Structured solutions for financing innovation: Venture Capital case

Roberto della Marina, PhD Head of Investments Venture Capital

Friulia SGR SpA

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Company Stages and Finance

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Time

Cash Flow

Revenues €

EBITDA

BEP operativo

Financial BEP

INCORPORATION

SOURCE OF FINANCING

Venture Capital

DEVELOPMENT PHASE

VC back start-ups along the «death valley»

Venture Capital invests in the early stage phases of a

company’s life

SEED

• Personal finance

• Grants

• Family & Friends

• Incubators

START UP

• Lead contracts and First client

• Grants

• Business angels

• Venture Capital

EARLY STAGE

• Sales

• Venture Capital

DEVELOPMENT

• Cash Flow (operating) •Venture Capital

BUY OUT & REPLACEMENT

• Buy out

• Mezzanine

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What does a Venture Capital fund do ?

• Raises capital from institutional investors (banks, foundations, fund of funds, pension funds)

• Finances young, fast growing, high tech companies

• Acquires minorities in the equity of such companies

• Gets a seat in the BoD and influences strategic decisions

• Creates value through active involvement in the company and support to the management team

• Bears high risks targeting high returns

• Works on the long term (3-5 years holding period expected)

• Makes money at the exit (trade sale or IPO)

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Venture Capital vs. Private Equity

A Venture Capital fund IS NOT a traditional

Private Equity fund

VENTURE CAPITAL

• Money in the company (equity)

• (Qualified) minority stakes

• High tech sectors, VCs look for the next breakthrough and disruptive technologies

• Young and small companies (or teams)… with very ambitious business plan and high growth potential and high risk

• Equity

• Outstanding targets of return on investment: trade sales or IPO (5x-10x)

PRIVATE EQUITY

(or BUY OUT)

• Company acquisition (money to former shareholders)

• Majority stakes (looking for control)

• Traditional business sectors

• Consolidated companies with proven track records

• Structured finance (debt + equity)

• More conservative target of ROI: e.g. put/call option (Euribor + spread)

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Offer side: VC players in Italy in 2010

Source: “Il mercato italiano del Private Equity e Venture Capital nel 2010”, AIFI - PWC

• Only 7% of private equity

investors in Italy are early

stage VC investors

• In 2010 89 early stage

investments for a total of 106

M€

• Average size of 800k€ per

investment

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Offer side: Italian VC market in 2010

• Friuli Venezia Giulia,

despite its small

size, is second

overall in Italy for PE

investments

• Biotech and Medtech

hold 44% of the high

tech total deal share

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AlAdInn Venture at a glance

• First venture capital fund focused on North-Eastern Italy, with cross-border ambitions (Alpe Adria Euroregion)

• Sectors: life sciences, cleantech, nanotech, ICT and components

• Phases: seed, start-up and early expansion

• Investments size: € 250k - € 3mn

• Exit: 3-5 years through IPO or trade sale

• Fund’s size: € 28,6 mn

• Outstanding and long experienced sponsor (Friulia S.p.A.)

• Dedicated management company (Friulia SGR S.p.A.)

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AlAdInn Ventures – positioning

360 ° Capital ° AlAdInn Ventures 360 ° Capital ° AlAdInn Ventures

• €20k – 200k per deal

• Seed funds

ANGEL INVESTING

• € 200k – 2Mln per deal

• 1st level VC

SEED – EARLY STAGE

• € 2Mln – 5Mln per deal

• 2nd Level VC

EARLY STAGE – LATE STAGE

• € 5Mln – 50Mln per deal

• Growth Capital – Mezzanine

LATE STAGE – GROWTH CAPITAL

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Investment strategy by geographical area

Key Innovation Indicators

Knowledge workers = Number of technical-scientifical degrees per year

Med/hi-tech manufacturing = Employment rate in manufacturing companies using mid to high technology

Public R&D = Impact of public expenditure on R&D (GDP %).

