Venture capital financing in the Thai economy.

SUMMARY

This paper is concerned with the management of venture capital financing in the Thai economy. It presents Small and Medium Enterprise Development Bank of Thailand (SME Bank) activities in support of the generation of new businesses and innovations. Being the bank for technology-based businesses to increase the nation's innovation capacity is the great challenge for SME Bank as the bank needs to garner the integrated financial and entrepreneurial support as well as a network of alliances. The paper proposes the model of venture capital management for changing the innovative environment to create the tech economy. Innovative initiatives at SME Bank would be useful for economies in other developing countries to launch programmes supporting the diffusion and commercialisation of innovations.

KEY WORDS

small--and medium--sized enterprise (SME); technology bank; silicon valley; technology--based businesses; venture capital (VC); technology commercialisation

INTRODUCTION

This paper is concerned with the management of venture capital financing in the Thai economy. It presents the Small and Medium Enterprise Development Bank of Thailand (SME Bank)'s activities in supporting the generation of new businesses and innovations. SME bank is a special-purpose bank reshuffled from the Small Industry Finance Corporation (SIFC) to focus on providing financial facilities to SMEs. SME Bank was established in 2002 to assist SMEs in accessing sources of funds, preparing a business plan, and providing advice on operational issues. It is state owned--the Finance Ministry holds an 86% stake. The mission of SME bank is to act as a financial intermediary to support SMEs with growth potential to significantly improve their products or services. The goal of SME Bank is to assist businesses that have been shut out of the commercial banking system. In other words, it is the bank set up to help small businesses realise their entrepreneurial potential. The bank has initiated many activities to assist, promote and develop Thai small- and medium-sized enterprises (SMEs). SME Bank has been awarded Bank of the Year 2004 for having the most outstanding performance in helping 11,035 entrepreneurs and setting up 80 branches all over the country. Currently, it has the policy of shifting the paradigm from helping the small businesses towards supporting technology-based start-ups to produce innovative capacity for the Thai research & development (R&D) market.

In extending the bank's lending-based services to venture capital (VC) financing, SME Bank is taking higher risks on start-up ventures. In the move towards the bank for technology-based businesses (Technology Bank), SME Bank had set aside capital to support the entrepreneurial start-ups in the technology sector. The bank has committed in extending the supply of capital to technology-based businesses to facilitate the process of developing and commercialising technologies which would help drive the country's economy. Following on the introductory section, there are 4 further sections. Section 2 discusses the importance of the Triple Helix model in encouraging economic growth and development. The model provides a basis for an empirical analysis. Section 3 presents the innovative activities undertaken at SME Bank to promote the venture capital economy of Thailand. Section 4 presents the model of venture capital management to create the tech economy and promote innovations in SMEs. Section 5 concludes the paper.

THEORETICAL FRAMEWORK

Triple Helix model emphasising network interactions to foster innovation

Etzkowitz (2003) has developed the model of double helixes (university--industry, government--university, industry--government) and the new model version of triple helixes (government, university, industry). Indeed, the most important change in the model has been the move from bilateral interactions to trilateral interactions. The networks connecting the productive sector and the government are emphasised by the Triple Helix model to enhance economic development and competitiveness. The model postulates an interaction among the institutional spheres to foster the condition for innovation (Etzkowitz & Leydesdorff 1998, 2000; Etzkowitz 2002; Etzkowitz 2004; Cowan & Jonard 2004; McEvily et al. 2004).

The interaction characteristic process of the Triple Helix model plays a vital role in creating phenomenal economic growth of the 2 leading US high-tech regions, Silicon Valley and Boston Route 128 (New England). Figure 1 shows the total venture capital investment in the US which drives innovation and competition and encourages the competitiveness of the regions. The VC financing is a significant force behind the growth and economic development of Silicon Valley and Boston Route 128 (New England).

[FIGURE 1 OMITTED]

Figure 2 shows the Triple Helix model emphasising the integration of 3 institutional spheres (university--industry--government relations). Indeed, firms benefit from networks of collaborations among universities, research centres, small and large firms along several activities such as R&D, production and marketing. The interactions help facilitate the move of technologies from universities/ research organisations into the private sector. It is argued that the government policies should support these interactions for knowledge generation and industrial development (Etzkowitz & Leydesdorff 2000; Gay & Dousset 2005).

