Thermi: innovative private high-tech incubator

Thessaloniki, Greece

SYNTHESIS

The Thermi Business Incubator1 was established in April 2004 with the objective to support the establishment of fast growing start-up business ventures and new small firms focused on exploiting innovative know-how and research results with potential market value. The Incubator now hosts 33 firms from various high technology or innovative sectors (e.g. life sciences, information and communication technologies, environmental technologies, energy, etc.). The incubator has invested in 10 of the 33 companies, five of which were at start-up stage and received investments of €4.2m; and another five were at an early stage with a total investment of €2.1m. The experience has demonstrated that private business incubators can be self-sustainable and profitable, something that is not self-evident based on incubator experience in Greece and even elsewhere in Europe.

Public funding made it possible to provide innovative business opportunities to private investors with a reduced investment risk and create opportunities for profit generation through the creation of its own investment fund. The incubator was set up by professional investors, already involved in venture capital financing and innovation investments, with additional financial support from the European Regional Development Fund and the Greek Government through the ELEFTHO programme2. It has a €14.5m budget, of which €7.25m is private contribution, €5.1m came from the ERDF and €2.2m from national funding. ELEFTHO’s objective is to provide incentives for establishment and development of science and technology parks and technology business incubators to support creation of innovative and knowledge intensive enterprises. The ultimate objective is to tackle Greece’s weakness in the generation of new high value added enterprises and ability to compete in international markets.

In addition to the provision of office space, back office services and general purpose installations (conference and meeting rooms, video conference, multimedia rooms, library, computer rooms, restaurant, etc.), the Thermi Business Incubator offers value added services (e.g. technical audit, patenting advice, etc.); funding through a mix of venture capital and loans. Every incubated company is eligible for funding from the Thermi Business Incubator of up to €2,000,000. Networking support for co-operation with universities, technology institutions, etc. is also provided.

The success of the incubator was substantially increased by the existence of an investment fund, which provides the incubator with a long-term source of profits based on the investments made. Moreover, the ability to exploit partners’ know-how, experience and skills in the creation and expansion of new innovative ventures proved of key relevance, particularly in niche markets providing significant future returns on their investments.

Furthermore, the incubator is located in proximity to major scientific and technical facilities, which facilitates provision of high-level services. The Thermi Business Incubator has created a strong network of highly experienced associates from the business world

1 http://www.thermokoitida.gr/ 2 http://www.gsrt.gr/default.asp?V_ITEM_ID=1075

1 allowing sharing their know-how and creating new ideas and investment possibilities. Thermi’s success is also closely linked to the competence of the professionals employed who combine business acumen with scientific and technical understanding and a hands-on management approach in relation to its tenant. This enables the staff to understand better the needs and nature of running an incubator and to offer customised support and problem solving services.

By mid-2007, the incubator has established a continuous and steady flow of income in the form of payments from tenants for the services offered and rents. Secondly, the incubator benefits from the capital returns resulting from exits from equity investments made by Thermi. It is clear that the incubator has all the characteristics necessary to become a sustainable venture without the need for further ERDF financial support.

Background information

Country: Greece Region: Thessaloniki Project title: Thermi S.A. Business Incubator

Key words: support for enterprises: start up, spin off, incubators; business advisory services; innovation financial engineering

Duration of project: January 2004 – January 2007

Funding: Total budget €14,500,000 ERDF contribution €5,075,000 National budget €2,175,000 Private contribution €7,250,000

ERDF Objective: Objective 1

2 1. PROJECT DESCRIPTION

The Thermi Business Incubator (Thermi) was established in April 2004 through the support of the ELEFTHO programme, which is administered by the General Secretariat of Research and Technology (GSRT) of the Greek Ministry of Development. The aim of the ELEFTHO Programme is to provide incentives for the establishment and development of science and technology parks and technology business incubators in order to support creation of innovative and knowledge intensive enterprises and address Greece’s weaknesses in the generation of new high value added enterprises capable to compete in the international markets.

The purpose of the Thermi Business Incubator is to support start-ups and new small and medium sized enterprises (SMEs), exploit innovative commercial know-how and to serve as a vehicle for the transfer of research results from research institutes, universities, private research and development (R&D) departments and individuals, to market.

