Risk Capital Project

Financing

Entrepreneurial Firms

Glenda Napier

FORA

Oslo University - 27 February, 2007

Outline

Lecture 1

> Innovation and Sources of Financing

> What is Venture Capital (informal and formal)

> The Entrepreneur and Investor

Lecture 2

> Access to Venture Capital Across Countries

> Financing Gaps

> The Need for Public Intervention and Policies

Copyright 2006 © FORA, Langelinie Allé 17, 2100 Kbh Ø - www.foranet.dk

Lecture 1

Financing Entrepreneurial Firms


EU's Performance Challenges

> The European Commission’s Green Paper on

Entrepreneurship:

> “to boost the Union’s levels of entrepreneurship,

[by] adopting the most appropriate approach for producing more entrepreneurs and for getting

more firms to grow”


Types of Innovation

> Incremental/linear type of innovation

> Radical/systemic type of innovation



Incremental/Linear Approach

INNOVATOR ENTREPRENEUR INVESTOR



Radical/Systemic Approach

INNOVATOR

ENTREPRENEUR

INVESTOR


Varying Forms of Innovation Require

Different Types of Financing

> Incremental/linear innovation → Assets based financing (debt)

> Radical/systemic innovation → High Risk Capital =

Venture Capital


Risk Financing: Venture Capital


Investment Stages 1

> Seed stage refers to period where the product/service is developed, patens requirements are completed and market surveys and team recruitment are key activities. The funds at this stage predominantly come from the entrepreneurs, their family and friends.



> Start-up stage refers to the period where the entrepreneurs are ready to commence their product/service. Products are launched and therefore investment in follow up product introduction by doing marketing activities, producing more products to be sold, and hiring more people. Since the medium risk is still embedded, hence it is difficult to get the fund supported by formal capital institutions. Thus in this stage, the funds is still mainly provided by informal investors/business angels.



> Expansion refers to the period when the company has gained some orders and starts to expand its current situation. There has been inflow money, but not yet a profit. The fund needed for this stage is used to increase the working capital since production is higher because the demand is increasing and the product/service is more widely known. As business has looked promising, due to the prospect of the market and the product, venture capitalists may take a hand as well as commercial banks. And informal investors also still support in this stage.


Venture Capital Investment Stages

Start-up Seed

US National

Venture Capital

Association

> Management Team

> Business Plan

> Prototype (R&D)

Early Stages

> Senior Management team

> Completed R&D

> Min. revenues

> Negative cash flows

Expansion Later Stages

> Viable products

> Market

> Customers

> Revenues

> Positive cash flows

European Venture

Canadian Venture

Capital Association

> R&D

> No commercial activity

British Venture

Capital Association

> R&D

> Business Plan

> Prototype (R&D)

> Prior to market

> R&D

> Marketing

> Business set up


> Completed R&D

> Manufacturing and sales

> No profit

> Increase in production capacity

> Increase R&D and marketing

> Break even or profit

> R&D

> Marketing

> Business set up


> Completed R&D


> No profit




> R&D

> Business set up


> Manufacturing and Sales

> Completed R&D

> Profit or not



European Business

Angel Networks

> R&D > R&D

> Marketing

> Business set up


> Completed R&D


> No profit





Types of investors

> Friends, families and founders (FFF)

> Small money, various types of relation, unprofessional investors

> Business Angels

> Small money, high-risk investors, active involvement, hands-on investment, including non-financial investment

> Venture Capital

> Larger amounts, monitoring, board participation, usually high risk investment

> Corporate Venture Capital

> Industry specific investment and value added

> Public Funding Schemes

> Early stage, high-risk,


Determinants for Investors (value of firm)

> Market size

> Sale

> Competitive advantage

> Skills, experience and track record of the team

> Rate of return on investment

> Exit opportunities

> State of economy and industry

> Philanthropic (business angels)


Some Issues between Entrepreneur and

Investor

> Lacking investment readiness (EN)

> Giving space to “externals” and their decision power (EN)

> Allowing active involvement (EN)

> Managing expectations of investors (EN)

> Monitoring and sharing of information (INV)

> Estimating value (INV)

> Syndications between investors (EN&INV)


Types of Exits (important for investor)

Exits/ Divestment Private equity investors generally get their principal return on investment via a capital gain or sale or flotation.While an IPO may be the most glamorous type of exist, venture capitalistsand owners, most succesful exits of venture investment occur through a M&A

IPO

Trade Sale/M&A

Write-off

Initial Public Offering, “flotation”, “float”, “going public”,

“listing” are just some of the terms used when a company obtains a quotation on a stock market.

Stock markets include the Official List of the London Stock

Exchange (where around 40% of trading company flotations are venture backed), the Alternative Investment Market (AIM),

NASDAQ Europe, NASDAQ (USA) and other overseas exchanges. It brings capital and public awareness. All financial documents and statements are public.

The venture firm receives stock or cash from acquiring companyand the venture investor will distribute the proceed from the sale to its limited partner;

Reduction in the value of an investment

Secondaries When a private equity firm acquires existing shares in a company from another private equity firm or from another shareholder or shareholders.


Lecture 2

Financing Entrepreneurial Firms,

Equity Gaps and Public Policies


Development in Venture Capital Markets

Source: Vækstfonden, 2006


Investment pr. country

(total, % of GDP, VC and Buy out)



Venture Capital Investment pr. country

(total, % of GDP)



The Financing Gaps (Sohl, 1999)


Equity Gaps for Entrepreneurs


Explaining the Gaps – Market Failures

– Turning to Public Policies..








The Investment Policy Model

Framework Conditions for Risk Capital Investment

Investment

Opportunities

High-Growth

Firms

Knowledge intensive sectors

Commercialisation of Public R&D

Investment

Readiness

Public Guarantee

Schemes

Public co-investment schemes

Taxation

Administrative

Burdens

Investor

Networking

Investment

Incentives

Investment

Culture

Investment values

Investment

Capital

Private Wealth

Private Funds

Public Funds

Regulation

Internationalisation of markets

Exit Opportunities

Investment

Abilities

Human Capital

Social capital


Q&A

Thank you for your attention


Risk Capital Project

Financing Entrepreneurial Firms

Financing Entrepreneurial Firms,

Equity Gaps and Public Policies

Thank you for your attention

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Risk Capital Project

Financing Entrepreneurial Firms

Financing Entrepreneurial Firms,

Equity Gaps and Public Policies

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