Over the past decade government has gone to considerable trouble to promote and financially support hi-tech product development and commercialisation. The system that has been built is not without its flaws - what system is? - and my peers from a large state finance institution and I were recently considering how to improve their lead flow of hi-tech companies requiring venture finance.
This question can, I believe, be answered by analysing the data gathered recently by Acorn Technologies, the only bioscience incubator in the Western Cape.
Acorn developed a Web-based resource, called Fundman, which provides prospective capital seekers with a platform from which to find sources of capital and identify those that are suitable.
In return for the service, Fundman gathers information from the entrepreneurs and shares this with the innovation community.
The data, drawn from 346 project registrations, was collected between September 2005 and August. The majority comes from hi-tech sectors, with ICT accounting for 20% and the balance shared almost equally between engineering disciplines and life sciences.
The data gets interesting when you consider this: at what point do entrepreneurs seek finance? Just over half of all leads are within the first three stages of product development. In other words, at the basic research, prototype and functional development stages rather than at the later stages of market testing, commercialisation and post-commercialisation - where most government funding is aimed.
Perhaps this explains, at least partially, the relative dearth of lead flow the government instruments are experiencing.
Adding to the problem is the tendency of these funds, given their relatively anorexic coffers, to pick winners rather than follow their mandates, which is to invest in early stage companies, take risks and expect a long commercialisation process.
These gaps arise, I believe, because there has been no effort to fund the entire innovation pipeline cohesively. And even though funds, like the BRICs, are designed to support early stage investment, they have elected to focus on the low-hanging fruit, at the expense of the pipeline.
Another fact that suggests to me that the available funds and the available projects are misaligned is the amount of capital required by the start-ups registered on the Fundman site. The majority of the projects, especially the earlier stage ones, required funds of up to R1m.
Yet the average deal size at the Innovation Fund is about R7m, and similarly for the BRICs. Yes this is expensive, and yes it is necessary. But what these funds lack is a formal, market-tested and accepted instrument that covers the need for "cheap" early stage investments and sufficient capital for commercialisation-stage investments.
Where is the private capital, you may ask. Bioventures is the only bioscience-focused fund that operates at this level. Little wonder it is fully committed.
Further analysis of the funding that is actually going into projects by stage reveals more anomalies. As you would expect, more funds become available as the technology under development progresses through the stages and the risk declines. But, despite the fact that there are more requests for funding at the commercialisation stage, the number that are funded drops off at this stage.
The reason for this is not clear. What is clear though is that there are a lot of projects that deserve state finance and are not getting it.
Given that the data supports what we always knew - that there are big gaps in the funding system - it seems to me this is the answer to the question: How to improve your lead flow? Apply more funding to early and commercial-stage businesses.
This argument may suit some more than others - depending on which side of the fence they sit on. On the strategic end, the state wants to support the development of a hi-tech innovative business culture; but on the financial side, influential voices are arguing that government should seek out financial (read short-term) returns on its investments.
The most powerful voice at the time will decide what happens.
- Peter Breitenbach is CE of E8, a technology development company
