The Role of Business Angels,
Venture Capital and Financial
Institutions in Empowering
Micro, Small and Medium
Enterprises
Dr. Guriqbal Singh Jaiya
Director
Small and Medium-Sized Enterprises Division
World Intellectual Property Organization
www.wipo.int/sme
Stages of Technology Transfer:
From Research Support to Economic Growth
Federal
Corporate
Startups
State
Research
Support
More in Tax
Revenues
Inventions
Disclosure
Endowment
Patents
Licenses
New Products
Higher Standard of living
Economic
Growth
New Jobs
3 M’s of ENTREPRENEURSHIP
MANAGEMENT
MONEY
MARKETING
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?
Positioning for a Capital Injection
PEOPLE
Strategy
MARKET
•Business model
•Resourcing
•Target investors
TECHNOLOGY
Valuation / Building value
Capital Injection
Add value before raising capital
►Documentation
and Presentation
►Government grants
►Intellectual Property Protection
►R&D Partners
►In principle agreements
►Licences
►Customers
The “Ask and Offer”
►Financial
Projections
►Business and IP valuation
►Critical
negotiating tools
►Justifies assumptions
►Forces in depth research
►Forces decision making
►Makes you strong and confident
SOURCES OF START-UP CAPITAL (USA)
OTHERS
(3,9%)
GOVERNMENT LOANS
(1,1%)
MORTGAGED PROPERTY
(4,0%)
VENTURE CAPITALISTS
(6,3%)
FRIENDS
(9,0%)
EMPLOYEES / PARTNERS
FAMILY MEMBERS
BANK LOANS
PERSONAL SAVINGS
(12,45)
(12,9%)
(14,4%)
(78,5%)
START-UP CAPITAL
►25%
start with less than $5,000
►50%
start with less than $25,000
►75%
start with less than $75,000
►Less
than 5 % with $ 1,000,000 or
more
The Paradox of Access to Finance
►Banks
►Venture
Capitalists
►Stock Exchange
have money
But argue that there aren’t enough good
projects
What is a good project?
A Good Project!
A good project is a project presenting in the
eyes of an investor:
► acceptable risk profile
► a good perspective of return
this means:
► access to market = innovation
► profits
Source of High Risks Money
Which are today these sources ? we may regroup these in 3 major
groups:
 Business Angels: we are basically talking here about rich private individuals who are
ready to invest much needed “seed capital” at a very early stage of development of a
company, i.e. for new and speculative projects. Their role is extremely important, when we
talk about raising money between USD 0.5 and 2 million.
 Venture capital investors: these are usually private equity funds managed by
professionals. They seek to identify and finance the rapid growth of high potential young
firms that embrace innovative products, processes or technologies. This way, they
generate substantial rewards from successfully overtaking existing business paradigms.
Note that very often, traditional finance institutions do invest a small part of their funds
into alternative investments such as these V.C. funds.
 Last but not least, Governments: The first computers, the first commercial jet planes
were built in the U.S.A. as funded by DoD contracts. The U.S.A and Europe have set up
specific programs to promote new science and technology businesses. These are key
tools in helping scientists to engage into new business ventures.
N.B: A business environment – laws, taxes, etc… – which encourages private and
commercial investors to invest into risk taking ventures is an absolute prerequisite.
Government First: U.S.A.
The U.S. example – the Small Business Innovation Research program
 SBIR awards take the form of contracts for the development of technologies required
by agencies of the US Government. They provide 100% of the funding needed plus a
small profit element. The “norm” is USD 850 K for each project. Small business can win
and run multiple projects in parallel. The SBIR analysis below is done for the UK
Government in an attempt to copy and adapt it:
Government First: U.S.A.
The U.S. example – the Small Business Innovation Research program
 Established in 1982, it is the World’s largest seed capital program for science and
technology business.
The law stipulates that 2.5% of all federal agencies’ external R&D research must be done
through SBIR. Furthermore, the US has established a very large set of policies to favor
small US businesses in government procurement.
