Needs and Funding Sources for Customers:
To be able to sell their services, innovation hubs need to grasp the different stages of development of their customers and the associated services and funding needs. What is more, to attract customers, innovation hubs need to be very clear on the services they offer, be locally present and accessible, and be able to establish a relationship based on trust.
Funding Sources and life-cycle funding:
The life cycle of companies comprises of different phases, each with its own characteristics and specific needs. A better understanding of the position of the enterprise in these phases gives a better insight in the steps necessary to gain access to finance as well as the insight where to go (which party).
The company life cycle starts with the start-up phase which is about research, proof of concept, establishing IPR, preparation and starting up the company. In the set-up stage of the company, important steps are proof of products and market introduction. Following, the early growth phase is about prove of market, IPR, manufacturing, marketing and sales. Subsequent, the sustained growth and maturity phase is the period of business expansion.
At the beginning, the cost of a company are high due to prototyping, pilot and marketing introduction. Only from the early stage on will a company start to generate revenues. These early revenues are often not enough as the company needs funds to prototyping and scaling up. This means that the net cash pool position of a company is negative for a long time – a period often referred to as the ‘valley of death’.
Which funding sources should companies approach?
As mentioned above, financial needs and costs are high in the start-up stage and the return on investment is uncertain. Therefore, private investors are not willing to invest in such an early stage. As a result, the company needs pre-seed and seed funds to help them out in these phases. From the early stage on, a company is generating revenues and can show market interest. From this stage on a company can approach private funding opportunities such as VC and private investors.
For a fast growing start-ups and high tech companies, a lot of capital is needed in the early days for research and proof of concept. As a result, different funding sources need to be combined in the early stages to ensure enough funding and support of the company. In these cases, subsidies and grants are important funding source. This is especially true for high tech start-ups with high R&D expenditure which seed financing cannot cover. For these start-ups, financial engineering is necessary to help them combine the patchwork of funding opportunities.
What are the possible funding sources for customers of an innovation hub?
As each funding source has its own rules, both the innovation hub and its customers need to understand what the available funding sources are. A (digital) innovation hub can help its customers by giving them an overview of the funding sources, educating them about what is coming in the future, and even set up programs to help companies in their pre-seed stage.
There are four general types of funding opportunities for the customers of innovation hubs:
- Donations or sponsors are a desirable source as funding is not repayable;
- Grants/subsidies have the advantage of no shareholder dilution and low capital costs but applying for these grants/subsidies is time consuming and complex. Therefore companies should apply before starting the project. Companies can increase their chances of receiving a grant by collaborating with partners and asking consultants to help them out with the application process;
- Debt (such as bank loans, bonds, leasing) is also an important source of funding for companies. However, companies need to be aware that banks focus on securities and maximizing collateral and are not interested in high tech innovation projects. When deciding on a potential investment, a bank is interested in issues such as management team, credit history, pay back capacity, quality of the business plan, collateral and guarantees, etc;
- Equity, in the form of venture capitalists for instance, is another importance source of financing for companies. An innovation hub can offer its customers help in selecting a venture capitalist by pointing to the relevant factors such as the financing stage covered by a VC, geographical coverage, sector preference, etc.
Needs of the customers and possible services DIHs can offer:
A DIH can offer a number of services, ranging from community building to commercial infrastructure, and mentoring activities. The relevance of these services is dependent on the different targeted customers: start-ups, SMEs, or corporates. All customers are likely to be interested in the community building services and the activities related to skills and education offered by DIHs. Still, mentoring activities will be more attractive to start-ups and SMEs, while participation in collaborative projects is likely to interest large corporations.
Are customers willing to pay?
Next to the diverging needs of its customers, a DIH should also consider the willingness and ability of its customers to pay for the offered services.
- Start-ups are interested in mentoring, support for networking and access financing. However, start-ups typically cannot pay for the services offered by DIHs and need to be convinced of the advantages of using the services offed by DIHs. A DIH can fund these services for start-ups by setting up programs/projects to accelerate the regional start-up ecosystem using regional or national public funds.
- SMEs are generally interested in testing and validation, accelerator programs and support for business development plans. SMEs are prepared to pay for the services offered by DIHs when they are convinced of the benefits a DIH offers and the possibility of cost-saving. DIHs need to convey to SMEs the potential for new business and may offer services such as innovation vouchers and business plan vouchers to help SMEs make the first step. For that, DIH can use a mix of private and public funding to fund these service.
- Corporates or large companies are usually interested in shared R&D (due to cost reduction), skills and education, community building. They are capable of running demonstration projects, they are used to collaborating with others, and often have available funding. Corporates can help DIHs with accessing public funding by doing collaborative R&D and setting up clusters.
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