Thermi is located in Thessaloniki, in a broader area called the Innovation Zone and very close to the Centre for Research and Technology Hellas3 (one of the most active research centres in Greece) and the Thessaloniki Technology Park4. It has a total budget of €14.5m of which 50% (€7.25m) was raised by private investors in the form of share capital investment, the balance coming from the ELEFTHO programme. The budget was used to build the incubator’s premises (6,000 m²), finance fixed assets (electronic equipment, furniture, etc.), finance operational costs (personnel, marketing, overheads, etc.) for three years, and create a small investment fund of €6.33m for equity participation in a number of its start-ups.

Thermi offers a wide range of services to its start-ups aiming to support their market development and enable successful “graduation” including: - leasing office space to innovative enterprises; - business advisory services: business planning and business plan monitoring, benchmarking, technical audit, financial consulting, commercial output reports, training, standards advice, informatics, public relations, advertising, legal advice, patenting advice; - networking: links with universities, technology institutions, research parks, chambers of commerce, industrial federations and associations; - back office services: secretariat, call centre, Internet, accounting, publications; - general purpose installations: conference and meeting rooms, video conference multimedia rooms, library, computer rooms, restaurant.

The main beneficiaries of the project are the incubator’s shareholders and the SMEs hosted by the incubator. Other beneficiaries are researchers and academics applying for funds to commercially exploit their research results; the region’s SMEs looking for funding and specialised services in order to expand their activities; and the wider region of Thessaloniki which aims to become a more competitive economic environment.

During its three years of operation, Thermi has fully exploited its premises, providing innovative SMEs with office space, attracting successful Greek scientists from abroad to

3 http://www.certh.gr/root.en.aspx 4 http://www.thestep.gr

3 set up innovative business ventures in Greece, creating international synergies for the hosted SMEs and directly investing funds in newly established companies, committing its entire budget of €6.33m to share capital investments.

Thermi hosts 33 SMEs from various sectors including: medical technologies, pharmaceutics, biotechnology (seven companies); software development for innovative applications (five companies); mechanical & electrical hardware, process systems (seven companies); telemetry, telematics, wireless data transfer (six companies); innovative internet services development (four companies); environment technologies (one company); energy (two companies); and agrotechnology (one company).

The incubator has invested in 10 of the 33 companies, five of which were at start-up stage (€4.2m) and another five at an early development stage (€2.13m). The incubator’s management team has received 350 innovative proposals and business plans. The team assessed approximately 200 proposals and proceeded to a full technological and financial evaluation for approximately 80 proposals.

Thermi has created a space in which companies have access to high value added services offered by experienced professionals (e.g. business training, improvement of management skills, business networking, etc.), which should allow them to become more efficient, competitive and secure in their pursuit of business excellence, growth and profit.

The likely impact of the project is twofold. Firstly, it is expected that an important innovation “pole” will emerge in Central Macedonia, which will attract research teams and innovative SMEs and contribute to establishing spin-off and spin-out companies. Secondly, substantial assistance will be offered for the development of innovation, entrepreneurship, the creation of employment opportunities for high skilled professionals and the economic rejuvenation of the region following the focus on innovative high-tech business ventures.

In Greece, the European Regional Development Fund (ERDF) has been a main contributor to funding innovation policy, providing up to 75% of public funds to many projects. In the absence of alternative public financial resources, the ERDF is the cornerstone of innovation project funding. As a result of the ERDF’s involvement, the risks for private investors are substantially reduced making investments such as Thermi more attractive and feasible. The ELEFTHO programme subsidised 50% of the project’s total budget needs. This subsidy included the capital required for the initial establishment and operation of Thermi, i.e. development of the premises and appropriate infrastructure, day-to-day operating expenses, availability of advisors on innovation and business plans (including technical, legal, organisational and financial advice) and the development of a small seed fund to support the creation and development of newly established innovative business ventures.

The ERDF’s support has produced important added value regarding: 1) creation of a more favourable environment for innovative activities in the Greek market, 2) boosting entrepreneurship through financial support for the creation of innovative and risky high- tech business ventures, 3) contributing to the exploitation of research results in association with other community support measures (e.g. the EU's Research Framework Programmes5) and 4) creating new employment opportunities.

