andrea di anselmo - prospects for the development of capital investments in europe

Prospects for the development of capital investments in Europe

Various ways of acquiring capital for innovative projects:business angels, private investors seed and venture capital funds

Andrea Di AnselmoVice president META Group - ZMV spa

Krakow 04/03/20010

Start-ups

Early Stage investments

Regional/interregional

Structural Funds

Revolving

ERDF – ESF

PPP

Market & Profit driven

Policy Issue

Demand side:

Quality of the Deal Flow

Investment readiness

International dimension

Policy Issue

Environment:

Risk adverse culture

Low level of recognition of the entrepreneur as part of the elite

O Be selectiveO Market & profit driven approachO Global born ambitious venturesO Co-investment schemesO Better use of the leverage (private investors and

state aid)O Accept to take riskO Avoid Bank way of doing it (they are the best for

other kind of financial support)O Engage the ecosystem (but open it up)

“… Europe needs to foster entrepreneurial drive more effectively. It needs more new and thriving firms to reap the

benefits of market opening and to embark on creative or innovative ventures for commercial exploitation on a larger

scale”

….”Entrepreneurship is crucial to competitiveness”.

The Green Paper on Entrepreneurship in Europe, COM(2003) 27 final COM(2003) 27 final

Creativity + Entrepreneurship = KICs(Knowledge intensive companies)

ambitious entrepreneursfast growing marketintangible assets

They are small in numbers butcover a critical role

O strongly affecting employmentO playing an increasingly active part in Global Markets and

Value Chains: initiators

Knowledge Intensive Companies

Knowledge Intensive companies

O Quality and quantity employment: 2% of new companies produces 50% of new employment in Europe and 70% in USA

O Dynamism of the economy: Nokia alone has changed Finland physiognomy and perception

O Creative destruction: today AT&T only exist as a brand

O 75% of Fortune 500 did not exist 25% ago

Knowledge intensive companies need (a lot

of) money!

3 Fs (Fools/Founders, Family, Friends) are not

enough!

Smart Money… (Finance is not enough)

o investment readiness/ready

o Mentoring and (training)

o Acceleration (not incubation)

o Internationalisation – cross border

o The added value of business angel investment

All the money is not the same

(Christian Saublens, Eurada)

O Venture Capital Funds tend to lower the risk associated and begin investing in the start up phase

O Exploitation related Grants are “tick box” driven and not market driven

Pre-Seed Seed

“Funding”

Gap

€ 200.000 to

€ 1.500.000

Start up Expansion

EntrepreneurFFFF

PoC funds

Venture Capital Funds

€ 1.500.000

to € 10.000.000

€ 20.000

to € 100.000

The Financing Food Chain

Grants

Cultural

Gap

€ 50.000 to

€ 300.000

EARLY STAGE RISK FINANCE (and more)

Early Stage Financing

Pre-seed up to0,5 $ Mln Seed up

to 1-2 $ Mln

Start up 5/10 $ Mln

Second Round 10/12 $ Mln

Expansion Capital10/50 $ Mln

Turnover

Cumulative Cash Flow

Business Angels

Venture Capital

Product definitionNo turnover

Product Completion

Initial commercial feedback

Venture Capital

Product Consolidation

Structuring of commercial channels

Strategic Partnerships

Continuous ideas/concepts/products innovation

Consolidation of the organisation

Partnerships and acquisitions

Proof of concept funds

Seed funds

FINANCIAL CYCLE (and more)

Expansion CapitalSecond round

Later stage (Venture Capitalist)

Start up SeedPree-Seed

Early stage (Proof of concept funds, BAs, Seed Funds, Venture Capitalist)

Scope

Company life-cycle

Identification of Market potential

Pre-businessplan

PrototypingAnd product development

Businessplan

Commercial-scale manuf. And

sales

Company established but not invoicing

Structuring commercial channels

Building up turnover

Continuous ideas/concepts/products innovation

Making Profits

Financial tools for KIC (what we miss)

o Proof of concept funds

o Business Angels

o Seed funds

Risk taking and risk rewarding

Source: EVCA Year Book 2008 Stage distribution of investments per year

In 2007, seed investments represented 0,3% of recorded VC investments in Europe

Seed + start up around 3 bn €

EU INVESTMENT ACTIVITY 25% of US LEVELS

Source: Compiled information from EBAN, ACA and Center for Venture Research

2007 EU US

Networks 297 245

Estimate n of angels

75.000 250.000

Investment per round

165.000€ 210.500€

Total estimate invested annually

3-5 billion€ 20 billion€

Total invested by VC annually in seed (EVCA data)

