rus
Issue #8/2023
K. I. Baboshin
Industry Expert Evaluation of Projects and Fund Raising by the High-Tech Industrial Enterprises
Industry Expert Evaluation of Projects and Fund Raising by the High-Tech Industrial Enterprises
DOI: 10.22184/1993-7296.FRos.2023.17.8.614.618
The article is devoted to the opportunities provided to the small and medium-sized high-tech companies to attract financing for business development. Such proposals relate to the attraction of debt capital through the financial instruments other than the conventional bank project financing, bank loans, targeted public financing or income received due to the fulfillment of public contracts. The alternative funding instruments are provided, such as venture capital financing, digital financial assets, bond issue, Pre-IPO.
The article is devoted to the opportunities provided to the small and medium-sized high-tech companies to attract financing for business development. Such proposals relate to the attraction of debt capital through the financial instruments other than the conventional bank project financing, bank loans, targeted public financing or income received due to the fulfillment of public contracts. The alternative funding instruments are provided, such as venture capital financing, digital financial assets, bond issue, Pre-IPO.
Теги: bond issue digital financial assets funding instruments pre-ipo pre-ipo small and medium-sized high-tech companies venture capital financing венчурное финансирование инструменты фондирования малые и средние высокотехнологичные компании цифровые финансовые активы эмиссия облигаций
Industry Expert Evaluation of Projects and Fund Raising by the High-Tech Industrial Enterprises
K. I. Baboshin
Frezard LLC, Moscow, Russia
The article is devoted to the opportunities provided to the small and medium-sized high-tech companies to attract financing for business development. Such proposals relate to the attraction of debt capital through the financial instruments other than the conventional bank project financing, bank loans, targeted public financing or income received due to the fulfillment of public contracts. The alternative funding instruments are provided, such as venture capital financing, digital financial assets, bond issue, Pre-IPO.
Key words: small and medium-sized high-tech companies, funding instruments, venture capital financing, digital financial assets, bond issue, Pre-IPO
Article received: October 16, 2023
Article accepted: November 30, 2023
Financing for high-tech industries is one of the most difficult tasks for both industrial enterprises and prospective investors. The implementation of high-tech programs and projects requires significant amounts of monetary funds. The projects do not always guarantee high yield and have the significant return on investment periods of up to tens of years. Such natural restraints often erode the interest of creditors and investors. However, without proper financing, many market players often cannot implement their applied commercial projects.
The start-up companies focusing on the commercial market for high-tech products are uneven in competition compared to the major companies. If the state-owned enterprises, major companies with public ownership or companies with an extensive experience and strong financial examination (albeit with restrictions) can afford to participate in the procurement procedures according to the Federal Laws No. 44-FZ and No. 223-FZ [1, 2], and can simultaneously count on support from the development institutions [3–5] or targeted public funding, then the relatively infant enterprises often experience a liquidity shortage. However, it is their legal status that opens up the potential for new funding opportunities that are not available to the state-owned enterprises.
The point at issue is raising debt capital using the financial instruments other than the conventional bank project financing, bank loans, targeted public financing or income received due to the fulfillment of public contracts. The alternative funding instruments are now becoming available to the medium and small-sized enterprises. Such instruments include venture capital financing, digital financial assets, bond issues, Pre-IPO.
At present, venture capital financing is the fastest way to obtain financial support. Venture capital financing is provided by the venture capital funds and represents financing of the startups that require monetary funds to launch business activities or to scale, as well as financing of individual projects. Due to the fact that a significant part of such projects do not achieve the expected financial results, the funds redistribute the risks between all projects leading to rather strict conditions for completion of funding.
The digital financial assets (DFAs) have recently become the increasingly popular approach. The DFAs are a modern analogue of both standard securities and hard assets. The key difference is that the DFAs are completely digitized and blockchain-based. The DFA instrument makes it possible to attract financing in a faster way than by placing securities on the stock exchange or searching for a hard asset buyer. An expensive asset in the form of DFA can be divided into the smaller assets and is therefore more accessible to a larger number of prospective investors.