5 http://cordis.europa.eu/fp7/home_en.html

4 2. POLITICAL AND STRATEGIC CONTEXT

Greece is facing considerable challenge regarding the competitiveness of its business environment. The economy has followed predominantly a low cost business strategy, which does not produce required long-term results. In addition, globalisation and presence of multinationals have increased the competition.

It is believed that country’s competitive advantage can be reinforced through the creation of highly innovative, technology-focused business ventures. This is a challenge, however, as the SME sector is not mature enough to promote new business based on innovation and technology. Supporting new and young innovative companies also poses a high risk for local risk-averse capital owners (i.e. banking institutions, venture capitalists, etc.).

In this context, the Greek government aimed to develop a new approach to innovation policy and to stimulate a private investment environment. On one hand, evaluation reports argued that Greece was weak in terms of creation of innovative business ventures and was experiencing serious difficulties in technology transfer. The Greek government was anxious to find ways to stimulate innovation and deliver on the Lisbon objectives6.

On the other hand, Greek venture capital and private equity investors have been active only for a few years and were not sufficiently mature to correctly evaluate risks and opportunities presented by business proposals. The majority of venture capital and private equity firms have been established by large banking organisations and they have inherited banking culture of credit analysis and risk. All these factors have resulted in a risk-averse investment environment and predominance of very selective strategies regarding the assessment of new business ventures.

It is also important to point out that innovation and technology are not parts of the business structure of Greek SME sector. The majority of firms in this sector are micro-enterprises, established mainly out of necessity and their primary intention was not exploiting specific market opportunities. Furthermore, most of these companies are involved in more traditional sectors of production and services.

Understanding that successful innovation is based on good research and private investment policies - a combination that generates new types of business ventures and entrepreneurs - certain measures were designed and implemented through the ERDF co-funded programmes for the 2000-2006 period7. One of these measures was the ELEFTHO Programme to support business incubators and technology parks. The programme acts as a safety net for private investors that have already, rather cautiously, invested in innovative SMEs and allows them to feel more confident about such investments as well as to increase them on a more structured, regular and professional basis.

Within this context, Thermi has created environment for innovative business ventures that supports their growth and provides them with seed and start up funding, neither of which is easy to find in the Greek financial market. It also provides services to enable successful competition in the local and European markets to ensure sustainability and profitability of these new firms.

6 http://ec.europa.eu/growthandjobs/index_en.htm 7 http://www.3kps.gr/en_2000-2006.htm

5 3. IMPLEMENTATION

3.1. Project design and planning For many years, Thermi’s shareholders have been involved in investments focusing on highly innovative business ventures and support in favour of research and technological system in the Thessaloniki region, and indeed Greece. This activity was spontaneous and involved mostly investing. This experience has shown that in order to make new venture a success investors should also offer a variety of value added services designed to deliver the desired final results.

The main risks of embarking on such a venture were the same as all private companies and private investors face, that is how to make the business profitable and sustainable and how to have a continuous flow of potential deals. There are four ways to tackle this risk. Firstly, utilisation of the ELEFTHO programme minimises the risk by subsidising 50% of all capital investments, operational expenses and creation of an investment fund. Secondly, the existence of complementary programmes, such as PRAXE Phase A8, creates a number of opportunities for the creation of high technology innovative ventures, which attracts companies to the programme. Thirdly, although the creation of an investment fund is not obligatory, the project partners decided to make provision for the creation of such fund with the result that the investments made to the selected projects would ensure the long- term sustainability and, most importantly, profitability of the incubator through the future realisation of these investments. Finally, the partners decided to construct their own premises. In case the project was not successful, the value of the building would at least secure their invested capital.

All of these factors acted as incentives for the incubator’s current shareholders to cooperate and prepare a proposal for the establishment of a high technology business incubator in Thessaloniki. The proposal’s evaluation by the GSRT, which administers the ELEFTHO programme, was positive. In April 2004 the incubator was established and work began immediately on constructing premises and infrastructure. At the same time, the Thermi management team was preparing the portfolio of services to be offered to the hosted companies and putting into action the general development strategy of the incubator. In parallel, the shareholders began to search for appropriate professionals to be involved in running the project.

