Title: International Training Course on Business Startup and Access to Finance for Small and MediumSized En
1International 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
2FINANCING OF A N.T.B.F.
- DEBTS
- PUBLIC FINANCING
- VENTURE CAPITAL
- Formal Venture Capital
- Informal Venture Capital (business angels)
3FINANCIAL 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
4THE 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
5THE 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
6THE 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
7THE 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
8VENTURE CAPITAL (formal informal)
- Institutional operators (formal venture capital)
- Private subjects
- Banks
- Insurance
- Corporate venture capital
- Non-institutional operators (informal venture
capital) - Business Angels
9BUSINESS 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)
10BUSINESS 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
11BUSINESS 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
12ANGELS success stories
13ANGEL 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
14ANGEL 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
15IS 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?
16ANGEL DUE DILIGENCE PROCESS
17THE 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
18ROLE 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)
19THE 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.
20LEGITIMIZATION 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)
21OBTAINING 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
22PRIORITIES FOR EQUITY PROVIDERS
23FORMAL AND INFORMAL EQUITY PROVIDERS
Source van Osnabrugge, 1998, p.2
24FORMAL 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
25ASYMMETRY 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
26ASYMMETRY 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
27EXIT 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
28BAN 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
29BAN 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
30BAN 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
31BAN 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
32BAN 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
33BAN 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
34BAN 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!
35BAN by country
Source EBAN statistics on Business Angels
Networks (national and regional)
36EBAN 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
37Benchmarking 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
38Thanks for your attention
Ing. Paolo ANSELMO IBAN Italian Business
Angels Networks e-mail presidenza_at_iban.it www.
iban.it www.eban.org