Patents = Number of patents registered at EPO – European Patent Office per million of inhabitants

Life-long learning = Number of employees taking part at training and educational activities

Hi-tech services = Employment rate in services using mid and high technology

Business R&D = Impact of private expenditure on R&D (GDP %)

0 500 1000 1500 2000

(122) Veneto

(102) Kartner

(95) FVG

(63) Slovenia

(44) Lazio - best Italy

(1) Stockholm, best UE

Regional Innovation Scoreboard 2006

Knowledge workers life-long learning

med/hitech manufacturing hi-tech services

Public R&D Business R&D

Patents

Source: European Regional Innovation Scoreboard 2006

• North Eastern Italy, Southern Austria and Slovenia are developing a winning model of collaborative trans-national economic system (Euroregion) and are very active in fostering R&D and innovation

• Lots of good early stage opportunities in the area and limited competition on deals

• Real “hands on” VC style thanks to limited distances (invest where you can drive!)

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Investors

Organizational structure

Advisory

Board

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Management Company - Friulia S.G.R.

Friulia S.G.R. Board of Directors

Risk Management Internal Audit

Investment Area Outsourcing Area

Friulia S.G.R. SpA

- SGR is a “Società di Gestione del Risparmio” created under the D.M. n. 228 of May 24, 1999

- Founded in July 2006

- Authorized by Bank of Italy in December 2006

- Sole shareholder: Friulia S.p.A.

- The company was established in order to manage closed-end non speculative funds

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• TFM Compliance srl

- Regulations Compliance

• PA Practice Audit srl

- Internal Audit

• State Street Bank

- Fund Administration

- Depository Bank

• Friulia SpA

- Administration

- Risk Management

- Company Secretary

- General Services

- ICT

* To be launched

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Friulia complementary financial tools

Risk

Return on capital

Business Incubation (Bic Incubatori FVG)

Leasing and Medium term loans

(Banca Mediocredito FVG)

Project Financing (Friulia)

Promotion and support for company internationalization

(Finest)

Venture Capital (AlAdInn Fund)

Regional Development (Friulia)

Logistics (Friulia)

Company buy out (Friulia)

SMEs

(Friulia)

INVESTMENT ACTIVITY INVESTMENT SIZE TARGET WAY OUT TERMS FOCUS

FRIULIA DEVELOPMENT AND EXPANSION From € 250,000 to € 5 million

It invests through minority equity stakes and long term loans. It has focused on small and medium companies (SMEs), as well as operates in several financing stages, including turnaround.

5-6 years Put - call options and eventually trade sale

SMEs already active in the market with the aim of supporting their chances of growing and keeping their shareholders structures

SGR VENTURE CAPITAL Up to € 3 million Small Companies at Early Stage (Seed, Start up)

3 – 5 years IPO or trade sale Companies highly innovation oriented

INCUBATORI

FVG BUSINESS INCUBATORS

Possibility of getting access

to the full range of financial

services offered by the

Friulia Group

Technologically advanced spin offs

and start ups 3 years

Enterprise workshops

from 40 to 200 sq m,

management

coaching and

functional tutoring

To favour enterprise start up and

development in a centre of

excellence

Project

Financing

Venture

Capital

Friulia’s

Equity investment

Development

Buy Out Quasi-equity

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Investment strategy by sector

• Consolidated VC investment sectors

• Growth rates and exit opportunities yet very promising

•LIFE SCIENCE

•CLEANTECH

Features Strategy

• Trend Follower

• Creation of technologies\initiatives synergistic clusters\subportfolios

•NANOTECH

• Very recent VC sector

• Great potential in materials and life sciences applications

• Trend Setter

• Risk mitigation by building specific know how and by implementing prudent asset allocation

•Components • ICT

• Very differentiated investment sectors

• Synergic with traditional manufacturing districts in the North Eastern area

• Opportunistic approach

• Mature companies expanding through innovative products

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Investment strategy by phase

• Proprietary and well protected technology (patents, licenses)