[FIGURE 2 OMITTED]

In high technology sectors, the Triple Helix model provides a platform for innovators through university--industry--government relations. Early stage investments in high-technology companies are of high risk and thus need the government support programmes for venture development. The next section will describe the attempts of SME Bank in developing the tech economy by helping SME access to venture capital funds. SME Bank has tried to strengthen the venture capital industry by providing financial services to emerging growth and high-tech companies. It is challenging for SME Bank in opening up opportunities for entrepreneurial firms and encouraging economic growth through VC financing.

VENTURE CAPITAL ECONOMY OF THAILAND

In Thailand, commercial banks are the major financial institutions initiating financial programmes to help SMEs. Among the commercial banks, Krung Thai Bank is the country's largest state-run bank, playing a major role in providing finance to SMEs. The National Innovation Agency (NIA) is one of the major organisations supporting innovation development in Thailand. NIA has provided a range of financial programmes to promote investment to venture businesses. The financial programmes to support SMEs are, for example, Good Innovation Zero Interest, Technology Capitalization, Innovation Cluster Grant, Venture capital. SME Bank is another prominent bank playing a role to assist young entrepreneurial firms. SME Bank was established in 2002 to mitigate the risks of SMEs by assisting them with access to sources of funds, business plan preparation, and advice on operational issues.

The influential factors in the process of technology commercialisation are shown in Figure 3. It can be seen that capital has been the most important factor as the entrepreneurial firms often have problems finding financing for their innovation or idea. In other words, for the firms to deliver innovative products and technologies, securing funds is often the problem. Public venturing is therefore a key first step in supporting venture capital-backed spin-offs.

SME Bank has taken up the role of small innovation business development in the VC industry. The bank has eased lending criteria and taken greater risks than commercial banks do in order to ease the SMEs' financial crunch and support the generation of new businesses. However, to limit possible damage incurred from lending, the main target customers of SME bank are projects initiated in line with the government's economic stimulus programmes such as the industrial and agricultural restructuring programmes, the village fund and social investment schemes.

In making contribution to the government's objective of making entrepreneurs more innovative and competitive in the market, SME Bank considers that it needs to readjust its financial offerings to the evolving needs of SMEs, including the new technology-based businesses whose risk and credit profiles fall outside the scope of most financial institutions. SME Bank has extended the services beyond serving the needs of its traditional clientele by investing in early- and expansion-stage capitalisation through equity financing. SME Bank has adopted a proactive approach by establishing many forms of collaboration with the government and private sector organisations as well as financial institutions like KfW (Germany's state-owned development bank), financial institutions in the Asia-Pacific Economic Cooperation (APEC) region, various financial institutions in Japan, India, South Korea, China, Sri Lanka as well as other Asian countries to support and strengthen SMEs. In 2005, SME Bank focused on providing full network services from incubation, financing, mentoring, strategic alliances, to capital raising on the stock market (initial public offering or IPO support). Table 1 shows SME Bank's commitment to develop strategic clusters in line with the national strategic cluster policy.

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.

3. Channel risk capital investment in R&D innovations (to turn R&D into innovation).

To enhance the efficiency of the VC process, SME Bank VC Corporation needs to employ a new management approach of intellectual property (IP) portfolios and VC pipeline (research projects with commercial potential for the production scale set up for technology transfer). A value chain of R&D activities should be created to support the progress of research outcomes towards commercial innovations. The VC pipeline efficiency needs the interorganisational interactions that contribute to the creation of technologies along the value chain process. As a public venturing mechanism, SME Bank VC Corporation needs to play an active role in financing new businesses in high-technology industries, providing them with diversified and complementary financial services to help VC-backed businesses succeed. In stimulating innovation and economic growth, SME Bank VC Corporation would function as a one-stop centre to help technology-based businesses in their business plans, training, human resource development, moving up the value chain.

MANAGEMENT IMPLICATIONS AND CONCLUSIONS

This paper is concerned with the management of venture capital financing in the Thai economy. It presents the Small and Medium Enterprise Development Bank of Thailand (SME Bank)'s activities in supporting the generation of new businesses and innovations. SME Bank has taken high risks on start-up ventures in the technology sector to support the diffusion and commercialisation of innovations which would help induce economic growth and development. With the government policies to support technology innovation of SMEs, SME Bank currently considers the challenge of setting up SME Bank VC Corporation, a separate VC arm of SME Bank, to support VC-backed businesses in creating the tech economy. Managerial and technological implications on the attempts of SME Bank in moving towards technology bank are as follows:

