Labor Markets Core Course 2013: Approaches to Access to Finance


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Labor Markets Core Course 2013: Approaches to Access to Finance

  1. 1. APPROACHES TO ACCESS TO FINANCEIsfandyar Z. KhanEurope and Central AsiaWorld
  2. 2. CONTENT Universe of SMEs The ABC of Government Intervention Various programs for support Key Takeaways
  3. 3. COMPANY RISK, CAPITAL REQUIREMENTS AND TYPES OFGOVERNMENT INTERVENTION3Companies who work with new products have a longer development horizon (hightech segment – like life sciences, clean tech and IT)Risk profile is high, not suitable for debt financingCompanies that have a short development timeline and may already have a productand/or the first customersRisk profile is low, can typically be suitable for debt financing,.
  4. 4. A TYPICAL MARKET FOR INNOVATIONFINANCEFinanceoptionsPRE-SEED SEED EXPANSIONSTART-UPIncubators, Accelerators, proof ofconcept, etc.Business angels, small regional funds, venture fundsGlobal funds
  5. 5. CONTENT Universe of SMEs The ABC of Government Intervention Various programs for support Key Takeaways
  6. 6. PUBLIC SECTOR INTERVENTIONSAPEXES AND OTHER WHOLESALE FUNDING FACILITIES•Prioritize the development of sustainable finance providers•Ensure the apex institution has a strong independent governance structure•Apply a funding policy based on clear selection criteria•Apply commercial (not subsidized) interest rates•Ensure the capacity to evolve and adapt its mission and products•Introduce flexible and market reactive disbursement plans•Ensure high quality operational management and staff skills6Preconditions for successful application of an apex model include:
  7. 7. PUBLIC SECTOR INTERVENTIONSPARTIAL CREDIT GUARANTEE SCHEMESCoverage ratios should ensure sufficientprotection against default riskFees should be risk-based and contributeto financial sustainabilityPayment rules should take into accounteffectiveness of collateral and insolvencyregimesPCGs can support the capacity (skills,systems, products) of banks to provide SMEfinanceEvaluation mechanism: to measureoutreach, additionally and sustainability.7SME BANKGuaranteeProgramLoan ApplicationLoan Disbursement,RepaymentAllocatesGuarantees basedon lowest %covered(biddingprocess)-Feevaries by FI, depending on loss (claim) rate-Loss rates (default) less than 2%-FIskeep responsibility for analysis and collectionExample:FOGAPE, Chile
  8. 8. PUBLIC SECTOR INTERVENTIONSSME CAPACITY, CREDITWORTHINESS• Capacity building should customize content for specific groups of entrepreneurs• Both public and private organizations have a role to play in capacity building• Donor support may be needed to ensure effective data and monitoringmechanisms in benchmarking and program evaluation8Capacity-building can improve SME management capacity, marketknowledge, expertise, and make SMEs more attractive to finance providersTurk Economici Bank (private)• Its capacity building support has resulted in a decrease in loan delinquency rates in its SMEportfolio, new client acquisition and greater customer loyalty.•The primary goal of training is to build SME competitiveness and strategic planning capabilities,helping SMEs to take a market-centric approach to their businesses, giving them the tools toidentify and respond to new opportunities for products and services.
  9. 9. REGULATORY AND SUPERVISORY FRAMEWORKSENABLING REGULATORY FRAMEWORKS FOR ALTERNATIVE SME FINANCE PRODUCTS: LEASING9 A legislative framework for leasing shouldClarify rights andresponsibilities ofthe parties to aleaseRemovecontradictionswithin theexistinglegislationCreate non-judicialrepossessionmechanismsEnsure tax rulesare clear andneutralClarify the rightsof lessors andlessees underbankruptcy.
  10. 10. FINANCIAL INFRASTRUCTURESECURED TRANSACTIONS10Develop simplelaws andregulations basedon best practiceprinciplesCreate unitarylegal ST systems,not fragmentedEnsure a broadscope of securedtransactions lawAllow all types ofassets to be used ascollateralSimplify thecreation of securityinterests inmovable propertyModernizemovable collateralregistriesEstablish clearpriority schemesfor claims oncollateral.
