Dr. Mohamed Riyazh Khan

DoMS

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SUMMARY

1. Brief history and definition of Venture Capital;

2. Corporate structure and operation;

3. Italian contest

4. Main European players and relationship with EU istitutions

5. New sector of investment and conclusions

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History of Venture Capital

1946 = first two venture capital firms:

1. ARDC

2. J.H Whitney & Company ;1960/1970 = Venture Capital as e synonymous with

technology finance;1980 = declining returns caused by the growth of the

industry; 1990/2000= The Venture Capital Boom and the

Internet Bubble.

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Venture Capital

It’s a private funding used to support risky new business and speculative ventures, usually with high growth potential.

A typical venture capital investment usually involves the business owner giving up equity to venture capitalist in return for funding.

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Venture Capitalists and Business Angels

Venture Capitalists are investment firms that makes venture investment, providing capital for start-up or expansion.

They are looking for higher rate of return, bringing their managerial abilities to small businesses with great potential growth.

Business Angels are private investor with huge personal capital, looking forward to invest their money in business which are not helped by financial institutions because are too risky.

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Structure of Venture Capital Firms

Venture capital firms are typically structured as partnership;

This comprises both high net worth individuals and institutions with large amounts of available capital, such as state and private pension funds, university financial endowments, foundations, insurance companies, and pooled investment vehicles, called fund of funds or mutual funds

VC firms in the United States may also be structured as limited liability companies, in which case the firm's managers are known as managing members.

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Venture capital fundingVenture capitalists are typically very selective in deciding

what to invest in;

Funds are most interested in ventures with exceptionally high growth potential,providing the financial returns and successful exit event within the required timeframe (typically 3–7 years) that venture capitalists expect.

Young companies to raise venture capital require a combination of innovative technology, potential for rapid growth, a well-developed business model, and an impressive management team.

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Venture capital funding This sheme meets businesses having large up-front capital

requirements which cannot be financed by cheaper alternatives such as debt.

Intangible assets such as software, and other intellectual

property, whose value is unproven,explains why venture capital is most prevalent in the fast-growing technology and life sciences or biotechnology fields.

Venture capitalists are expected to nurture the companies in which they invest, in order to increase the likelihood of reaching an IPO stage when valuations are favorable.

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FinancingAccording to the development of the company, there

are three types of financing with venture capital:1.Early2.Expansion and development3.Acquisitions and restructuring

To analyze these points, they can be divided in several subgroups in order to stress the fact that every step in a company lifetime involves a different approach by venture capitalists.

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Disinvestment

Time of exit from the firm’s capital is almost never predetermined, but depends on the development of the company.

In successful cases, divestments take place when the company has reached the level of expected development and the value of the company and thus the membership, has consequently increased.

Disinvestments happens when the conviction that is no more possible to solve the situation created takes hold.

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How to disinvest?There are several ways of disinvestment, depending

on the type of business and operations previously put in place and on results achieved. Typical channels used by investors to sell shares in their possession are:

1.the IPO of the subsidiary titles2.sale of the securities to another firm or to another

institutional investor;3.the repurchase of the participation by the original

business group 4.the sale to new and old members, resulting from the

merger of several companies in the meantime achieved.

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Just an overview of the enviroment in Italy:

In italy small conpanies are 4 milions and they repreasent 99,9% of the companies in Italy;

81,7 % of the employes in italy are emploied in small companies;

Importance of industrial district in Italy:stream of small companies that are emploied in each stage of the production.(Ex:knitwear in the district of Carpi,engine components in Modena)

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Small companies in Italy can be defined as having three main characteristics:

• Companies are not quoted on a stock exchange – they are “unquoted”

• Ownership of the business is typically restricted to a few individuals.

Family connection between the shareholders

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Why do small companies in Italy find financing a problem?

Small companies rarely have a long history or successful track record that potential investors can rely on in making an investment;

Larger companies can easier have access to the international finance;

Banks are particularly nervous of smaller businesses due to a perception that they represent a greater credit risk;

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Why do small companies in Italy find financing a problem?

A common problem is often that the banks will be unwilling to increase loan funding without an increase in the security given.

Problem of uncertainty relates to businesses with a low asset base. These are companies without substantial tangible assets which can be use to provide security for lenders.

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How a small company in Italy could finance their buiness:

- Existing shareholders and directors funds (“owner

financing”)- Overdraft financing-Trade credit

-Equity finance -Business angel financing

- Venture capital- Factoring and invoice discounting- Hire purchase and leasing- Merchant banks (medium to longer term loans

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Venture capital

Focus on high potential growth small companies;

It makes research on the company and it builds a business plan fot the small company;

Often venture capitalists buy company and after restiring them,they sell them at an higher price.