- 4 billion € 20 billion €

2007 EU US

Networks 297 245

Estimate n of angels

75.000 250.000

Investment per round

165.000€ 210.500€

Total estimate invested annually

3-5 billion€ 20 billion€

Total invested by VC annually in seed (EVCA data)

- 4 billion € 20 billion €

2007 EU US

Networks 297 270

Estimate n of angels

75.000 250.000

Investment per round

165.000€ 210.500€

Total estimate invested annually

3-5 billion€ 20 billion€

Total invested by VC annually in seed (EVCA data)

- 4 billion € 20 billion €

2007 EU US

Networks 297 270

Estimate n of angels

75.000 250.000

Investment per round

165.000€ 210.500€

Total estimate invested annually

3-5 billion€ 20 billion€

Total invested by VC annually in seed (EVCA data)

- 4 billion € 20 billion €

Angel Investing - Summary of industry statistics

Early stage investment in Europe

Source: AIFI; BVCA; AFIC; ASCRI; BVK; 2008

Red (in € Mln) amount invested in seed e start up in 2008

Green N° of operations

Fund Type % Return

1 Yr 3 Yr 5 Yr 10 Yr 20 Yr

EARLY/SEED VC -2.9 -19.8 47.1 37.9 19.1

Balanced VC 20.5 -9.4 17.5 20.8 13.6

Later Stage VC 38.0 -6.9 7.1 17.1 14.1

All Venture 15.7 -13.3 22.0 26.0 15.7

All Buyouts 28.8 0.1 2.6 8.1 12.4

Mezzanine 18.1 2.0 5.9 7.6 9.6

All Private Equity 23.4 -3.6 6.8 12.8 13.7

Source: Innovation Philadelphia (2005)

Seed vs Other Investment Returns

Some Data: Evolution of Seed ‘99 -05’

Some data: Seed in Europe today

o seed invested (< 500k€ per investment) in 2005: 97 ml € (EVCA report - down 34% from 2004)

o availability estimated to be much higher (from 300% - to 2000% more according to different sources)

o …we need much more deals in seed stage

Seed Funds and BAs

o They are the two (and only) players in this arena (<500 k€)

o Potentially 300 seed funds and 300 BANs active in Europe

o So far collaboration is occasional

o Weak lobbying, tax breaks, professional recognition

o Business angels network and Seed Funds should work together (sidecar, syndicate, regional focus)

Investments in knowledge intensive companiesare considered risky due to:

O the intangible nature inherent their activities O the small sizes of transactions O perceived high default ratesO lack of an established income stream

Seed capitalists and Business Angels are the most likely to invest in knowledge based enterprises providing equity finance for medium/long-term investments and managerial/technical

experience integrating the management Team

…All money is not the same!!!

(Christian Saublen, Eurada)

The evaluation approach of risk capital investors

Financial tools (early stage financing) for knowledge based start ups

o Proof of concept funds

o Business Angels

o Seed funds

Early stage investors – evaluation approach

Proof of concept

O Innovativeness (+)O IPR – Valorisation of research resultsO Entrepreneurial spirit

Business angels (informal investors and Spin-off corporate venturing)

O Atmosphere of trust between individuals and positive feeling, confidence (+)

O Possibility of hands on interventionO Credible business plan in the eyes of the Business AngelO Availability of exit routeO Return on investment (capital gain)

Early stage investors – evaluation approach

Seed capital funds

O Team (+)O Clear Business modelO Intellectual capitalO Growth potential (High)O Availability of exit routeO Return on investment (capital gain)

Early stage investors – evaluation approach

Investing in talents

SEED FINANCING

EARLY STAGE FINANCING

START UP FINANCING

Spin-off and Start–ups

with no more than 36 months

Located in Emilia Romagna

Intervention modalities

Equity Investment

Temporary/minority position (max. 45%)

Successive rounds investments

300 - 500.000 € average per investment up to 1 million €

PharmEste Academic Spin-off of University of Ferrara - reduction Neuropath Pain and Vesicular Hyperactivity.

Techgenia Spa: spin-off from Solgenia Spa. Informatics reliability and security through network appliances.

RaySolar: two researchers from Italian National Research Council (CNR) and two young economists production of hi-purity solar grade silicon.

H.D.S. Headmost Division Service, Facility Management.

Intrauma: medtech start-up, innovative screws for the reduction of fractures.

Passpack: online password manager with impenetrable cryptography, for companies and privates.

Investments

Thank you for listening

a.dianselmo@meta-group.com

“It is not difficult tolearn new things

butto quit old habits”