  11. 11. •Leads to principal-agent problems such as moral hazard,•Investors and banks are not able to correctly assess the differencesin risk adverse selection leads to “adverse selection”•lead to market imperfections and sub-optimal allocation ofcapitalARGUMENTS FOR GOVERNMENT INTERVENTIONAsymmetricinformation•Guarantee schemes have assumed a crucial role to help maintainthe flow of credit to SMEs and support the growth of thesecompanies•Avoid “dead weight” proportion of the loans which would havebee granted anyways and constant reassessmentCredit RationingExperiencebuildingExternalities• Completely or partially remove some of the cost of a “first-moverdisadvantage”•Focus on maximizing the spill-over effect•Ensure a high degree of residual of experience and knowledge. .• Socio-economic returns to society
  12. 12. ManagementteamsInvest incompaniesCompaniesgrowPositiveExitsGood trackrecordAble toraise newfunds12Wheel of fortune for viable and sustainableinnovation finance market….Promotinga positivespiral
  13. 13. ..need a right environment…A viable and sustainable long-term market for innovation finance and a proficientinvestment climate requires a strong interplay of a variety of factors: A healthy enabling environment often require: convincing regulatory framework and institutional set-up. contract enforcement, adequate intellectual property legislation regimes tax code promoting business R&D as well as entrepreneurs and investments. enforced limitations on institutional investors allocating capital to riskier assetclasses and capital requirements. Strong deal flow and commercialization of projects, promoting a strong pipeline ofhigh tech innovative start-ups A professional and well-functioning investor market often require: base of investors in the region that adequately address the needs of companies at thevarious developmental stages investors with local attachment, integrated with the innovation cycle as well ashaving a global network (syndication network) functioning as mentorship access to adequate financing to close finance gaps throughout a start-ups developmentprocess and be able to draw on (international) syndication partners. strong partnership between companies and investors.13
  14. 14. 14…...and a long term game plan• A viable exit-market often require:− Companies and investors require a viable exit market (exit refers to the process of aninvestor exiting the investment and thereby trades an illiquid asset (shares in a privatecompany) for a liquid asset (e.g. cash). Exits can mainly be pursued in two forms: initialpublic offering (IPO) or trade sale (merger/acquisition by a another company).− Successful exits can ensure the financing of the next generation of innovativecompanies as a positive track record is developed making more investors interested.Without positive exits the investment cycle can be impeded and in the long run it couldresult in the depletion of the eco-system.• These above-mentioned factors are prerequisites for a comprehensivedevelopment of a viable market for innovation finance.• In the short run, innovative SMEs often need to resort to governmentprograms or if possible foreign equity markets for financing.• When considering government intervention the entirety of the investmentcycle should be reflected.
  15. 15. CONTENT Universe of SMEs The ABC of Government Intervention Various programs for support Key Takeaways
  16. 16. 16JEREMIE - JOINT EUROPEAN RESOURCES FOR MICRO TO MEDIUMENTERPRISES•Offers EU Member States to use part of their EU Structural Funds to finance small andmedium-sized enterprises (SMEs)• equity, loans or guarantees, through a revolving Holding Fund acting as anumbrella fund.•The JEREMIE Holding Fund can provide to selected financial intermediaries. SME-focused financial instruments including guarantees, co-guarantees and counter-guarantees, equity guarantees, (micro) loans, export-credit insurance, securitization,venture capital, Business Angel Matching Funds and investments in TechnologyTransfer fundsFlexibility: Contributions from the Operational Programmes to the JEREMIEHolding Fund will be eligible for interim up-front payments by EU Structural Funds,Benefits of a portfolio approach: The Holding Fund will be able to re-allocatethe resources to one or more financial products in a flexible way, depending on the actualdemand over timeRecycling of funds: The Holding Fund is of a revolving nature, receivingrepayments from the financial intermediaries for further investments in SMEsLeverage: Engage the financial sector either at the Holding Fund level, withadditional capital from financial institutions, or at the level of financial instruments
  17. 17. 17
  18. 18. FINANCING SMES AT A REGIONAL LEVEL WITH JEREMIE-LANGUEDOC-ROUSSILLON (FRANCE) • POPULATION: 2.5 MILLIONS • GDP :€ 60.5 BILLIONMarket failures• Financing gaps for innovative businesses• Difficulties for financing standard growing SMEs – Tangible assets / equipment – Commercial development – Working capital18
  19. 19. 19MANUFACTURING SECTOR SMESMAS (Manufacturing Advisory Service) – UK• Highly skilled advisors• Experience of both shop floor working and management skills• Many services are free and supplemented by appropriate grant fundingManufacturing Extension Partnership (USA)• The nationwide network provides a variety of services, from innovation strategies toprocess improvements to green manufacturing• MEP field staff has over 1,300 technical experts –• For every one dollar of federal investment, the MEP generates nearly $20 in new salesgrowth and $20 in new client investment. This translates into $2.5 billion in new salesannually. For every $2,100 of federal investment, MEP creates or retains onemanufacturing job.19
  20. 20. DANISH GROWTH FUND The Danish Growth Fund has its own legal framework. Themission statement is as follows: “Promote innovation and new business solutions to secure agreater socioeconomic return”. Set-up as an evergreen-fund (recirculating capital) with acapital base of 0.5 bn USD (yet to be profitable)
  21. 21. SPECIFIC EQUITY INSTRUMENTSEMPLOYED Fund-of-funds: Leveraging private funds alongside a syndicate ofinstitutional investors: often cornerstone investor; first timeteams; leveraging institutional investors Funding closed-end funds (10 year + 2)• Direct Investments: Investing directly into early-stage companies with equityalongside business angels and other funds; often in areaswhere specialized funds are not focusing
  22. 22. LEVERAGING THE MARKET AS A FUND-OF-FUNDSDGFInstitutionalInvestorsPrivate managed fundsCOMPANIESOtherInvestorOtherInvestorOtherInvestorOtherInvestorOtherInvestorOtherInvestorOtherInvestor
  23. 23. MANAGEMENT SELECTIONIndirect funding:The board has hired a specialized fund-of-funds team.The team locate investment opportunities throughstandard investment proposals. Investment proposalsare presented to the board for their approval.Standard remuneration in the funds (2,5 % and acarry split).Direct funding:- Shadow fund established inside the DGF. Team hasinvestment requirements. Capped carry. Option tobecome a spin-out if they can raise private capital.
