Mr. Paolo Mr. Paolo AnselmoAnselmo

President of the Italian Network of Business Angels (IBAN)President of the Italian Network of Business Angels (IBAN)

Member of the Executive Committee of the European Network of Business Angels Member of the Executive Committee of the European Network of Business Angels (EBAN)(EBAN)

Member of the INSME Association BoardMember of the INSME Association Board

Geneva - July 12, 2006Geneva - July 12, 2006

WIPO-INSME INTERNATIONAL TRAINING PROGRAMWIPO-INSME INTERNATIONAL TRAINING PROGRAMON THE ROLE OF INTELLECTUAL PROPERTY IN RAISING ON THE ROLE OF INTELLECTUAL PROPERTY IN RAISING FINANCE BY SMALL AND MEDIUM-SIZED ENTERPRISESFINANCE BY SMALL AND MEDIUM-SIZED ENTERPRISES

jointly organized byjointly organized byWIPO and INSMEWIPO and INSME

Theme 9: Theme 9: Role of Business Angels in Supporting Your Innovation Role of Business Angels in Supporting Your Innovation PlansPlans

FINANCING OF THE PROJECTFINANCING OF THE PROJECT

► DEBTS DEBTS ► PUBLIC FINANCINGPUBLIC FINANCING► VENTURE CAPITAL: VENTURE CAPITAL:

Formal Venture Capital Formal Venture Capital Informal Venture Capital (business angels)Informal Venture Capital (business angels)

FINANCIAL SUPPLY CHAIN FINANCIAL SUPPLY CHAIN

BanksGuaranties

LeasingFactoring

Infrastructure:business angels networks,

incubators, etc.

Advice: investment readiness program,

tutorship

Expertise: professional

fund managers

Own resources

FFF VCLoans on trust

Pre-seedLoans for investors

Reimbursable advance payments

IPOBA

CorporateVenturing

Seedcapital

FFF : Family, Friends, FoolsBA : Business angelsVC : Venture capitalIPO : Initial Public Offering

GrantsMicro-credits

Other public support

Prerequisites

Tools

THE ENTERPRISE FINANCING THE ENTERPRISE FINANCING PROCESSPROCESS

Financingneeds

Financing stage

HighRisk

LowRisk

Growth

SEED STAR T-UP PH ASE EARLY GROWTH EXPANSION

MARKET GAP

MARKET GAP

THE ENTERPRISE FINANCING THE ENTERPRISE FINANCING PROCESSPROCESS

Corporate Fundand

Venture Capital

Idea Start-Up Market introduction Growth Maturity

InnovationSeed CapitalFunds and

Publicfunding

Commercial and Savings Banks

Time

Efforts made by financiers Risk

Cash flow

Transfer

PrivateInvestors

andBusinessAngels

THE ENTERPRISE FINANCING THE ENTERPRISE FINANCING PROCESSPROCESS

R&D Start-upEarly

growthAccelerating

growthSustaining

growthMaturitygrowth

Proof ofConceptFunding

SeedCorn

FirstRound

SecondRound

DevelopmentCapital

ReplacementCapital

MBO / MBIDevelopment

Capital

Founders, family and friends

Public Sector

Business angels

Venture capital funds

Corporate venturing

Public listing / IPO

Source ofFunding

Type ofFunding

Stage inCycle

IS A COMPANY READY?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 & VENTURE CAPITAL (formal & informal)informal)

► Institutional operators Institutional operators (formal venture capital)(formal venture capital) ► Private subjectsPrivate subjects► Banks Banks ► InsuranceInsurance► Corporate venture capital Corporate venture capital

► Non-institutional operators Non-institutional operators (informal venture capital)(informal venture capital)

► Business Angels Business Angels

BUSINESS ANGEL (BA) - BUSINESS ANGEL (BA) - definitiondefinition

“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)BUSINESS ANGEL (BA)

• 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

Attitudes, behaviour and characteristics:

ANGEL’S – success ANGEL’S – success storiesstoriesCompany 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 reminder service

$100.000 $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 STRATEGYANGEL STRATEGY

• 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

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):

