Funding Sources for DIHs:
Financing an innovation hub requires a combination of public and private funding. Deciding on the most appropriate funding source depends on the evolutionary stage of the innovation hubs as well as on the activities to be financed. While public funding is essential in the preparation and initiation stage of a hub, it is usually decreases in proportion as the hub stabilizes and more private funding becomes available and the innovation hub sustains a steady income. In order to sustain its viability in the long-term, an innovation hub requires both long-term public funding and multiple business models, offering different services and maximizing the use of infrastructure.
What activities need to be financed?
The costs associated with setting-up and running a DIH can be grouped in four related activities. Each of these activities requires different funding sources:
1) Preparatory activities require start-up funding to build the consortium, develop a feasibility study and a business plan, and find financing. There is little available funding (both private and public) for these activities and a lot of in-kind contribution from the consortium is needed.
2) Financing infrastructure requires a lot of investments at the start of the innovation hub due to the initial expenses related to purchasing equipment. The private funding for these activities is limited. The public funding is difficult to arrange but regional funds play an important role in financing the infrastructure.
3) Running the projects using the available infrastructure involves expenses related to R&D and project management personnel. In the beginning an innovation hub needs public funding in order to build its project portfolio. Even when developed, innovation hubs might require public funding to support the projects. Offering fully paid commercial services is difficult and SMEs do not always have the financial ability to pay for them.
4) Operational activities (eg. rent for buildings, maintenance of infrastructure, salaries) also require funding throughout the life of the innovation hub, with higher costs at the beginning related to organizing PR, website, etc. Both public and private funding for these activities is limited and the costs are generally covered through the hub’s revenues.
What are the types of funding sources?
A distinction can be made between public and private sources for funding an innovation hub.
Public funding is typically available to address grand challenges and specific market failures. Many governments focus on lower TRLs and expect industry to address the higher TRLs. Public funding sources are diverse – grants, subsidies, loans, support in communication, laws and regulation, etc. – but public funding is governed by the State Aid rules on R&D&I.
Public financial instruments are available on national, regional and EU-level but these are not always aligned and may have different objectives and priorities.
- Regional funding is more focused on economic development then innovation. Regional financing instruments are important in the initiation stage, contributing towards infrastructure, providing opportunities to get housing and a connection to educational programs and the European regional development funds
- National funding instruments are focused on innovation and link research and industry. National funds are bound by state rules and address market failures.
- EU-level funding instruments aim at creating pan-European cooperation, boosting the economy and addressing Grand Challenges using innovation and excellence. Receiving EU funds is usually a formalized and requires the participation of more than one country.
Private financing is provided by organizations with business interests and is usually more relevant to a hub’s customers. Private financing mechanisms target low-risk, high-profit projects with a focus on higher TRLs. Examples of private financial instruments are:
- Private equity and venture capital (VC) are generally of interest to the customers of innovation hubs. DIHs can create indirect mechanisms with VCs to attract customers and offer the VCs the technological expertise they might need. Venture capitalists are thus an important partner for an innovation hub to ensure a connection with the hub’s customers. As VCs are interested in higher returns on investment and do not usually target long-term complicated projects, they are less relevant for directly raising financing for an innovation hub.
- Loans from private banks can help a DIH to address its cash flow problems. Lending capital is generally based on collateral and a sound business plan. Due to fast depreciation however, the equipment of an innovation hub is often considered a risky collateral. Consequently, the overall business model of the hub should be well prepared and demonstrate how the hub will make money.
- Industrial partnerships create participation with innovative business to create joint ventures, test their equipment, get inspiration or just reduce costs. For industrial partnerships to be created however, there must be a win-win situation for the partners. Larger firms have more opportunities to participate in partnerships because they have a portfolio of projects for which long-term participation might be of interest.
- Membership fees are another possibility for raising private financing. Through memberships, an innovation hub gets involvement of the industry and that is beneficial for receiving public funding. In return of the fees, the members of the get connected the network, possibility to participate in contract or collaborative research, participation in conferences, newsletters.
- Partner investments create access to the market and partnerships in RDI, as well as operationalize the partner’s societal mission as innovation partner. Partners may offer location, IT infrastructure, equipment. Innovation partnerships usually focus is on low TRL and the science & technology expertise aspects of an innovation hub. Often, it is expected that the investments will be reduced after a few years.
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