International Training Course on Business Startup and Access to Finance for Small and MediumSized En

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International Training CourseonBusiness
Start-up and Access to Finance forSmall and
Medium-Sized Enterprises (SMEs) and
NewTechnology Based Firmsjointly organized
bythe International Network for Small and
Medium-Sized Enterprises(INSME
Association)andUNIDO ITPO Italy and UNIDO ITPO
Bahrain ARCEITSession 3 - The role of
informal risk capital industry for the set up and
growth of a New Technology Based Firm business
angels and their networks
Mr. Paolo Anselmo President of the Italian
Network of Business Angels (IBAN) Member of the
Executive Committee of the European Network of
Business Angels (EBAN) Member of the INSME
Association Board Rome December 1st, 2006
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FINANCING OF A N.T.B.F.

• DEBTS
• PUBLIC FINANCING
• VENTURE CAPITAL
• Formal Venture Capital
• Informal Venture Capital (business angels)

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FINANCIAL SUPPLY CHAIN
Banks Guaranties Leasing Factoring
Grants Micro-credits Other public support
Prerequisites

Own resources
FFF
VC
Loans on trust Pre-seed Loans for
investors Reimbursable advance payments
IPO
BA Corporate Venturing
Seed capital
Infrastructure business angels networks,
incubators, etc.
Advice investment readiness program, tutorship
Expertise professional fund managers
Tools
FFF Family, Friends, Fools BA Business
angels VC Venture capital IPO Initial Public
Offering
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THE ENTERPRISE FINANCING PROCESS IN THE BUSINESS
LIFECYCLE
FUNDING STAGE
Business angels
Pre-Start
Existence
Survival
Success
Take-off
Maturity
Proof of Concept
LIFE CYCLE STAGE
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THE ENTERPRISE FINANCING PROCESS
GROWTH
CAPITAL NEEDS
Public aids
IPO
HIGH RISK
Formal Venture Capital
Business Angels
LOW RISK
Friends, Family, Fools
TIME
SEED
START-UP
EARLY GROWTH
SUSTAINED GROWTH
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THE ENTERPRISE FINANCING PROCESS
Efforts made by financiers
Cash flow
Risk
Time
Innovation Seed Capital Funds and Public funding
Private Investors and Business Angels
Transfer
Idea
Start-Up
Market introduction
Growth
Maturity
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THE ENTERPRISE FINANCING PROCESS
RD
Start-up
Early growth
Accelerating growth
Sustaining growth
Maturity growth
Stage in Cycle
Proof of Concept Funding
Seed Corn
First Round
Second Round
Development Capital
Replacement Capital MBO / MBI Development Capital
Type of Funding
Public Sector
Founders, family and friends
Business angels
Source of Funding
Venture capital funds
Corporate venturing
Public listing / IPO
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VENTURE CAPITAL (formal informal)

• Institutional operators (formal venture capital)
• Private subjects
• Banks
• Insurance
• Corporate venture capital
• Non-institutional operators (informal venture
  capital)
• Business Angels

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BUSINESS ANGEL (BA) - definition
A Business Angel is a middle aged male with
reasonable net income, personal net worth,
previous start up experience, who makes one
investment a year, usually close to home or
office, prefers to invest in high technology and
manufacturing ventures with an expectation to
sell out in three to five years time. (Kelly and
Hay, 1996) Business angels (informal investors,
independent investors) are investors who provide
risk capital directly to new and growing
businesses in which they have no prior
connection.(Harrison and Mason, 1996)
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BUSINESS ANGEL (BA)
Attitudes, behaviour and characteristics

• male, rarely female
• successful experience as an entrepreneur or
  manager
• high net worth individual and / or sophisticated
  investor
• have a declared propensity to invest and to risk
  in a start-up firm
• invest their own money (50K250K euro) (part of
  their cash capital 20-30 )
• Seeking profit, but also fun (seeking minimum
  20 return)
• are willing to share their managerial skills and
  their enterprise background
• often invest in their region of residence
• make one investment a year
• prefer high-technology and manufacturing
• take a minor participation medium term
  investment
• are willing to wait for an exit for 3-5 years

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BUSINESS ANGEL- short profile