ANGEL DUE DILIGENCE ANGEL DUE DILIGENCE PROCESSPROCESS

TechnologyTechnology developmentProduct developmentProcess developmentProduct supplyDeliveries

MarketMarketingSalesPRCompetitorsIPR

OrganizationRecruitment BoardNetwork of service suppliersOffice

Economy / FinanceCash forecastFinance activitiesCost estimateBudget

PRIORITIES FOR EQUITY PROVIDERSPRIORITIES FOR EQUITY PROVIDERS

Equity providers Eligibility Criteria

Business angels orinformal 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 andFinancial 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 FORMAL AND INFORMAL EQUITY PROVIDERSPROVIDERS

* Source: van Osnabrugge, 1998, p.2

Personnel Firms funded Due diligence Investment's location Contracts used Monitoring ex-post Exiting the firm Rates of return

Business Angels Entrepreneurs Small, early stage Minimal Of concern Simple Active 'hands-on' Of lesser concern Of lesser concern

Formal venture capital Investors Large, mature Extensive Not important Comprehensive Strategic Highly important Highly important

FORMAL AND INFORMAL EQUITY FORMAL AND INFORMAL EQUITY PROVIDERSPROVIDERS

VC– Easy to find via directories

– Your request is only one among many hundred a VC receives

– Can often via syndication provide large investment

– Thorough and formal due diligence and investment process

– Exit route very important

BA– Difficult to find

– Request often strong personal involvement

– Limited amount to invest

– Investment decisions often quick and less formal

– Syndication more and more usual

– Exit route less in focus

OBTAINING RISK CAPITALOBTAINING RISK CAPITAL► Advantages for theAdvantages for the “science based” “science based”

enterprise:enterprise:► acquisition of financing for developmentacquisition of financing for development

► operative and financial consultancyoperative and financial consultancy

► growth in prestige and visibility at growth in prestige and visibility at international levelinternational level

► attraction of talents with stock optionsattraction of talents with stock options

► reinforcement of negotiating power with the reinforcement of negotiating power with the credit system, clients and supplierscredit system, clients and suppliers

► possibility for way out and positive re-possibility for way out and positive re-evaluationevaluation

THE IRREGULATITY OF THE THE IRREGULATITY OF THE INFOMRATION AVAILABLEINFOMRATION AVAILABLE

►THE IMPORTANCE OF THE INFORMATION THE IMPORTANCE OF THE INFORMATION NEEDS OF THE INVESTORS IN THE NEEDS OF THE INVESTORS IN THE EVALUATION OF THE EVALUATION OF THE PROJECTPROJECT

to evaluate the yield of the investmentto evaluate the yield of the investment to reduce the risk of requests from opportuniststo reduce the risk of requests from opportunists

►““WHAT” AND “HOW” TO EVALUATEWHAT” AND “HOW” TO EVALUATE Economic and financial information Economic and financial information

(quantitative/(quantitative/consumptiveconsumptive)) Business plan (quantitative/prognostic) Business plan (quantitative/prognostic) Qualitative judgment of the confidence of the projectQualitative judgment of the confidence of the project

THE FIRM-ORIENTED THE FIRM-ORIENTED APPROACHESAPPROACHES

► 1st Criteria: approaches based on costs 1st Criteria: approaches based on costs (historic and/or substitutions)(historic and/or substitutions)

►2nd Criteria: 2nd Criteria: approaches based on valueapproaches based on value

► ??.., what is the OBJECT of the ??.., what is the OBJECT of the evaluation? evaluation?

