Jak Boumans
Electronic Media Reporting, Utrecht, the Netherlands

A brilliant idea is no guarantee of investment. It is usually the start of a long journey through a labyrinth of private companies, banks, regional or national institutes and European programmes. Much time can be lost knocking on the doors. Charting and prospecting the investment opportunities will save a lot of time for both the proposer and investor. The judging criteria differ between commercial and institutional circuits.

The Commercial Circuit

There was a time when it was almost enough to paint a black and white picture in order to indicate how fast a new company could make money. Internationalisation of the project helped to influence the decision. These times are gone, and there is less money around. Consequently, there are more criteria and less money for projects.

Essential on the commercial circuit is to know where to start knocking on doors. After writing and rewriting a business plan and after having produced a presentation, it should be clear what is needed in terms of immediate financing, as well as funding for the following years. The phase the project development is in, and the amount needed, will inform which financial partners should be sought.

If an idea is still in development, the project might need seed money in order to mature into a clear and well-balanced business plan. In that case, it is good to look for business angels, private people with money to spend, but usually also with management experience and contacts in the business. Their criteria for investing money will be the basic idea, the potential in terms of geographical distribution, the management of the project or new company and the financial demand. Before approaching a funding agency, it is, of course, wise to understand their objectives and priorities, as well as their history of outreach.

While business angels invest some million euro, banks and venture capital institutions invest tens of millions of euros. Sometimes the money providers team up to inject capital into a project or company. Financial institutes look at the proposed management, the financial demands, the risks and the return on investment. Business plans that show a crystallised, well-formed operational strategy and a financial roadmap will be best suited to banks and venture capital institutes. In creating your plan, a range of questions should be answered:

What is your new product?

- Why do you see a need for your new product, i.e. what trends do you see that drive the current and future needs of the targetted customers you want to serve?
- What does the product do, and why?
- What makes it so different, so special?
- Why would anybody want to buy this product, rather than similar products (or products that perform the same function) from other suppliers?

What customers and markets do you see for your new product, and what is its potential?

- Who will be your target customers (grouped per segment), and why? Why do you see these segments, and what are the characteristics most important to your business?
- What is the estimated size per segment, and how will they develop over time? Why?
- What is the market potential for your new product (based on estimate of sales per segment, multiplied by the product price per unit? Include time-lines.

What is your business model and how are you going to make money with your product?

- What parts of your product will your customers pay for, and how will it develop over time?
- Will you further develop the product yourself, or will you out-source this - if so, what parts and who will be your suppliers? Why and what elements do you pay for? Do you see any opportunities for developing partnerships in this field?
- Will you market, distribute, sell and service your product directly to your customers, or will you use other channels - if so, what channels? Why are these channels best suited to reach your target customers? What about partnerships?
- Do you see opportunities to enhance the scalability of your business by turning it into an "e-business"? If so, what impact would that have on your competitive advantage, and financial mechanics?

Why are you able to beat your competitors on your target segments with your new product and to attain and build a strong position over a longer period of time?

- What companies do you know that offer similar products (or products that offer the same function) to your target customers - or are likely to step in to compete in your target segments?
- How strong are these competitors in each segment, and why do you think you are able to beat them?
- How do you plan to build "sustainable competitive advantage", that is, how are you going to beat your competitors over a longer period of time? (E.g. by creating entry barriers, developing value adding functions over time, patents etc.). Be very clear on this issue!

What are the key issues for you to address to make your new product a success, and what risks are involved? What overall strategy do you see to cope with these issues/risks and build a defensible market position?

For example:
- Time-to-market of your first product
- Speed to build your position
- Anticipated competitors with more power than you (i.e. their present position, lock-in effects of customers/channels etc.)
- Large investments to finish your product
- Resource squeezes (e.g. people) with a negative impact on your growth
- High costs to build your channels, etc.

What is the current status of your business (i.e. your current position), and what milestones have you planned for further development?

Market
Customers/revenues: do you already have launching customers? Or have you already served customers successfully and with what result? What product elements already generate revenues, and how will this develop over time? Channels: what marketing and distribution channels have you targeted, and how are you going to build them (milestones/timelines)? Do you already have signed agreements with these channels? Marketing/sales: Do you want to develop a brand - if yes, how? What are your strategies and plans for marketing, sales and pricing? Include goals and milestones over time.

Product
What is the status of your product, and what milestones have you planned for further development? What sound strategy do you see for your product development? Be clear on goals and milestones over time.

Organisation
What is the current status of your own organisation and set-up of your suppliers? What milestones do you see to acquire the necessary skills and resources over time, and to enlarge a supplier coalition?

