financing entrepreneurial firms glenda napier fora oslo university - 27 february, 2007

Financing Financing Entrepreneurial FirmsEntrepreneurial Firms

Glenda Napier FORAOslo University - 27 February, 2007

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

OutlineOutline

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


Lecture 1Lecture 1

Financing Entrepreneurial FirmsFinancing Entrepreneurial Firms


EU's Performance ChallengesEU'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 InnovationTypes of Innovation

> Incremental/linear type of innovation > Radical/systemic type of innovation


Incremental/Linear ApproachIncremental/Linear Approach

INNOVATOR ENTREPRENEUR INVESTOR


Radical/Systemic ApproachRadical/Systemic Approach

INNOVATOR ENTREPRENEUR

INVESTOR


Varying Forms of Innovation Require Varying Forms of Innovation Require Different Types of Financing Different Types of Financing

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

> Radical/systemic innovation → High Risk Capital = Venture Capital


Risk Financing: Venture CapitalRisk Financing: Venture Capital


Investment Stages 1Investment 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 StagesVenture Capital Investment Stages

.

Seed Start-up Early Stages Expansion Later Stages

US National Venture Capital

Association

> Management Team> Business Plan> Prototype (R&D)

> Senior Management team > Completed R&D> Min. revenues> Negative cash flows

> Viable products> Market > Customers > Revenues > Positive cash flows

European Venture Capital Association

> R&D > R&D> Marketing > Business set up> No commercial activity

> Completed R&D> Manufacturing and sales> No profit

> Increase in production capacity> Increase R&D and marketing > Break even or profit

Canadian Venture Capital Association

> R&D> No commercial activity

> R&D> Marketing> Business set up> No commercial activity



British Venture Capital Association

> Business Plan> Prototype (R&D)> Prior to market

> R&D> Business set up> No commercial activity

> Manufacturing and Sales> Completed R&D> Profit or not

> Increase in production capacity> Increase R&D and marketing

European Business Angel Networks

> R&D > R&D> Marketing > Business set up> No commercial activity




Types of investorsTypes 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)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 Some Issues between Entrepreneur and InvestorInvestor

> 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)Types of Exits (important for investor)

Exits/ DivestmentExits/ 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

IPOIPO 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.

Trade Sale/M&ATrade Sale/M&A The venture firm receives stock or cash from acquiring companyand the venture investor will distribute the proceed from the sale to its limited partner;

Write-offWrite-off Reduction in the value of an investment

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


Lecture 2Lecture 2

Financing Entrepreneurial Firms, Financing Entrepreneurial Firms, Equity Gaps and Public PoliciesEquity Gaps and Public Policies


Development in Venture Capital MarketsDevelopment in Venture Capital Markets

Source: Vækstfonden, 2006


Investment pr. country Investment pr. country (total, % of GDP, VC and Buy out)(total, % of GDP, VC and Buy out)



Venture Capital Investment pr. country Venture Capital Investment pr. country (total, % of GDP)(total, % of GDP)



The Financing Gaps (Sohl, 1999)The Financing Gaps (Sohl, 1999)


Equity Gaps for EntrepreneursEquity Gaps for Entrepreneurs


Explaining the Gaps – Market FailuresExplaining the Gaps – Market Failures– Turning to Public Policies..– Turning to Public Policies..


The Investment Policy ModelThe Investment Policy Model

Framework Conditions for Risk Capital Investment

High-Growth Firms

Commercialisation of Public R&D

Investment Readiness

Investor Networking

Public Guarantee Schemes

Knowledge intensive sectors

Investment Opportunities

Public co-invest-ment schemes

Investment Incentives

Investment Culture

Investment Capital

Investment Abilities

Taxation

Administrative Burdens

Private Wealth Investment values

Public Funds

Private Funds

Internationalisation of markets

Regulation

Exit Opportunities

Social capital

Human Capital


Q&AQ&A

Thank you for your attentionThank you for your attention

financing entrepreneurial firms glenda napier fora oslo university - 27 february, 2007

Documents

venture capital slide

risk financing

capital informal

forms of innovation

sources of financing

working capital

investment stages

formal capital institutions