8.1.4 Case Study

Financing innovation in micro companies

The following case study is aimed at providing you with a practical example on how a small technological start-up went through the laborious process of developing, financing and marketing an innovative product in the field of ground penetrating radar technologies. For this purpose the case study has been structured as a short interview with a manager of newly established innovative company and illustrates the importance of identifying and finding the appropriate financing scheme when you represent a small technological company located in a remote area and with limited knowledge and resources on developing and financing such innovation.

The interview contains series of questions aimed at gathering practical information and feedback on some of the main hinders and challenges that the interviewed company went through in order to develop and finance its innovation endeavours.

Q: Please provide us with some background information regarding your company’s field of activity.

A: Our enterprise was established at 2007 with the aim of developing and introducing an innovative application of the GPR method (Ground Penetrating Radar) (Geo-radar method for non-destructive control and assessment of the performance quality – QA/QC based upon the properties of the electromagnetic waves). Currently we employ 7 high skilled experts in the field of GPR in our main office and research laboratories which are located in the city of Blagoevgrad, Bulgaria.

Q: What was your perception on innovation in relation to your vision for company development? Do you think there are advantages in being a smaller company when it comes to innovation?

A: Being innovative is in the core of our vision for the development of the company since it is entirely dedicated to the development of new types of products and technologies in the field of non-destructive ground penetrating radars. Our goal is to familiarize Bulgaria with a method that has been studied at universities across the world and considered as fundamental for many years now. Developing innovation in a relatively smaller community by a small company is both an advantage and a challenge. On the negative side we are far away from the big technology centres and large research institutes at the capital city of Sofia. Therefore we could not rely on any specific assistance or expert advice in both developing and marketing our innovative products. On the other hand being smaller company we are more flexible and can adapt to changes in the market relatively quickly. We are willing to take more risk than bigger research oriented companies. Therefore I think smaller is better when innovating. On the contrary most of the Bulgarian companies located in typically isolated rural region like ours very often underestimate the very meaning of innovations, not to mention investments in optimizing the production process, training the staff, allocating the necessary funds for innovations, etc. In present times of economic decline it is not unusual for companies to have a reduced innovation potential, mostly due to lack of financial resources. But being innovative, like our company is striving to be, could act as the much needed ingredient for not only surviving the present crisis but also becoming more competitive on the market.

Q: Could you please provide us with more details on the main issues that you have encountered while developing and commercialising your innovation?

A: I will start from the beginning. Our company is based on a university friendship including professors and entrepreneurs of the region of Blagoevgrad which specialized in the research and development of geological devices in the field of ground penetrating technologies. Shortly after the establishment of our company we came up with the idea of marketing a new type of Geo-radar method for non-destructive control and assessment of the performance quality – QA/QC based upon the properties of the electromagnetic waves. In order to initiate the innovation process, patent the invention and market the innovation to interested sub-contractors we estimated that we will require a small – scale funding of approximately 50 000 Euro. The first major obstacle was the lack of knowledge and information in finance, as we all were engineers in spatial development and ground planning. First we started with friends and other more informal information and finance channels such as relatives, private investors, including competitors. Soon we discovered that in the present time of crisis nobody was able to set aside the amount of financing we needed for a project which seemed quite sophisticated to most of the people it was presented to. Then we turned to banks. But finding the right loan scheme or credit line proved very difficult task since financial obligations and loan conditions were unacceptable for a small start-up company like ours – high interest rates, various financial guarantees, short return period, etc. Banking sector in Bulgaria was very cautious at that time due to the economic crisis.
After many struggles in finding the appropriate financial source our company decided to seek the advice of a local business support organization. Experts of the business organization carefully analyzed our idea and proposed us to apply for public funding within one of Bulgaria’s Operational Programmes which provides financing for innovative start-ups.

Q: What have made you choose public funding over the financing from the bank sector, or any other type of financing, such as business angels, venture capital funds or else?

A: I have already mentioned the high requirements of the banking sector for granting financing of a small technological start-up. In some cases there are credit lines that are financed by institutions such as the EBRD (European Bank for Reconstruction and Development), which provide very low interest rates and special benefits for technological companies. Regretfully such financing scheme was not available to us at that time.

In regard to risk investors or venture capitalists I think they do not apply to the scale of both our business and particular project. Venture capitals prefer usually to invest in larger projects. In addition they are very hard to find, since most of their offices are located in the big technological and financial centres of the capital city.

Then we decided to consider the opportunity of applying for public funding grant. When talking about public financing I personally think is the type of financing everyone is talking about and nobody is actually applying for it. At least that was and still is the situation in our region. There is so much information about various types of funding available such as such as Community Programmes, National SME support EU funded programmes, National Innovation Support Funds, etc. Personally I think that public funding is the choice that small companies trying to innovate should consider because: 1) It is relatively easy to find assistance and expert advice in developing the proposal; 2) Preparing the proposal in our case was easy since we already knew what we will develop so it was easy to draft the idea and the business plan; 3) In most cases there is a high percent of grant financing – more than 90% of the total cost of the project when applying with highly innovative project; and last but not least 4) You can rely on advance payments, which are vital at the initial stages of the innovation development process;

Q: What is the common understanding of public sector funding in relation to financing innovation?

A: The heavy administrative procedures and the long application period often “scare” most small entrepreneurs on their quest in commercializing their innovative ideas and inventions. Other hinders include the relatively long period for improving, developing and successfully reporting such projects, etc. In our case there was similar attitude towards public funds but after careful consideration of other options and with the assistance of local experts we decided to move forward towards applying for such funding.

Q: Ultimately what happened with your innovation project and what advice you would give to micro companies willing to invest in innovations and seeking the appropriate funding for such activities?

A: After many struggles in finding the appropriate information and respective financial source we decided to seek the advice of a local business support organization. Experts of the business organization carefully analyzed our idea and proposed us to apply for public funding within one of Bulgaria’s Operational Programmes which provides financing for innovative start-ups. Moreover a summary of our project was published in the organization’s internal network of technological offers and business partners. Soon after several investors contacted us with request for initiating business relations and proposed to invest in the development of the innovative product. We rejected this option since the proposed financial conditions were not satisfactory.

Ultimately the company applied in the middle of 2010 with a project proposal under the Bulgarian Operational Programme “Competitiveness”, financed by the European Union Structural Funds. After 3 months we received an invitation for grant contract and we are currently in the process of negotiating the first advance payment on the project which will allow us to complete the patent procedure for our invention and to attend an international event where we will present our technology

(The interview was carried out and recorded by: Plamen Todorov Association Business Information and Consulting Center – Sandanski 27.12.2010 Sandanski, Bulgaria)