1. WIPO-INSME INTERNATIONAL TRAINING PROGRAM ON THE ROLE OF INTELLECTUAL PROPERTY IN RAISING FINANCE BY SMALL AND MEDIUM-SIZED ENTERPRISES jointly organized by WIPO and INSME Theme 9: Role of Business Angels in Supporting Your Innovation Plans
Mr. Paolo Anselmo
President of the Italian Network of Business Angels (IBAN)
Member of the Executive Committee of the European Network of Business Angels (EBAN)
Member of the INSME Association Board
Geneva - July 12, 2006

2. FINANCING OF THE PROJECT
DEBTS
PUBLIC FINANCING
VENTURE CAPITAL:
Formal Venture Capital
Informal Venture Capital (business angels)
In Europe Business Finance is dominated by major Banks
In Europe Finance provided to entrepreneurs is predominantly debt finance
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,
Debt finance usually requires some form of security
Banks look for collateral (intangible assets are not security)
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.

3. FINANCIAL SUPPLY CHAIN
Banks
Guaranties
Leasing
Factoring
Grants
Micro-credits
Other public support
Prerequisites
Own resources
FFF
Loans on trust
Pre-seed
Loans for investors
Reimbursable advance payments BA
Corporate
Venturing
Seed
capital VC
IPO
Adequate funding provision for each specialised fund or instrument or tools (critical mass is a key factor)
Availability of professional managers
Mechanism to reduce due diligence costs (they are high and almost identical regardless the investment size)
Market liquidity - Exit route are sometimes scarce  no reinvestment opportunity for investor
Networking and partnership
Availability of private equity (formal & Informal) which is capable of maximising the leverage potential of public funds.
Tools
Infrastructure:
business angels networks, incubators, etc.
Advice: investment readiness program, tutorship
Expertise: professional fund managers
FFF : Family, Friends, Fools
BA : Business angels
VC : Venture capital
IPO : Initial Public Offering

4. THE ENTERPRISE FINANCING PROCESS

5. THE ENTERPRISE FINANCING PROCESS
Efforts made by financiers
Cash flow
Risk
Commercial and Savings Banks
Time
Innovation
Seed Capital
Funds and
Public
funding
Private
Investors
and
Business
Angels
Financial approach
Corporate Fund
and
Venture Capital
Idea
Start-Up
Market introduction
Growth
Maturity
Transfer

6. THE ENTERPRISE FINANCING PROCESS
Stage in
Cycle
R&D
Start-up
Early
growth
Accelerating
growth
Sustaining
growth
Maturity
growth
Proof of
Concept
Funding
Seed
Corn
First
Round
Second
Round
Development
Capital
Replacement
Capital
MBO / MBI
Development
Type of
Funding
Public Sector
Founders, family and friends
The importance of the public approach in the R&D phase
The importance of the role of industry
Source of
Funding
Business angels
Venture capital funds
Corporate venturing
Public listing / IPO

7. 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?
The context of reference is the science or knowledge based enterprise

8. VENTURE CAPITAL (formal & informal)
Institutional operators (formal venture capital)
Private subjects
Banks
Insurance
Corporate venture capital
Non-institutional operators (informal venture capital)
Business Angels

9. BUSINESS ANGEL (BA) - definition
“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)

10. BUSINESS ANGEL (BA) Attitudes, behaviour and characteristics:
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: %)
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
THE POTENTIAL OF BA IN ITALY:
HNWI – world: ( )
HNWI – USA: ( )
HNWI – Europe: ( )
HNWI – Italy: ( )
High Net Worth Individual – more than $ (building excluded)
Source World Wealth Report 2005 – Capgemini & Merrill Lynch (2004 versus 2003)
The model of BA in Italy – in the search of the angel

11. ANGEL’S – success stories
RETURN ON INVESTMENT FOR THE BA
The main findings of a study conducted on UK angels in 1998/1999 by Professor Colin Mason from the Hunter Centre of Entrepreneurship in Strathclyde are:
34% of investments involved total loss
6% involved partial loss
8% broke even
7% had a return of under 10%
7% had a return of 10-24%
13% had a return of 25-49%
25% had a return of over 50%

