pres_deho_insme-unido_2006.ppt
TRANSCRIPT
Business Start-up and Access to Finance for
SMEs and New Technology based firms
The investment activity of Venture Capital funds:
from deal flow to investment Sonia Dehò
INSME-UNIDO 30th November 2006
Private Equity and Venture Capital
Early-stage
Development
Change
Venture Capital
Private Equity
Private Equity in the financial system
Companies
Institutional Investors:
• Pension Funds• Insurance Comp.• Foundations• Pension Inst.
Risk Capital
Private Equity
Stock Ex.
Private Placement
Loans
Bonds
Investment Banks
“Traditional” banks
Debt Capital
The offering of risk capital
Amount of financial sources
Business Angels
Venture Capital
Private Equity
Stock Exchange
Time
Venture Capital
Specialised form of finance, organised in close-end funds supporting new entrepreneurial initiatives
Focused on investments in rapidly growing sectors, as like information technology and biotech
Take higher risks with the expectation of higher returns (“capital gains” through divestments)
Purchase equity securities (common stocks, preferred stocks, convertible loans)
Assist in the development of new products and services
Have a long-term orientation (3 to 7 years)
“Create value” through active participation
The role of Venture Capital in value creation Venture capital does not only mean financing!
Support in development strategy definition
Financial know-how
Network of relationships in the industrial and financial sectors
Contribution to a professional and objective management of the business
Improvement of the entrepreneur’s standing versus banks and markets
Improvement in attracting outstanding managers
Venture Capital: transactions definition
Seed Financing
(testing)
Start-up
Financing
Investment during the phase of testing of a new
product/service
Investment during the phase of start-up of the
production activity
Expansion
Financing
The company is in the development phase with the need of consolidation
of the activity
Lessons from USA
High tech sectors contributed for 1/3 to the GDP growth in USA
At least 2 investments of success for every 10 start-ups with IRR higher than 25%
The billions of dollars of venture capital pumped into U.S. companies from 1970 to the end of 2003 has created 10.1 million jobs and USD 1.8 trillion in revenue
As of the end of 2003, 9.4% of the jobs in the U.S. and 9.6% of the U.S. GDP were created by companies in which venture capital invested USD 338.3 billion
From 2000 to 2003 venture-backed companies created 600,000 new jobs (i.e.: Ebay, Google, Jetblue) with a growth of 6.5% in employment rate (against a –2.3% for U.S.)
GLOBAL INSIGHT, (July 2004), “Venture Impact 2004”
It is proven in many countries (the US, the UK and Israel for example) that venture capital has been the most effective means to manage innovation and creation of new companies
The competitiveness of a country in high tech sectors is largely dependent on the quantitative and qualitative level of the existing venture capital
Despite forecasts of the eighties, the lack of venture capital in Japan determined the impossibility to reach US in Information Technology (while Japan was leader in consumer electronics)
The impact of venture capital on innovation is four to five time greater that corporate research development (J. Lerner)
Companies like Digital Equipment Corporation, Apple, Federal Express, Compaq, Sun Microsystems, Intel, Microsoft are examples of venture-backed companies
Venture Capital and management of innovation
What a Venture Capital Fund is
Management Company
Advisor
Investorspension funds, financial institutions, insurance companies, corporations
Venture Capital Fund
Portfolio Companies
Decision to divest(IPO, trade sale, write-
off)
capital gain/loss
Decision to invest(vision, idea, management,
technology, market, ecc.)
Deal flow analysis (Reactive or pro-active)
Valuation
Due diligence
Investment execution
Follow-up
What a Venture Capitalist does
INFORMATION GATHERING(B.P. + B.I.)
PROJECT ASSESSMENT
VALUATION & DEAL STRUCTURE
T/S & INVESTMENT AGREEMENT
INVESTMENT
1-2 wks 1-2 wks 1 wk 3-4 wks 1 wk
FIRST CONTACT
FIRST DIRECT
MEETING
PRELIMIN. DECISION
SECOND DIRECT
MEETING
FINAL DECISION
The process
Follow
-up
Deal flow analysis Valuation
Due diligence, investment execution
Deal flow analysis: decision drivers
DECISION DRIVERS
EXIT
BUSINESS MODEL
BUSINESS IDEA
MANAGEMENT TEAM
COMPETITION ARENA
BUSINESS PLAN
IMPORTANCE
Decision drivers of investments: business plan
BUSINESS PLAN
Executive summary the opportunity, mission, business model, target market, the competitive advantage, etc
Team management, Board, key contributors
Company general info, value proposition, partnerships, etc.