The issue of bonds holds a prominent place in the structure of investment sources. A bond is a debt security, the holder of which extends a credit to the issuer through the bond purchase, and the issuer is obliged to return the specified funds within a specified period of time, as well as to pay a coupon profit. The bonds are traded on an exchange and are available to a very wide range of institutional and retail investors.
A pre-IPO company is a private company that is ready to enter the public market in three or four years. This is the stage of a corporate development when the company is ready to approach the public market (Initial Public Offering – IPO) and attracts financing through the sale of shares prior to the public listing. Purchase of the company’s securities at the Pre-IPO stage is a riskier initiative for an investor than after an IPO. However, it bears less risk than the venture capital financing. The pre-IPO shares combine an average potential yield and an average level of risk. Any investments in Pre-IPO are investments in the mature businesses that show good growth dynamics.
The fund-raising tools given above do not seem inaccessible to the small and medium-sized enterprises, but they require considerable efforts and expertise on the part of the management team of these companies, who may not have the free resources to use such tools. Such approach requires specialists with the relevant financial and legal background, monetary funds for implementation, time, and a willingness to rebuild the internal business processes of a high-tech company. In addition, attraction of external financing will require the company to be extremely transparent.
In this vein, the task of branch unions and associations is becoming extremely important, since such organizations can provide any expert support to the industrial enterprises, while offering any “out-of-the-box” financial solutions for the enterprises and direct financial assistance through the establishment of sector-specific funds. Such sector-specific funds can be financed both through the issue of equity positions and through the issue of bonds that must be backed by the public guarantees and that can be in demand not only among the retail investors, but also among the institutional investors. Having considered importance of the development and implementation of high technologies for the state, it is the branch unions and associations that will provide the opportunity to develop a direct structured dialogue with the financial institutions and the state, while involving it in the process of industrial problem solution.
These are precisely the footsteps followed by the Russian enterprises in the man-made diamond production industry being one of the branches of innovation-driven economy. Its products are used to develop and produce the radio-photonic devices (microwaves), microwave devices, heat-conducting substrates for electronics, laser diodes, prototypes of quantum computers, equipment for astronomy, nanodiamonds for therapy and drug delivery to the damaged organs, radiation-resistant detectors, ROFARs (radio-optical phased array antennas with a simultaneous radiation frequency of 1 Hz – 100 GHz and object identification at a distance of up to 400 km). In Russia, many companies are engaged in the man-made diamond production technologies with NV centers, CVD technologies for diamond films. According to the forecasts of foreign analysts, the global market for man-made diamonds will exceed $25 billion in the coming years, will grow exponentially and reach $170 billion by 2035 [6].
The Diamond Cluster of the Russian Federation [7] established in April 2023 by the leading Russian industry players is designed to solve practical industrial issues, including any financial examination of corporate projects. For these projects, the cluster can attract additional financing using the tools shown above that will speed up the implementation of projects and become the key to the corporate development in the industry. In order to reduce the risks and to increase the investors’ confidence in the projects of cluster members, the structural subdivisions of the cluster consisting of leading industrial experts, will conduct process and scientific examination of projects. We are confident that the Diamond Cluster will have a positive functional effect for other high-tech companies.
REFERENCES
Federal Law “On the contract system in the field of procurement of goods, works, services to meet state and municipal needs” dated 04/05/2013 N 44-FZ (latest edition). URL: https://www.consultant.ru/document/cons_doc_LAW_144624.
Federal Law “On the procurement of goods, works, services by certain types of legal entities” dated July 18, 2011 N223-FZ (latest edition). URL: https://www.consultant.ru/document/cons_doc_LAW_116964.
On approval of the list of institutions for innovative development and other organizations providing state support for innovation activities, submitting information to the Unified Register of final recipients of state support for innovation activities. Order of the Government of the Russian Federation of December 16. 2022. No. 3999‑r. URL: https://www.garant.ru/products/ipo/prime/doc/405866143/#1000.
