Access to Finance


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  • NB: Some BA work alone, not likely for virgin angels annual operating costs: 100 000 - 150 000 euro
  • Access to Finance

    1. 1. FINANCING INITIATIVES & CHALLENGES FOR SMEs Christian SAUBLENS EURADA [email_address] Avenue des Arts 12 Bte 7 / B – 1210 Brussels / Tel. : +32 2 218 43 13 / Fax : + 32 2 218 45 83 [email_address]
    2. 2. Foreword <ul><li>All money is not the same; </li></ul><ul><li>It’s not only a question of access to money but also a question of life cycle of a company and about … sales and market penetration; </li></ul><ul><li>It’s more and more difficult for start-ups to access finance; </li></ul><ul><li>There is an asymmetry of information between entrepreneurs and investors; </li></ul><ul><li>Investment readiness is needed; </li></ul><ul><li>There’s still a lot to be done in our regions. </li></ul>
    3. 3. 1 .The paradox of access to finance <ul><li>Banks </li></ul><ul><li>Venture Capitalists have money </li></ul><ul><li>Stock Exchange </li></ul><ul><li>But argue that there aren’t enough good projects </li></ul><ul><li>What is a good project? </li></ul>
    4. 4. 1.1. Trial to analyse the equity paradox Supply: Is there enough money available for seed and early equity? <ul><li>Demand : </li></ul><ul><li>Are entrepreneurs aware of investors aspirations/ expectations (asymmetric information; all money is not the same)? </li></ul><ul><li>Are entrepreneurs ready to receive equity finance (Investment readiness)? </li></ul><ul><li>Are entrepreneurs proposals/ideas really innovative for investors? </li></ul>
    5. 5. 1.2. Solutions <ul><li>Public authorities should: </li></ul><ul><li>invest more in public/private partnership to share risk in this market; </li></ul><ul><li>ensure fluidity of the risk capital market: </li></ul><ul><li> think in terms of a regional supply chain of equity provision; </li></ul><ul><li> identify SME real demand, not the obvious one; </li></ul><ul><li> invest in solutions to bottelnecks, not in fashionable tools! </li></ul><ul><li> improve the legal, administrative and fiscal environment to increase the flow of equity for early stage investment; </li></ul><ul><li> provide investment readiness schemes to entrepreneurs. </li></ul>
    6. 6. 2 . Segmentation of the market <ul><li>Start-up phase </li></ul><ul><li>First financial round </li></ul><ul><li>Subsequent financial round </li></ul><ul><li>N.B: </li></ul><ul><li>Indirect supports </li></ul><ul><li>Integrated actions </li></ul>
    7. 7. 2 .1. Start-up Phase <ul><li>Seed capital fund </li></ul><ul><li>Loans without interest and/or guarantee </li></ul><ul><li>University and research centres spin off funds </li></ul><ul><li>Micro-credit </li></ul><ul><li>Public or para-public funds for creation or innovation </li></ul><ul><li>Public grants </li></ul><ul><li>Reimbursable loans </li></ul>
    8. 8. 2 .2. First Financial Round <ul><li>Business Angels </li></ul><ul><li>Seed capital fund </li></ul><ul><li>Banks loans/Overdraft </li></ul><ul><li>Guarantee funds </li></ul><ul><li>Public or para-public investment funds </li></ul><ul><li>Regional Public venture capital </li></ul><ul><li>Public grants </li></ul><ul><li>Corporate venturing </li></ul>
    9. 9. 2 .3. Subsequent financial round <ul><li>Private venture capital </li></ul><ul><li>Bank Loans </li></ul><ul><li>Share subscription bonus </li></ul><ul><li>Mezzanine </li></ul><ul><li>OTHER TYPES </li></ul><ul><li>Leasing </li></ul><ul><li>Factoring </li></ul>
    10. 10. N.B. <ul><li>Indirect financial support </li></ul><ul><ul><li>Pre-incubation, incubation </li></ul></ul><ul><ul><li>Nurseries and easy-in and easy-out workshops </li></ul></ul><ul><ul><li>Tutorate (coaching, mentoring, hands-on management) </li></ul></ul><ul><li>Integrated Actions </li></ul><ul><ul><li>Financial value chain </li></ul></ul><ul><ul><li>Intermediation </li></ul></ul><ul><li>Understanding decision process </li></ul>