• Aged between 35 and 65 the older they are, the
  more they invest both in terms of the number of
  deals and in the amount
• Successful experience as an entrepreneur or
  manager
• Informal private investor with smart money
  (finance expertise or money management)
• Willing to share their managerial skills,
  specialist knowledge and networks
• Seeking profit, but also fun
• High net worth individual and / or Sophisticated
  investor
• BA activities are not new
• Origin of the expression USA

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ANGELS success stories
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ANGEL STRATEGY (I)
High-growth start-ups new businesses that are
likely to see sales grow to around 1M and
employment to between 10 and 20 people in early
years and export oriented. Key selection
criteria of risk capital investors (generally)

• New products or technological improved products
  in an existing market
• A product or service that can be taken to market
  without further development (i.e. past the
  initial concept stage)
• Creation of new markets
• Companys growth should expected to be higher
  than market growth
• Increase of market share against competitors
• Superiority regarding competitors

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ANGEL STRATEGY (II)

• High growth and highly ambitious management
  seeking an exit (flotation or trade sale) within
  3 to 5 years
• Significant commitment to venture already
  demonstrated by management, preferably cash
• Management prepared to discuss conversion of any
  existing loans to equity and ideally investing in
  this round
• Realistic pre-money valuation

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IS A COMPANY READY?

• Business plan?
• Stage of development of the company
• Type of investment?
• Valuation?
• Management team ready?
• Has the management team enough time and energy
  to raise funds?
• Is the team shaped to talk to investors?
• Does the company know where to go?

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ANGEL DUE DILIGENCE PROCESS

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THE IRREGULATITY OF THE INFORMATION AVAILABLE

• THE IMPORTANCE OF THE INFORMATION NEEDS OF THE
  INVESTORS IN THE EVALUATION OF THE PROJECT
• to evaluate the yield of the investment
• to reduce the risk of requests from opportunists
• WHAT AND HOW TO EVALUATE
• Economic and financial information
  (quantitative/consumptive)
• Business plan (quantitative/prognostic)
• Qualitative judgment of the confidence of the
  project

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ROLE OF THE SCIENTIFIC COMMUNITY

• () the KNOWLEDGE WORKERS attracted, why?
• opportunity to increase technical competences
• opportunity to enrich ones CV
• to increase the visibility in ones community
• access a global scientific network
• able management of eventual elitist attitude
• (-) the intrinsic mobility of KNOWLEDGE WORKERS
  (generation of a risk of unstable knowledge
  and/or cessation of know how to third parties)

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THE REPUTATION OF THE ENTERPRISE

• An extremely important resource in phase of start
  up in order to limit the environmental pressures
  and to attract the necessary resources
• How it is constructed
• Collaborated vertical agreements (University,
  enterprises)
• Relational systems and participation in networks
  (social capital)
• N.B. More social relations form an enterprise,
  the potential for the reputation and confidence
  should mature over time.

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LEGITIMIZATION STRATEGIES

• SEARCH FOR CONSENT - RELATIONAL CONTEXT (in order
  to increase the level aperture towards the
  outside world)
• Access to scientific networks (in order to
  acquire qualified human resources)
• Access to financial networks (to acquire
  financial resources)
• Access to business networks (in order to acquire
  managerial resources)
• STRATEGIES
• Passive attitude (patenting of research results)
• Active attitude (localization near innovation
  locations)
• Proactive attitude (communication of the
  scientific successes obtained)

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OBTAINING RISK CAPITAL

• Pros
• No cost of interest and no fixed repayment
  schedule
• Stronger financial position
• Reduced financial pressure
• Access to professional network and coaching

• Cons
• Loss of management / ownership control
• Request for strong financial discipline
• Influence on management and strategic decisions
• Exit route for investor to be prepared

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PRIORITIES FOR EQUITY PROVIDERS
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FORMAL AND INFORMAL EQUITY PROVIDERS
Source van Osnabrugge, 1998, p.2
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FORMAL AND INFORMAL EQUITY PROVIDERS

• VC
• Easy to find via directories
• Your request is only one among many hundred a VC
  receives
• Can often via syndication provide large
  investment
• Thorough and formal due diligence and investment
  process
• Exit route very important

• BA
• Difficult to find
• Request often strong personal involvement
• Limited amount to invest
• Investment decisions often quick and less formal
• Syndication more and more usual
• Exit route less in focus

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ASYMMETRY OF EXPECTATIONS investee

