Financing Innovation — Case Studies

Case 2 — Start-Up

SME Type:	Technology
Business/products:	Innovative and effective manufacturing process for an active ingredient in chemicals production
Profile of founders:	2 researchers in a public laboratory
Potential customers:	Chemicals manufacturers
Project:	Finalize a prototype and commercialize the new process
Total project financing sought:	$3 million over 3 years.

Background

The founders were researchers in a public laboratory and therefore could continue their research for a year while being housed and paid by the institution, an environment that supported "spinoffs". As a result, there was less pressure on the founders and they could develop an appropriate business model and plan, and seek expressions of interest from potential customers.

Strategy

• Negotiate the transfer of all patents to a separate company.
• Integrate the company into a recognized technology incubator.
• Involve the initial partner (the public laboratory) within the board of directors and as a shareholder; obtain a symbolic investment from them to use as leverage.
• Divide financial requirements into "go/no go" stages.
• Approach two target venture capital groups.

Process/approach

• The founders had their employer's support (their salaries) for a year (the equivalent of GROUP A).
• The patents were transferred to the company in exchange for a licence agreement. Other patents could eventually lead to marketable products.
• By joining with an incubator, the company managed to obtain a pre-capitalization loan for $250,000 (GROUP C), in addition to the capital obtained from the former employer ($100,000).
• The business plan was developed after undertaking a number of market evaluations.
• A board of directors was created, including the initial partner.
• R&D tax credits were obtained and Investissement Québec financed them (GROUP E) in such a way that they improved the company's liquidity.
• Given the process' high level of innovation (compared to traditional processes) and its international potential, two venture capital groups were approached, one European and one American (GROUP I). The project was also presented to several Québec-based venture capital groups.

Results

Apart from the pre-capitalization financing (GROUP C) and the former employer's initial investment (GROUP A), over a period of two years, the company obtained $1.5 million in venture capital from Quebec and Europe (GROUP A).