1

Tidlige fase finansiering - hva er det private markedets oppgaver og hvor bør det offentlige spille en rolle ? Erfaringer fra Northzone Ventures.

Tellef Thorleifsson, Partner

Nordic Industrial Fund Conference 15-16 October 2002

2

Agenda

Northzone Ventures

The Nordic Venture Market

What should be the role of the Government ?

3

Northzone Ventures

Established in 1996, 3 funds to date

Capital injected into 30 early stage companies

Total funding of EURO 100 mill. provided by large Nordic and International professional investors

A team of 10 professionals with extensive entrepreneurial experience

Main focus on the Nordic market with offices in Oslo, Stockholm and Copenhagen

Specialisation on ICT

Proven track-record and high ROI

Strong international network

4

Northzone’s investment strategy

Specialize on high-growth wireless, broadband, software and services opportunities in an increasingly networked society

Focus on the Nordic region to ensure volume of high quality deals and draw on regional competence base

Concentrate on the ”early stages” to leverage the team’s ability to add value and thereby maximize returns

Focus on scalable business models with an international scope and high value potential

Emphasize pro-active search for value creation opportunities arising from market shifts/transformations

5

Agenda

Northzone Ventures

The Nordic Venture Market

What should be the role of the government ?

6

Technology Indices and FTSE Europe last 5 years

Jul 99 Jul 00 Jul 01 Jul 02 Jul

Ind

ex

0

50

100

150

200

250

300

350

0

50

100

150

200

250

300

350

NASDAQ

Nordic Tech

European TechNeuer Markt

FTSE Europe

A choppy ride

7

0

5 000

10 000

15 000

20 000

25 000

30 000

35 000

40 000

45 000

50 000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Q102

Funds Raised

Private Equity I nvestments

€ m

Source: EVCA

• Reduction from 2000 to 2001 was modest compared to the US • Figures from Q102 indicate a major reduction in 2002

European Funds Raised and Investments

8

0

2 000

4 000

6 000

8 000

10 000

12 000

14 000

16 000

18 000

20 000

Thousands

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

Q1

02

Expansion

Start-up

Seed

Source: EVCA

• The trend from Q102 indicate that we might be back to 96/97 activity levels

• Largest reduction in Seed and Start-up

Investment Trends in Europe by Stage

9

0,0380,042

0,070,0760,0790,0890,089

0,1260,1520,159

0,180,1830,1840,19

0,2150,2210,225

0,252

0,4390,646

0,873

0.253

0 0,2 0,4 0,6 0,8 1

Slovak RepublicCzech Republic

AustriaPolandGreece

PortugalSwitzerland

I relandNorwayBelgium

I talyDenmark

SpainFinland

GermanyIcelandFrance

HungaryEurope

NetherlandsUnited Kingdom

Sweden

% of GDP

2001

=> Sweden stands apart from the other Nordics Source: EVCA

Private Equity investments as % of GDP

10

NORWAY• The Internet Hype didn’t

last for very long• Healthy economy, but

large dependence on oil• VC Capital is still available,

but the main VC’s are funding few new cases,

• The Grey Market is gone• Many VC’s have changed

focus from IT&Telco to energy and life sciences

SWEDEN Europe’s Silicon Valley

during the Internet hype The Internet consultants &

all the new VC players are gone

Ericsson’s demise is having severe repercussions

VC funding is still available, early stage cases are struggling hard to get funding

DENMARK Healthy economy Never really a part of the

Internet and the wireless boom Institutions dominate the VC

space Strong technology competence,

but still relatively few entrepreneurs (& VC’s)

FINLAND The Nokia effect has

tampered off The rush of international

“wireless” VC funding is no longer available

Back to basics The major VC’s are well

funded

The Nordic Venture Capital Scene

11

Agenda

Northzone Ventures

The Nordic Venture Market

What should be the role of the government ?

12

Chief Priority: To focus on the business climate, stability, and infra-structure

The public sector has historically been a poor player when targeting investments and sectors

Early stage financing - the responsibility of the private sector The market will over time bring about the most efficient allocation of capital “Friends, Family & Fools “, Private investors, angels, venture funds and growth funds

should be responsible the financing and growth of new companies.

THE MAIN ROLE OF THE GOVERNMENT: TO PROVIDE A STABLE CLIMATE AND GARDEN ASSISTANCE

Make it as simple as possible to start a new company (i.e. reduce the number of reports imposed on a small limited company.)

Provide practical assistance to Start ups – reduce red tape Reduce tax on employment options Emphasize the basics - There is too much focus on agencies, aid, packages and schemes

13

However, don’t leave the market all by itself, because there is an equity Gap

Business Angels have been playing a limited role in the Nordic countries. In the US wealthy individuals last year invested about USD 20 bill. while the venture funds

invested about USD 10 bill.  In the Nordic countries such private funding is much less important Grey Markets have been buoyant during Hype times, but provide fragile funding for early

stage tech companies, and fraud cases have been prevalent. Right now the Grey Market is more or less non-existent.  The availability of early stage financing from VC’s such as Northzone is very limited. The incubators are gone

The magnitude of the Equity Gap will depend on the market & where we are in the cycle. The equity gap will be widened in the period we

are now entering into 

“Mind the Gap”

14

..and us Nordics are also struggling with an Attitude Gap 

With the exception of Finland, where are remarkable changes have taken place during the last 10 years, the other Nordic countries are still facing a large

competence and attitude gap between the R&D circles/the government officials and the commercial forces/venture funds.

