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Mr. Paolo Anselmo President of the Italian Network of ...

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  • KEY WORDS: Informal risk capital (business angel): private individuals investing part of their personal assets in businesses and contributing their managerial skills and experience Business Angels Networks (BANs): regional platforms that match business angels with businessmen.
  • In Europe Business Finance is dominated by major Banks In Europe Finance provided to entrepreneurs is predominantly debt finance One of the major challenge confronting SMEs (which make up for 98% of enterprises in Europe) is getting access to financial recourses , particularly at their seed, start-up, and growth phases – not least as: they are often considered as a high risk investment , Debt finance usually requires some form of security Banks look for collateral (intangible assets are not security) with potentially low returns which only materialize in the medium to long term . In a changing financial environment and to some extend due to the new rating culture , banks may be reluctant to provide credit to what perceive as their riskiest clients , potentially providing insufficient profit margins – an attitude which leads to high transactions costs for SMEs .
  • Adequate funding provision for each specialised fund or instrument or tools ( critical mass is a key factor ) Availability of professional managers Mechanism to reduce due diligence costs (they are high and almost identical regardless the investment size) Market liquidity - Exit route are sometimes scarce  no reinvestment opportunity for investor Networking and partnership Availability of private equity (formal & Informal) which is capable of maximising the leverage potential of public funds.
  • DON’T FORGET THE ROLE OF THE PUBLIC AIDS
  • The financial approach
  • The importance of the public approach in the R&D phase The importance of the role of industry
  • THE POTENTIAL OF BA IN ITALY: HNWI – world: 8.300.000 (7.700.000) HNWI – USA: 2.700.000 (2.500.000) HNWI – Europe: 2.600.000 (2.500.000) HNWI – Italy: 195.000 (188.000) High Net Worth Individual – more than 1.000.000 $ (building excluded) Source World Wealth Report 2005 – Capgemini & Merrill Lynch (2004 versus 2003) The model of BA in Italy – in the search of the angel
  • A BA is a manager? YES – He does things in the right way A BA is an entrepreneur? YES – He does the right things BAs are not searching for an occupation or a career BAs tend to stick to their own sector The sympathy for the project & its founder is always vital
  • RETURN ON INVESTMENT FOR THE BA The main findings of a study conducted on UK angels in 1998/1999 by Professor Colin Mason from the Hunter Centre of Entrepreneurship in Strathclyde are: 34% of investments involved total loss 6% involved partial loss 8% broke even 7% had a return of under 10% 7% had a return of 10-24% 13% had a return of 25-49% 25% had a return of over 50%
  • Concerning the business model
  • Concerning the team
  • The context of reference is the science based enterprise or the knowledge based enterprise
  • INFORMATIVE ASYMMETRIES IN THE EVALUATION OF THE PROJECT The participation to risk capital presupposes the appraisal of the entrepreneurial plan, to the aim to consider the validity of it, that means: The economic-financial feasibility The expected earning (dividends) for the time of the operation. The expected capital gain at the moment of cession of the acquired participation The informative asymmetries between investors and entrepreneurs (or people bringing an entrepreneurial idea) makes that investors have to take investment decisions with higher uncertainty, not knowing all information of the entrepreneur (risk of ADVERSE SELECTION). On the other side entrepreneurs may advantage themselves of this asymmetry in order to pursue opportunistic scopes (MORAL HAZARD). A correct economical-financial information increases the visibility of the company and increases the credibility of the management. In the start-ups the retrospective economical-financial information (balance sheets and relative financial analyses ) is not properly reliable. Furthermore, following international book keeping principles , R & D costs incurred are completely charged to the exercise of temporal competence . It is easy therefore to under evaluate earnings of the first exercises and to over evaluate the exercises of entrance to regimen. This amplifies the Possibility of “OPPORTUNISMO” of the entrepreneurs. The reliability of the entrepreneurial plan, therefore, has to be based on the evaluation / screening of the business plan, on the credibility of economical-financial simulations of the plans and of the future programs. * These plans and programs, as they are based on forecasts, may be objectively evaluated only ex-post. ** Even the business plan is not enough to evaluate the quality / goodness of the project . *** It’s really important the trustiness of all the people involved in the project.
  • The reputation of the enterprise represents the fundamental variable also for the researchers and for the technologists who mean to join to the entrepreneurial initiative. Beyond to the economic feasibility of the plan and the competitive potentialities of the enterprise, the scientific feasibility of the plan and its attractively assume a particular importance. The attractive ability is fundamental in order to acquire financial resources!!! The ability to manage the highest attitudes / elite attitudes facilitates the creation processes and the spread process of the organizational knowledge that facilitates the most critics phases in the business development.