On the state guarantee for projects of the “project financing factory” Order of the Government of the Russian Federation of August 7, 2018 No. 1647‑r. URL: http://government.ru/docs/32828.
On the state guarantee for bond loans raised by a specialized project finance company. Decree of the Government of the Russian Federation of June 6, 2018 No. 654. URL: http://government.ru/docs/32828.
World market for synthetic diamonds. URL: https://rough-polished.expert/ru/news/109396.
Diamond cluster of the Russian Federation. https://diamondcluster.ru.
About the author
Baboshin Konstantin Igorevich, Ph.D., MBA degree, deputy director general for strategy and investments in Frezart LLC, Moscow, Russia.
K. I. Baboshin
Frezard LLC, Moscow, Russia
The article is devoted to the opportunities provided to the small and medium-sized high-tech companies to attract financing for business development. Such proposals relate to the attraction of debt capital through the financial instruments other than the conventional bank project financing, bank loans, targeted public financing or income received due to the fulfillment of public contracts. The alternative funding instruments are provided, such as venture capital financing, digital financial assets, bond issue, Pre-IPO.
Key words: small and medium-sized high-tech companies, funding instruments, venture capital financing, digital financial assets, bond issue, Pre-IPO
Article received: October 16, 2023
Article accepted: November 30, 2023
Financing for high-tech industries is one of the most difficult tasks for both industrial enterprises and prospective investors. The implementation of high-tech programs and projects requires significant amounts of monetary funds. The projects do not always guarantee high yield and have the significant return on investment periods of up to tens of years. Such natural restraints often erode the interest of creditors and investors. However, without proper financing, many market players often cannot implement their applied commercial projects.
The start-up companies focusing on the commercial market for high-tech products are uneven in competition compared to the major companies. If the state-owned enterprises, major companies with public ownership or companies with an extensive experience and strong financial examination (albeit with restrictions) can afford to participate in the procurement procedures according to the Federal Laws No. 44-FZ and No. 223-FZ [1, 2], and can simultaneously count on support from the development institutions [3–5] or targeted public funding, then the relatively infant enterprises often experience a liquidity shortage. However, it is their legal status that opens up the potential for new funding opportunities that are not available to the state-owned enterprises.
The point at issue is raising debt capital using the financial instruments other than the conventional bank project financing, bank loans, targeted public financing or income received due to the fulfillment of public contracts. The alternative funding instruments are now becoming available to the medium and small-sized enterprises. Such instruments include venture capital financing, digital financial assets, bond issues, Pre-IPO.
At present, venture capital financing is the fastest way to obtain financial support. Venture capital financing is provided by the venture capital funds and represents financing of the startups that require monetary funds to launch business activities or to scale, as well as financing of individual projects. Due to the fact that a significant part of such projects do not achieve the expected financial results, the funds redistribute the risks between all projects leading to rather strict conditions for completion of funding.
The digital financial assets (DFAs) have recently become the increasingly popular approach. The DFAs are a modern analogue of both standard securities and hard assets. The key difference is that the DFAs are completely digitized and blockchain-based. The DFA instrument makes it possible to attract financing in a faster way than by placing securities on the stock exchange or searching for a hard asset buyer. An expensive asset in the form of DFA can be divided into the smaller assets and is therefore more accessible to a larger number of prospective investors.
The issue of bonds holds a prominent place in the structure of investment sources. A bond is a debt security, the holder of which extends a credit to the issuer through the bond purchase, and the issuer is obliged to return the specified funds within a specified period of time, as well as to pay a coupon profit. The bonds are traded on an exchange and are available to a very wide range of institutional and retail investors.
A pre-IPO company is a private company that is ready to enter the public market in three or four years. This is the stage of a corporate development when the company is ready to approach the public market (Initial Public Offering – IPO) and attracts financing through the sale of shares prior to the public listing. Purchase of the company’s securities at the Pre-IPO stage is a riskier initiative for an investor than after an IPO. However, it bears less risk than the venture capital financing. The pre-IPO shares combine an average potential yield and an average level of risk. Any investments in Pre-IPO are investments in the mature businesses that show good growth dynamics.