  24. 24. HIGH-TECH GRÜNDERFONDS – SEED INVESTOR IN HIGH-TECH START-UPS„Success factors of a public-private partnership”
  25. 25.  German economy generates huge tradesurplus with high-tech products German industries are leading in theworld economy (machine tools,automotive, medicine, chemicals, …) Long and successful tradition of smalland medium sized companies(„Mittelstand”)On one hand … … on the other hand Start-up industry under-developed inGermany: 16 seed investments 2004and 2005 by members of the GermanVC association Venture Capital industry rapidly declining/ escaping to later stages No start-up in DAX 30 since SAP But: Billions of government money spenton technology developmentThe challenge in 2004: Vastly underutilized potential
  26. 26.  Founded: 2005 Volume: 272 Mio. EUR Investors: German Government, KfW, BASF, Dt. Telekom, Siemens,Daimler, Robert Bosch, Carl Zeiss Planned duration: 6 years investment plus 7 years disinvestment period Focus: Innovative high-tech companies in the seed phase (start ofoperations < 12 months) Investment: 500.000 – 1.000.000 equity per companylead investor Support: Support through local coachesvalue add by High-Tech Gründerfonds teamHIGH-TECH GRÜNDERFONDS: KEY FACTS
  27. 27.  Closing of 186 investments1) / 226commitments Closing of 138 follow-on investments bythird parties2) External capital raised: >209 millionEuro Thereof: 71% private capital Eight exits, five profitableOperations Set-up of a high-number of workingpartnerships Impact on the early stage market onseveral levels (market share of 50% inthe Germany seed market) Number of “produced” paper millionaires:89 Set-up of high performance organization FunOther resultsMain results1) 4 in 2005, 52 in 2006, 40 in 2007, 42 in 2008, 34 in 2009, 14 in 20102) Various public and private investors
  28. 28.  Involvement of government representatives, experts withbackground of public financing and private investors Private contribution to the fund (17m, 6,3%) Strong understanding of the venture capital business model Systematic inclusion of relevant know-how (e.g. mistakes from thepast) „Independent“ management company that can focus on goals („nopolitical influence“) Right timing at the bottom of the marketSUCCESS FACTORS – STRATEGIC AND CONCEPTUAL
  29. 29.  Freedom to set up management company with few restrictions (nostrings to an existing organization) Set-up of a high-performance organization:- Consistent breakdown of company goals and variable pay on individual level- High recruiting standards- Fluctuation consistent with performance Significant freedom for investment managers- Laptops, mobile phone and mobile e-mail for everyone (2005)- no forms to allow job related travel- Very flexible work hours, no time sheet recording Strong effort to build a positive performance cultureSUCCESS FACTORS – OPERATIONAL
  30. 30. 32*Courtesy: Scott McIntyre, Phabric Development, mc@phabriq.comCROWDFUNDING*• Process of funding your projects by a multitude of people contributing a smallamount in order to attain a certain monetary goal:• Donation-based transactions: shared affinities, associations, charities• Reward-based transactions: pride, fame, access, premiums, pre-sale*• Debt-based security: time & interest-based microloans, student loans,lines of credit• Revenue-based security: usually a time-limited tie to income generated• Equity-based security*: stock, options, liquidity, transferability• Crowd Sourcing using social media:• Drive broader public awareness by offering friends, family and supporterstangible• Local and affinity/experience-based support from service professionals• Complementary companies & sales channel to gauge consumer interest
  31. 31. 33CROWDFUNDING HISTORY1600s: early book printers would fund via honorable mentions inside cover1885: Joseph Pulitzer finances the Statue of Liberty’s foundation usingCrowdfunding1930s: SEC restricts entrepreneurs from advertising stock offerings1990s: Internet revolution spawns Microfinancing, leading to institutionalCrowdfunding1997: Marillion UK band tour and album financed by fans2009: raises nearly $300million from 5 million people tobuy Pabst Blue Ribbon--SEC squashes deal, brand tycoon later purchases for$250million, validating Crowdfund valuation2012: $2.8billion Crowdfunding raised. Projected $6billion 2013 50% increase/yr.since 2009.• Portals growing from niche to general• Kickstarter, WeFunder, Believers Fund, Quirky, IndieGoGo,