This first phase of the project took approximately one year and at the beginning of 2005, the first companies were installed in the incubator’s premises either as simple tenants or as start-ups financially and operationally supported by Thermi.

3.2. Management, monitoring and evaluation system Although Thermi is a private company and the shareholders select its management, specifications and requirements of the ELEFTHO Programme, more or less, dictate its monitoring and evaluation system. The cooperation between Thermi as a privately owned company and ELEFTHO’s supervising committee appointed by the public authorities has not been problematic. The project partners also took into consideration requirements of the programme and the requests of the public authority responsible for its implementation from the design stage of the project.

8 http://www.gsrt.gr/default.asp?V_ITEM_ID=1064

6

Thermi’s management system is a very straightforward. It is a simple pyramidal structure with a board of directors, management team and analysts. The structure ensures flexibility of operations, most importantly in decision-making procedures. However, the most important aspect of the incubator’s management system is the hands-on approach related to the profitable development of the companies hosted by the incubator. This system includes regular meetings with the board of directors of the companies in which the incubator has invested and weekly meetings with the other incubator tenants. The aim of these meetings is to create an environment of constant information flow, establishment of cooperation and development proposals and strategies, networking and development of internal synergies, and finally, the offer of general support services.

Monitoring and evaluation systems applied to Thermi follow the very strict timetable of the project. The different costs and expenses financed by ELEFTHO have to be accounted for and monitored by the management authority of the programme. The project’s monitoring system, a vital part of the incubator’s smooth operations, is mainly structured around the ELEFTHO programme’s requirements and includes submitting regular reports on the physical as well as the financial evolution of the project. The incubator’s management team identified the need for a close watch on the activities of the newly created business ventures in order to ensure their success and the success of incubator itself. This process has helped in anticipating potential problems and providing solutions where necessary. Thus, the incubator has, to some extent, created its own quality system.

Monthly reports that are requirement of the monitoring system must be produced for a period of three years. This reporting was directly requested by the programme management authority along with reports on each venture for internal use by the management team. These reports are vital for documenting innovativeness of individual project-business ventures, their market development, their general progress, etc.

As for the monitoring and evaluation system, the incubator complies with the programme’s instructions. Thermi has undergone three annual audits by the GSRT, which evaluated the physical and financial progress of the project. In addition, Thermi’s management team has developed an internal evaluation system for its companies, which includes quarterly reports and weekly meetings.

3.3. Governance: partnership and leadership Thermi’s structure includes four shareholders: - 45% of the share capital belongs to a Greek industrialist and business angel located in northern Greece who has 25 years of entrepreneurial experience in the region. - 40% is owned by a Greek holding company listed on the Athens Stock exchange with a long history in entrepreneurial activity. Its strategic objective is development of strong holding company with participation in other powerful companies, capable of generating added value via a network of financial, organizational and brokerage advisory services. Currently its portfolio includes seven high profile investments in the financial, insurance, communications, health care, business consulting, construction and commercial sectors. - 10% of the share capital is owned by a Greek banking organisation with a strong investment focus addressed towards innovative business ventures.

7 - 5% is owned by a Greek investment financial organisation, holding group with investments in banking and in wider financial services sector, with a solid track record of investment in innovative and high technology based business ventures.

The main factor behind the development of Thermi is the partners’ desire to enter the new, promising and highly active innovative entrepreneurship sector in Greece. The possibility of funding from the ELEFTHO, which minimised the partners’ risk substantially, was another incentive. They were also attracted by the possibility of creating a high technology investment hub and playing an important role in the economic development of the region by encouraging the establishment of competitive and innovative SMEs with European profiles.

The partners’ responsibilities were determined based on their level of investment and experience. They had another key informal role to create and expand existing business networks with a view to supporting future start-ups as well as their own business activity. As the profitability of the incubator is linked to the ratio of successful ventures, the partners are actively involved in promotion of the new businesses. Thermi cooperates closely with innovation transfer and business actors in the region of Central Macedonia, which gives it access to the information and knowledge regarding local market opportunities.