Infrastructure
Do you need an infrastructure to support your activities for development, delivery and service? If so, will you outsource this, or build it yourself? Why? And what (intermediary) goals and milestones do you see?

What are the characteristics of the team you need to make your new product a success?

- What key qualities should be represented in your team to successfully market, develop, produce and grow?
- Who is on the product team now, and what are their qualities? (Include CVs, and indicate whether they are full-time team members.)
- In your view, what qualities are missing? (Don't worry - at this stage this is not a reason for rejection.)

Based on your combined plans, what will be the financial mechanics of your new product?

- What investments do you need to develop your product, and when?
- What costs will you make to build your organisation, develop marketing etc, and approximately when?
- When do you expect to bring your product to market, and when do you foresee any sales - and how will your sales volume develop over time?
- What resulting cash flows do you project, in several scenarios ranging from optimistic to pessimistic? What factors are the strongest drivers for any changes in your forecasts?
- Are you already financed? If yes - how?
- In each scenario - what financial support would you need, and when?
- What is (or will be) the initial shareholder structure?

The above is a list for producing a business plan as used by the Dutch incubator Twinning. Source: www.twinning.nl

The Institutional Circuit

Besides commercial investors, there are different investment institutions linked to regional and national bodies as well as European bodies. Often these institutes have been set up for regional development, or for stimulating national economies.

Regional and national programmes are sometimes set up as a compensation for activities that have been lost in a region of country (such as the textile industry around Manchester in the UK or the mining industry in the south of the Netherlands). These programmes are also initiated in order to be in the forefront of economic developments. Usually a specific scope is needed in order to qualify for a capital injection from these investment institutions.

Regional and national governmental bodies offer not only investment schemes, but also subsidies and subordinated loans. In order to qualify for these subsidies and loans a good business plan is needed and a good reason for requesting a subsidy or a loan. In addition to the almost obligatory paragraph pointing out the employment opportunity of the project or company, a good motivation in applying for a subsidy or a loan can be the speeding up of the development. The faster the idea has been converted into reality, the sooner employees can be attracted.

The European Programmes

The European Commission finances many developments in the field of multimedia tools and applications. But in order to apply for them, one should be prepared to take time out to study the texts of the programmmes and consider the appropriateness of this avenue and approach. If the drive is in order to get money quickly, and with less strings attached than from venture capital, you are at the wrong address. Applying for participation in a European programme is a project in itself, but with the right attitude it can be both interesting and rewarding.

Every five years the Commission writes a programme, the so-called Framework Programme. At present the Commission is working on the Sixth Framework Programme, while the Fifth Framework Programme is heading for its conclusion. In these programmes, which have to be approved by the European Parliament, the Commission indicates its objectives for the next five years in a number of sectors. In the life of such a Framework Programme the Commission publishes several Calls for Proposals. Once a call for proposals has been published a whole circus starts. From the publication date onwards, a company has about three months to organise their approach, and name a project leader. For it is not just about submitting a business plan; the process is more complex than that.

The submission of a project for co-financing of at most 50% by the European Commission is very different to applying for venture capital with commercial companies. As such, it is worthwhile to think about a proper rationale. Why should a company go the European way? If it is just for money, then commercial routes, and national routes, might prove faster and less complex. Consequently, a good European rationale is needed. If a company wants to go European, participation in a project consortium is a secure approach. If a company wants to develop a new multimedia tool or application, the European route can be a fine instrument to reach this goal, but there are a lot of conditions and procedures attached to this.

As it is, a European programme will require cooperation between companies in European member states, candidate member states, associate member states and EFTA countries, so a consortium of at least three companies or institutes must be formed. The companies will need to know each other to an extent, as they will collaborate within the project. They will need to have the required knowledge and skills to actualise their plan, as well as creditworthiness. Together the consortium will have to distribute the activities over the partners, according to their knowledge and financial strength.

Once the consortium has been put together, the application should be written by a project manager, articulating a clear vision, and expressing a strategy in order to satisfy many criteria. They have been categorised by the European Commission as follows:

Scientific/Technological quality and innovation

Most European co-financing goes to research and innovation. These proposals need to have the following properties:

- The quality of the research proposed and its contribution to addressing the key scientific and technological issues for achieving the objectives of the programme and/or key action;

- The originality, degree of innovation and progress beyond the state of the art, taking into account the level of risk associated with the project; and

- The adequacy of the chosen approach, methodology and work plan for achieving the scientific and technological objectives.

