Venture capital financing in the Thai economy.

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.