venture capital advanced

8/13/2019 Venture Capital Advanced

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Benedetta L. Romani

Francesco Fiocchetti

Gennaro PengueFlavia Guagliardo

Adriano Pisculli

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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 EUistitutions

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

Its a private funding used to support risky new

business and speculative ventures, usually with highgrowth potential.

A typical venture capital investment usually involves

the business owner giving up equity to venturecapitalist 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 orexpansion.

They are looking for higher rate of return, bringingtheir managerial abilities to small businesses withgreat potential growth.

Business Angels are private investor with hugepersonal capital, looking forward to invest theirmoney in business which are not helped by financialinstitutions 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 andinstitutions with large amounts of available capital, suchas state and private pension funds, university financialendowments, foundations, insurance companies, andpooled investment vehicles, called fund of funds ormutual funds

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

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Venture capital funding Venture capitalists are typically very selective in deciding

what to invest in;

Funds are most interested in ventures with exceptionallyhigh growth potential,providing the financial returns andsuccessful exit event within the required timeframe(typically 37 years) that venture capitalists expect.

Young companies to raise venture capital require acombination of innovative technology, potential for rapidgrowth, a well-developed business model, and animpressive management team.

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Venture capital funding

This sheme meets businesses having large up-front capitalrequirements which cannot be financed by cheaperalternatives such as debt.

Intangible assets such as software, and other intellectualproperty, whose value is unproven,explains why venturecapital is most prevalent in the fast-growing technology andlife sciences or biotechnology fields.

Venture capitalists are expected to nurture the companies inwhich they invest, in order to increase the likelihood ofreaching an IPOstage 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.Early

2.Expansion and development

3.Acquisitions and restructuring

To analyze these points, they can be divided in severalsubgroups in order to stress the fact that every stepin a company lifetime involves a different approachby venture capitalists.

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

on the type of business and operations previouslyput in place and on results achieved. Typicalchannels 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 originalbusiness group

4.the sale to new and old members, resulting from themerger of several companies in the meantimeachieved.

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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 smallcompanies;

Importance of industrial district in Italy:stream ofsmall companies that are emploied in each stage ofthe production.(Ex:knitwear in the district ofCarpi,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 exchangethey 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 canrely on in making an investment;

Larger companies can easier have access to theinternational finance;

Banks are particularly nervous of smallerbusinesses due to a perception that they represent agreater 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 beunwilling to increase loan funding without anincrease in the security given.

Problem of uncertainty relates to businesses with

a low asset base. These are companies withoutsubstantial tangible assets which can be use toprovide security for lenders.

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How a small company in Italy could

finance their buiness:- Existing shareholders and directors funds (ownerfinancing)

- 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 abusiness 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 angel

A business angelis an affluent individual whoprovides capital for a business start up;

Usually in exchange for convertible debt orownership equity;

A small but increasing number of angel investorsorganize themselves into angel groupsor angelnetworksto share research and pool theirinvestment capital.

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For exampleItalian small company

producing clothes

Business angel activitythat analize the business

plan Clothing producer needs cash to

buy a machine for special

embroderies;

The machine costs 20.000 euroand the company needs money tobuy it;

The banks turned down to lendmoney because the companydoesnt meet the requirements.(lowasset value)

The small company needs anangel;

The menbers of the associationanalyse the business plan of the

company;

The company falls in a basket withother purposes of business plans;

Our company show sthe own plan;

The association can decide tocatch or drop the investment;

If the angels decide to financeit,the company will be a part of abasket of investments that themenbers 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 arerelatively more popular.

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European Institutions and venture

capital funds

1998: The Commission published several documentsin order to create a Pan-European Equity Market

for innovative companies.

In the same year was created the EVCA (EuropeanVenture Capital Association) tend to focus on thesupply of funds and on the creation of favorablestructural conditions for enterpreneurship.

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Eurpean Venture Capital

Association

It is the largest private equity and venture capitalmember association in the world, with over than1200 members.

It caters for: investors in university spins-out;

venture and grown capitalists;

corporate venture capitalcompanies;

mid-markets and larger buyoutinvestors;

miriad advisory members. 24


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The European Investment Fund

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In 2000, the Commission restructured the EIF (EuopeanInvestment Found) that provides portfolio guarantees tofinancial insitutions involved in SME finance.

The EIF offers:

Equity products:

1. Technology Transfer;

1. Lower mid-market;

1. Venture Capital.

Debt products:

1. Credit enhancement-

securisation;

1. Guarantees/counter-guarantees.


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Competitiveness and Innovation Framework Programme (CIP):

this programme aims to facilitate access to loans and equityfinance for small-medium enterprises where market gaps havebeen identified.

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

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

Risk capital for SMEs with high growth potential in theirespansion phase: EIF can invest 7.5 to 15% of the total equityof the intermediary venture capital funds, or exceptionally up to50%.

Programming Period 2007-

2013


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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 betteron this special kind of investment;

U.S and Europe kept investing a lot over the yearson this new market in order to find new sources ofenergies.

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Renewvables energies:an

opportunity to catch for theventure capital

Three 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 projectslong the value chain,focusing on two directions:

1.Increasing efficiency of the energetic system;

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

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In recent years

2006:venture capital invested $7.4 billion onrenewvables energies winth an increasing of 146%respect the last year;

2008:in the last mounths of the year a drop in themarket 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 fixedpoints for investments;

By the way, in recent years wind energy became thetop 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 VCinvestments on renewvables energies sat;

Europe represents the 30% of total investments inthe world, concerning this sector;

Large stage Early stage Borning stage

65% 20% 15%

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Conclusions

From the previous table we noticed that venturecapitals prefer to acquire energy companies thatalready own high skills;

This tendency is becaming quite the opposite in thislast years because of the improving of new

technologies that allow to manage better the risk ofborning firms.

venture capital advanced

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