3.4. Innovative elements and novel approaches to implementation Within the economic and policy context of Greece, the business incubation concept itself is an innovative way of doing business. It was first introduced ten years ago, but initially did not produce much success. However, in the last five years, it has begun to grow, mainly because of the ELEFTHO Programme and the fact that the Greek entrepreneurial environment has matured sufficiently to enable the implementation of such projects.

International experience has shown that business incubation activity is not usually profitable. Hence the majority of business incubators worldwide are in part publicly supported. The fact that Thermi is a privately owned business incubator can be considered a key innovative element (the private ownership of Thermi was one of the main requirements of the ELEFTHO programme). It is important to note that this is supported by another innovative element, i.e. the availability of funds for investing in incubatees likely to produce high investment returns and thus transforming the incubator into a self- sustainable and profitable business venture. This element is innovative because the investment procedure follows all the practices of a small venture capital fund. The fund invests money in new ventures in the form of share capital participation for a particular time period with an aim of developing them and increasing their market value. The profits are realised by selling shares to other interested investors. This is not a common practice in the business incubator industry, which mainly focuses on providing office space and services to help new companies to grow up to a certain level.

An additional innovative element is the informal role of the partners in creating networks to provide the incubator with various options for realising investments made and thereby becoming profitable. Finally, services offered to the companies are developmental in nature and aim at creating higher financial value for investors, rather than being a simple source of income covering the incubator’s day-to-day operational needs.

8

3.5. Key implementation obstacles and problem-solving practices The implementation of the project did not pose any obstacles that could not be solved by the management team. However, in order to make the project efficient and feasible, it was necessary to resolve certain aspects.

Completion of the premises and necessary infrastructure Thermi owns a three storey well equipped building, which provides all necessary infrastructure for well-functioning company office spaces. Problems that arose were related to the fact that the construction took longer than expected. Furthermore, design of premises had to take into consideration requests by tenants for special facilities related to their activities such as areas set up as small laboratories. In order to proceed with construction some licences had to be obtained. These issues delayed start of the actual activities of the incubator. Thus, in future developments decisions regarding an incubator’s premises should take into account such elements that might cause delays. Partners involved in any similar venture should weigh up the advantages of constructing a building from scratch compared to buying, leasing or even renting an existing building and adapting it to the incubator’s needs.

Finding the necessary human capital It was extremely challenging for partners and the management team to find appropriate professionals to help in the incubator’s development. The individuals were expected to be able to evaluate highly innovative business proposals, to have technical and scientific skills to understand the added value of the new venture’s activities and to deal successfully with issues such as intellectual property rights, exploitation rights, etc. It was, therefore, necessary to find people who had three different fields of expertise and know-how: R&D, business development and investment. Thermi partners centred their staff search on the venture capital market, research institutions and universities, and personal contacts.

Supporting the incubator’s tenants The incubator concept is all about giving support and nurturing newly established business ventures in order to make them become competitive and self-sustainable in the open market. It is a concept that was not always clear to the incubator’s tenants. Thermi’s team had to demonstrate to them that they needed professional services offered to them in order to develop and become profitable. It was necessary to make them understand that incubator was not just a low rent well equipped office space. This was a demanding process. The focus was on changing the existing culture and offering highly professional and specialised know-how. These two aspects were combined with advantageous pricing compared to market levels and, most importantly, extensive informal training and coaching.

9 4. INNOVATION RESULTS

By 2007, the incubator hosted 33 innovative firms active in various sectors of the economy (i.e. life sciences, ICT, energy, etc.) employing in total over 250 professionals. The four shareholders in the incubator have so far funded ten newly established innovative SMEs to a total amount of approximately €6m. This has been invested through the investment fund created at the incubator. The companies invested in were five start-ups and five early stage ventures.

The incubator has designed its growth strategy and structured its activities in such a way that it will achieve sustainability and profitability. Working in a difficult context, Thermi has mobilised private investors to embrace and support the creation of innovative firms that incorporate the concept of high risk in their activities. It has shown that providing funding for seed, start-up and early stage business ventures can be attractive investment options.