    11. 11. 3. Sources of finance All money is not the same! <ul><li>Seed capital : capital required for the purpose of financing projects upstream of product or service marketing. Seed capital is often essential for hi-tech projects in order to allow businesses to study, research and develop prototypes of the products that later come to constitute heir core business. </li></ul><ul><li>Venture capital : assets temporarily invested as stock by specialised firms expecting return on investment that is both fast and very substantial, i.e. commensurate with the level of risk. Such specialised investors play a role during both start-up and development. </li></ul>
    12. 12. <ul><li>Informal risk capital (business angel): private individuals investing part of their personal assets in businesses and contributing their managerial skills and experience. </li></ul><ul><li>Business Angels Networks (BANs): regional platforms that match business angels with businessmen. </li></ul><ul><li>Early-stage finance – Start-up: funds invested downstream of research and development, in businesses that need additional finance to start marketing their products and services. </li></ul>
    13. 13. <ul><li>Mezzanine : intermediate layer of financing products (between equity and debt). Interest rates are often quite high. </li></ul><ul><li>Financial package : a combination of various sources of finance. </li></ul><ul><li>Corporate venturing : venture capital supplied by existing companies for the purpose of financing innovative businesses set up by their own personnel or active in industries considered to be of strategic importance. </li></ul>
    14. 14. Source of capital for enterprises <ul><li>Initial and unorthodox ways </li></ul><ul><li>Equity </li></ul><ul><li>Debt finance </li></ul><ul><li>Combination of equity and debt </li></ul><ul><li>Public finance </li></ul>
    15. 15. Initial an unorthodox ways <ul><li>Enterpreneurs savings </li></ul><ul><li>FFF </li></ul><ul><li>Profit reinvestments </li></ul><ul><li>Second mortgage </li></ul><ul><li>Personal credit cards </li></ul><ul><li>Customer advance </li></ul><ul><li>Delay of payments </li></ul><ul><li>Permices sharing </li></ul><ul><li>Employing relatives at below market salaries </li></ul>
    16. 16. Equity <ul><li>Seed capital </li></ul><ul><li>Business Angels </li></ul><ul><li>Venture capital </li></ul><ul><li>Corporate ventures </li></ul><ul><li>I.P.O. and Post I.P.O. </li></ul>
    17. 17. Debt finance <ul><li>Bank credits: </li></ul><ul><ul><li>Short term </li></ul></ul><ul><ul><li>Long term </li></ul></ul><ul><ul><li>Unsecured </li></ul></ul><ul><ul><li>Micro </li></ul></ul><ul><li>Commercial debt (papers) </li></ul><ul><li>Public/semi public loans </li></ul><ul><li>Bonds </li></ul><ul><li>Factoring </li></ul><ul><li>Leasing </li></ul><ul><li>Franchising </li></ul>
    18. 18. Combination of equity and debt <ul><li>Mezzanine </li></ul>
    19. 19. Public finance <ul><li>Grants </li></ul><ul><li>Reimbursable advances </li></ul><ul><li>guarantees </li></ul>
    20. 20. 4. Financing SMEs Risk and ROI SME size <ul><li>Finance: </li></ul><ul><li>loans </li></ul><ul><li>guarantees </li></ul><ul><li>mezzanine </li></ul>Development capital <ul><li>Seed capital and advice: </li></ul><ul><li>BAs </li></ul><ul><li>Seed Funds </li></ul>Source : Vaeksfonden (DK) SMEs’ three financing circles
    21. 21. 5. Financing Stages
    22. 22. 6. Regions and access to finance Case Study of the Rhône-Alpes (F) Source: RHONE-ALPES CREATION PROJECTS High-tech (strong potential ) INDUSTRY AND INDUSTRIAL SERVICES (product- or process-based innovation) SMALL INDUSTRIES (CAPACITY SUBCONTRACTING) SERVICES AND TRADE (traditional, moderately innovative activities) MICRO BUSINESSES TRADE CRAFTS TRAINING – ADVICE- SUPPORT Incubators CREALYS GRENOBLE INNOEXPERT (CCI Lyon) BUSINESS CENTRE ( EM Lyon ) BUSINESS INCUBATORS ( NOVACITES FRAC CREATION ) Business development and reception service (CCI) Sponsorship Local platforms Entreprendre en France Banks + Comité Sofaris CCI + professionals Chartered accountants ( ATEN ) « 3 hours – 3 days » FINANCING «  Venture Capital  » (National or International) ( Sudinnova, Siparex Venture, Banexi, Partech ) «  Seed capital  » - National (thematic) ( I Source, Emertec, BioAm ,…) - Regional ( Amorçage Rhône Alpes ) «  Business development venture capital  » Rhône-Alpes Création Banque Pop., Crédit Agricole Rhône-Dauphiné Développement DEVELOPMENT TYPES «  Réseau Entreprendre  » (Loans on trust + Sponsorship) «  ARJE  » (Regional repayable short-term loans for new businesses—1-5 years) «  P.C.E .  » ( BDPME loans) «  Mille et Un Talents  » (Regional grants) ANVAR L O C A L F U N D I N G R E Q U I R E M E N T S S C A L E «  Local platforms  » (Loans on trust) Local initiative platform ADIE Business Angels € 300,000+ € 300,000 to € 45,000 € 45,000 to € 15,000 € 15,000 to € 7,500 Sup. de Co. Grenoble