Most administrative R&D staff have to be more commercially minded

The Public Sector’s understanding of international business is not strong enough

Likewise, the Business Community’s understanding of political priorities, its constraints and how the political system works is far too weak.

Then what shall the governments do ?

15

1. Improve the risk-reward ratios

Widespread direct government ownership in early stage undertakings is not in the long term interest of any economy

The government can easily find itself being a very big fish in a very small pond

(Rosenberg.) “Rather than try to get into the business of technology itself by forming companies or investment funds or by picking industries through trade protection or tax

incentives, Government helps most when it creates mechanisms for improving the risk-reward ration for private entrepreneurs. The two main routes are

encouraging private venture capital by passive co-investing programs and the likes, and

by reducing the risk of undertaking R&D.”

 

16

2. Plant Seeds and Build Green Houses

• Invest heavily in Research & Education

• Educate the future work force – give them hard skills, drive and motivation

• Continue investments in Basic Research, but

• Increase the allocation to Applied Research within areas with potential commercial applications at the expense of spreading it out widely on a wide range of “soft areas”.

• R&D should be seen as an investment for future tax income and employment, not just as an academic luxury !!

• Educate commercial skills – not just accountants and economist, but also the techies (such as eg. Gründerskolen)

• Create environments which may foster contacts between businesses and R&D, and international links

- Research Parks

- Scholarships

- International cooperation and joint ventures

17

3. Water the Seeds and Build irrigation networks – tap into private networks

Enable R&D projects with a commercially viable basis to continue longer than today. (Large public resources are spent on R&D, but far too little is allocated for developing projects to level where they are becoming palatable for the investors.)

- Alone – based on milestones, regular scrutiny and evaluation by independent committees.

- Jointly – with private sources. Public funding only to be released when private sources are willing to commit accordingly. With the public funding giving some kind of a kicker/leverage on the private funding. (and or Reducing the downside.)

- The Yozma Venture Capital project in Israel

-  Enterprise Irland

-  Forny-programmet (Norway)

-  The proposed EFFECT project (Norway)

NB. Create direct financial incentives to Researchers related to patents and license income on patents filed. (The Stanford model) Such income should not only be allocated to departments or faculties, but also to individuals.

18

4. Encourage irrigation of dry soils through incentive schemes

Tax breaks and investment incentives for individuals may be cheaper for the government and a lot faster to implement than direct government investment schemes.

- In the UK private investors investing in start ups, are tax exempted on capital gains if the stock is held for more than 3 years

- £ 150 000 can be invested for each year with a 20 % tax break

=> 77 % of the British investors utilizing the scheme, claim that it has encouraged investments that would not otherwise have been done.

However, the experience from similar types of tax incentives in Germany have been more mixed

In Norway the most tax advantageous area for allocation of private investments is real estate. Lavish office spending will not bring about future growth !!

19

5. Apply your fertilisers with caution, focus and clear goals

Direct government Investments A mixed blessing In Norway SND has been imposed rigid regional strings.

Very few companies now promoted by the members of NVK have received funding from SND.

In the US the Government has played a very active role in the technology sector through the SBIC and SBIR, but most of this funding has been indirect.

Direct government investments should in principle focus on the early stages

The later stages should be left to the market The government is in a position to act counter-cyclically

Draw a clear line between regional development aid and profit maximization. (Establish separate funds, arms length from the politicians, when profit maxi-misation is the goal)

Most government agencies have been imposed impossible, or at times conflicting goals, i.e. to both gain high returns and to attain regional growth or other “softer” goals.

20

6. ..and if possible distribute fertilizers through private vehicles

Fund in Funds

- The European Investment Fund is a large fund in fund investor in the EU

- Argentum (NOR)/Vækstfonden (DK) are also applying the Fund in Fund Model

- Similar types of fund in fund vehicles should also be built up in seed financing set ups

Loans/Other types of Incentives to venture funds

- US venture funds can access long term loans from SBA. 57 % of the number of venture firms funded in the US last year, was done by VC-firms receiving loan financing from SBA (SBIC/SBIR)

- In Norway Startfondet has tested out a similar type of model, but ideally this type of schemes should be made available to all players satisfying the requirements so established.

- Avoid subsidising a few players – make it open and available to the entire professional market

21

Summary

Basically, governments should focus on the general business climate, stability, and infrastructure

However, don’t leave the market all by itself, because there is an Equity Gap An Attitude Gap, and Very choppy times..

Hence, as regards early stage funding governments have to:

1. Improve the risk-reward ratios

2. Plant Seeds and Build Green Houses

3. Water the Seeds and Build irrigation networks – preferably by tapping into private networks

4. Encourage irrigation of dry soils through incentive schemes

5. Only apply fertilisers with great caution, focus and clear goals

6. ..and if possible distribute fertilizers through private vehicles