Assessing the Investment Potential of SMEs Emerging from EU R&I Programmes Luis Sánchez DG RTD EIC Task Force TF3 – Financial Instruments Innovation & Investment WG Meeting Diving into the European Single Market Tools for SMEs 23rd October 2019, 09.15-11.45
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Assessing the Investment Potential of SMEs
Emerging from EU R&I Programmes
Luis Sánchez
DG RTD
EIC Task Force
TF3 – Financial Instruments
Innovation & Investment WG Meeting
Diving into the European Single Market
Tools for SMEs
23rd October 2019, 09.15-11.45
Purpose, scope and objective
• Boost the investment readiness of FP7/H2020 SMEs.
• Ensure that assessed SMEs identify the key issues required to access private funding.
• Improve FP7/H2020 SMEs capacity to access to finance.
• Put forward recommendations to identify policy measures for potential improvement.
Increase market uptake of European R&D
OVERALL
OBJECTIVE
Introduction to "Action 10"
• Action 10 was carried out by an Independent Investment Expert Group (IIEG) as a
follow-on of Action 9 "Assessing the Investment Potential of Emerging from Phase 1
and Phase 2 of the SME Instrument" in 2016.
• 31 experts were chosen to undertake investment readiness assessments of SMEs,
based on their expertise and knowledge of venture capital and private markets.
• 173 SMEs accepted to participate from a larger pool of SMEs participating in
collaborative projects under FP7 and Horizon 2020.
• The selection criteria were based either on the participation of SMEs as project co-
ordinators or on the ratio of their financial contribution to the EC contribution to
the project being > 15%.
• Some top performing innovation radar projects were also included in the analysis,
while SME Instrument beneficiaries were excluded, as they were already covered
in Action 9.
Methodology
• 2,218 SMEs were invited to take part in the action.
• Those interested in participating responded to the invitation filling out and sending a
first basic questionnaire.
• Experts were assigned to the participating SMEs considering sector and geographical
area.
• Experts contacted SMEs to perform a face-to-face investment readiness assessment
based on a IR questionnaire.
• According to the results of the assessment, the experts produced an enabling plan for
each SME (roadmap to become IR).
Investment readiness level assessment
Key parameters:
1. General information
2. Leadership team capability
3. Product readiness
4. Market readiness
5. Financials and exit strategy
6. Impact Assessment
Participants by age and employees
30
5755
31
00
10
20
30
40
50
60
<= 5 5-10 10-20 20-50 > 50
Nu
mb
er
of
SM
Es
Age (years)
Average = 13,2
Max = 43
104
57
6 6
90
70
7 6
79 80
7 7
40
106
1611
0
20
40
60
80
100
120
< 10 < 50 < 100 100 and more
Nu
mb
er
of
co
mp
an
ies
Number of employees
2014 2015 2016 Forecast
Participants by sector (NACE code)
Classification of SMEs: Case 1A, Case 1B, Case 2
Companies are grouped into the following sub-categories based on expert’s
assessment and the roles they have played as part of the EU funded programmes:
• SMEs have been classified based on market driven SMEs (referred to as Case 1)
with either
• high growth and/or scale up potential (Case 1A) or
• low to moderate growth potential (Case 1B).
• This analysis has also identified SMEs that provide support to other consortium
partners in these EC programmes (referred to as Case 2).
Classification of SMEs: Innovation cycles - short, medium and long
At the heart of this investment readiness analysis is the identification and study of
SME’s against innovation cycles they belong to:
• Short Innovation Cycle (SIC) (e.g. ICT sector), typically 1-4 years from proof of
concept to commercialisation.
• Medium Innovation Cycle (MIC) (e.g. manufacturing, food, environment sectors),
typically 4-8 years from proof of concept to commercialisation.
sectors), typically 6-12 years from proof of concept to commercialisation.
Investment readiness Action 10/Action 9 and by case
• 1 out of 5 Action 10 beneficiaries are investment-ready.
• Case 1 companies (market-driven SMEs) represent 97% of investment ready SMEs.
• Case 1A (high growth potential SMEs) represents the 91% of all the investment ready SMEs.