Government First: The European Union
The first program in Europe: COST – an international framework for
European Co-operation in the field of Basic Scientific and Technical
Research ( www.cost.esf.org )
 Established in 1971, COST allows the co-ordination of nationally funded research by
maximising European synergy and raising the level of scientific interaction at the scale of
Europe. Its budget for the period of 2002-2006 was of 1.5 Billion Euro.
 COST Actions cover
basic and precompetitive research.
Ukraine as a NonCOST country took
part in 15 actions.
 From March 2006,
Ukraine initiated
consultation to discuss
potential full
membership.
Government First: The European Union
EUREKA – an international framework for European Cooperation in the field of Marketable Scientific and
Technical Research ( www.eureka.be )
 The primary goal of EUREKA has always been to raise the productivity and
competitiveness of European industry and national economies through its ‘bottom-up’
approach to technological innovation. Since its inception in 1985, substantial public and
private funding has been mobilized to support the research and development carried out
within the EUREKA framework.
 Through its flexible and decentralized Network, EUREKA offers project partners rapid
access to a wealth of knowledge, skills and expertise across Europe and facilitates access
to national public and private funding schemes.
 The internationally recognized EUREKA label adds value to a project and gives
participants a competitive edge in their dealings with financial, technical and commercial
partners.
 Through a EUREKA project, partners develop new technologies for which they agree the
Intellectual Property Rights and build partnerships to penetrate new markets.
 Ukraine was granted full membership on 9 June 2006. Currently a total of 15 projects
have been developed with Ukrainian participants for a total of 1.1 M. Euro.
Public Interventions
Mix of non-financial and
financial support services
This means that intermediaries have to
(1) provide value-added services; and
(2) become more professional
Finding Innovation Funding Innovation
25 April 2007
Access to finance for West Midlands
SMEs
Patrick Palmer – Head of Access to
Finance at Advantage West
Midlands
What sort of initiatives are there?
►Demand
side initiatives
Provision of better information of what is available;
Investment Readiness programmes.
►Supply
side initiatives
Grants to support Research and Development and
certain “Proof of Concept” activity;
The Research and Development Tax Credit;
Grants for capital investment in certain areas;
A range of venture capital funds;
Encouragement of Business Angel activity;
Small Firms Loan Guarantee Scheme;
Community Development Finance Institutions.
Demand Side Actions
►Better
information
www.westmidlandsfinance.com;
►Investment
programmes
Readiness
Route to Investment (R2i);
CONNECT / InvoRed.
R2i
►Provided
through the Business Link network and
funded by Advantage West Midlands and the ERDF
►Comprising four stages:
Increasing Awareness of funding sources;
Education of businesses in funders’ requirements;
Developing applications and businesses to ensure
they are “investment ready” (Complex
Development);
Post Investment Support.
►Access
through Business Link West Midlands
Telephone 0845 113 1234
website www.businesslinkwm.co.uk
InvoRed
A tailored programme delivered across the West
Midlands that helps technology based businesses
from pre-incorporation to 2nd or 3rd stage funding:
•Get ‘Investor-ready’;
•Understand finance options ;
•Make the pitch;
•Find investment
•Flexible programme with 2 streams
Amber Stream – for early stage companies
Green Stream - Fast-track grooming for later stage companies
Supply Side Actions - Grants
►DTI
Grants operated by AWM –
Selective Finance for Investment in
England and Grant for Research and
Development
►Grants available through Business Link
– Diversification, Accelerate
►Mercia Spinner, Technology Transfer
Fund
Grant for Research and Development
►Grant
is available under four categories:
Micro projects;
Research projects;
Development projects;
Exceptional development projects.
• Grant
is only available to SMEs;
• Available throughout the West Midlands;
• AWM have secured ERDF money to
support this grant scheme.
Grant for Research and Development
Type of grant
Employee
numbers
Grant as %
of eligible
expenditure
Grant
range
Micro (small
development
projects)
< 10
50%
£2,500 £20,000
Research
< 50
60% - 65%
Development
< 250
35% - 40%
£20,000 £75,000
£20,000 £200,000
Exceptional
development
< 250
Up to 35%
£200,000 £500,000
Grant for Research and Development
Key criteria are:
►Technologically innovative;
►Technical risks and R & D challenge;
►Commercial potential and market need;
►Exploitation prospects;
►Management and project team abilities;
►Commercial and financial viability;
►Intellectual property secure;
►Additionality;
►Wider aspects – sustainability and design
considerations.