  32. 32. 34ENABLING REGULATORY LANDSCAPESmall business investment bill (USA)• Legislation to help startup companies raise capital by reducing some federalregulations The legislation combines six smaller bills that change Securities and ExchangeCommission rules so small businesses can attract investors and go public with lessred tape and cost. It eases rules on advertising and permits startups to use theinternet and other social media to solicit a large number of small-scale investors.The centerpiece of the bill is a measure to reduce costs for companies seekingto go public by phasing in over five years SEC regulations that apply to“emerging growth companies.” That status would be in effect for companieswith annual gross revenue of less than $1 billion.The measure would remove SEC regulations preventing small businesses fromusing advertisements to solicit investors, raise from 500 to 2,000 the number ofshareholders a company or community bank can have before it must registerwith the SEC, and allow smaller companies to sell up to $50 million in shares,compared with $5 million now, without filing some SEC paperwork.
  33. 33. 35 Limited to accreditedinvestors Entities with at least $ 5m in assets Individuals with over $1million in assets or over$200K in annual income Does not allow generalsolicitation or massadvertisements Limits # of investors Requires registrationwith SEC and do an IPO Or qualify for exception Anyone can invest inCrowdfunding Token: Rewards, donations Equity Crowdfunding, when SECdefines parameters, loweraccreditation restriction areexpected Advertisements anywhere arepermitted No limits on # of shareholders Regulations balancing economicgrowth and investor protections CF portal/Intermediaries requiredto register and self regulate Strict background check anddisclosure for issuers and investors Limits to annual amountsraised/issued Limits to amountinvested/investorsCurrent Law Under JOBS Act
  34. 34. 36
  35. 35. 37Kickstarter: 60,000 plus projects launched, $260M raised, 44% success rateIndustry: 540 plus CF portal expected by year end, $ 2.8 B expected global fundsraised, $ 6 B mkt size expectedMap courtesy of
  36. 36. WHY CROWDFUNDING’S TIMING IS GOOD FOR ALL Unlocks Capital for Small Businesses and Spreads the Wealth• Mistrust of public stock exchanges cause people to save in banks at very low interest rates. Investorswill now be able to invest in small, local and friends’ businesses in addition to the traditional stockmarket, all while holding the power in their hands to affect growth directly.•Generates Broader Economic Prosperity, Not Just in Urban Centers• Because Crowdfund investing is done via the internet, entrepreneurs anywhere can get funding, notjust Silicon Valley and major metros.Levels Playing Field Against Socioeconomic Discrimination• Individuals/SMEs from wealthier backgrounds find it easier to raise funds than those in morechallenging circumstances. Now, anyone with a great concept and some initiative can find support fortheir dreams based on the merit of their ideas.Increases success rates for Small Businesses• Crowdfund investors are motivated supporters. Crowdfund investors with skin in the game have beenshown more willing to participate in business development and marketing. Reduces the failure rate ofsmall because the wider knowledge base and human network is an obvious advantage for a smallbusiness–particularly in the age of social media.• Existing Customers can become investors.• Existing Suppliers can become investors. Again, self-interest dictates that a supplier wants hisbuyers to remain solvent.38
  37. 37. CONTENT Universe of SMEs The ABC of Government Intervention Various programs for support Key takeaways
  38. 38. KEY TAKEAWAYSAgeAppropriateinterventionsFlexibleregulations toallow newmarketsMenu ofinstrumentsSMEs Each stage of companygrowth needs a tailoredsolution Well run professionalmanagement for anygovernment interventionprogram is a must &private sector leveraging Peer to Peer (p2p) lendingand crowd funding willchallenge currentregulation. Balancing act betweengrowth and investorprotection key
  39. 39. 41Thank You