Business Start-up and Access to Finance for SMEs and New Technology based firms The investment activity of Venture Capital...
Private Equity and Venture Capital Early-stage Development Change Venture Capital Private Equity
Private Equity in the financial system Companies <ul><li>Institutional Investors: </li></ul><ul><li>Pension Funds </li></u...
The offering of risk capital Time Amount of financial sources Business Angels Venture Capital   Private Equity Stock Excha...
Venture Capital <ul><ul><li>Specialised form of finance, organised in close-end funds supporting  new  entrepreneurial ini...
The role of Venture Capital in value creation <ul><ul><li>Venture capital does not only mean financing!  </li></ul></ul><u...
Venture Capital: transactions definition Seed Financing (testing) Start-up Financing Investment during the phase of testin...
Lessons from USA High tech sectors contributed for 1/3 to the GDP growth in USA At least 2 investments of success for ever...
<ul><ul><li>It is proven in many countries (the US, the UK and Israel for example) that venture capital has been the most ...
What a Venture Capital Fund is Management Company Advisor Investors pension funds, financial institutions, insurance compa...
<ul><li>Deal flow analysis (Reactive or pro-active) </li></ul><ul><li>Valuation </li></ul><ul><li>Due diligence </li></ul>...
INFORMATION GATHERING (B.P. + B.I.) PROJECT ASSESSMENT VALUATION & DEAL STRUCTURE T/S &  INVESTMENT  AGREEMENT INVESTMENT ...
Deal flow analysis: decision drivers DECISION  DRIVERS EXIT BUSINESS MODEL BUSINESS IDEA MANAGEMENT TEAM COMPETITION ARENA...
Decision drivers of investments: business plan BUSINESS  PLAN  <ul><ul><li>Executive summary </li></ul></ul><ul><ul><ul><l...
Decision drivers of investments:  competition  arena COMPETITION ARENA <ul><ul><li>Target market analysis </li></ul></ul><...
MANAGEMENT TEAM <ul><ul><li>Who is the ideal entrepreneur?  HE/SHE MUST BE : </li></ul></ul><ul><ul><ul><li>fast, “have vi...
BUSINESS MODEL BUSINESS IDEA Decision drivers of investments:  business idea and business model <ul><ul><li>Value of the i...
Valuation <ul><ul><li>Three stages: early stage investment, new rounds of financing, </li></ul></ul><ul><ul><li>divestment...
Due diligence <ul><li>Business due diligence </li></ul><ul><ul><li>Management </li></ul></ul><ul><ul><li>Does the IDEA wor...
Negotiation and investment execution  (1/2) <ul><li>TERM SHEET/INVESTMENT AGREEMENT </li></ul><ul><ul><li>“ Milestones” of...
Negotiation and investment execution  (2/2) <ul><li>NEGOTIATION </li></ul><ul><ul><li>Pre-money valuation and anti dilutio...
Follow-up: from start-up to company <ul><li>R ELATIONSHIP WITH THE ENTREPRENEUR </li></ul><ul><ul><li>Board and day by day...