Technology Transfer Fund
►Available
in the Central Technology Belt,
but extending its area of activity;
►Provides proof of concept funding (ranging
from £5k - £25k) for new start-ups and
existing SMEs;
►Currently confined to medical technologies
and advanced materials technologies;
►Delivered by Birmingham Research and
Development Ltd with AWM and ERDF
funding
Objective
► To raise the number of spin-out companies from the eight West
Midlands Universities.
Resources
► 16 Business Development Managers;
► Provides small grants (up to £50k) to the Universities to support
patenting, market research, business plans, prototyping and
interim management for designated projects;
► Consultancy from Warwick Ventures and Birmingham Research
and Development Limited (BRDL)
► Related
Technology Transfer fund in the Central
Technology Belt.
The R & D Tax Credit
►An
enhanced tax deduction for eligible R & D costs
– 125% for large companies, 150% for SMEs;
►Claimed through annual Corporation Tax Return;
►For SMEs, if no taxable profit after R & D Tax
Credit, can receive a cash payment from HMRC of
24p for every £ of eligible cost;
►“R & D” for these purposes is “Work to resolve
scientific or technological uncertainty aimed at
achieving an advance in science or technology”;
►£1.8 billion of benefit since April 2000, £1 billion for
SMEs and £.8 billion for larger companies.
The R & D Tax Credit
R & D can include:
R & D does not include:
Planning the technical aspects Social Science
of a project
Work to improve or adapt
existing technology
Work similar to that done in
other companies where
details of the other work are
unknown
Creating new processes (as
well as new products or
services)
“Failed projects”
Non-technical work (market
research, financing, etc)
Work with no real technical
challenge (eg copying)
Developing content (eg
ringtones, economic models)
to be delivered by technology
Patenting / PR activity
Selective Finance for Investment in England
►A
grant of £10,000 or more (very exceptionally a
loan) to a business to help fund new investment
projects that lead to long term improvements
in productivity, skills and employment;
►Grant is minimum required to enable the project to
go ahead, but cannot exceed specified % of capital
expenditure
►SFIE is only available in specified areas (but
throughout the West Midlands for SMEs);
►SFIE projects have to meet a number of specific
criteria.
SFI Criteria
► Available
in specified areas (Tier 2 for non-SMEs and Tier 3 for
SMEs)
► Supports capital expenditure (grant can range from 10% to
35% of eligible capex depending on size and location)
► Must “make a difference” (“Additionality”)
► Project must create or safeguard jobs (ave grant £7,000 per
job, but excellent productivity and skills scores can justify
much more)
► Project and applicant must be viable
► Project should improve productivity
► Project should contribute to improved workforce skills
► Project should yield regional and national benefits
► Sustainability
SFIE – where can you get it?
SFIE – how much?
► Non-SMEs
– only in Red (Tier
2) areas.
► SFIE in Tier 3 areas
(everywhere except red areas)
is only available to Small and
Medium Sized Enterprises
► SFIE in Tier 3 is a maximum of
£100,000 (No maximum in Tier
2)
► How much – see table on right
► In Tier 3 areas project capital
expenditure should be less
than £1,500,000
► SME limits are: less than 50 /
250 employees; turnover less
than €10m / €50m or balance
sheet totals less than €10m /
€43m; “independent”.
