Financial tools for high-tech field active SMEs

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Financial tools for high-tech field active SMEs

Butko B.

Butko B. Postgraduate Department of International Economics and Marketing, Taras Shevchenko National University of Kyiv, Kyiv, Ukraine

The article analyzes the main instruments of financing of active small and medium-sized businesses in the high-tech market, which facilitate the implementation of innovations. Dynamics of investment activity of small and medium business entities has been considered. The dynamics of investment activity of private investment companies of the EU, the USA and Japan has been monitored and graphically represented. The evolution of investment venture capital in Europe, investment activity Business angels American investment segments, business angels on the EU market, the number of business angel networks and the main segments of investment business angels have been investigated.

Keywords: venture capital; corporate venture funding; business-angels; crowdfunding; R&D; SME.

Relevance. Private sector functionality in hightech sphere is not limited to large companies, even though they dominate globally in this segment of the global market. Much of developed countries gross domestic product had been created in the sector of small and medium businesses (SMEs). In context of knowledge revolution where the transition leads from physical and material to knowledge dominated economy, SMEs become the main micro-unit. Group cohesion, versatility, flexibility and organizational dynamism that traditionally fit smaller, dynamic companies today are crucial for the economy and society which is predominantly knowledge-based.

Recent articles on the research analysis. Investment activities of SMEs in high-tech global market studied by M. Roko, V. Beynbridzh, H. Erlyh, D. Haltivanher, I. Hetevey, H. Miranda and others.

Unexplored chapters of the overall problem. Despite the growing importance of entrepreneurship in creation of highly efficient and mobile high-tech businesses almost everywhere, in every country advanced and innovative SMEs face a number of barriers to finance, especially ones with asymmetric information and significant financial gaps between investors and entrepreneurs. They also suffer from a lack of resources, insufficient collateral and lack of relevant tracking record.

The following study is an analysis of main instruments to financing high-tech SMEs, their investment activity dynamics and further development trends.

The article body. SMEs dominate the global business stage by the number. Although accurate data seems difficult to obtain, late estimates indicate over 95% of enterprises of the global world are SMEs, which is, in turn, covers 60% of private sector employment [1].

"Annual Report on European SMEs 2013/2014 "Partial and fragile recovery" emphasizes that “In past 2013, there were 21.6 million SMEs in EU, employing 88.8 million people and receiving revenues of almost 3.7 trillion euro (28% of EU GDP). 99 out of a 100 of companies belong to this category, as well as each two out of three employed workers. 58% of added value for each euro was generated in the SMEs sector. This well illustrates how important small and medium business are” [2].

The report further underlined the key indicators to a comparison of SMEs in the EU, US and Japan. The EU currently has more than 21 million of non-financial SMEs and the US more than 18 million SMEs then in Japan there are almost 4 million (Table 1).

Table 1. SMEs overlook in EU28 (2017), US (2016) and Japan (2017)

These figures do not take differences in the size of the respective economies into account and, therefore, do not provide a clear picture of relative importance of the SMEs sector in each of the three countries. A completely different picture is made when rates are adjusted accordingly for SMEs, for example in relation to gross domestic product (Fig. 1).

Fig. 1. Number of enterprises and employment in EU28 (2017), US (2015) and Japan (2016) - ratios to GDP (ppm $).

Small business continues to be an incubator for innovations and employment growth in recent years. Small businesses continue to play a vital role in the economy of the US. They amounted up to 46% of private non-farm income to GDP in 2008 (last year for which data source is available), compared to 48% in 2002 [3].

Contribution of small businesses to Canada's GDP is nearly 30%, while medium-sized enterprises form 9% of GDP. SMEs employ almost ten million Canadians. [4]

National Science Foundation of the US (NSF) in the annual analytical publication «Science and Engineering Indicators 2014» provides dynamics of R&D expenditure by private US companies according to their size (number of employees).

Substantial lead on this indicator is observed by companies employing 25,000 or more. Second spot in this SMEs "race" belongs to companies where the number of employees is less than 500, which is striking. In 2011, the following companies spent 46.5bln$ on R&D. This fact pushes to elaborate on issue of SMEs investment, evaluate the opportunities that small enterprises gain in advancing their scientific and technological achievements in high-tech global market.

The OECD «OECD Science, Technology and Industry Outlook. 2012» annual review showcased the basic tools of financing SMEs in order to promote innovation are provided (Table 2).

Table 2. The main instruments of financing small and medium enterprises in order to promote innovation [6]

We have already noted that innovation, particularly in the research, development and implementations of high technology sphere is a process creative, dynamic, emergent, unpredictable, and in other words - a process with high risk potential. Therefore, consideration should be paid to focus SMEs financing instruments that respond precisely on the feature of inclusive innovation process, which are, by name - venture capital, business angels and crowdfunding.

Many definitions of venture capital exist, but they somehow had all reduced to its functional task - growth of a particular business promotion by providing a certain amount of money in exchange for a certain business - stake.

Classic venture capital has the following characteristics:

Performed directly in equity companies;

High risk involved;

Lack of long-term liquidity;

- Return on investment made by selling companies' shares.

Subjects of venture business are: financial acceptors - venture capitalists and entrepreneurs; financial donors - individuals, companies and specialized funds; financial and information intermediaries that provide the connection between the two.