Sonia Dehò Pino  Partecipazioni S.p.A. [email_address]
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  • business plan: Executive summary: il Team, l’azienda, analisi di mercato, analisi della concorrenza, prodotti e servizi offerti, marketing e vendite (Piano di marketing, Strategia di vendita, Canali distributivi e partners, Pricing, Piano di comunicazione), proiezioni economico finanziarie (financial summary, ricavi, fabbisogno finanziario, CE, SP, cash flow) competition arena: mercati ad elevato tasso di crescita/spazio nel mercato per nuove società management team: management team di successo con doti di leadership business idea: valore dell’innovazione/prodotto Business model: ritorno ai fundamentals (revenues, margine lordo, profitto), prospettive di un elevato ritorno finanziario Exit: IPO o trade sale
  • Pres_Deho_INSME-UNIDO_2006.ppt

    1. 1. Business Start-up and Access to Finance for SMEs and New Technology based firms The investment activity of Venture Capital funds: from deal flow to investment   Sonia Dehò INSME-UNIDO 30th November 2006
    2. 2. Private Equity and Venture Capital Early-stage Development Change Venture Capital Private Equity
    3. 3. Private Equity in the financial system Companies <ul><li>Institutional Investors: </li></ul><ul><li>Pension Funds </li></ul><ul><li>Insurance Comp. </li></ul><ul><li>Foundations </li></ul><ul><li>Pension Inst. </li></ul>Risk Capital Private Equity Stock Ex. Private Placement Loans Bonds Investment Banks “ Traditional” banks Debt Capital
    4. 4. The offering of risk capital Time Amount of financial sources Business Angels Venture Capital Private Equity Stock Exchange
    5. 5. Venture Capital <ul><ul><li>Specialised form of finance, organised in close-end funds supporting new entrepreneurial initiatives </li></ul></ul><ul><ul><li>Focused on investments in rapidly growing sectors, as like information technology and biotech </li></ul></ul><ul><ul><li>Take higher risks with the expectation of higher returns (“capital gains” through divestments) </li></ul></ul><ul><ul><li>Purchase equity securities (common stocks, preferred stocks, convertible loans) </li></ul></ul><ul><ul><li>Assist in the development of new products and services </li></ul></ul><ul><ul><li>Have a long-term orientation (3 to 7 years) </li></ul></ul><ul><ul><li>“ Create value” through active participation </li></ul></ul>
    6. 6. The role of Venture Capital in value creation <ul><ul><li>Venture capital does not only mean financing! </li></ul></ul><ul><ul><li>Support in development strategy definition </li></ul></ul><ul><ul><li>Financial know-how </li></ul></ul><ul><ul><li>Network of relationships in the industrial and financial sectors </li></ul></ul><ul><ul><li>Contribution to a professional and objective management of the business </li></ul></ul><ul><ul><li>Improvement of the entrepreneur’s standing versus banks and markets </li></ul></ul><ul><ul><li>Improvement in attracting outstanding managers </li></ul></ul>
    7. 7. Venture Capital: transactions definition Seed Financing (testing) Start-up Financing Investment during the phase of testing of a new product/service Investment during the phase of start-up of the production activity Expansion Financing The company is in the development phase with the need of consolidation of the activity
    8. 8. Lessons from USA High tech sectors contributed for 1/3 to the GDP growth in USA At least 2 investments of success for every 10 start-ups with IRR higher than 25% <ul><ul><li>      </li></ul></ul><ul><ul><li>T he billions of dollars of venture capital pumped into U.S. companies from 1970 to the end of 2003 has created 10.1 million jobs and USD 1.8 trillion in revenue      </li></ul></ul><ul><ul><li>A s of the end of 2003, 9.4% of the jobs in the U.S. and 9.6% of the U.S. GDP were created by companies in which venture capital invested USD 338.3 billion    </li></ul></ul><ul><ul><li>From 2000 to 2003 venture-backed companies created 600,000 new jobs (i.e.: Ebay, Google, Jetblue) with a growth of 6.5% in employment rate (against a –2.3% for U.S.) </li></ul></ul>GLOBAL INSIGHT, (July 2004), “Venture Impact 2004”
    9. 9. <ul><ul><li>It is proven in many countries (the US, the UK and Israel for example) that venture capital has been the most effective means to manage innovation and creation of new companies </li></ul></ul><ul><ul><li>The competitiveness of a country in high tech sectors is largely dependent on the quantitative and qualitative level of the existing venture capital </li></ul></ul><ul><ul><li>Despite forecasts of the eighties, the lack of venture capital in Japan determined the impossibility to reach US in Information Technology (while Japan was leader in consumer electronics) </li></ul></ul><ul><ul><li>The impact of venture capital on innovation is four to five time greater that corporate research development (J. Lerner) </li></ul></ul><ul><ul><li>Companies like Digital Equipment Corporation, Apple, Federal Express, Compaq, Sun Microsystems, Intel, Microsoft are examples of venture-backed companies </li></ul></ul>Venture Capital and management of innovation
    10. 10. What a Venture Capital Fund is Management Company Advisor Investors pension funds, financial institutions, insurance companies, corporations Venture Capital Fund Portfolio Companies Decision to divest (IPO, trade sale, write-off) capital gain/loss Decision to invest (vision, idea, management, technology, market, ecc.)
