Mr. Paolo Mr. Paolo AnselmoAnselmo

President of the Italian Network of Business Angels (IBAN)President of the Italian Network of Business Angels (IBAN)

Member of the Executive Committee of the European Network of Business Angels Member of the Executive Committee of the European Network of Business Angels (EBAN)(EBAN)

Member of the INSME Association BoardMember of the INSME Association Board

Rome – December 1st, 2006Rome – December 1st, 2006

International Training CourseInternational Training Courseonon

“Business Start-up and Access to Finance for“Business Start-up and Access to Finance forSmall and Medium-Sized Enterprises (SMEs) and NewSmall and Medium-Sized Enterprises (SMEs) and New

Technology Based Firms”Technology Based Firms”jointly organized byjointly organized by

the International Network for Small and Medium-Sized Enterprisesthe International Network for Small and Medium-Sized Enterprises(INSME Association)(INSME Association)

andandUNIDO ITPO Italy and UNIDO ITPO Bahrain – ARCEITUNIDO ITPO Italy and UNIDO ITPO Bahrain – ARCEIT

Session 3 - The role of informal risk capital industry for the set up and Session 3 - The role of informal risk capital industry for the set up and growth of a New Technology Based Firm: business angels and their growth of a New Technology Based Firm: business angels and their

networksnetworks

FINANCING OF A N.T.B.F.FINANCING OF A N.T.B.F.

► DEBTS DEBTS ► PUBLIC FINANCINGPUBLIC FINANCING► VENTURE CAPITAL: VENTURE CAPITAL:

Formal Venture Capital Formal Venture Capital Informal Venture Capital (business angels)Informal Venture Capital (business angels)

FINANCIAL SUPPLY CHAIN FINANCIAL SUPPLY CHAIN

BanksGuaranties

LeasingFactoring

Infrastructure:business angels networks,

incubators, etc.

Advice: investment readiness program,

tutorship

Expertise: professional

fund managers

Own resources

FFF VCLoans on trust

Pre-seedLoans for investors

Reimbursable advance payments

IPOBA

CorporateVenturing

Seedcapital

FFF : Family, Friends, FoolsBA : Business angelsVC : Venture capitalIPO : Initial Public Offering

GrantsMicro-credits

Other public support

Prerequisites

Tools

THE ENTERPRISE FINANCING PROCESS IN THE BUSINESS THE ENTERPRISE FINANCING PROCESS IN THE BUSINESS LIFECYCLELIFECYCLE

Pre-Start Existence Survival Success Take-off Maturity

Sustained Growth

Early Growth

Start-up

Seed

FU

ND

ING

ST

AG

E

LIFE CYCLE STAGE

Proof of Concept

Business angels

THE ENTERPRISE FINANCING THE ENTERPRISE FINANCING PROCESSPROCESS

CAPITAL NEEDS

TIME

SEED START-UP EARLY GROWTH

SUSTAINED GROWTH

HIGH RISK

LOW RISKFriends,

Family, Fools

Business Angels

Formal Venture Capital

IPO

GROWTH

Public aids

THE ENTERPRISE FINANCING THE ENTERPRISE FINANCING PROCESSPROCESS

Corporate Fundand

Venture Capital

Idea Start-Up Market introduction Growth Maturity

InnovationSeed CapitalFunds and

Publicfunding

Commercial and Savings Banks

Time

Efforts made by financiers Risk

Cash flow

Transfer

PrivateInvestors

andBusinessAngels

THE ENTERPRISE FINANCING THE ENTERPRISE FINANCING PROCESSPROCESS

R&D Start-upEarly

growthAccelerating

growthSustaining

growthMaturitygrowth

Proof ofConceptFunding

SeedCorn

FirstRound

SecondRound

DevelopmentCapital

ReplacementCapital

MBO / MBIDevelopment

Capital

Founders, family and friends

Public Sector

Business angels

Venture capital funds

Corporate venturing

Public listing / IPO

Source ofFunding

Type ofFunding

Stage inCycle

VENTURE CAPITAL (formal & VENTURE CAPITAL (formal & informal)informal)

► Institutional operators Institutional operators (formal venture capital)(formal venture capital) ► Private subjectsPrivate subjects► Banks Banks ► InsuranceInsurance► Corporate venture capital Corporate venture capital

► Non-institutional operators Non-institutional operators (informal venture capital)(informal venture capital)

► Business Angels Business Angels

BUSINESS ANGEL (BA) - BUSINESS ANGEL (BA) - definitiondefinition

“A Business Angel is a middle aged male with reasonable net income, personal net worth, previous start up experience, who makes one investment a year, usually close to home or office, prefers to invest in high technology and manufacturing ventures with an expectation to sell out in three to five years time”. (Kelly and Hay, 1996)