Indirectly, Thermi is creating a network of market players assisting new ventures and young innovative companies hosted by the incubator in becoming successful in a highly competitive environment. It provides necessary exit options to enable realisation of already made investments. Thermi has created a steady flow income mechanism that is generated by the services offered to its tenants and which covers annual operating expenses.

5. SUSTAINABILITY AND TRANSFERABILITY

5.1. Sustainability Sustainability of the project is ensured in two ways. Firstly, the incubator has established a continuous and steady flow of income in the form of payments from tenants for the services offered and rents. Secondly, the incubator benefits from the capital returns resulting from exits from equity investments made by Thermi.

Furthermore, the incubator is working to ensure a continuous recycling of tenants through its networks in order to fully use its available office space. It is trying to raise and manage new investment funds that will increase its portfolio and hence its potential for new exits and investment returns. It is clear that the incubator has all the characteristics necessary to become a sustainable venture without the need for further ERDF financial support.

5.2. Transferability The combination of the usual incubator processes and the creation and utilisation of an investment fund created by the incubators themselves can develop into a good-practice idea for all business incubators in the EU. This approach could assist regions or countries that are characterised by poor access to funds for the SME sector, especially when these SMEs are focused on innovative high-risk activities and are at the seed, start-up or early stages. However, in countries with well-developed financial tools for creation of new innovative, and thus more risky businesses, the availability of an investment fund is not as important as services offered.

10 6. CONCLUSIONS: MAIN SUCCESS FACTORS

Support from public funds The incubator was established through the ELEFTHO programme and received 50% its budget in the form of a subsidy. This considerably minimised the underlying risks for investors and made it easier for them to engage in such an innovative project in Greece. It is an aspect that is highly valued by the Greek investors, who are both risk averse and unfamiliar with the management of such ventures.

Internal investment fund Another factor contributing to its success is the creation of the investment fund, a financial tool that considerably increased the possibility of the incubator being profitable and successful. Moreover, the existence of the investment fund allows the incubator’s partners to directly employ their know-how, expertise and skills (i.e. locating promising business opportunities, accurately evaluating the market potential of innovative business ideas, identifying needs of the tenants and providing solutions, creating essential networks, etc.) in creating and expanding innovative entrepreneurial ventures with high added value activities in niche markets, and thus increasing future returns on their investments.

Building local business networks The incubator’s partners have assumed that the important role of network creators is to ensure the development of a constant flow of business ventures and ideas and the availability of various exit options from the realised investments. This effort has resulted in strong network of associates such as the Innovation Relay Centre Praxi and the Association of Information Technology Companies of Northern Greece, institutions that are highly experienced in business innovation and provide not only know-how when needed, but also act as a source of potential deal flows for the incubator.

Proximity to a strong research base The location of the incubator is also a considerable attribute as it is close to a major pool of scientific and technical knowledge and resources (Centre for Research & Technology Hellas, Thessaloniki Technology Park, Thessaloniki Innovation Zone), which companies located in the incubator, through direct cooperation, can exploit in their search for business excellence and development.

Highly qualified staff and responsive management Thermi is employing perceptive business professionals with good expertise, who are able to understand both scientific and technical aspects of new business ventures and translate them into market and business language to assist in their successful development.

Finally, Thermi’s decision to adopt hands on management approach by being directly involved and assisting in the everyday management and development of the companies enabled the incubator to better understand their needs, offer them appropriate support and, most importantly, foresee potential problems and provide solutions.

11 PROJECT CONTACT DETAILS

Contact person

Name: Dr. John Agnantiaris Position: Investment Consultant Organisation: Thermi S.A.

Address: 9th klm Thessaloniki Thermi Str., 57001 Thessaloniki Greece

Telephone: +30 2311 999 999 Fax: +30 2311 999 997

Email: [email protected] Project’s website: http://www.thermokoitida.gr

The information contained in this case study is up to date as of: September 2007

This case study has been prepared by Nikos Maroulis in the framework of a study carried out by Technopolis Group on behalf of the European Commission. The contents and views expressed in this case study are those of the author(s) and do not necessarily reflect the opinions or policies of the European Commission.

12