Tier 2 –
excl
Coventry
Tier 2 Coventry
Tier 3
Large
Med
Small
15%
25%
35%
10%
20%
30%
N/a
7.5%
15%
Supply side actions – an escalator of venture
capital funds and other risk capital
Source
Range
Advantage Early Growth Fund (SBS
and AWM + co-invest
Advantage Growth Fund (SBS and EIF
+ private) operated by Midven
£20k - £100k (and
potentially to £200k)
£20k - £250k (and
potentially to £500k)
Advantage Creative Fund (AWM and
£0 - £250k
ERDF)
Mercia Technology Seed Fund (AWM + £50k - £500k
universities + private)
Advantage Enterprise and Innovation
Fund (AWM and ERDF + co invest)
Advantage Business Angels (costs
£500k - £2 million
£10k - £500k +
Supply side actions
Small Firms Loan Guarantee Scheme
►Provides
Government guarantees on loans from
private sector providers to small firms under 5
years old with viable business proposals but
insufficient security for conventional finance;
►Loans may range from £5,000 to £250,000 and for
periods from 2 to 10 years;
►Guarantee is for 75% of the loan;
►Operated through commercial banks and
administered by the Small Business Service;
►“Small” = less than 200 employees, turnover less
than £5 million (non-manufacturing £3 million)
Supply side actions - Loan Funds/
Community Development Finance Institutions (CDFIs)
Source
Range
Location
Princes Trust -18-30yrs
£250-£5k
Region
Halal Fund –non interest based
£7.5k -£35k Region
Arrow Fund
£1k -7.5k
B’ham & Solihull
Aston Reinvestment Trust
£2k-50k
B’ham&NSolihull
3b
Up to £20k
B’ham & Black
Country
Black Country Enterprise Loan Fund
Up to 5k
Black Country
Black Country Reinvestment Society
Up to £50k
Black Country
Impetus – Marches Rural Reinvestment
Trust
Up to £50k
Rural Marches
North Staffordshire Risk Capital Fund
£10-50k
North Staffs
Michelin Development Fund
£5k+
Stoke-on-Trent
Coventry&Warwickshire Reinvestment
Trust
Up to 50k
Coventry& Warks
Regional Financial and Equity Value Chain
Public
funding
Entrepreneur’s
own resources
and
reinvestment
capacities
- Grants
- Micro-credits
- Guarantees
- Proof of concept
FFF
Pre-seed
University spin off
Equity
Private
funding
- Banks
- Guarantees
- Leasing
- Loans
- Loans on trust
- Reimbursable advance
Corporate
Venturing,
Seed
capital
Business
Angels
Mezzanine
VC
- Factoring
- Micro-credits
- Export credits
Prerequisites
Risk taking investors:
private, public
Infrastructure:
business angels
networks, incubators, etc.
Intermediaries:
advice, investment
readiness, tutorship
Human capital:
professional fund
managers, state
aids experts
FFF : Family, Friends, Founders; BA : Business angels; VC : Venture capital; IPO : Initial Public Offering
IPO
Regions and Access to Finance
Case Study of the Rhône-Alpes (France)
TRAINING – ADVICE- SUPPORT
« Venture Capital » (National or International)
(Sudinnova, Siparex Venture, Banexi, Partech)
Incubators CREALYS
GRENOBLE
INNOEXPERT
(CCI Lyon)
BUSINESS
CENTRE
(EM Lyon)
Sup. de Co. Grenoble
Business
development and
reception service
(CCI)
L
O
C
A
L
FINANCING
BUSINESS
INCUBATORS
(NOVACITES
FRAC CREATION)
PROJECTS
High-tech
(strong potential)
INDUSTRY AND
INDUSTRIAL SERVICES
€300,000
+
« Seed capital » - National (thematic)
(I Source, Emertec, BioAm,…)
- Regional
ANVAR
(Amorçage Rhône Alpes)
(product- or process-based
innovation)
« Business development venture capital »
Rhône-Alpes Création
Banque Pop., Crédit Agricole
Rhône-Dauphiné Développement
SMALL INDUSTRIES
(CAPACITY SUBCONTRACTING)
SERVICES AND TRADE
Business
Angels
« Réseau Entreprendre »
(Loans on trust + Sponsorship)
« ARJE » (Regional repayable short-term
loans for new businesses—1-5 years)
€300,000
to
€45,000
€45,000
to
€15,000
(traditional, moderately innovative activities)
Sponsorship
Local platforms
Entreprendre en France
Banks + Comité Sofaris
CCI + professionals
Chartered accountants
(ATEN)
MICRO BUSINESSES
TRADE
CRAFTS
« Local platforms »
(Loans on trust)
Local initiative platform
ADIE
€15,000
to
« P.C.E. »
(BDPME loans)
F
U
N
D
I
N
G
R
E
Q
U
I
R
E
M
E
N
T
S
S
C
A
L
E
€7,500
« Mille et Un Talents »
(Regional grants)
« 3 hours – 3 days »
DEVELOPMENT TYPES
Source: RHONE-ALPES CREATION
Case Study Wales (United Kingdom)
The region of Wales (UK) re-organised all its financial services around
a single organisation called Finance Wales (www.financewales.co.uk)
to provide the following financial services and products:
►
►
►
►
►
►
Community loans amounting to US$ 10.000 to US$ 100.000 for
the social economy
Xenos: its business angels network
Spinout: unsecured loans without interest of up to US$ 50.000 for
university spinouts
Venture capital: up to US$ 1.500.000 per financial pool and US$
3.000.000 in total
Mezzanine: US$ 20.000 to US$ 800.000
Loans: from micro-credit of US$ 2000 to US$ 20.000 to loans of
up to US$ 1.200.000
Roadmap to Financing Options
Founders
Sweat equity
Science for Hire
On Spec
Federal
Corporations
Debt
Equity
Profit
Licensing
Partnerships
IP sale
Family, friends
Personal credit
banks
Business angels
Fed,State loans
Venture Capital
Referral network
Accountants
Attorneys
Successful entrepreneurs, etc
Corporations
Investment banker
Financing Options as a Function of
Application & Resources Required
•Spin-off
•Joint venture
•Equity investment
A lot
•Joint R&D
•Licensing
•Strategic alliance
•Equity investment
$
REQUIRED
•Bootstrap
•Angel investment
•Debt financing
•Partnerships
•Licensing
•Angel investment
A little
Few
Many
APPLICATIONS
THE ENTERPRISE FINANCING PROCESS
Grow th
Financing
needs
High
Risk
.O
I.P
MARKET
GAP
MARKET
GAP
IES
T
N
RA
A
GU
nk
Ba ans
Lo
ss
e
n
si ls
Bu nge
A
;
ur
e
en
ep
,
r
t
ily s
En
m
d
F a ien
r
F
SEED
s
lic
b
Pu
al
m
r
re
Fo ntu al
Ve pit
ca
ec
ra
to
ed l
Se ita
p
Ca
y
uit
q
E
id
Low
Risk
STAR T-UP PH ASE
E ARLY GROWTH
EXP ANSION
Financing stage
THE ENTERPRISE FINANCING PROCESS
Efforts
made by
financiers
Risk
Cash flow
Time
Commercial and Savings Banks
Innovation
Seed Capital
Funds and
Public
funding
Idea
Private
Investors
and
Business
Angels
Start-Up
Market introduction
Corporate Fund
and
Venture Capital
Growth
Maturity
Transfer
THE ENTERPRISE FINANCING PROCESS
Stage in
Cycle
Type of
Funding
R&D
Start-up
Proof of
Concept
Funding
Seed
Corn
Early
growth
First
Round
Accelerating
growth
Second
Round
Sustaining
growth
Maturity
growth
Development
Capital
Replacement
Capital
MBO / MBI
Development
Capital
Public Sector
Founders, family and friends
Source of
Funding
Business angels
Venture capital funds
Corporate venturing
Public listing / IPO
Investment Continuum
High Founder, friends
and family
Business Angels
Level of
Investment
Risk
Assumed by
Investor
Venture Capitalists
Corporate VC
Equity Markets
Commercial banks
Low
Seed
* “Angel Investing”
Osnabrugge & Robinson
Start-Up
Early Growth
Established
Angel market addresses the $500K
investment gap between love money
and serious money
VENTURE CAPITAL (Formal & Informal)
►
Institutional operators
(formal venture capital)
Private subjects
► Banks
► Insurance
► Corporate venture capital
►
►
Non-institutional operators
(informal venture capital)
►
Business Angels
FORMAL AND INFORMAL EQUITY PROVIDERS
Business Angels Formal venture
capital
*
Personnel
Entrepreneurs
Investors
Firms funded
Small, early stage
Large, mature
Due diligence
Minimal
Extensive
Investment's
location
Of concern
Not important
Contracts used
Simple
Comprehensive
Monitoring ex-post Active 'hands-on'
Strategic
Exiting the firm
Of lesser concern
Highly important
Rates of return
Of lesser concern
Highly important
Source: van Osnabrugge, 1998, p.2
FORMAL AND INFORMAL EQUITY PROVIDERS
VC
– Easy to find via directories
BA
– Difficult to find
– Your request is only one among
many hundred a VC receives
– Request often strong personal
involvement
– Can often via syndication
provide large investment
– Limited amount to invest
– Thorough and formal due
diligence and investment process
– Exit route very important
– Investment decisions often
quick and less formal
– Syndication more and more
usual
– Exit route less in focus
BUSINESS ANGEL (BA) - Definition
“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)
Attitudes, behaviour and characteristics:
• 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 (around 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
ANGEL’S – Success Stories
Company 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
$500.000
cylinder
replacements
$24 million
Lifeminders.com
Frans Kok
Internet e-mail $100.000
reminder
service
$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
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):
• 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 be expected to be higher than
market growth
• Increase of market share against competitors
• Superiority regarding competitors
ANGEL DUE DILIGENCE PROCESS
Technology
Technology development
Product development
Process development
Product supply
Deliveries
Market
Marketing
Sales
PR
Competitors
Organization
Recruitment
Board
Network of service suppliers
Office
Economy / Finance
Cash forecast
Finance activities
Cost estimate
Budget
IPR
Angel Motivations
►
Altruistic - willing to provide:





►
Advice - financial and management
Contacts - broad range to assist in development of venture
Hands-on Involvement - at basic level, if required
Governance - Board of Directors / Advisors
Credibility - sends good signals to customers, partners &
investors
Pragmatic
 Will hand off involvement to next level of investors …
 Therefore will use same criteria as VC to evaluate opportunity
 57% of companies with angel investment achieve VC
funding
Dr. Allan Riding, Carleton University research on Ottawa angels
 10% of companies with no angels achieve VC funding
Types of Business Angels
►
Professional
 Doctors, lawyers, accountants
►
Micromanagement
 Very hands on with lots of
experience, but may be toxic
►
Enthusiast
 Usually retired, investing is a
hobby, little value add
►
Corporate
 Retired senior managers
looking to support their
investments or create a new
senior job for themselves
“Millions of years of evolution, and
that’s the latest model?!?”
►
Entrepreneurial
 Most active, successful
entrepreneurs looking to
diversify portfolio or expand
current business
Investing Approaches
Sprinkle and Sprout
Approach
-
Investors make many
smaller investments
Bet on management
Follow-on investment in
successful sprouts
Fewer than 25% of the
“sprinkled seeds” sprout
successfully *
Heavy Lifting
Approach
- Investors make fewer,
larger investments
- Understand market
- Active involvement,
Advisory Board
- 75% of investees
succeed *
* ONSET Ventures research
THE U.S. ENTREPRENEURSHIP
SUCCESS STORIES
FIRST COMPANY WHICH ACHIEVED $ 100 MILLION SALES IN THE FIRST
YEAR:
COMPAQ INC.
► PRODUCT: PORTABLE PC’S
► HEADQUARTERS: HOUSTON, TEXAS
►
FIRST COMPANY WHICH ACHIEVED $1 BILLION SALES IN THREE YEARS:
SUN MICROSYSTEMS INC.
► PRODUCT: WORKSTATIONS + SOFTWARE
► HEADQUARTERS: MOUNTAIN VIEW, CALIFORNIA
►
►
►
FIRST COMPANY WHICH ACHIEVED $4 BILLION SALES AT INITIAL PUBLIC
OFFERING
NETSCAPE COMM. CORP. (BOUGHT BY AOL IN 1999)
HEADQUARTERS: MOUNTAIN VIEW, CA www.home.netscape.com
A Financial Chronology of Google.com
Price/share
(in US $)
1995
Larry Page & Sergey Brin@Stanford University
1997
0.06
0.50
15 000 US $ creditcards
100 000 US $ B.A. Andy Bechtolstein (Sun Microsystems)
Patent OTL
fin 1998
mai 1999
2.34
85
25 000 000 US $ 2 V.C.
Kleiner Perkins (Sequoia)
2001
15 000 000 US $ of which Yahoo
août 2004
295
NB:
960 000 US $ 3 B.A.
OTL receives2 % of the shares
2005
2 718 281 828 US $ I.P.O.
4 000 000 000 US $ Capital increase
turnover. 200 000 US $ 1999
8 000 000 000 US $ 2006
Source: Hervé Lebert
Amgen: A Capital Venture
►World’s
largest biotech company
►Founded 1980
 $19 million venture capital
investment
►2007
Financial Year
 $14.8 billion revenues
 $4.8 billion profit (before tax)
►Market
capitalisation: $51 billion
60
Venture Capital
► Invest
in:
 Private companies with high growth potential
 Launch, early development, or expansion
 Management buy-outs and buy-ins
► Raise
funds for investment from:
 Private and public pension funds
 Endowment funds
 Foundations, corporations, wealthy individuals
►Looking
for >5-fold return on
investment within 5 years
61
Venture Capital
► Profit
and risk sharing (high risk – high
return)
► 10 to 15% of portfolio will give very high
returns
► Detailed due diligence
► High level of hand holding
► Ownership and control of business shared
► Patient, flexible financing (5-7 years to exit)
► Highly selective financing – importance of
deal flow
62
Exit Strategy
►Exit
through the stock exchanges
(“IPO”)
►Sell to another VC
company/strategic investor
►Strategic mergers and acquisitions
►Issues in Exit : Minimum return expected by VC
fund.
 Minimum equity size for public
issue
63
Venture Capital Drivers
Fund Providers
Money
Venture Capital Firms
Limited Partners
2.5% Annual Fee
General Partners
20% capital gains
Pension Funds
Individuals
Corporations
Ins Companies
Foreign Sources
Endowments
80% of capital
gains + principal
Customer
(Revenue to VC firms)
Portfolio Companies
Money
Entrepreneurs
IPOs and Mergers
Equity
Management
(SG&A)
Supplier
(Cost of Goods Sold)
Venture Capital is a money distribution business where
entrepreneurs compete for “shelf space” and where only 1 in 100
companies get funded!
What VCs are Looking for
Products
A novel biological or chemical hypothesis
► A well understood mechanism of action
► Proof of principle
► Significant unmet need
► A strong IP position (both freedom to operate and
power to exclude)
► A strategy for partnering so that the risks
associated with the timing of FDA approval can be
passed on to someone else (although clear clinical
endpoints are a plus)
►
Start-Up Pitfalls
Venture Capital Nightmares
► Undocumented
commitments to cofounders or promoters who assist in
arranging the initial round of financing
► Unconventional corporate or capital
structures
► Equity arrangements that are not tied to
future performance of services; everyone
must have “skin in the game”
► A management team lacking a critical skill
set
► An unwieldy or dysfunctional board of
directors
Intellectual Property Pitfalls
► All
of the investors/institutions have not assigned
their rights to the university
► The university has not made patent filings on a
timely basis in relevant markets for the
technology
► The technology’s inventors published their ideas
prior to the filing of patent applications
► The claims of the filed patent applications are
not broad enough to cover the intended
application of the technology
► A non-infringement analysis (freedom to
operate) has not been done
Intellectual Property Pitfalls
Why is this so important?
►Because
universities typically provide
 No representations or warranties
 No indemnification
 An “as is” transfer of rights to the
underlying intellectual property
►This
translates to increased RISK for
the venture investor
Other IP Diligence Traps
► The
original sponsor of the research retains
“strings” restricting its commercialization
► The new company requires access to
biological materials, information, or other
technologies not covered by the license
► Only patents and tangible property can be
licensed, not “know how”
► The inventor’s activities are limited by preexisting, third party consulting agreements
Licensing Pitfalls
► Technology
licensing arrangements that
fail to contemplate the most likely
business model and liquidity event
► Failure to study the university’s incomesharing and conflict of interest policies
► Failure to adequately and appropriately
incentivize the inventors/scientific
founders
► Inability to have input on patent
prosecution and intellectual property
strategy for licensed technology