Venture capital financing in the Thai
economy.
by Wonglimpiyarat, Jarunee
Realising the need to provide financing to growing technology-based
businesses, SME Bank has developed a strategy focusing on turning
R&D into innovation. Small technology companies or
techno-entrepreneurs may utilise the assets of copyrights, patents,
petty patents, or trademarks by transforming them into capital for
establishment or expansion of their businesses or working capital. In
the valuation process, the valuation experts appraise the patents or
intellectual property and perform required due diligence. The patents
related to intellectual property investment may be assessed at fair
market values. Clearly, the equity interest represents ownership in
technology-based patent assets. For the process of transforming into
intellectual capital equity, the techno-entrepreneurs have the rights to
share the profits of patented discoveries as sources of income. By
capitalising on research outputs and developing them into applications
of value to society (scaling up to manufacturing), this would assist the
process of knowledge transfer to industries. Currently, SME Bank
considers the challenge of setting up SME Bank VC Corporation, a
separate VC arm of SME Bank, to enhance the growth prospect of VC-backed
businesses, particularly, early stage high-tech companies. The venture
investments would assist the start-up technology companies to grow and
generate innovations in fueling economic growth (Further discussion in
Section 4).
To take steps on technology investments, SME Bank would require a
risk management through more efficient uses of capital. SME Bank is
underway of implementing Stewart & Co.'s Economic Value Added
(EVA)1 programme focused on improving performance and competitiveness to
revitalise banking activities. Given that capital is driven by risk, SME
Bank has a real interest in risk management but extends its function to
include pricing the risk in accordance with the return. In moving
towards Technology Bank, SME Bank has pushed its managers and staffs to
see and understand performance from a shareholder's perspective.
The management of SME Bank see EVA as an operational initiative looking
at how efficiently VC-backed companies are using capital that has been
allocated to them, and whether they are receiving sufficient return for
the risk that has been taken on.
SME Bank plans to use EVA to focus organisation on creating greater
value to society. In adopting EVA, SME Bank would concentrate on
improving operational performance. The aim of implementing the EVA
system is to have the bank managers act and feel like business
owners--with the same upward and downward risks that shareholders have
to deal with. The venture managers would manage their portfolio
companies with the use of EVA to measure corporate performance (return
on capital approach). In practice, the VC managers incur a cost to their
portfolio, representing a charge for the capital they invest (driven by
risks). The VC investment would then focus on planned exit event to
deliver a solid Return on Investment (ROI). This would help drive
VC-backed businesses from a business perspective while effectively
control risks.
TECHNOLOGY BANK WITH THE NEW MODEL OF VENTURE CAPITAL MANAGEMENT
In moving towards Technology Bank, a separate VC management
function needs to be formed with a mission to support higher risk
ventures. Given that early-stage investments are too risky to the
bank's overall lending portfolio, the VC function should be
structured on an individual basis so that the VC portfolio performance
would not affect the bank's overall performance and value. The set
up of SME Bank VC Corporation will be the great challenge and a shift in
the bank's policy to manage the risk capital for generating new
businesses and innovations. The VC investment would focus on investing
in national strategic clusters of food, fashion, tourism, automotive,
software (the national competitiveness agenda).
Silicon Valley and Boston Route 128 (New England) are successful
examples of high-tech regions taking full advantage of the interaction
process of the Triple Helix model. SME Bank sees itself as having the
potential to play a very positive role in creating the Silicon Valley
ecosystem. To emulate the success of the US Silicon Valley whereby the
flourishing technologies and innovative business creation come from the
interaction of institutional spheres, an empirically-based VC model for
SME Bank is developed (Figure 4). The model of SME Bank venture capital
management focuses on a high integration among institutions and
industries. The model follows the Triple Helix model linking the
university basic research, university applied research, industry R&D
and a local industrial base. Importantly, the move from SME Bank towards
Technology Bank requires shifting patterns of strategic alliances, with
new collaboration and social networks to gain access to up-to-date
technology and market information.
[FIGURE 4 OMITTED]
Although the models that work successfully in Silicon Valley or
Boston Route 128 (New England) may not be successful in another country
setting, the SME Bank VC model (Figure 4) does, of course, present a
very simplified picture of reality, especially with respect to
innovation diffusion. It represents a near objective model to give
indication of how to manage VC financing for emerging technology
companies. Certainly, the model throws some light on the VC management.
In this simple but important model, it explains the process of using VC
as a form of financial intermediation to support the creation and growth
of innovative, entrepreneurial companies. The VC process has in one way
or another involved the steps of fund raising, investment sourcing, due
diligence on potential investments, investment execution, managing the
investments and exiting the investments.
Governments around the world have been trying to replicate the
success that VC has succeeded in the US. In Malaysia, the government has
developed strong VC base to support start-ups. Bank Negara Malaysia
(Malaysia's central bank) has set up the technopreneur fund to
support the venture capital industry. The VC policy of equity
participation is in accordance with the Ministry of International Trade
& Industry and Ministry of Finance guidelines. The provision of
venture capital in Malaysia has been targeted to high return and high
growth industry with special focus on technology and manufacturing
industries. The VC-backed businesses have been aimed at listing on the
Kuala Lumpur Stock Exchange (KLSE) and Malaysian Exchange of Security
Dealing & Automated Quotation (MESDAQ).
In Korea, the government has implemented a series of laws to
promote venture businesses. The Korea Technology Banking Corporation
(KTB) offers financial support to companies' technology development
activities. This financial support (in the form of equity investments,
debenture purchases, conditional loans, technology development loans)
aims to encourage the new products and process development, and the
commercialisation of new technologies. The high-tech start up companies
could also get direct financing by listing on the KOSDAQ through the IPO
(Initial Public Offering).
SME Bank faces a challenge to support the growth in the early stage
of the venture capital industry for a sustained economic recovery.
However, for SME Bank to move in this direction, it needs to form a
network of alliances with the governmental organisations, industries and
universities so as to integrate know-how and services for the promotion
and development of technology-based entrepreneurs. By linking SME Bank
VC corporation with the governmental research organisations (Figure 4),
this would help encourage the new companies to exploit the research
organisations' discoveries. The linkages between SME Bank VC
Corporation and universities can enable the technology-based businesses
to gain and master different knowledge bases that can then be used in
developing new innovative products and obtaining patents that would
strengthen the businesses' competitive position in the marketplace.
Further, the linkages with the stock market (Market for Alternative
Investment: MAI) would facilitate further capital raising and enable the
free flow of market-related information. The creation of SME Bank VC
Corporation would generate multiple positive feedbacks that enhance
technology investment opportunities. The extensive institutional links
would help turn innovations into commercial products.
SME Bank realises the importance of setting up the government VC
fund to provide venture support to small high-tech businesses. The VC
arm--SME Bank VC Corporation--would serve as a driver for economic
growth and innovation. The set up of SME Bank VC Corporation aims to
fill the lending gap of the commercial banks by helping technology-based
SMEs with strong growth and competitive edge with an injection of
capital. SME Bank VC Corporation (in addition to the role of the
commercial banks) could be an important financial intermediary to offer
a very wide range of opportunities to technopreneurs. The role of SME
Bank VC Corporation would play an active role to create and diffuse
knowledge. To create a national innovative capacity, the criteria for
selective VC investment in research results are needed. Any interested
investors would invest in technology-based projects with the financial
support in the form of venture capital from SME Bank VC corporation. The
planned steps to encourage the commercialisation of technology supported
by SME Bank VC Corporation are:
1. Define a clear set of policies promoting national innovative
capacity.
2. Define strategic positioning of cluster development.
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