• Just give me the money and I will spend it
• Angel is the last resort
• Do the deal quickly
• I am the only one who understands this
• I should have a preferential rights to buy back
  the shares
• I should not be giving warranties, You should
  trust me
• I should always have the final say

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ASYMMETRY OF EXPECTATIONS investor

• I will always have the right of veto
• Do the deal slowly proper due diligence
• I do not understands this, so I need someone
  else who does
• I should be able to sell to anyone at the best
  price
• I should be getting warranties and disclosures
  with stiff penalties
• I should always have the final say

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EXIT STRATEGIES

• Over 3 years, starting with 10 companies
• 3 are OK
• 1 can be a star
• 3 are languishing
• 3 are died
• Exit or way out
• trade sale (competitors partners other BAs
  VCs)
• MBO MBI
• IPO
• total loss

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BAN THE NETWORKS (I)

• It is difficult for new companies to raise funds
  because they do not have the necessary guarantees
  and track record
• lack of mechanisms to access to finance
• Business angels and venture capital
  organisations have difficulties in finding good
  business plans
• insufficient pool of available investors
• Due Diligent costs are increasingly expensive
• absence of support for entrepreneurs
• Need for Business Angel Networks

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BAN THE NETWORKS (II)

Private or semi-public body whose aim is to match
entrepreneurs looking for equity with Business
Angels Business angels are an old tool
Business angels networks are new tools
(typically) The non profit BANs develop
services that the private sector can not provide
or is not interested in providing to the market
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BAN services provided

• Creating awareness of the Business Angel concept
• Business Plan training activity advising
  (legal, fiscal, etc.)
• Assistance in preparing and analyzing the BP
• Screening BP process before someone is listed
• Coaching the investees to present effectively
  investment ready companies
• Identification and recruitment of BAs
• Training activities for BAs
• Matching BAs and entrepreneurs an independent
  marketplace for investors and investees
• Opportunity to syndicate a deal
• Raising awareness and creating motivation to
  start businesses

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BAN assist the companies to

• Review business objectives, strategy and
  valuation
• Understand the finance options
• Make their business investor ready and
  attractive to founders
• Identify appropriate target investors
• Make the pitch
• Facilitate introductions and deliver
  presentations
• Guidance through legal and completion process
• Do the deal

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BAN THE NETWORKS (II)

MATCHING BY THE BAN
Entrepreneur
Business Angel

Contact of BAN
Identification
BP evaluation and validation
Training
Confronting offer demand
Identification of investment priorities
Drafting of BP summary
Circulation of Business plan
BA added to database
Investment readiness programme
MATCHING
Participation in investment forum/club
Preparation of a presentation
Leverage funding -co-funding -bank loans
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BAN critical points

• A large public awareness towards BAs and
  entrepreneurs
• Strong links with the investors community
  (Banks, VC, ...)
• Strong partnerships with local stakeholders and
  organisations
• A relevant business projects portfolio database
• A business plan evaluation quality control
  system (soft due diligence)
• no great unexpected events in the projects
• cost-coverage is absolutely needed for quite
  some time
• A BAN is a self sustainable organisation on the
  long run

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BAN THE NETWORK

Venture Capital, Business Angels and Banks
Network of Intermediaries and
Universities

BAN
Universities, Research Centers and technology
companies
Professional Services and Business Support
Organizations
Thank you for listening!
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BAN by country

Source EBAN statistics on Business Angels
Networks (national and regional)
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EBAN THE EUROPEAN DIMENSION

• Established in 1999 by EURADA and with the
  support of the European Commission
• Non-profit association 19 countries
  represented
• Encouraging the exchange of experience among
  business angels networks and encouraging best
  practice
• Promoting recognition of BANs
• Contributing to working out and carrying out
  local, regional and national programs of
  assistance to the creation and development of a
  positive environment for business angels
  activities.
• Lobbying at E. C. level

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Benchmarking Report Best No1-2003

• Raising Awareness of BA and BANs
• Collecting data from the BA market place
  regularly
• Creating a BA panel to discuss topical issues
  affecting the angel community
• Paying attention to the effects of taxation on BA
  activity
• Ensuring public financing of BAN operations
• Promoting high ethical standards of BANs

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Thanks for your attention
Ing. Paolo ANSELMO IBAN Italian Business
Angels Networks e-mail presidenza_at_iban.it www.
iban.it www.eban.org