Immaterial and non-patentable factorsImmaterial and non-patentable factors Intellectual property (importance if the “scientific Intellectual property (importance if the “scientific

dimension” vs the “economic/financial dimension”)dimension” vs the “economic/financial dimension”) Prospective revenues (strong influence of the state of Prospective revenues (strong influence of the state of

development of the product/service with respect to the development of the product/service with respect to the marketmarket) )

THE INDIVIDUAL-ORIENTED THE INDIVIDUAL-ORIENTED APPROACHESAPPROACHES

► Approaches based on qualitative variables Approaches based on qualitative variables (subjectiveness of the proposers):(subjectiveness of the proposers):

► Demographic variables of the entrepreneurDemographic variables of the entrepreneur► Social variables such as political editorials Social variables such as political editorials ► The context: academic or industrial origin (technical-The context: academic or industrial origin (technical-

scientific and managerial capacity)scientific and managerial capacity)

N.B.N.B. THE CRITERIA OF EVALUATION DEPEND ON: THE TIMING THE CRITERIA OF EVALUATION DEPEND ON: THE TIMING OF THE FINANCIAL INTERVENTION (OF THE FINANCIAL INTERVENTION (enterprise’senterprise’s phase); phase); QUALITATIVE JUDGEMENT OF THE INDIVIDUALS (human QUALITATIVE JUDGEMENT OF THE INDIVIDUALS (human capital); capital); QUANTITATIVE ESTEEM OF THE ENTERPRISE (the QUANTITATIVE ESTEEM OF THE ENTERPRISE (the reputation of the enterprise).reputation of the enterprise).

ROLE OF THE SCIENTIFIC ROLE OF THE SCIENTIFIC COMMUNITYCOMMUNITY

► (+) the KNOWLEDGE WORKERS “attracted”, (+) the KNOWLEDGE WORKERS “attracted”, why?why?

► opportunity to increase technical competencesopportunity to increase technical competences► opportunity to enrich one’s CVopportunity to enrich one’s CV► to increase the visibility in one’s communityto increase the visibility in one’s community► access a global scientific networkaccess a global scientific network► able management of eventual elitist attitudeable management of eventual elitist attitude

► (-) the (-) the intrinsic mobilityintrinsic mobility of KNOWLEDGE of KNOWLEDGE WORKERS (WORKERS (generation of a risk of unstable generation of a risk of unstable knowledge and/or cessation of know how to third knowledge and/or cessation of know how to third parties)parties)

THE REPUTATION OF THE THE REPUTATION OF THE ENTERPRISEENTERPRISE

► An extremely important resource in phase of An extremely important resource in phase of start up in order to limit the environmental start up in order to limit the environmental pressures and to attract the necessary resourcespressures and to attract the necessary resources

► How it is constructed: How it is constructed: ► Collaborated vertical agreements (University, Collaborated vertical agreements (University,

enterprises)enterprises)► Relational systems and participation in networks Relational systems and participation in networks

(social capital) (social capital) N.B.N.B. More social relations form an enterprise, the More social relations form an enterprise, the

potential for the reputation and confidence should mature potential for the reputation and confidence should mature over time.over time.

LEGITIMIZATION STRATEGIESLEGITIMIZATION STRATEGIES

► SEARCH FOR CONSENT - RELATIONAL CONTEXT (in SEARCH FOR CONSENT - RELATIONAL CONTEXT (in order to increase the level aperture towards the outside order to increase the level aperture towards the outside world)world)

► Access to scientific networks (in order to acquire qualified Access to scientific networks (in order to acquire qualified human resources)human resources)

► Access to financial networks (to acquire financial resources) Access to financial networks (to acquire financial resources) ► Access to business networks (in order to acquire managerial Access to business networks (in order to acquire managerial

resources)resources)

► STRATEGIESSTRATEGIES► Passive attitude (patenting of research results)Passive attitude (patenting of research results)► Active attitude (localization near innovation locations)Active attitude (localization near innovation locations)► Proactive attitude (communication of the scientific Proactive attitude (communication of the scientific

successes obtained)successes obtained)

BAN – THE NETWORKBAN – THE NETWORK

Thank you for listening!

Venture Capital, Business Angels and Banks

Network of Intermediaries and Universities

Universities, Research Centers and technology companies

Professional Services and

Business Support Organizations

BAN

Ing. Paolo ANSELMO

IBAN – Italian Business Angels Networks

c/o Centro Sviluppo SpaVia Lavoratori Vittime Col du Mont, 24

11100 Aosta – ItalyT: +39 0165 305511 – F: +39 0165 305540

e-mail: presidenza@iban.it

www.iban.itwww.eban.org

Thanks for your attentionThanks for your attention