”Business angels (informal investors, independent investors) are investors who provide risk capital directly to new and growing businesses in which they have no prior connection”.(Harrison and Mason, 1996)

BUSINESS ANGEL (BA)BUSINESS ANGEL (BA)

• male, rarely female• successful experience as an entrepreneur or manager• high net worth individual and / or sophisticated investor• have a declared propensity to invest and to risk in a start-up firm• invest their own money (50K–250K euro) (part of their cash capital: 20-30 %)• Seeking profit, but also fun (seeking minimum 20% return)• are willing to share their managerial skills and their enterprise background• often invest in their region of residence• make one investment a year• prefer high-technology and manufacturing• take a minor participation – medium term investment• are willing to wait for an exit for 3-5 years

Attitudes, behaviour and characteristics:

BUSINESS ANGEL- short BUSINESS ANGEL- short profileprofile

• Aged between 35 and 65 – the older they are, the more they invest both in terms of the number of deals and in the amount• Successful experience as an entrepreneur or manager• Informal private investor with smart money (finance + expertise or money + management)• Willing to share their managerial skills, specialist knowledge and networks• Seeking profit, but also fun• High net worth individual and / or Sophisticated investor

“BA activities are not new”

Origin of the expression: USA

ANGEL’S – success ANGEL’S – success storiesstoriesCompany name Angel Investor Business Investment Value at Exit

Apple Computer (Name Witheld) Computer hardware

$91.000 $154 million

Amazon.com Thomas Alberg Online bookshop

$100.000 $26 million

Blue Rhino Andrew Filipowski

Propane cylinder replacements

$500.000 $24 million

Lifeminders.com Frans Kok Internet e-mail reminder service

$100.000 $3 million

Body Shop Ian McGlinn Body care products

£4.000 £42 million

ML Laboratories Kevin Leech Kidney medical treatment

£50.000 £71 million

Matcon Ivan Semenenko Bulk containers

£15.000 £2.5 million

Source: partially adapted from unpublished data provided by Amis Ventures in 1999

ANGEL STRATEGY (I)ANGEL STRATEGY (I)

• New products or technological improved products in an existing market• A product or service that can be taken to market without further development (i.e. past the initial concept stage)• Creation of new markets• Company’s growth should expected to be higher than market growth• Increase of market share against competitors• Superiority regarding competitors

High-growth start-ups: new businesses that are likely to see sales grow to around € 1M and employment to between 10 and 20 people in early years and export oriented.

Key selection criteria of risk capital investors (generally):

ANGEL STRATEGY (II)ANGEL STRATEGY (II)

• High growth and highly ambitious management seeking an exit (flotation or trade sale) within 3 to 5 years• Significant commitment to venture already demonstrated by management, preferably cash• Management prepared to discuss conversion of any existing loans to equity and ideally investing in this round• Realistic pre-money valuation

IS A COMPANY READY?IS A COMPANY READY?

• Business plan?• Stage of development of the company• Type of investment?• Valuation?• Management team ready?

• Has the management team enough time and energy to raise funds?• Is the team shaped to talk to investors?• Does the company know where to go?

ANGEL DUE DILIGENCE ANGEL DUE DILIGENCE PROCESSPROCESS

TechnologyTechnology developmentProduct developmentProcess developmentProduct supplyDeliveries

MarketMarketingSalesPRCompetitorsIPR

OrganizationRecruitment BoardNetwork of service suppliersOffice

Economy / FinanceCash forecastFinance activitiesCost estimateBudget

THE IRREGULATITY OF THE THE IRREGULATITY OF THE INFORMATION AVAILABLEINFORMATION AVAILABLE

►THE IMPORTANCE OF THE INFORMATION THE IMPORTANCE OF THE INFORMATION NEEDS OF THE INVESTORS IN THE NEEDS OF THE INVESTORS IN THE EVALUATION OF THE EVALUATION OF THE PROJECTPROJECT

to evaluate the yield of the investmentto evaluate the yield of the investment to reduce the risk of requests from opportuniststo reduce the risk of requests from opportunists

►““WHAT” AND “HOW” TO EVALUATEWHAT” AND “HOW” TO EVALUATE Economic and financial information Economic and financial information

(quantitative/(quantitative/consumptiveconsumptive)) Business plan (quantitative/prognostic) Business plan (quantitative/prognostic) Qualitative judgment of the confidence of the projectQualitative judgment of the confidence of the project

ROLE OF THE SCIENTIFIC ROLE OF THE SCIENTIFIC COMMUNITYCOMMUNITY

► (+) the KNOWLEDGE WORKERS “attracted”, (+) the KNOWLEDGE WORKERS “attracted”, why?why?

