) 2500 2000 of US$ US$1 470 US$1,470 Millions o 1500 … 1000 US$854 72% US$530 61% 500 0 2009 2010 2011 2012 Source: Crowdfunding industry report (2012) 19
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