The fund-raising tools given above do not seem inaccessible to the small and medium-sized enterprises, but they require considerable efforts and expertise on the part of the management team of these companies, who may not have the free resources to use such tools. Such approach requires specialists with the relevant financial and legal background, monetary funds for implementation, time, and a willingness to rebuild the internal business processes of a high-tech company. In addition, attraction of external financing will require the company to be extremely transparent.
In this vein, the task of branch unions and associations is becoming extremely important, since such organizations can provide any expert support to the industrial enterprises, while offering any “out-of-the-box” financial solutions for the enterprises and direct financial assistance through the establishment of sector-specific funds. Such sector-specific funds can be financed both through the issue of equity positions and through the issue of bonds that must be backed by the public guarantees and that can be in demand not only among the retail investors, but also among the institutional investors. Having considered importance of the development and implementation of high technologies for the state, it is the branch unions and associations that will provide the opportunity to develop a direct structured dialogue with the financial institutions and the state, while involving it in the process of industrial problem solution.
These are precisely the footsteps followed by the Russian enterprises in the man-made diamond production industry being one of the branches of innovation-driven economy. Its products are used to develop and produce the radio-photonic devices (microwaves), microwave devices, heat-conducting substrates for electronics, laser diodes, prototypes of quantum computers, equipment for astronomy, nanodiamonds for therapy and drug delivery to the damaged organs, radiation-resistant detectors, ROFARs (radio-optical phased array antennas with a simultaneous radiation frequency of 1 Hz – 100 GHz and object identification at a distance of up to 400 km). In Russia, many companies are engaged in the man-made diamond production technologies with NV centers, CVD technologies for diamond films. According to the forecasts of foreign analysts, the global market for man-made diamonds will exceed $25 billion in the coming years, will grow exponentially and reach $170 billion by 2035 [6].
The Diamond Cluster of the Russian Federation [7] established in April 2023 by the leading Russian industry players is designed to solve practical industrial issues, including any financial examination of corporate projects. For these projects, the cluster can attract additional financing using the tools shown above that will speed up the implementation of projects and become the key to the corporate development in the industry. In order to reduce the risks and to increase the investors’ confidence in the projects of cluster members, the structural subdivisions of the cluster consisting of leading industrial experts, will conduct process and scientific examination of projects. We are confident that the Diamond Cluster will have a positive functional effect for other high-tech companies.
REFERENCES
Federal Law “On the contract system in the field of procurement of goods, works, services to meet state and municipal needs” dated 04/05/2013 N 44-FZ (latest edition). URL: https://www.consultant.ru/document/cons_doc_LAW_144624.
Federal Law “On the procurement of goods, works, services by certain types of legal entities” dated July 18, 2011 N223-FZ (latest edition). URL: https://www.consultant.ru/document/cons_doc_LAW_116964.
On approval of the list of institutions for innovative development and other organizations providing state support for innovation activities, submitting information to the Unified Register of final recipients of state support for innovation activities. Order of the Government of the Russian Federation of December 16. 2022. No. 3999‑r. URL: https://www.garant.ru/products/ipo/prime/doc/405866143/#1000.
On the state guarantee for projects of the “project financing factory” Order of the Government of the Russian Federation of August 7, 2018 No. 1647‑r. URL: http://government.ru/docs/32828.
On the state guarantee for bond loans raised by a specialized project finance company. Decree of the Government of the Russian Federation of June 6, 2018 No. 654. URL: http://government.ru/docs/32828.
World market for synthetic diamonds. URL: https://rough-polished.expert/ru/news/109396.
Diamond cluster of the Russian Federation. https://diamondcluster.ru.
About the author
Baboshin Konstantin Igorevich, Ph.D., MBA degree, deputy director general for strategy and investments in Frezart LLC, Moscow, Russia.
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