Market analysis & competition analysis
Products/services offered products/services portfolio, technology, R&D, pre & post sale services, delivery, etc.
Marketing and sales marketing plan and strategy, sales tactics, pricing, partners, advertising and promotion, distribution, etc.
Economics and financial projections (P&L, BS, CF)
Decision drivers of investments: competition arena
COMPETITION ARENA
Target market analysis
Competition analysis
Competitive strategy (control over costs, prices, and distribution)
Barriers to entry (i.e.: proprietary protection, legal/contractual advantage, networks)
Delivery and distribution channels
Market penetration and sales forecasts
MANAGEMENT TEAM
Who is the ideal entrepreneur? HE/SHE MUST BE: fast, “have vision”, informed, able to copy experience – track record, knowledge of target market able to change, recognise and understand its mistakes a “sailor”, a team leader and a builder willing to step back at the right time able to go “bankrupt” and willing to start again able to be at the right place at the right time lucky !!!
Decision drivers of investments: management team
Recognising Entrepreneurial people Personal characteristics – Learnable
commitment, long-term involvement, low need for status and power, opportunity oriented, integrity
Personal characteristics – More difficult to acquire high energy, emotional stability, conceptual ability, creativity, capacity to inspire
CAUTION WITH TECHNICAL
ENTREPRENEURS!!!
BUSINESS MODEL
BUSINESS IDEA
Decision drivers of investments: business idea and business model
Value of the innovation/product (an unanswered need)
All ideas are not opportunities
Scalability/“Crystal clear” Business margins
companies with good margins are better evaluated! Speed of execution
speed and timing of revenue generation speed in reaching operating and financial break even
Sustainable growth “value addition” growth sustainable for a long time (i.e. technological advantage, offering differentiation)
Capital intensity What is cash burn more cash is needed to reach a competitive dimension, more the investment is risky !!!
Valuation Three stages: early stage investment, new rounds of financing, divestment (IPO or trade sale)
Valuation methods early stage investment: negotiation with the entrepreneur (uncertainty on values used for calculations, the only certainty is cash needs!) new rounds of financing/divestment: multiples, DCF, options (valuation given by external advisors)
Definition of “pre-money”. FINAL VALUE = pre-money+investment
pre-money: is based on “intangibles”, such as level of innovation and potential of the idea, value of the management, etc., and “tangibles” like: how much already invested by the entrepreneur, patents, strategic agreements, etc. investment: is the cash required (funding need), even divided into several tranches
The ratio between pre-money and cash injected determines the share of the investor
We don’t want the majority, however it can happen When the investment is divided into several tranches, assumptions on future valuation is made, subject to certain milestones agreed are reached
Due diligence Business due diligence
Management
Does the IDEA work? - Intellectual Property
Is there an unmet market need/pent-up demand?
Competitive advantage
Financial due diligence
Financial analysis: P&L, BS and CF (actual, if any, and projections)
Returns analysis (child vs. dwarf)
Tax position
Legal due diligence
Company books, deed of incorporation, articles of association, CEO powers…
Agreement and commitments (with customers, suppliers, banks,…)
Insurance, guarantees, trademarks, patents, licences…
Litigation
Negotiation and investment execution (1/2)
TERM SHEET/INVESTMENT AGREEMENT
“Milestones” of the agreement (the handshake between gentlemen):
Valuation
Anti dilution/ratchet clause
Business plan
Governance (board seats)
Exit
Non-binding and no-shopping condition
Subject to positive due diligence and investment committee approval
Negotiation and investment execution (2/2)NEGOTIATION
Pre-money valuation and anti dilution rights
Corporate governance
Exit strategy/rights
(SHAREHOLDERS/INVESTMENT) AGREEMENT
Present and future capital increases
warrants; tranches; earn-out;
Rights/majority/veto rights for the shareholders meeting
Rights/majority/veto rights for the board
Stock Option plan
Lock up and permitted transfer
Exit: IPO, trade sale, first refusal/offer, tag and drag along
Follow-up: from start-up to company
RELATIONSHIP WITH THE ENTREPRENEUR
Board and day by day management
Budget control and forecast (cash management!!!), reporting
Sounding board for strategy, marketing and operations
Mediation
Next rounds
Exit
SUPPORT ACTIVITIES
Communication and public relations
Networking (revenues) and portfolio synergies
Head hunting
Support in future round of financing