    23. 23. 7. The Commercialisation Cycle Source: Presentation by Mr Lex de Lange, Managing Director, Zernike Group, made at PARTNER Focus Group in Tartu, Estonia, May 2003
    24. 24. 8. Average size of deals   Importance (%) Average size/deal (€)   2000 2003 2000 2003 Seed 2.3 1.6 984000 494150 Replacement 2.7 4.6 2372700 6229700 Start-up 16.7 11.9 1520600 823300 Expansion 37.1 29.4 2828000 1702300 Buyouts 41.2 52.4 16635000 16917600 TOTAL 100 % 100 % 3351100 3907600
    25. 25. 9. Demand for equity <ul><li>Businesspersons are generally faced with four </li></ul><ul><li>types of issues when trying to raise equity:  </li></ul><ul><ul><li>cultural reluctance when it comes to opening their companies to outsiders (shareholders and managers); </li></ul></ul><ul><ul><li>difficulties in presenting themselves or their business plan in a way that accommodates the priorities and management requirements of equity suppliers; </li></ul></ul>
    26. 26. <ul><li>c) project investment readiness: certain credit and venture capital tools are not adapted to the needs of all businesses at all stages of their development; </li></ul><ul><li>d) difficulties in identifying, and reckoning with, the administrative requirements of venture capital and credit providers. Such requirements include information on projects as well as financial and managerial data (corporate governance). Downstream of investment, businesses should also recognise the importance of regular, properly formatted reporting to investors . </li></ul>
    27. 27. 10. Priorities for equity and loan providers <ul><li>Availability of guarantees </li></ul><ul><li>Perceived ability to repay the loan </li></ul><ul><li>Company track record </li></ul><ul><li>Rating </li></ul>Banks <ul><li>Meeting or matching of individual entrepreneurs with business angels </li></ul><ul><li>Atmosphere of trust between individuals </li></ul><ul><li>Credible business plan in the eyes of the Business Angel </li></ul><ul><li>Good management </li></ul><ul><li>Fiscal incentives </li></ul><ul><li>Market knowledge of the entrepreneur </li></ul><ul><li>Availability of exit route </li></ul><ul><li>Return on investment (capital gain) </li></ul>Business angels or informal investors and Spin-off corporate venturing <ul><li>Personal relationship based on trust </li></ul>Family, Friends and Fools Eligibility Criteria Equity providers
    28. 28. <ul><li>Business plan credibility </li></ul><ul><li>Readiness to cooperate with a tutor </li></ul>Loans on trust <ul><li>Stamina as well as technical and financial skills/abilities </li></ul>Guarantees <ul><li>Innovative nature of business projects </li></ul><ul><li>Business plan quality </li></ul><ul><li>Management team </li></ul>Repayable short-term loans <ul><li>Business plan credibility </li></ul><ul><li>Business plan with patent technology </li></ul><ul><li>Track record (over previous years) </li></ul><ul><li>Ability to grow fast and deliver quick ROI </li></ul><ul><li>Management team quality </li></ul>Venture capital and Financial corporate venturing <ul><li>New jobs </li></ul><ul><li>Investment in productive tools </li></ul>Public funding
    29. 29. <ul><li>Business plan </li></ul><ul><li>Proprietary technology (IP) </li></ul><ul><li>High growth </li></ul><ul><li>Good management </li></ul><ul><li>Tax incentives from government </li></ul>Institutional investors <ul><li>Business plan quality </li></ul><ul><li>Perception of the innovative nature of the project </li></ul><ul><li>Intellectual property </li></ul><ul><li>High growth potential </li></ul><ul><li>Government tax policies </li></ul>Seed capital funds <ul><li>Innovative nature of the project in relation to the company’s core business </li></ul><ul><li>Industry-specific usefulness of the project, in particular from a technological standpoint </li></ul><ul><li>Business plan quality </li></ul><ul><li>Good management </li></ul><ul><li>Tax incentives </li></ul>Corporate venturing