    11. 11. <ul><li>Deal flow analysis (Reactive or pro-active) </li></ul><ul><li>Valuation </li></ul><ul><li>Due diligence </li></ul><ul><li>Investment execution </li></ul><ul><li>Follow-up </li></ul>What a Venture Capitalist does
    12. 12. INFORMATION GATHERING (B.P. + B.I.) PROJECT ASSESSMENT VALUATION & DEAL STRUCTURE T/S & INVESTMENT AGREEMENT INVESTMENT 1-2 wks 1-2 wks 1 wk 3-4 wks 1 wk FIRST CONTACT FIRST DIRECT MEETING PRELIMIN. DECISION SECOND DIRECT MEETING FINAL DECISION The process Follow-up Deal flow analysis Valuation Due diligence, investment execution
    13. 13. Deal flow analysis: decision drivers DECISION DRIVERS EXIT BUSINESS MODEL BUSINESS IDEA MANAGEMENT TEAM COMPETITION ARENA BUSINESS PLAN IMPORTANCE
    14. 14. Decision drivers of investments: business plan BUSINESS PLAN <ul><ul><li>Executive summary </li></ul></ul><ul><ul><ul><li>the opportunity, mission, business model, target market, the competitive advantage, etc </li></ul></ul></ul><ul><ul><li>Team </li></ul></ul><ul><ul><ul><li>management, Board, key contributors </li></ul></ul></ul><ul><ul><li>Company </li></ul></ul><ul><ul><ul><li>general info, value proposition, partnerships, etc. </li></ul></ul></ul><ul><ul><li>Market analysis & competition analysis </li></ul></ul><ul><ul><li>Products/services offered </li></ul></ul><ul><ul><ul><li>products/services portfolio, technology, R&D, pre </li></ul></ul></ul><ul><ul><ul><li>& post sale services, delivery, etc. </li></ul></ul></ul><ul><ul><li>Marketing and sales </li></ul></ul><ul><ul><ul><li>marketing plan and strategy, sales tactics, pricing, </li></ul></ul></ul><ul><ul><ul><li>partners, advertising and promotion, distribution, etc. </li></ul></ul></ul><ul><ul><li>Economics and financial projections (P&L, BS, CF) </li></ul></ul>
    15. 15. Decision drivers of investments: competition arena COMPETITION ARENA <ul><ul><li>Target market analysis </li></ul></ul><ul><ul><li>Competition analysis </li></ul></ul><ul><ul><li>Competitive strategy (control over costs, prices, </li></ul></ul><ul><ul><li>and distribution) </li></ul></ul><ul><ul><li>Barriers to entry (i.e.: proprietary protection, </li></ul></ul><ul><ul><li>legal/contractual advantage, networks) </li></ul></ul><ul><ul><li>Delivery and distribution channels </li></ul></ul><ul><ul><li>Market penetration and sales forecasts </li></ul></ul>
    16. 16. MANAGEMENT TEAM <ul><ul><li>Who is the ideal entrepreneur? HE/SHE MUST BE : </li></ul></ul><ul><ul><ul><li>fast, “have vision”, informed, able to copy </li></ul></ul></ul><ul><ul><ul><li>experience – track record, knowledge of target market </li></ul></ul></ul><ul><ul><ul><li>able to change, recognise and understand its mistakes </li></ul></ul></ul><ul><ul><ul><li>a “sailor”, a team leader and a builder </li></ul></ul></ul><ul><ul><ul><li>willing to step back at the right time </li></ul></ul></ul><ul><ul><ul><li>able to go “bankrupt” and willing to start again </li></ul></ul></ul><ul><ul><ul><li>able to be at the right place at the right time </li></ul></ul></ul><ul><ul><ul><li>luc k y !!! </li></ul></ul></ul>Decision drivers of investments: management team <ul><ul><li>Recognising Entrepreneurial people </li></ul></ul><ul><ul><ul><li>Personal characteristics – Learnable </li></ul></ul></ul><ul><ul><ul><ul><li>commitment, long-term involvement, low need for </li></ul></ul></ul></ul><ul><ul><ul><ul><li>status and power, opportunity oriented, integrity </li></ul></ul></ul></ul><ul><ul><ul><li>Personal characteristics – More difficult to acquire </li></ul></ul></ul><ul><ul><ul><ul><li>high energy, emotional stability, conceptual ability, </li></ul></ul></ul></ul><ul><ul><ul><ul><li>creativity, capacity to inspire </li></ul></ul></ul></ul>CAUTION WITH TECHNICAL ENTREPRENEURS!!!