► opportunity to increase technical competencesopportunity to increase technical competences► opportunity to enrich one’s CVopportunity to enrich one’s CV► to increase the visibility in one’s communityto increase the visibility in one’s community► access a global scientific networkaccess a global scientific network► able management of eventual elitist attitudeable management of eventual elitist attitude

► (-) the (-) the intrinsic mobilityintrinsic mobility of KNOWLEDGE of KNOWLEDGE WORKERS (WORKERS (generation of a risk of unstable generation of a risk of unstable knowledge and/or cessation of know how to third knowledge and/or cessation of know how to third parties)parties)

THE REPUTATION OF THE THE REPUTATION OF THE ENTERPRISEENTERPRISE

► An extremely important resource in phase of An extremely important resource in phase of start up in order to limit the environmental start up in order to limit the environmental pressures and to attract the necessary resourcespressures and to attract the necessary resources

► How it is constructed: How it is constructed: ► Collaborated vertical agreements (University, Collaborated vertical agreements (University,

enterprises)enterprises)► Relational systems and participation in networks Relational systems and participation in networks

(social capital) (social capital) N.B.N.B. More social relations form an enterprise, the potential More social relations form an enterprise, the potential for the reputation and confidence should mature over for the reputation and confidence should mature over time.time.

LEGITIMIZATION STRATEGIESLEGITIMIZATION STRATEGIES

► SEARCH FOR CONSENT - RELATIONAL CONTEXT (in SEARCH FOR CONSENT - RELATIONAL CONTEXT (in order to increase the level aperture towards the outside order to increase the level aperture towards the outside world)world)

► Access to scientific networks (in order to acquire qualified Access to scientific networks (in order to acquire qualified human resources)human resources)

► Access to financial networks (to acquire financial resources) Access to financial networks (to acquire financial resources) ► Access to business networks (in order to acquire managerial Access to business networks (in order to acquire managerial

resources)resources)

► STRATEGIESSTRATEGIES► Passive attitude (patenting of research results)Passive attitude (patenting of research results)► Active attitude (localization near innovation locations)Active attitude (localization near innovation locations)► Proactive attitude (communication of the scientific Proactive attitude (communication of the scientific

successes obtained)successes obtained)

OBTAINING RISK CAPITALOBTAINING RISK CAPITAL

Pros– No cost of interest and no fixed repayment schedule

– Stronger financial position

– Reduced financial pressure

– Access to professional network and coaching

Cons– Loss of management / ownership control

– Request for strong financial discipline

– Influence on management and strategic decisions

– Exit route for investor to be prepared

PRIORITIES FOR EQUITY PROVIDERSPRIORITIES FOR EQUITY PROVIDERS

Equity providers Eligibility Criteria

Business angels orinformal investors

• Meeting or matching of individual entrepreneurs with the angel• Atmosphere of trust between individuals• Credible business plan in the eyes of the angel• Good management• Market knowledge of the entrepreneur• ………• Availability of exit routeAvailability of exit route• Return on investment (capital gain)Return on investment (capital gain)• …………• Fiscal incentives (if existing)

Venture capital andFinancial corporate venturing

• Business plan credibility• Business plan with patent technology• Track record (over previous years) • Ability to grow fast and deliver quick ROI• Management team quality

FORMAL AND INFORMAL EQUITY FORMAL AND INFORMAL EQUITY PROVIDERSPROVIDERS

* Source: van Osnabrugge, 1998, p.2

Personnel Firms funded Due diligence Investment's location Contracts used Monitoring ex-post Exiting the firm Rates of return

Business Angels Entrepreneurs Small, early stage Minimal Of concern Simple Active 'hands-on' Of lesser concern Of lesser concern

Formal venture capital Investors Large, mature Extensive Not important Comprehensive Strategic Highly important Highly important

FORMAL AND INFORMAL EQUITY FORMAL AND INFORMAL EQUITY PROVIDERSPROVIDERS

VC– Easy to find via directories

– Your request is only one among many hundred a VC receives

– Can often via syndication provide large investment

– Thorough and formal due diligence and investment process

– Exit route very important

BA– Difficult to find

– Request often strong personal involvement

– Limited amount to invest

– Investment decisions often quick and less formal

– Syndication more and more usual

– Exit route less in focus

ASYMMETRY OF EXPECTATIONS: ASYMMETRY OF EXPECTATIONS: investeeinvestee

• Just give me the money and I will spend it• Angel is the last resort• Do the deal quickly• I am the only one who understands this• I should have a preferential rights to buy back the shares• I should not be giving warranties, You should trust me• I should always have the final say