Community added value and contribution to EU policies

This is the European dimension of the problem. You need to consider the extent to which the project would contribute to solving problems at the European level and whether the expected impact of carrying out the work at European level would be greater than the sum of the impacts of national projects.

The European added value of the consortium refers to the need to establish a critical mass in human and financial terms and the combination of complementary expertise and resources available Europe-wide in different organisations.

The project's contribution to the implementation or the evolution of one or more EU policies (including "horizontal" policies, such as towards SMEs, etc.) or addressing problems connected with standardisation and regulation, is also considered.

Contribution to community social objectives

This concerns the contribution of the project to improving the quality of life and health and safety (including working conditions); the contribution of the project to improving employment prospects and the use and development of skills in Europe; and the contribution of the project to preserving and/or enhancing the environment and the minimum use/conservation of natural resources.

Economic development and S&T prospects

Criteria here are:

- The possible contribution to growth, in particular the usefulness and range of applications and quality of the exploitation plans, including the credibility of the partners to carry out the exploitation activities for the RTD results arising from the proposed project and/or the wider economic impact of the project;

- The strategic impact of the proposed project and its potential to improve competitiveness and the development of applications markets for the partners and the users of the RTD results; and

- The contribution to European technological progress and in particular the dissemination strategies for the expected results, choice of target groups, etc.

Resources, Partnership and Management

The criteria are:

- The quality of the management and project approach proposed, in particular the appropriateness, clarity, consistency, efficiency and completeness of the proposed tasks, the scheduling arrangements (with milestones) and the management structure. In addition, the tools to be used for monitoring project progress, including the quality of specified indicators of impact and performance, and ensuring good communication within the project consortium;

- The quality of the partnership and involvement of users and/or other actors in the field when appropriate; in particular, the scientific/technical competence and expertise and the roles and functions within the consortium and the complementarity of the partners;

- The appropriateness of the resources - the manpower effort for each partner and task, the quality and/or level and/or type of manpower allocated, durables, consumables, travel and any other resources to be used. In addition, the resources not reflected in the budget (e.g. facilities to carry out the research and the expertise of key personnel). For this criterion, comments may be given rather than marks.

There are also programmes for projects that are not always research or innovation programmes, but more application programmes, in particular sectors such as eContent and eGovernment. The research criteria are adapted to the particular programme.

Once a proposal has been deposited, a procedure will start within the European Commission. This procedure is schematically represented below.

Summary of the steps involved in the proposal evaluation and project selection process

Call for proposals.
Pre-proposal checks (optional).
Pre-registration of proposals (optional).
Proposal submission.
Registration of proposals.
Administrative check on eligibility .
Evaluation of eligible proposals by external experts.
Panels of experts prepare evaluation summary reports and advice to the Commission on evaluation of satisfactory proposals.
Commission services draw up priority lists of proposals suitable for funding and prepare decision on rejection of proposals that are ineligible, out of scope or not of sufficient quality.
Further checks and/or negotiations with partners suitable for funding.
Proposers informed after Commission rejection decision.
Commission rejection decision for proposals for which negotiations fail or for which no funding is available.
Selection decision taken by the Commission after any required consultation of programme committee.
Contracts signed.

The core of the procedure is the evaluation of the proposals by experts who act as advisors to the European Commission. At least three evaluators, each a specialist in a particular field, see each proposal. A rapporteur supervises the quality of the evaluations by experts, while a European Commission official keeps a check on procedures. After selection, contract negotiations with the European Commission will start. Only after signing the contract can the project begin.

The procedure may appear a bit complicated, but since no interest is paid on the funding, it is quite appealing. One almost would start to look for a catch: Why should a company not take the European route? There are a few reasons to note. First, the call for proposals procedure is governed by the law of probabilities. Although proposals of good quality do always come up for selection, the quantity of proposals might be a problem. It is not uncommon for some 200 proposals to be submitted, of which 50 will be ranked for co-financing, while funds are available for only 30 proposals. In that case only the 30 proposals will be funded. In case one of the consortia drop out of the negotiations, number 31 will come in, but again only if there is enough funding left in the budget. There may be other reasons not to take European route. The time between the submission and the concluding of the contract usually transpires over a period of six months. Although this is being shortened, this might be too long a period for the market to wait for the new tool or application. Also, the rigours of the administrative work, meetings, and reviews might be a reason not to submit a proposal.

All the same, submitting a proposal, being selected, and concluding a contract may be a gratifying experience, as it not only provides a contribution to the financing of a new tool or application, but also generates collaboration between European companies.

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