NEXT Pitch Day. Introduction for startups and entrepreneurs

Transcription

1 NEXT Pitch Day Introduction for startups and entrepreneurs Paolo Anselmo - IBAN President Ancona - May 12, 2015

2 Entrepreneurship: a definition << Entrepreneurship is the dynamic process of creating incremental wealth. The wealth is created by individuals who assume the major risks in terms of equity, time and/or career commitment or provide value for some product or service. The product or service may or may not be new or unique but value must somehow be infused by the entrepreneur by receiving the necessary skills and resources >> Virtanen, 1997

3 Access to financial resources One of the major challenge confronting SMEs (which make up for 98% of enterprises in Europe) is getting access to financial recourses, particularly at their seed, start-up, and growth phases not least as they are often considered as a high risk investment, with potentially low returns which only materialize in the medium to long term. In a changing financial environment and to some extend due to the new rating culture, banks may be reluctant to provide credit to what perceive as their riskiest clients, potentially providing insufficient profit margins an attitude which leads to high transactions costs for SMEs. (DG Enterprise: new programme brings together competitiveness and innovation)

4 The paradox of access to finance Banks Venture Capitalists Stock Exchange have money Investors argue that there aren t enough good projects (unattractive for commercial capital) Entrepreneurs don t find capital to support their projects What is a good project? Who is right?

5 Tentative analysis of the equity paradox Businesspersons (techno-preneurs) are generally faced with four types of issues when trying to raise equity: equity aversion: cultural reluctance when it comes to opening their companies to outsiders (shareholders and managers) asymmetry of information: difficulties in presenting themselves or their business plan in a way that accommodates the priorities and management requirements of equity suppliers project investment readiness: certain equity and venture capital tools are not adapted to the needs of all businesses at all stages of their development difficulties in identifying, and reckoning with, the legal/administrative requirements of venture capital and credit providers. Such requirements include information on projects as well as financial and managerial data (corporate governance rules). Downstream of investment, businesses should also recognise the importance of regular, properly formatted reporting to investors.

6 Entrepreneurs & Investors The entrepreneur A great IDEA? A business PROJECT!! The investor

7 Entrepreneurs & investors - The traditional finance gap Current European Union situation Business Finance is dominated by major Banks Finance provided to entrepreneurs is predominantly debt finance EU Banking for small/new businesses is treated as retail There are gaps in the package of support (growing or new firms) SME s market segment seen as high risk with high transaction costs Debt finance usually requires some form of security or collateral (intangible assets are not security) Venture capital market is fragmented European angel market is immature

8 The Funding Gap Pre-seed Stage Seed/Startup Stage FUNDING GAP Early Stage Later Stages 3 F Founders Family & Friends (or Fools) Angel Investors (or Clubs) Very few angel deals done above 0,5 M Venture Capitalists Very few VC deals done below 1 M K 0,5 M 1 M 5 M up

9 Entrepreneurs & investors - Closing the gap Innovative Finance for Innovative Companies How? Encouraging Money with Management Addressing the gaps in the current market e.g. Regional Venture Capital Fund Developping an integrated approach - an escalator of financial packages

10 Funding options for an entrepreneur There are several possibilities of financing a company Own founder money LOVE money (family & friends) Bank loans & overdrafts (with or without guarantees) Public Grants & micro credits (local/national government) Informal investment - Business Angels (small equity) Venture capital or Corporate venturing (larger equity) Public shares issue (equity, IPO Initial Public Offering) EQUITY or DEBT

11 Priorities for equity and loans providers 1/2 Equity providers Eligibility Criteria Banks Availability of guarantees or collateral Perceived capability to repay the loan Company track record Rating Good management Repayable short-term loans Innovative nature of business projects Business plan quality Management team Family, Friends and Fools Seed capital funds Personal relationship based on trust Business plan quality Perception of the innovative nature of the project Intellectual property High growth potential

12 Priorities for equity and loans providers 2/2 Equity providers Business angels Venture capital Corporate venturing Eligibility Criteria Meeting or matching of individual entrepreneurs with Business Angels Atmosphere of trust between individuals Credible business plan in the eyes of the Business Angel Good management Fiscal incentives Market knowledge of the entrepreneur Availability of exit route Return on investment (capital gain) Business plan credibility Business plan with patent technology Track record (over previous years) Ability to grow fast and deliver quick ROI Management team quality Innovative nature of the project in relation to the company s core business Industry-specific usefulness of the project, in particular from a technological standpoint Business plan quality Good management Tax incentives

13 Equity Providers PROs No cost of interest and no fixed repayment schedule Stronger financial position Reduced financial pressure Access to professional network and coaching CONs Loss of management / ownership control Request for a strong financial discipline Influence on management and strategic decisions Exit route (for investor) to be prepared

14 Venture Capital Vs Business Angels VC Easy to find via directories. BA Difficult to find. Your request is only 1 among many hundred a VC receives. Request often a strong personal involvement. Can often provide large investment, e.g. via syndication. Thorough and formal due diligence and investment process. Exit route very important. Limited amount to invest Investment decisions often quick and less formal. Syndication more and more usual. Exit route less in focus.

15 Business Angels - Identikit Business Angel: private individual investing own wealth in early stage businesses PLUS own expertise and network of contacts Investment Euro Equity investors Willing to share managerial skills, specialist knowledge and networks No sector preference Often prefer to invest in their region of residence local investors Seeking profit, but also fun and adventure Usually total investments below 25% of wealth Can become involved in the business management ( active Angel ) or not ( passive Angel ).