• Excellent team • Rich R&D and products pipeline • Entrepreneurship

•SEED

Key points Investment attitude

• € 0,25-0,75 mn, targeting € 1 mn with follow-on rounds

• Co-investment with more specialized funds and/or extensive technology due diligence

•START UP

• Compelling product idea • Successful launch • Visibility on revenues backlog • Reasonable equity price • Round size adequate to reach break

even phase

• € 0,75-1,5 mn • Lead-investor in known

technologies\sectors • Networking to accelerate commercial

development • Earn out formulas

•EXPANSION

• Leading brand • Successful product • High growth rate • High margins • Detailed use of proceeds

• € 1,5 – 3 mn • Lead-investor or sole investor • Detailed market analysis • Acceleration through M&A

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VC role in the innovation ecosystem

SELECTION

• Picking the best: deal flow selection is extremely competitive, <4/100 success rate

GROWTH

• Coaching and accelerating success

EXIT

• Creating a virtuos cicle for early stage financing

The role of early stage VCs as Aladinn Ventures, is to

accelerate success and give to the next “Google” time and resources to grow their products a/o services before becoming “cash-flow positive”.

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SCOUTING

Scientific excellence and brilliant ideas are not enough ...

Valuable for a VC are also business model, business plan, management team, IPR, shareholders’ agreement …

Networking and international projects can help in a critical and time-consuming activity!

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Smart Money: be part of an ecosystem…

FRIULIA

AlAdInn Ventures

Universities

Disctricts and clusters

Tech Park and

incubators

Companies

Public Institutions

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ORIGINATION

100 SCREENING

Fund screening criteria

40 PRELIMINARY ASSESSMENT

Investment screening criteria

BP evaluation

20 DUE DILIGENCE

Technology

Market

IP, Legal, Accouting, Fiscal

10 NEGOTIATION

Governance

Milestones, lock up, non competition

IPR management

Exit rights (drag/tag along, liquidation)

7 CLOSING

Investiment contract

Shareholders agreement

New statute

New Board of Directors, Auditors,

New CFO / CEO / Mkyg and Sales Director

4

Deal flow selection

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SELECTION – choosing the best • Focus on businesses showing signs of success willing to raise

money to grow faster.

• Look for target companies with strong value chain positioning:

– Compelling macro-factors

– Clear market demand / no existing solutions

– Great product idea

– Technical leadership

• Focused and capable management teams able to execute the business plan

• Rigorous due diligence and deal negotiation processes

• Realistic valuations

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GROWTH - portfolio companies’ coaching

• Becomes a full partner playing an active role in the corporate

governance

• Works closely with company management to optimize

business strategy and operations

– maximize impact of board representation by taking a fully active role

– advise on business development and operations to facilitate plan execution

– advise on financial management, reporting and capital budgeting

– develop quality managements through mentoring and recruitment advice

• Connects with industry partners and potential additional

VC and PE funds

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EXIT – AV creates value in a virtuous cycle for innovation’ financing

• AV harvesting strategy is 3-5 years depending upon business sector and company life stage

• At the right time, Friulia’s 100+ companies portfolio is expected to generate networking and partnering opportunities as well as management team expertise which could be exploited to profitably generate exit via:

– Merger

– Trade Sale

– Initial Public Offering

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Portfolio Companies

Biotech Udine June 2007

is a spin-off of University of Udine developing innovative products, coming from proprietary technologies in cell culture and tissue engineering.

ICT/Food Trieste Dec 2011

is a start-up of AREA Science Park developing services and products in the field of nutrigenetics, offering solutions for wellness and weight management based upon genetic profiling

Med-tech/ MIS Verona October 2009

is developing a new generation of surgical robotic solutions, bringing space technologies to fruition in the rapidly growing field of Computer Assisted Robotic Surgery.

Clean-tech Trieste March 2010

operates in R&D, manu-facturing and commercia-lization of advanced products for sustainable chemistry and drugs production.

Biotech Trieste July 2008

is a biotechnology drug development company focused on novel cancer therapies, cancer diagno-stics and concepts for anti-infective agents.

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www.friuliasgr.it