    17. 17. BUSINESS MODEL BUSINESS IDEA Decision drivers of investments: business idea and business model <ul><ul><li>Value of the innovation/product (an unanswered need) </li></ul></ul><ul><ul><li>All ideas are not opportunities </li></ul></ul><ul><ul><li>Scalability/“Crystal clear” </li></ul></ul><ul><ul><li>Business margins </li></ul></ul><ul><ul><ul><li>companies with good margins are better evaluated! </li></ul></ul></ul><ul><ul><li>Speed of execution </li></ul></ul><ul><ul><ul><li>speed and timing of revenue generation </li></ul></ul></ul><ul><ul><ul><li>speed in reaching operating and financial break even </li></ul></ul></ul><ul><ul><li>Sustainable growth </li></ul></ul><ul><ul><ul><li>“ value addition” growth sustainable for a long time </li></ul></ul></ul><ul><ul><ul><li>(i.e. technological advantage, offering differentiation) </li></ul></ul></ul><ul><ul><li>Capital intensity </li></ul></ul><ul><ul><ul><li>What is cash burn </li></ul></ul></ul><ul><ul><ul><li>more cash is needed to reach a competitive </li></ul></ul></ul><ul><ul><ul><li>dimension, more the investment is risky !!! </li></ul></ul></ul>
    18. 18. Valuation <ul><ul><li>Three stages: early stage investment, new rounds of financing, </li></ul></ul><ul><ul><li>divestment (IPO or trade sale) </li></ul></ul><ul><ul><li>Valuation methods </li></ul></ul><ul><ul><ul><li>early stage investment: negotiation with the entrepreneur (uncertainty on values used for calculations, the only certainty is cash needs!) </li></ul></ul></ul><ul><ul><ul><li>new rounds of financing/divestment: multiples, DCF, options (valuation given by external advisors) </li></ul></ul></ul><ul><ul><li>Definition of “pre-money”. FINAL VALUE = pre-money+investment </li></ul></ul><ul><ul><ul><li>pre-money: is based on “intangibles”, such as level of innovation and </li></ul></ul></ul><ul><ul><ul><li>potential of the idea, value of the management, etc., and “tangibles” like: </li></ul></ul></ul><ul><ul><ul><li>how much already invested by the entrepreneur, patents, strategic </li></ul></ul></ul><ul><ul><ul><li>agreements, etc. </li></ul></ul></ul><ul><ul><ul><li>investment: is the cash required (funding need), even divided into </li></ul></ul></ul><ul><ul><ul><li>several tranches </li></ul></ul></ul><ul><ul><li>The ratio between pre-money and cash injected determines the share </li></ul></ul><ul><ul><li>of the investor </li></ul></ul><ul><ul><ul><li>We don’t want the majority, however it can happen </li></ul></ul></ul><ul><ul><ul><li>When the investment is divided into several tranches, assumptions on </li></ul></ul></ul><ul><ul><ul><li>future valuation is made, subject to certain milestones agreed are reached </li></ul></ul></ul>