    30. 30. <ul><li>V iability and consolidation </li></ul><ul><li>At least three years in existence </li></ul><ul><li>Positive results at least once within twelve months prior to application </li></ul><ul><li>More than €1.5 million in shareholder’s equity </li></ul><ul><li>Ability to publish quarterly results </li></ul><ul><li>Public recommendation by analyst </li></ul><ul><li>Positive media attention </li></ul><ul><li>Government tax policies </li></ul><ul><li>Capable and experienced management team </li></ul><ul><li>Prominent Board </li></ul><ul><li>Experienced team of financial, legal and underwriter advisers </li></ul><ul><li>New business concept </li></ul><ul><li>Large market share </li></ul><ul><li>Record of high growth or high growth potential </li></ul>New capital markets
    31. 31. 11. Demand driven schemes <ul><li>Investment readiness </li></ul><ul><ul><li>Business Plan evaluation </li></ul></ul><ul><ul><li>Business Plan improvements </li></ul></ul><ul><ul><li>Business Plan presentation </li></ul></ul><ul><ul><li>Investment readiness </li></ul></ul><ul><li>Integrated Finance </li></ul><ul><ul><li>Entrepreneurs and all equity providers as advisors </li></ul></ul>
    32. 32. 12. Improving the « demand side » <ul><li>Investment readiness scheme (UK, Australia,…) 5 main components: </li></ul><ul><ul><li>Critical evaluation of business plan, </li></ul></ul><ul><ul><li>Knowledge of funding sources, </li></ul></ul><ul><ul><li>Understanding of timing and amounts to be expected from finding applications, </li></ul></ul><ul><ul><li>Perceiving the needs and expectations of the different investors (banks, B.A., V.C.,…) </li></ul></ul><ul><ul><li>Training in submitting business proposals  demonstrate that the business proposal is a « good risk » for the investor. </li></ul></ul>
    33. 33. <ul><li>B.A. academy (F, DK, D,…) </li></ul><ul><li>2 main components: </li></ul><ul><ul><li>Business angels: bringing potential to become serial angels (not training but capacity building); </li></ul></ul><ul><ul><li>Business Angels Network management: improving the market place. BAN is a place where angels meet with entrepreneurs. </li></ul></ul>
    34. 34. 13. The role of public authorities at the regional level <ul><li>Support for the setting up and financing of the operational cost of a regional business angels network; </li></ul><ul><li>Setting up of seed capital funds; </li></ul><ul><li>Support for repayable short-term loan schemes; </li></ul><ul><li>Setting up of investment capital funds; </li></ul><ul><li>Deployment of guarantee schemes; </li></ul><ul><li>Priority access for innovative SMEs to public procurement; </li></ul>
    35. 35. 14. Financial Supply Chain Banks Garanties Leasing Factoring Infrastructure: business angels networks, incubators, etc. Advice: investment readiness, 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
    36. 36. <ul><li>Informal private investor with smart money (finance+expertise) </li></ul><ul><li>Investment 25 000 - 250 000 euro </li></ul><ul><li>Willing to share their managerial skills, specialist knowledge and networks </li></ul><ul><li>Often prefer to invest in their region of residence </li></ul><ul><li>Seeking profit, but also fun </li></ul>What is a business angel? 15. BA Networks in Europe
    37. 37. Business Angel Network <ul><ul><li>Private or semi-public body whose aim is to match entrepreneurs looking for equity with Business Angels </li></ul></ul><ul><li>- Business angels are an old tool- </li></ul><ul><li>- Business angels networks are new tools- </li></ul>
    38. 38. Services Provided by BANs <ul><li>Creating awareness of the Business Angel concept </li></ul><ul><li>Identification of BAs </li></ul><ul><li>Assistance to entrepreneurs and BAs </li></ul><ul><li>Training activities for BAs </li></ul><ul><li>Matching BAs and entrepreneurs </li></ul>
    39. 39. Business Angel networks in Europe
    40. 40. Business Angel syndication <ul><li>The gathering of several business angels into an informal consortium for the purpose of creating a critical mass of funds above what each business angel could—or would be prepared to—invest. This term also applies to the pooling of competencies in order to offer more managerial skills than any individual business angel could display. </li></ul>
