Why private investors and public funding agencies need each other

You might have heard of mp3. Yes, thàt mp3, the disruptive music format that allows you to carry around all your music on a tiny device that fits in your pocket. You might not have heard that mp3 was the result of a publicly funded European research project involving engineers from 5 different European countries. The research that eventually gave us mp3 was one of the many projects made possible by Eureka, a network of public funding agencies from 40 countries in Europe that allows innovators to bring the result of their cutting edge science to the market.

In terms of venture capital, there’s often a tendency to think in terms of either/or. There’s public money, and there’s VC money. In fact, I want to argue that in the European landscape of today, they probably need each other.

Investing in a new business, and even more developing a new technology, is always risky. And with times as difficult as they are, it’s getting harder for small businesses and startups to find cash for development at early stages. That’s where networks like Eureka have traditionally stepped in, to get risky research funded and to the point where they can enter the market.

Public funding agencies: bridging the financing gap

What we’re working on very hard right now, is to address the financing gap that occurs after this development stage, when a start-up will need more funds to take its new technology onto the market. It’s the final obstacle to cross before profitability, but a lot of entrepreneurs struggle to find support at this level – this is why it’s generally called a “financing gap”.

We’re now looking into closing that gap, by tailoring finance instruments generally regrouped under the name of “second round funding” to further fund companies and research projects that have already proven to be successful after having received public support for the first time.

But on top of that, we’re also developing a dialogue between the public funding agencies and the European venture capital scene. To that end, we organise very successful “Investor Shop” events, a way for startups who were originally financed by public agencies to get themselves in front of private VC’s and business angels.

Public funding gives credibility to a project

It’s obvious that these kinds of events help startups get follow up funding: the fact that they have been backed by public funds gave them the credibility to get the rest of the money they needed from private investors. A few examples:

Videntifier, an Icelandic company specialising in forensics, was spotted by Arinco, an investment company from Holland.

IMSYS Technologies AB, a Swedish fabless semiconductor company. Imsys Technologies, found initial capital via EUREKA funding in a technological project development. Once the technology was ready, Imsys obtained a major investment from Nordic venture fund Creandum AB, and Industrifonden, one of the leading venture capital organisations in Sweden.

The most successful programme of Eureka in attracting investors to date has been Eurostars, which was specifically created to support small and medium size companies in the high-tech sector. It has been so far the most successful into attracting investors:

French biotech startup Crossject was part of the portfolio of Gemmes Ventures, a VC specialised in early stage funding for years. Crossject recently received funding from Eurostars allowing it to sell thousands of units of needleless injectors in two years: a game changer for the pharmaceutical industry.

Another example is FlexGen, a spin-off from a Dutch university, which is using technologies developed by MIT and the aerospace industry to analyse genomes faster and cheaper than anybody else.

Finally, Mendeley, a web-based start-up, received its Eurostars funding more or less at the same time as it was starting to be financed by Stefan Glänzer, the former executive chairman of Last.fm.

These are just a few examples of a positive trend, where private funding and public funding reinforce each other and pass the baton to each other quicker and smoother, so that there is less effort wasted in bridging the financing gap. Ultimately, that should bring innovations to the market faster.

Public funding agencies network Eureka on the web:

Photo: Flickr, chantrybee

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About the author

Okan Kara

Okan Kara is the chairman of EUREKA, the European network gathering public funding agencies in the field of innovation, and works for TUBITAK, the Scientific and Technological Research Council of Turkey. You can follow him on Twitter.

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