8.1. Financing Innovation in Europe

In today’s industry, Innovation is a key element and excellent ideas that could exploit new technologies or products are very important for the development of business. However, an idea in itself is often not enough. In order to put this idea into practice, an investment is required. This is a major hurdle to many SMEs which may have a very high potential and may be highly innovative, but lack the necessary economic strength to concretize it.
 
Developing an idea into a finished marketable product or technology is very time and money consuming. And finally, marketing the product successfully often takes amounts far from what was initially estimated.
 
Fortunately, there are many ways in which financing can be obtained for innovation.
 
This component will provide an overview of the different types of financing that are available when starting an innovation project. It is however important to note that the financing options available may vary from country to country, even within Europe. We tried to be as general as possible, but we cannot guarantee that the information available here is applicable to your country.
 
The main funding opportunities available, which will be included here, are:

 

8.1.1. Determining the Right Financing for You

In order to seek the right type of financing, it is necessary to take into consideration a number of aspects, such as the specific nature of the innovation project or new technology business, the financial risks involved, the complexity of the project and the time needed for development.
 
The nature of a project is extremely important in determining the kind of financing that is sought.
 
If it is a research project, it is best to apply for a grant, as investors, be they venture capitalists, business angels or banks, will generally not be interested unless the outcomes of the project can be marketed and are expected to produce a profit.
Venture capitalists or informal investors (business angels) may be prepared to finance projects where the initial research has been completed and you are ready to start developing an initial product or prototype.
 
Banks are generally a better option when some form of commercial operation is already in existence and more capital is required. Banks will generally be reluctant to provide financing to a company or project, unless they have guarantees that they will be able to recover their investment in the case of success as well as failure.
 
Stock markets are only a feasible opportunity for companies which have been trading for some time and which have gained a considerable market value.
 

 

8.1.2. Grants

Grants are generally used to fund the early stages of a project. There are a large number of grants available which are offered by governments, local bodies, sector-specific schemes or even Europe-wide programmes.
 
The importance of SMEs involved in innovation within the European market has been recognised and important European entities, such as the European Commission, the European Investment Bank and the European Investment Fund, have generated schemes to support innovation within SMEs.
 
Advantages
Disadvantages
  • The main advantage of a grant is that it is generally non-reimbursable. This means that it is financial support which is given, but which will not indebt the company from the start.
 
  • Due to the large amount of different grants available, it may be difficult to identify the most suitable ones to apply for
  • There are large numbers of applicants for grants, so it is necessary to convince those responsible for approving the grant, that this project deserves the support more than the others
  • It may take a long time from the time a grant is applied for to the point where it is approved
  • Often, there are enormous amounts of paperwork involved at the application stage as well as during the period covered by the grant
  • In most cases, grants don’t cover the full amount required to finance a project. This means that the remaining amount would need to be provided by internal funding or from other sources of funding
 
 
The thing to bear in mind when applying for a particular grant is that grants are available according to certain criteria. These may be related to the industrial sector, the target group, particular development methods or processes, size of the project, etc. It is therefore important to analyse the suitability of your project, before applying for a grant.
 

 

 

8.1.3. Venture Capital

Venture capital is one of the most commonly used sources of financing start-up companies or innovative projects as venture capital often focuses on knowledge-based or innovative industry sectors.
 
Companies that receive venture capital are generally perceived to have a very good growth prospect, but lack access to the necessary funds to finance this growth.
 
Nevertheless, venture capital doesn’t come for free. In exchange for the venture capital, the investor will expect some kind of compensation for the funds raised on the capital market. This may take the shape of a partial ownership of the company, seats on the board of directors, preferred shares, royalties or a combination of the above. The investment is not made with view to an immediate profit, but is made expecting the company to grow and thus increase the value of the investment.
 
The advantages of venture capital are that no security needs to be given, so if the investment doesn’t bear fruit, the risk is with the investor as much as with the company and so is the loss. Also, an experienced investor will bring his knowledge to the company and will be aware of and possibly advise on best practices and approaches regarding development, marketing, etc. However, this involvement of a venture capitalist will also mean a loss of control.
 
Venture capitalists are sometimes specialised to particular industry sectors or will only invest in certain stages of a project or a company. It is therefore necessary to approach various venture capitalists and inquire as to whether this particular investor is suitable for your needs.
 
http://www.evca.com/ - The website of the European Private Equity & Venture Capital Association
 

 

8.1.4. Banks

Another option available for financing is to get a loan from a bank. This is therefore not really an investment on the part of the bank, but rather a loan as we know it from personal banking.
 
The problem with getting a bank loan in order to finance the growth of the company or an innovative project is that banks will demand a considerable amount of interest. This interest will have to be paid periodically and from the moment the loan is taken out, regardless of whether the endeavour is successful or not. Due to these factors, banks are generally not a very good option for long-term financing or relatively large amounts.
 
Bank loans should also be avoided if the company is not making a profit or doesn’t have sufficient cash flow, since it will not be possible to maintain control over the debt. Bear in mind that there will not only be the repayment of the loan made available by the bank, but also the interest on this loan.
A further problem with bank loans is that the bank will require security in the event that something goes wrong in the business venture. The banks will want to ensure that they can recover their loan, even in the case of failure.
 
Since innovation is considered a high-risk business by most banks, it is sometimes difficult to find a bank willing to offer a loan.
 
When asking for a loan from a bank, a well-developed business plan is important as this may convince the bank to grant funding.
 
In order to find out about bank loans you should approach your local banks.

 

8.1.5. Stock Markets

The stock market may be a way for a company to raise considerable amounts of funding. This is achieved by selling company shares to outside investors by means of an initial public offering.
 
Unfortunately, the choice of making company shares available for public purchase is in most cases only feasible for high growth companies with enough existing profile to raise public interest. There are strict entry requirements imposed on companies wishing to go ahead with this process.
 
A way around the harsh entry requirements is the so-called “Stock Markets for High Growth, Innovation Companies”. These are new stock markets which provide easier access for companies whose size may not be permissible at the traditional stock markets or which are relatively new companies.
 
Before attempting to enter the stock market, the following aspects have to be carefully analysed:
 
Further, it is important to bear in mind that the more of the company’s share equities are sold, the more control is passed to outside investors.
 

 

8.1.6. Business Angels

Business Angels are wealthy private individuals who invest in businesses by contributing funds and personal experience. Business angels are, by and large, interested in start-up businesses which they can help “shape” according to their interests and experience.
 
In many cases, business angels will be retired executives or people who have built successful businesses and then sold them. In either case, they would have an extensive knowledge of their market sector, the best practices, existing business contacts or other experience which may be otherwise difficult to acquire. Understandably, a business angel who has worked in a particular sector is attracted to investments related to his/her expertise. An added advantage is that there will not be a long application process, but the business angel should be fairly rapid in accepting or rejecting a proposed investment.
 
Business angels are unfortunately not merely pools of funding and experience, but will naturally wish for something in return. In most cases a business angel will ask for partial ownership of the company through equity shares or a seat on the board of directors and will generally wish to be involved in the running and decision-making of the business.
 
Even though business angels are wealthy individuals, the funding that they would be prepared to invest in a company is normally quite reduced in comparison to the funding that other sources, such as institutions or organisations, are willing to supply.
 
It may prove difficult to identify a business angel as they are often hard to discover. There is no section for “business angels” in the yellow pages. However there are a number of initiatives which aim to establish contact between business angels and interested companies.  Examples of such initiatives are national “Business Angel Networks” or the “European Business Angel Network”.
 
There are a number of national Business Angel Networks: