WIPO-INSME INTERNATIONAL TRAINING PROGRAM ON THE ROLE OF INTELLECTUAL PROPERTY IN RAISING FINANCE BY SMALL AND MEDIUM-SIZED ENTERPRISES jointly organized by WIPO and INSME Theme.
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WIPO-INSME INTERNATIONAL TRAINING PROGRAM ON THE ROLE OF INTELLECTUAL PROPERTY IN RAISING FINANCE BY SMALL AND MEDIUM-SIZED ENTERPRISES jointly organized by WIPO and INSME Theme 9: Role of Business Angels in Supporting Your Innovation Plans Mr. Paolo Anselmo President of the Italian Network of Business Angels (IBAN) Member of the Executive Committee of the European Network of Business Angels (EBAN) Member of the INSME Association Board Geneva - July 12, 2006 FINANCING OF THE PROJECT ► ► ► DEBTS PUBLIC FINANCING VENTURE CAPITAL: Formal Venture Capital Informal Venture Capital (business angels) FINANCIAL SUPPLY CHAIN Banks Guaranties Leasing Factoring Prerequisites Own resources Tools FFF Loans on trust Pre-seed Loans for investors Reimbursable advance payments Infrastructure: business angels networks, incubators, etc. Grants Micro-credits Other public support BA Corporate Venturing Seed capital Advice: investment readiness program, tutorship FFF : Family, Friends, Fools BA : Business angels VC : Venture capital IPO : Initial Public Offering VC IPO Expertise: professional fund managers 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 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? VENTURE CAPITAL (formal & informal) ► Institutional operators (formal venture capital) Private subjects ► Banks ► Insurance ► Corporate venture capital ► ► Non-institutional operators ► Business Angels (informal venture capital) 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 cylinder replacements $500.000 $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 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 IPR Organization Recruitment Board Network of service suppliers Office Economy / Finance Cash forecast Finance activities Cost estimate Budget PRIORITIES FOR EQUITY PROVIDERS Equity providers Eligibility Criteria Business angels or informal 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 Fiscal incentives Market knowledge of the entrepreneur Availability of exit route Return on investment (capital gain) Venture capital and Financial 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 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 OBTAINING RISK CAPITAL ► Advantages for the “science based” enterprise: ► acquisition of financing for development ► operative and financial consultancy growth in prestige international level ► ► and visibility at attraction of talents with stock options reinforcement of negotiating power with the credit system, clients and suppliers ► possibility for way out and positive reevaluation ► THE IRREGULATITY OF THE INFOMRATION AVAILABLE ► THE IMPORTANCE OF THE INFORMATION NEEDS OF THE INVESTORS IN THE EVALUATION OF THE PROJECT to evaluate the yield of the investment to reduce the risk of requests from opportunists ► “WHAT” AND “HOW” TO EVALUATE Economic and financial information (quantitative/consumptive) Business plan (quantitative/prognostic) Qualitative judgment of the confidence of the project THE FIRM-ORIENTED APPROACHES 1st Criteria: approaches based on costs (historic and/or substitutions) ► 2nd Criteria: approaches based on value ► ► ??.., what is the OBJECT of the evaluation? Immaterial and non-patentable factors Intellectual property (importance if the “scientific dimension” vs the “economic/financial dimension”) Prospective revenues (strong influence of the state of development of the product/service with respect to the market) THE INDIVIDUAL-ORIENTED APPROACHES ► Approaches based on qualitative variables (subjectiveness of the proposers): Demographic variables of the entrepreneur ► Social variables such as political editorials ► The context: academic or industrial origin (technical-scientific and managerial capacity) ► N.B. THE CRITERIA OF EVALUATION DEPEND ON: THE TIMING OF THE FINANCIAL INTERVENTION (enterprise’s phase); QUALITATIVE JUDGEMENT OF THE INDIVIDUALS (human capital); QUANTITATIVE ESTEEM OF THE ENTERPRISE (the reputation of the enterprise). ROLE OF THE SCIENTIFIC COMMUNITY ► (+) the KNOWLEDGE WORKERS “attracted”, why? ► ► ► ► ► ► opportunity to increase technical competences opportunity to enrich one’s CV to increase the visibility in one’s community access a global scientific network able management of eventual elitist attitude (-) the intrinsic mobility of KNOWLEDGE WORKERS (generation of a risk of unstable knowledge and/or cessation of know how to third parties) THE REPUTATION OF THE ENTERPRISE ► An extremely important resource in phase of start up in order to limit the environmental pressures and to attract the necessary resources ► How it is constructed: Collaborated vertical agreements (University, enterprises) ► Relational systems and participation in networks (social capital) ► N.B. More social relations form an enterprise, the potential for the reputation and confidence should mature over time. LEGITIMIZATION STRATEGIES ► SEARCH FOR CONSENT - RELATIONAL CONTEXT (in order to increase the level aperture towards the outside world) Access to scientific networks (in order to acquire qualified human resources) ► Access to financial networks (to acquire financial resources) ► Access to business networks (in order to acquire managerial resources) ► ► STRATEGIES Passive attitude (patenting of research results) ► Active attitude (localization near innovation locations) ► Proactive attitude (communication of the scientific successes obtained) ► BAN – THE NETWORK Venture Capital, Business Angels and Banks Network of Intermediaries and Universities BAN Universities, Research Centers Thank you and technology companies Professional Services and for listening! Business Support Organizations Thanks for your attention Ing. Paolo ANSELMO IBAN – Italian Business Angels Networks c/o Centro Sviluppo Spa Via Lavoratori Vittime Col du Mont, 24 11100 Aosta – Italy T: +39 0165 305511 – F: +39 0165 305540 e-mail: [email protected] www.iban.it www.eban.org