Venture financing was one of the drivers of the developed countries economy, although the size of its investment in total investment flow is relatively small. According to PricewaterhouseCoopers' venture capital private investment in new technologies in the first half of 2016 totaled nearly $ 22.7 billion. [7]

As for venture capital market segments, their distribution are presented in Table 3. Regarding venture capital investment activity of the EU, it should be noted that after the dynamic growth in 2008-2012, 2013 showed decline in funding, which actually stabilized in 2014. (see. Figure 3).

Table 3. Investments by industry, $ mln

Fig. 3. The investment activity of EU private equity firms (bln. Euro) [8]

As shown in Figure 3, private capital investment activity of EU enterprises has not reached pre-crisis level and decreased slightly compared to 2015. However, the dynamics of venture capital activity (Figure 4) shows that European investors with decrease in funding in absolute terms, have begun to pay more attention to Start-Up projects and made initial marketing. Such a company may be either emerging or already existent throughout a certain period, but has a short market history. Usually, such a company already has a team management, a business plan and is operational.

Fig. 4. The evolution of venture capital investment in Europe [8]

In a OECD recent report the important role played by the "Business Angels" in the financing of companies with high growth potential is emphasized. «Business Angels» are usually individuals with business experience which directly invest part of their personal assets in new and growing company which is not yet quoted on the stock market.

Business Angels mainly focus on information and communication technologies, software, biotechnology and health care (Figure 5). Most of the funding is performed to embryonic (seed) and early stages of the business and Start-Up businesses, although in some countries Business Angels are also involved at the stage of the EFF.

Fig. 5. Main Business Angels investment segments [9]

venture capital small business

Also, it should be noted that:

Business Angels prefer financing in highly risked entrepreneurial firms with high growth potential at an early stage of their development;

Prefer small amount of funding necessary to launch new enterprises;

Invest in virtually all industries, however, regardless of sectorial affiliation, Business Angels are mostly attracted by high growth potential;

Business Angels adopt flexible financial solutions rather than venture capitalists; formulate their own investment criteria, wider investment horizon shorter processing and lower rate of return;

Financial resources from Business Angels are commonly cheaper than those of financial institutions;

Most Business Angels are useful because of their deep knowledge of the case; that is why they prefer local investments, which allows an opportunity to take part in the management of the company;

Financial market Business Angels are more geographically dispersed than venture capital market;

Business Angels financing provides a positive impact on companies as it increases the attractiveness in the eyes of other stock market participants;

Business Angels are useful directly providing their clients with loan guarantees.

It is necessary to state that the number of Business Angels, except for some periods of crisis is growing, a vivid illustration of this are the data presented by the European Commission.

Fig. 6. The number of Business Angels networks (BAN's) in Europe (2003-2016). [10]

In addition, Fig. 7 shows that in 2016 business angels invested 554 million. Euro. This is 8.84% more than in the previous year.

Fig. 7. Amount of Business Angels investment to the EU market (bln. Euros)

European Business Investment Company (Organization) believes that all European Angel's markets (legal and gray markets as a whole) in 2016 was worth 5.54 billion Euro. Thus, the legal market is only 10% of the total estimated Angel investment market in 2016.

In 2016 US Business Angel's market continued the trend of investment growth that began in 2013. According to the Center for Venture Research at the University of New Hampshire's total investment in 2016 ended 24.8 billion USD (an increase of 8.3% compared to the year 2015). A total of 70,730 entrepreneurs received Angel funding in 2016 (an increase of 5.5% compared to 2015). The number of active investors in 2016 was 298,800 individuals (an increase of 11.4% to 2015). Segments which are mainly financed by US Business Angels in 2013 are shown in Fig 2.25 [11]. Software in 2016 is on top position with 23% of the overall Angel investment, followed by media (16%), medical services and medical equipment (14%).

Fig. 8. Business Angels US investment segments, 2016

Business Angel's development of extremely risky investment projects, particularly the high - tech, is becoming increasingly dynamic. Despite the difficulty to obtain complete and reliable information about the real amounts of money involved, the tendency still clearly traced to spread its use in many countries, which in turn necessitates more attention to its use and effectiveness.

Another instrument for financing risky investment projects, which has recently become a significant distribution is crowdfunding. Crowdfunding is a practical financial tool for projects or businesses set up by bringing financial contributions from a large number of people, usually through the Internet. Instead of traditional investment crowdfunding campaign funds a wider community. Typically, most successful projects receive about 25-40% of their income from the first, second and third degree of funds union. These may be friends, family, colleagues, or anyone related with the holder. Once if the project has undergone some success unrelated customers starting out "on the surface" to support the companies in which they believe.

In 2016, total crowdfunding funds increased by 81% to 2.7 billion US dollars according to data published by Massolution (a research firm that specializes in analyzing the masses business processes). Massolution expects crowdfunding to further accelerate; the company predicts that the global figure could reach $ 5.1 billion. US dollars in 2013, which is equivalent to growth of around 92% [12].

Crowdfunding is currently limited by mainly North America and Europe. These two continent's expenses are 96% of the overall worldwide crowdfunding. With this tool North America attracted 1.606 billion US dollars of investment. The European market amounted to about 945 million. US dollars - 65% more than in 2011. This level of financing makes Europe the second most active crowdfunding market participant in the world.

References

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