• MIC and LIC companies are deemed as riskier for private investors ascaptured in the Enabling Plans by experts.
• Most MIC and LIC SMEs rely on substantial grant funding for productdevelopment and early market development, and it can take severalyears before SMEs are able to generate revenue.
• MIC and LIC SMEs routinely underestimate the challenges aroundscale up of processes and products to full commercial scale. This isattributable to their underestimation of the time, effort and resourcesneeded for scale-up.
• VC, business angels and strategic investors are the mostrecommended types of financing by experts for MIC and LIC SMEsevaluated as either ready or almost-ready.
Key findings supporting the recommendations
• Non-ready SMEs have significant shortcomings in the areas of marketreadiness and financial strategy and planning mainly. Particular issues include:
- Lack of advisory groups/Boards to guide their development.
- Insufficient contact with potential customers and supply chains.
- Lack of understanding of market segments, routes to market and a go-to-market
strategy, value propositions.
- Lack of clear revenue model, revenue streams and poor cash flow management.
• These companies need to secure non-dilutive grants to further engage withthe market through market demonstration activities, and subsequently plan tosecure business angel funding, which would also come with some level ofguidance and mentoring from experienced angel investors.
• 50% of ready and almost-ready SMEs seek between 1 and 5 M€. 20% seekmore than 5 M€.
Key findings supporting the recommendations
MIC and LIC
• Have accelerated knowledge transfer, access to partners and bridges from research tomarket.
• Have aided/supported mobilisation of private investments via equity financing.
• Have explored alternative applications for their technologies.
SIC
• Possibility to hire qualified workforce and access to international customers andstakeholders.
• Very low level perception that EU grants are a means to mobilise private investment.
Perception of SMEs on EU grants
• Readiness:
- Case 1A are the 91% of all the investment ready SMEs.
- 95% of Case 1A are investment ready or almost ready.
• Belong to multiple sectors such as health, security, nanotech, food. Only 17% of ICT SMEs are Case 1A.
• Higher average number of patents (applications and granted) in comparison with Case 1B (almost twice).
Key findings from Case 1A SMEs (high growth potential SMEs)
Experts have recommended to prepare investor information package and define a strategy for negotiating
with investors.
Strengths Shortcomings
- marketable product/innovation with potential for disruption.
- highly complementary and experienced management teams.
- in-depth understanding of target market and potential customers.
- well validated business model.
- lack of sales and marketing resources.
- strategies for attracting investors.
- lack of robust plans for capital utilisation
Key recommendations to the European Commission (1/2)
• Continue to provide substantial grant funding to innovative SMEs,
especially in MIC and LIC.
• Implement SME support actions in parallel with R&I framework
programmes that prepare SMEs to become commercialisation ready,
attract investment and the connection with growth programmes such as
COSME.
• Identify and provide enhanced support, and continued funding to
Case 1A (high growth and/or scale-up potential) SMEs.
Key recommendations to the European Commission (2/2)
• Provide structured support mechanisms to help MIC and LIC SMEs to
access and utilise physical infrastructures for product and process
innovation, development, testing, integration and scale-up.
• Support patient venture capital provision (through EIB schemes or
other) for MIC and LIC SMEs to address the 1-5 M€ gap.
• Increase the number of funding sources for SMEs (grants, private
capital, debt financing and blended finance).
Related EC Initiatives
• InvestHorizon 2.0
• European Innovation Council
Thank you
Additional information
Investment readiness - general characteristics
Investment readiness by call and country
Participants by country
30
21
15 1514
11
9
7 7
4 4 43 3 3 3
2 2 2 2 2 21 1 1 1 1 1 1 1
0
5
10
15
20
25
30
35
Nu
mb
er
of
SM
Es
Participants by group of calls
Classification of SMEs: Innovation cycles - short, medium and long
At the heart of this investment readiness analysis is the identification and study of
SME’s against innovation cycles they belong to:
• Short Innovation Cycle (SIC) (e.g. ICT sector), typically 1-4 years from proof of
concept to commercialisation.
• Medium Innovation Cycle (MIC) (e.g. manufacturing, food, environment sectors),
typically 4-8 years from proof of concept to commercialisation.