16 Angel Roles in Portfolio Companies Board of Directors (non executive director) Advisor, mentor, coach Of CEO, of management team Step in during crisis (temporary), IF Assist in raising additional money Another Angel round VC money Tee up the company for the exit

17 An Angel Portfolio Strategy - Portfolio Considerations 5-10% of net worth invested (asset allocation approach) 8-15 investments (risk diversification) High tech, low tech, no tech (your choice) Variety of involvements Lead investor Board, advisor Passive Most of ROI from 1-2 of 10 companies

18 An Angel Portfolio Strategy - Integration Exits into Portfolio Strategy VCs exit in 3-5 years (assume 5) Angels invest earlier and expect to exit in 5-7 years (average assume 7) A balanced angel portfolio contains ten companies Consequently, angels should invest in 2-3 companies per year Build to ten company portfolio gradually A portfolio of companies in all stages of development Good balance for investors time and management commitment

19 An Angel Portfolio Strategy - What a Business Angel is looking for What a Business Angel is looking for A compelling and sustainable business plan. A strong and engaged management team. High growth, scalability, strong financial projections. Prototype/Product/Service readiness. Operational involvement of the Angel investor. Adequate and objective pre-money valuation. High Perceived return Friends&Family Business Angels Medium Entrepreneur Venture Capital Low S&P500 Nasdaq Investors Banks Low Medium High Perceived risk

20 An Angel Selection Strategy - Angel Toolkit Elevator Pitch Executive Summary PowerPoint Full Business Plan (write full BP first) 2 minutes verbal summary: Product, opportunity, differentiation Attract interest not closing 2-4 pages written summary Balanced presentation Attract interest not closing 20 minute verbal presentation Cover whole business plan Find serious investors pages plus appendices Validation scorecard (due diligence) Basis for all other plan forms

21 An Angel Selection Strategy - What can stop a positive closing of an investment deal Initial screening and meetings Entrepreneur(s) expectations on start-up value too high; Limited growth potential; Lack of affinity between proposer and investor. Business plan analysis un-consistent market projections, lack of data, weak management team Letter of intent Not acceptable valuation/exclusivity terms; IRR/ROI too you Technical, legal and financial diligence Poor IPR, generic financial planning, cash flow burn rate, etc. Negotiation on pre- and post-money valuation, equity % Closing

22 Business Angels - success case histories Company name Angel Investor Business Investment Value at Exit Apple Computer (Name Witheld) Computer hardware $ $154 million Amazon.com Thomas Alberg Online bookshop Blue Rhino Andrew Filipowski Propane cylinder replacements Lifeminders.com Frans Kok Internet reminder service Body Shop Ian McGlinn Body care products $ $26 million $ $24 million $ $3 million million ML Laboratories Kevin Leech Kidney medical treatment Matcon Ivan Semenenko Bulk containers Source: partially adapted from unpublished data provided by Amis Ventures in million million

23 Why Angels Join Groups - Solo Angel Investing Investment Process is time-consuming Deal sourcing Reading business plans Due diligence Due diligence is difficult Finding vertical experience May require using outside experts Legal (and fiscal) support is expensive

24 Why Angels Join Groups - Investing through Angel Organization Dividing the work eases the pain. Variety of vertical experience available. Standardized processes and term sheets. Deal flow encouraged, entrepreneur-friendly. Pick and choose the deals you like. Great camaraderie among the like-minded. The next future angel investment?? through angel group /club!!

25 IBAN Association - Vision and Key Programsket Promotion and development of Business Angels community in Italy; Representation of Business Angels in the innovation and economic development eco-system; Lobbying for a better legal and tax environment for BAs and high potential start-ups; Development and exchange of best practices and professional standards (through business meetings and networking events, ex. IBAN Academy & Annual Covention); Strong "relationship network" that provides a common factor to the skills and experiences of many organizations and operators in the sector, covering the entire "value chain" of "early stage phase of SME s. IBAN Association is the institution that best understands and represents Italian Business Angels and In this way IBAN can effectively support the start-up in the process of growth and value creation.

26 IBAN Association - Network structure and Membership to-date IBAN Association Business Angels & Professionals B.A.N. Regional operating area and focus on cross-sector businesses B.A.N. National/international operating area ad focus on cross-sector businesses IBAN s members are BANs, Investors Clubs, Business Angels and Professionals in matching investors (formal and informal) with entrepreneurs. Angel Investors Club Regional Financial Player, Incubators, etc.

27 Features of investments of Italian Business Angels - 1/2 The Italian informal venture capital market grows steadily, and in 2013 its total value was This is not an estimation of the universe of Business Angels (cfr. Mason, 2008). After a constant growth between 2000 and 2008, the annual value of investments is now stable in the range million euro. Total market value ( '000) Value of Investments (mln )

28 Features of investments of Italian Business Angels - 2/2 74% of Business Angels owned less than 15% of the share capital of the financed company. 46% of Business Angels made solo investments, and 31% coinvested with 8 or more Business Angels (consistently with previous years). The most financed industry in Italy was ICT, followed by media & entertainment and by medtech. The following graph shows the distribution of investments by industry financed (number of investments). Moreover, investments (also by Corporate Venturing) are increasing in the following business sectors: food, industry devices and social media. 35% 30% 30% 25% 20% 15% 10% 5% 0% 14% 11% 9% 8% 6% 6% 5% 3% 3% 2% 2% 2% 0% 0% 0% 0% 0%

29 Business Angels identikit - Characteristics and investment behavior The typical Italian BA is a years old man, he has a high educational degree (82,7%) who mainly lives in Northern Italy. Generally is an entrepreneur with past experience as a manager, declare assets lower than 2 mln and invests 10% of its available cash assets in the angel investing market.

30 Via Ampère, 61/A Milan Italy Tel Fax Member of: Paolo Anselmo - IBAN President presidenza@iban.it