* SME VC Bank Corporation represents a public venture capital (a contrasting model to US Silicon Valley with private sector-led VC initiatives) at the state level in helping start-up companies and taking them public. Although there is no government intervention in the US model, entrepreneurs in developing countries need the government gap funding programmes to compete in emerging industries. SME Bank VC Corporation can be seen as an efficient financing mechanism to assist high-technology industries in Thailand. It represents the role of the government in developing a VC market (acting as a major catalyst to accelerate the early stage investments in technology-based businesses). Nevertheless, the government programmes should be a complement to, not a replacement for, conventional equity financing. Indeed, the public funds should not crowd out private funds which might cause a reduction in overall industry returns. SME VC Bank Corporation needs to act responsibly to create positive impacts on the Thai industries. The government should encourage the private sector to take up venture capital investments to help businesses generate ideas and translate the R&D results into commercial outcomes.

* In the absence of private equity capital in Thailand, the government should play a dominant role in the venture capital market. The Thai government should take a number of steps to encourage investors to commit to the country's venture capital funds even though the return to the government is uncertain. The government should devote resources to science parks as policy instruments to promote research-based industrial capacity. The government role should also include facilitating and upgrading cluster development to strengthen the clustering effect. The adoption of cluster-based strategy would bring coordination to various funding programmes and activities that formerly operate in isolation and lack cumulative impact. The clustering effect would help stimulate the creation and growth of technology-based businesses, bring about the commercialisation of new technology and catalyse economic growth. In line with the government's cluster-directed policies, SME Bank VC Corporation should work with universities, research organisations as well as industries to build the science and technology infrastructure that brings new research ideas to the marketplace. For technological catch-up to encourage innovations, SME Bank VC Corporation needs a cluster development approach to grow and develop the VC market.

The findings in this paper suggest important future research on what should be the best VC management strategy to overcome obstacles of entrepreneurial start-ups and whether using active or passive venture management would resolve managerial problems and positively increase the performance of SME venture capital investments. In many developing countries including Thailand where the government (not the private sector VC funds) plays a major role in encouraging venture capital, the government may be the best to provide resources in advancing clusters. This would be an interesting research issue to explore the effectiveness of the government role in VC financing.

Acknowledgements

The author gratefully acknowledges the support of Mr. Chotisak Asapaviriya, SME Bank President; SME Bank management team; Prof. Henry Etzkowitz, Science Policy Institute, State University of New York; and Prof. Richard Nelson, the Earth Institute, Columbia University.

Received 9 March 2006

Accepted 16 May 2007

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JARUNEE WONGLIMPIYARAT

The National Science and Technology Development Agency

Ministry of Science and Technology

Pathumthani, Thailand

Endnote

(1) EVA (Economic Value Added) was developed by Stern Stewart as a measure of economic profit. EVA System is an integrated system of internal corporate governance, designed to create shareholder value by improving EVA performance. The EVA focuses performance measurement on the underlying economics of value and wealth creation. TABLE 1: SME BANK'S COMMITMENT TO NATIONAL STRATEGIC CLUSTERS Projects Aims/Objectives Kitchen of The project promotes food industries, for which the World Thailand possesses high competitive potential in

the global market, owing to rich agricultural land

and favorable climate for farming, fishery,

husbandry, as well as great biodiversity and local

wisdom in the processing of her produce. World Tropical The project encompasses three business clusters of Fashion textile and garments, leatherwear and footwear, and

gems and jewelry, to promote Thai brands of fashion

goods, and fashion design businesses. Tourism Capital The project aims to promote tourism and Thailand's of Asia strategic position from sub-regional level to

regional level, through co-operation with allies

such as China and Japan to brand Thailand to the

global public. New services are being offered such

as long-stay resorts, world-class hotels, spas, and

golf courses targeting high-potential travelers, a

distinctly different approach to the mere promotion

of scenic spots in the past. Detroit of Asia The project aims to promote Thailand as Southeast

Asia's automotive manufacturing hub. World Graphic The project aims to create highly skilled workforce Design Centre in information technology (IT) including software

programmers and hardware parts and components

developers. Source: SME Bank. FIGURE 3: INFLUENTIAL FACTORS IN THE PROCESS OF TECHNOLOGY COMMERCIALISATION Factors Number Others 9 Infrastructure 51 Capable personnel 53 Tax benefits 55 R&D with commercial potential 55 Capital 61 Source: The Office of Small and Medium Enterprises Promotion. Note: Table made from bar graph.