ASYMMETRY OF EXPECTATIONS: investorASYMMETRY OF EXPECTATIONS: investor

• I will always have the right of veto• Do the deal slowly – proper due diligence• I do not understands this, so I need someone else who does• I should be able to sell to anyone at the best price• I should be getting warranties and disclosures with stiff penalties• I should always have the final say

EXIT STRATEGIESEXIT STRATEGIES

Over 3 years, starting with 10 companies:•3 are OK•1 can be a star•3 are languishing•3 are died

Exit or way out:• trade sale (competitors – partners – other BAs & VCs)• MBO – MBI• IPO• total loss

BAN – THE NETWORKS (I)BAN – THE NETWORKS (I)• It is difficult for new companies to raise funds because they do not have the necessary guarantees and track record

“lack of mechanisms to access to finance”

• Business angels and venture capital organisations have difficulties in finding good business plans

“insufficient pool of available investors”

• Due Diligent costs are increasingly expensive“absence of support for entrepreneurs”

Need for Business Angel NetworksNeed for Business Angel Networks

BAN – THE NETWORKS (II)BAN – THE NETWORKS (II)

Private or semi-public body whose aim is to match entrepreneurs looking for equity with Business

Angels

Business angels are an old tool

– Business angels networks are new tools –

(typically) The non profit BAN’s develop services that the private sector can not provide or is not interested in providing to the market

BAN – services providedBAN – services provided Creating awareness of the Business Angel concept Business Plan training activity & advising (legal, fiscal, etc.) Assistance in preparing and analyzing the BP Screening BP process before someone is listed Coaching the investees to present effectively – investment ready companies Identification and recruitment of BAs Training activities for BAs Matching BAs and entrepreneurs: an independent marketplace for investors and investees Opportunity to syndicate a deal Raising awareness and creating motivation to start businesses

BAN – assist the companies BAN – assist the companies toto

Review business objectives, strategy and valuation Understand the finance options Make their business ‘investor ready’ and attractive to founders Identify appropriate target investors Make the pitch Facilitate introductions and deliver presentations Guidance through legal and completion process Do the deal

BAN – THE NETWORKS (II)BAN – THE NETWORKS (II)MATCHING BY THE BAN

Entrepreneur

Business Angel

Contact of BAN

BP evaluation and validation

Drafting of BP summary

Investment readiness

programmePreparation of a

presentation

Identification

Training

Identification of investment priorities

BA added to database

Participation in investment forum/club

Confronting offer & demand

Circulation ofBusiness

plan

MATCHING

Leverage funding

-co-funding-bank loans

BAN – critical pointsBAN – critical points

• A large public awareness – towards BAs and entrepreneurs• Strong links with the investors community (Banks, VC, ...)• Strong partnerships with local stakeholders and organisations • A relevant business projects portfolio database• A business plan evaluation quality control system (soft due diligence)• no great unexpected events in the projects • cost-coverage is absolutely needed for quite some time• A BAN is a self sustainable organisation on the long run

BAN – THE NETWORKBAN – THE NETWORK

Thank you for listening!

Venture Capital, Business Angels and Banks

Network of Intermediaries and Universities

Universities, Research Centers and technology companies

Professional Services and

Business Support Organizations

BAN

BAN by countryBAN by country

0

10

20

30

40

50

60

BAN

AustriaBelgiumDenmarkFranceGermanyIsraelItalyMonacoSwedenThe NetherlandsUK

Source: EBAN statistics on Business Angels Networks (national and regional)

EBAN – THE EUROPEAN EBAN – THE EUROPEAN DIMENSIONDIMENSION

• Established in 1999 by EURADA and with the support of the European Commission• Non-profit association – 19 countries represented• Encouraging the exchange of experience among business angels networks and encouraging “best practice”• Promoting recognition of BANs• Contributing to working out and carrying out local, regional and national programs of assistance to the creation and development of a positive environment for business angels activities. • Lobbying at E. C. level

Benchmarking Report Best: No1-Benchmarking Report Best: No1-20032003

• Raising Awareness of BA and BANs• Collecting data from the BA market place regularly• Creating a BA panel to discuss topical issues

affecting the angel community• Paying attention to the effects of taxation on BA

activity• Ensuring public financing of BAN operations• Promoting high ethical standards of BANs

Ing. Paolo ANSELMO

IBAN – Italian Business Angels Networks

e-mail: presidenza@iban.it

www.iban.itwww.eban.org

Thanks for your attentionThanks for your attention