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Business angelA business angel is an affluent individual who

provides capital for a business start up;

Usually in exchange for convertible debt or ownership equity;

A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital.

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For example…

Italian small company producing clothes

Business angel activity that analize the business plan

Clothing producer needs cash to buy a machine for special embroderies;

The machine costs 20.000 euro and the company needs money to buy it;

The banks turned down to lend money because the company doesn’t meet the requirements.(low asset value)

The small company needs an angel;

The menbers of the association analyse the business plan of the company;

The company falls in a basket with other purposes of business plans;

Our company show sthe own plan ;

The association can decide to catch or drop the investment;

If the angels decide to finance it,the company will be a part of a basket of investments that the menbers will enjoy;

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Venture Capital Investment in Europe : differences between Germany and United Kingdom

These two countries are very important in Europe: they account for over 50% of all venture capital investments in the Continent.

The spread of two countries is due to, most of all, the difference in their financial system:

Germany is Bank-oriented while

UK is Market-oriented.

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GERMANY UNITED KINGDOM

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Similarities between Germany and The United Kingdom

In both countries venture capital funds provide funding to companies in all stages with a sligh bias towards later stages of development.

Also the distribution of investments across industry is surprising similar: manifacturing and chemicals are relatively more popular.

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European Institutions and venture capital funds

• 1998: The Commission published several documents in order to create a “Pan-European Equity Market” for innovative companies.

• In the same year was created the EVCA (European Venture Capital Association) tend to focus on the supply of funds and on the creation of favorable structural conditions for enterpreneurship.

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Eurpean Venture Capital Association

It is the largest private equity and venture capital member association in the world, with over than 1200 members.

It caters for: investors in university spins-out;

venture and grown capitalists;

corporate venture capital companies;

mid-markets and larger buyout investors;

miriad advisory members.24

The European Investment Fund

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In 2000, the Commission restructured the EIF (Euopean Investment Found) that provides portfolio guarantees to financial insitutions involved in SME finance.

The EIF offers:

Competitiveness and Innovation Framework Programme (CIP): this programme aims to facilitate access to loans and equity finance for small-medium enterprises where market gaps have been identified.

It provides:• Risk capital for innovative SMEs in their early stage:

EIF can invest 10 to 25% of the total equity of the intermediary venture capital funds, or up to 50% in specific cases;

• Risk capital for SMEs with high growth potential in their espansion phase: EIF can invest 7.5 to 15% of the total equity of the intermediary venture capital funds, or exceptionally up to 50%.

Programming Period 2007-2013

New Sectors of Investment

Denmark 22.71%

Germany 38.68%

United Kingdom 5.79%

France 5.83%

Spain 12.35%

Austria 14.64%

Solar 33.22%

Bio-energy 5.79%

Idro-power 14.64%

Wind Energy 46.35%

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Renewvables energies:an opportunity to catch for

venture capital

Venture capitals put their eyes on renewvables energies;

They sat special teams or branches to focus better on this special kind of investment;

U.S and Europe kept investing a lot over the years on this new market in order to find new sources of energies.

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Renewvables energies:an opportunity to catch for the

venture capitalThree reasons of attractiveness :

1. Governments keep increasing deregulation of the market energy;

2. Enviromentalists put the attenction on the need of the world of new sources of energies;

3. Increasing costs of the oils.

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The goals

• Venture capital energy companies invest on projects long the value chain,focusing on two directions:

1.Increasing efficiency of the energetic system;

1.Decreasing the use of fossil fuel put down the values of the pollutions.

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In recent years2006:venture capital invested $7.4 billion on

renewvables energies winth an increasing of 146% respect the last year;

2008:in the last mounths of the year a drop in the market occured

2009/2010:investments increase again supported by the developing countries (China)and U.S.

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Sectors of investment

Solar and geothermal energies represent two fixed points for investments;

By the way, in recent years wind energy became the top ranking, achieving the status of most actractive technology among renewvables energies.

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What happens in Europe?Europe is one of main area where the VC

investments on renewvables energies sat;Europe represents the 30% of total investments in

the world, concerning this sector;

Large stage Early stage Borning stage

65% 20% 15%

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ConclusionsFrom the previous table we noticed that venture

capitals prefer to acquire energy companies that already own high skills;

This tendency is becaming quite the opposite in this last years because of the improving of new technologies that allow to manage better the risk of borning firms.

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