Transcript

  • 1. International Training Course on “Business Start-up and Access to Finance for Small and Medium-Sized Enterprises (SMEs) and New Technology Based Firms” jointly organized by the International Network for Small and Medium-Sized Enterprises (INSME Association) and UNIDO ITPO Italy and UNIDO ITPO Bahrain – ARCEIT Session 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
  • 2. FINANCING OF A N.T.B.F.
    • DEBTS
    • PUBLIC FINANCING
    • VENTURE CAPITAL:
          • Formal Venture Capital
          • Informal Venture Capital (business angels)
  • 3. FINANCIAL SUPPLY CHAIN Banks Guaranties Leasing Factoring Infrastructure: business angels networks, incubators, etc. Advice: investment readiness program, tutorship Expertise: professional fund managers Own resources FFF VC Loans on trust Pre-seed Loans for investors Reimbursable advance payments IPO BA Corporate Venturing Seed capital FFF : Family, Friends, Fools BA : Business angels VC : Venture capital IPO : Initial Public Offering Grants Micro-credits Other public support Prerequisites Tools
  • 4. THE ENTERPRISE FINANCING PROCESS IN THE BUSINESS LIFECYCLE Pre-Start Existence Survival Success Take-off Maturity FUNDING STAGE LIFE CYCLE STAGE Proof of Concept Business angels Sustained Growth Early Growth Start-up Seed
  • 5. THE ENTERPRISE FINANCING PROCESS CAPITAL NEEDS TIME SEED START-UP EARLY GROWTH SUSTAINED GROWTH HIGH RISK LOW RISK Friends, Family, Fools Business Angels Formal Venture Capital IPO GROWTH Public aids
  • 6. THE ENTERPRISE FINANCING PROCESS Idea Start-Up Market introduction Growth Maturity Innovation Seed Capital Funds and Public funding Time Efforts made by financiers Risk Cash flow Transfer Private Investors and Business Angels Corporate Fund and Venture Capital Commercial and Savings Banks
  • 7. THE ENTERPRISE FINANCING PROCESS R&D Start-up Early growth Accelerating growth Sustaining growth Maturity growth Proof of Concept Funding Seed Corn First Round Second Round Development Capital Replacement Capital MBO / MBI Development Capital Founders, family and friends Public Sector Business angels Venture capital funds Corporate venturing Public listing / IPO Source of Funding Type of Funding Stage in Cycle
  • 8. VENTURE CAPITAL (formal & informal)
    • Institutional operators (formal venture capital)
        • Private subjects
        • Banks
        • Insurance
        • Corporate venture capital
    • Non-institutional operators (informal venture capital)
        • Business Angels
  • 9. 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)
  • 10. BUSINESS ANGEL (BA)
    • 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 (50K–250K 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
    Attitudes, behaviour and characteristics:
  • 11. 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
  • 12. ANGEL’S – success stories
  • 13. ANGEL STRATEGY (I)
    • 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
    • Company’s growth should expected to be higher than market growth
    • Increase of market share against competitors
    • Superiority regarding competitors
    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):
  • 14. 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
  • 15. 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?
  • 16. ANGEL DUE DILIGENCE PROCESS Economy / Finance Cash forecast Finance activities Cost estimate Budget Organization Recruitment Board Network of service suppliers Office Market Marketing Sales PR Competitors IPR Technology Technology development Product development Process development Product supply Deliveries
  • 17. 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
  • 18. ROLE OF THE SCIENTIFIC COMMUNITY
    • (+) the KNOWLEDGE WORKERS “attracted”, why?
        • opportunity to increase technical competences
        • opportunity to enrich one’s CV
        • to increase the visibility in one’s 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)
  • 19. 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.
  • 20. 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)
  • 21. 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
  • 22. PRIORITIES FOR EQUITY PROVIDERS
    • Business plan credibility
    • Business plan with patent technology
    • Track record (over previous years)
    • Ability to grow fast and deliver quick ROI
    • Management team quality
    Venture capital and Financial corporate venturing
    • Meeting or matching of individual entrepreneurs with the angel
    • Atmosphere of trust between individuals
    • Credible business plan in the eyes of the angel
    • Good management
    • Market knowledge of the entrepreneur
    • ………
    • Availability of exit route
    • Return on investment (capital gain)
    • …………
    • Fiscal incentives (if existing)
    Business angels or informal investors Eligibility Criteria Equity providers
  • 23. FORMAL AND INFORMAL EQUITY PROVIDERS * Source: van Osnabrugge, 1998, p.2
  • 24. 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
  • 25. 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
  • 26. 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
  • 27. 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
  • 28. 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
  • 29. 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 BAN’s develop services that the private sector can not provide or is not interested in providing to the market
  • 30. 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
  • 31. 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
  • 32. BAN – THE NETWORKS (II) MATCHING BY THE BAN Entrepreneur Business Angel Contact of BAN BP evaluation and validation Drafting of BP summary Investment readiness programme Preparation of a presentation Identification Training Identification of investment priorities BA added to database Participation in investment forum/club Confronting offer & demand Circulation of Business plan MATCHING Leverage funding -co-funding -bank loans
  • 33. 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
  • 34. BAN – THE NETWORK Thank you for listening! Venture Capital, Business Angels and Banks Network of Intermediaries and Universities Universities, Research Centers and technology companies Professional Services and Business Support Organizations BAN
  • 35. BAN by country Source: EBAN statistics on Business Angels Networks (national and regional)
  • 36. 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
  • 37. 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
  • 38. Thanks for your attention Ing. Paolo ANSELMO IBAN – Italian Business Angels Networks e-mail: [email_address] www.iban.it www.eban.org