    19. 19. Due diligence <ul><li>Business due diligence </li></ul><ul><ul><li>Management </li></ul></ul><ul><ul><li>Does the IDEA work? - Intellectual Property </li></ul></ul><ul><ul><li>Is there an unmet market need/pent-up demand? </li></ul></ul><ul><ul><li>Competitive advantage </li></ul></ul><ul><li>Financial due diligence </li></ul><ul><ul><li>Financial analysis: P&L, BS and CF (actual, if any, and projections) </li></ul></ul><ul><ul><li>Returns analysis (child vs. dwarf) </li></ul></ul><ul><ul><li>Tax position </li></ul></ul><ul><li>Legal due diligence </li></ul><ul><ul><li>Company books, deed of incorporation, articles of association, CEO powers… </li></ul></ul><ul><ul><li>Agreement and commitments (with customers, suppliers, banks,…) </li></ul></ul><ul><ul><li>Insurance, guarantees, trademarks, patents, licences… </li></ul></ul><ul><ul><li>Litigation </li></ul></ul>
    20. 20. Negotiation and investment execution (1/2) <ul><li>TERM SHEET/INVESTMENT AGREEMENT </li></ul><ul><ul><li>“ Milestones” of the agreement (the handshake between gentlemen): </li></ul></ul><ul><ul><ul><li>Valuation </li></ul></ul></ul><ul><ul><ul><li>Anti dilution/ratchet clause </li></ul></ul></ul><ul><ul><ul><li>Business plan </li></ul></ul></ul><ul><ul><ul><li>Governance (board seats) </li></ul></ul></ul><ul><ul><ul><li>Exit </li></ul></ul></ul><ul><ul><li>Non-binding and no-shopping condition </li></ul></ul><ul><ul><li>Subject to positive due diligence and investment committee approval </li></ul></ul>
    21. 21. Negotiation and investment execution (2/2) <ul><li>NEGOTIATION </li></ul><ul><ul><li>Pre-money valuation and anti dilution rights </li></ul></ul><ul><ul><li>Corporate governance </li></ul></ul><ul><ul><li>Exit strategy/rights </li></ul></ul><ul><li>( S HAREHOLDERS /I NVESTMENT ) A GREEMENT </li></ul><ul><ul><li>Present and future capital increases </li></ul></ul><ul><ul><ul><li>warrants; tranches; earn-out; </li></ul></ul></ul><ul><ul><li>Rights/majority/veto rights for the shareholders meeting </li></ul></ul><ul><ul><li>Rights/majority/veto rights for the board </li></ul></ul><ul><ul><li>Stock Option plan </li></ul></ul><ul><ul><li>Lock up and permitted transfer </li></ul></ul><ul><ul><li>Exit: IPO, trade sale, first refusal/offer, tag and drag along </li></ul></ul>
    22. 22. Follow-up: from start-up to company <ul><li>R ELATIONSHIP WITH THE ENTREPRENEUR </li></ul><ul><ul><li>Board and day by day management </li></ul></ul><ul><ul><li>Budget control and forecast (cash management!!!), reporting </li></ul></ul><ul><ul><li>Sounding board for strategy, marketing and operations </li></ul></ul><ul><ul><li>Mediation </li></ul></ul><ul><ul><li>Next rounds </li></ul></ul><ul><ul><li>Exit </li></ul></ul><ul><li>S UPPORT ACTIVITIES </li></ul><ul><ul><li>Communication and public relations </li></ul></ul><ul><ul><li>Networking (revenues) and portfolio synergies </li></ul></ul><ul><ul><li>Head hunting </li></ul></ul><ul><ul><li>Support in future round of financing </li></ul></ul>
    23. 23. Sonia Dehò Pino Partecipazioni S.p.A. [email_address]
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