    41. 41. The benefits of syndication <ul><li>Increasing the level of financing of a project; </li></ul><ul><li>Diluting the risk to take for individual investors; </li></ul><ul><li>Broadening the panel of possible investment sectors </li></ul><ul><li>In some countries syndication allows for eligibility to a fiscal regime equivalent to that of formal risk capital investors. </li></ul>
    42. 42. An investment fund dedicated to the provision of equity finance to SMEs in which business angels have already invested in. The co-investment fund invests under the same terms and conditions as the angels, on a pari-passu basis. The fund is run by an independent management team,which trusts to a large extent the due diligence work done by the business angels. In some cases (side-car funds), angels that are already part of an investment structure (BAN) pool resources into a fund for specific investments, in parallel to the activities operated at the BAN level. First fund launched in December 2002 and is managed by Greater London Enterprise ( ). 16. Co-investment funds
    43. 43. 17. Loan on trust <ul><li>Average loan 5.000 € free of interest 2-3 years leverage impact for bank loans. </li></ul><ul><li>Network of 237 organisations every where in France. </li></ul><ul><li>Ex: in 20 years </li></ul><ul><li>49.100 loans </li></ul><ul><li>325,5 millions € of loans on trust </li></ul><ul><li>1.320 millions € of bank loans </li></ul><ul><li>111.000 jobs created. </li></ul><ul><li>In 2004, with 1 € loan on trust 6 € bank loans were secured by entrepreneurs. </li></ul><ul><li>Calvados department, 2004 77 loans min 3.000 € max 30.000 €. </li></ul>
    44. 44. 18. Understanding the Decision making process <ul><li>Advantage </li></ul><ul><ul><li>Pedagogy </li></ul></ul><ul><ul><li>Public answer by real demand and not by offer </li></ul></ul><ul><ul><li>Provision of non-financial support services </li></ul></ul>
    45. 45. SME FUNDING PATHWAYS Has your business plan been found to be robust by a specialised organisation ? Are you prepared to accept third-party shareholders in your SME? You should consider asking for the provision of:  specialised advice  (pre-)incubation services  business development funding  entrepreneurship training You can enter a business plan or business development competition Are you ready to meet potential investors? Do you have personal guarantees? Attend an investment readiness training course Get in touch with:  A bank to secure:  a loan  a financial lease  micro-credit  Public authorities to apply for subsidies, including in the form of reduced interest rates  A factoring corporation Contact an organisation that provides:  guarantees  loans on trust  subsidies YES NO YES NO NO YES YES NO Source: EURADA, December 2003 Understanding the Decision Path
    46. 46. Is your product / service ready for the market? YES NO Check the existence of support from:  innovation grants  incubation  technology centres  seed capital firms  public authorities  universities and technological parks How much equity /money do you expect to need? BANKS (If banks say no) Up to €250,000 Contact:  a business angel  a regional business angels network  a corporate venturing firm  a local financing company € 500,000-1,500,000 Contact:  a business angels syndicate  a seed capital or other public or private fund specialising in start-ups  a regional public equity participation fund  an industrial reconversion company Over 3,000,000 Contact:  a public or private venture capital firm  a regional equity participation fund  an organisation that specialises in bond issues Also check the attractiveness of your project—as adequately funded—with:  banks  guarantee firms  public authorities to secure subsidies and grants  venture capital funds Finally, consider:  an MBO (Management buyout)  an IPO (Initial Public Offering) Source: EURADA, December 2003
    47. 47. For more information EUROPEAN BUSINESS ANGEL NETWORK Avenue des Arts 12, Bte 7 B- 1210 Brussels T.: + 32 (0)2 218 43 13 F.: +32 (0)2 218 45 83 [email_address]