12. ANGEL STRATEGY
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):
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

13. ANGEL DUE DILIGENCE PROCESS
Technology
Technology development
Product development
Process development
Product supply
Deliveries
Market
Marketing
Sales PR
Competitors
IPR
Organization
Recruitment
Board
Network of service suppliers
Office
Economy / Finance
Cash forecast
Finance activities
Cost estimate
Budget

14. PRIORITIES FOR EQUITY PROVIDERS
Eligibility Criteria
Business angels or
informal 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 and
Financial 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

15. FORMAL AND INFORMAL EQUITY PROVIDERS
* Source: van Osnabrugge, 1998, p.2

16. FORMAL AND INFORMAL EQUITY PROVIDERSVC
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

17. OBTAINING RISK CAPITAL
Advantages for the “science based” enterprise:
acquisition of financing for development
operative and financial consultancy
growth in prestige and visibility at international level
attraction of talents with stock options
reinforcement of negotiating power with the credit system, clients and suppliers
possibility for way out and positive re-evaluation

18. THE IRREGULATITY OF THE INFOMRATION AVAILABLE
THE IMPORTANCE OF THE INFORMATION NEEDS OF THE INVESTORS IN THE EVALUATION OF THE PROJECT
to evaluate the yield of the investment
to reduce the risk of requests from opportunists
“WHAT” AND “HOW” TO EVALUATE
Economic and financial information (quantitative/consumptive)
Business plan (quantitative/prognostic)
Qualitative judgment of the confidence of the project
LE ASIMMETRIE INFORMATIVE NELLA VALUTAZIONE DEL PROGETTO
La partecipazione al capitale di rischio presuppone la valutazione del progetto imprenditoriale, al fine di considerare la validità dello stesso ossia:
La sua fattibilità economica-finanziaria
L’attesa di rendimento ottenibile sotto forma di dividendi per il tempo dell’operazione
L’attesa di capital gain al momento di cessione delle partecipazioni acquisite
La presenza di asimmetrie informative tra investitori e promotori fa si che i primi debbano assumere le decisioni di investimento in condizioni di maggiore incertezza non disponendo di tutte le informazioni note alla controparte (rischio di ADVERSE SELECTION).
D’altra parte i promotori hanno la possibilità di avvantaggiarsi di questa asimmetria per perseguire scopi opportunistici (MORAL HAZARD)
L’informazione economica-finanziaria “corretta” aumenta la visibilità dell’azienda ed accresce la credibilità del management
Si deve considerare che negli start-up l’informazione economico-finanziaria di tipo retrospettivo (bilancio di esercizio e relative analisi finanziarie) non è propriamente attendibile
Inoltre, l’aderenza ai principi contabili internazionali, fa si che i costi di ricerca e sviluppo sostenuti siano interamente imputati all’esercizio di competenza temporale:
È facile quindi sottostimare l’andamento reddituale dei primi esercizi e sovrastimare gli esercizi di entrata a regime
TUTTO CIO’ AMPLIFICA LA POSSIBILITA’ DI OPPORTUNISMO DEI PROMOTORI
L’affidabilità del progetto imprenditoriale và quindi ad essere fondata sul giudizio relativo al business plan, sulla credibilità delle simulazioni economiche finanziarie che scaturiscono dai piani e dai programmi futuri. I quali, proprio perché poggiano su previsioni, sono valutabili in modo oggettivo solo ex post.
NEANCHE IL BP E’ SUFFICIENTE AD AVVALORARE LA BONTA’ DELL’INVESTIMENTO
IN TERZA BATTUTA LA DISCRIMINANTE E’ POSTA ALLA VALUTAZIONE SULLA FIDUCIA CHE ESPRIMONO I SOGGETTI A VARIO TITOLO COINVOLTI NELL’INIZIATIVA IMPRENDITORIALE

19. THE FIRM-ORIENTED APPROACHES
1st Criteria: approaches based on costs (historic and/or substitutions)
2nd Criteria: approaches based on value
??.., what is the OBJECT of the evaluation?
Immaterial and non-patentable factors
Intellectual property (importance if the “scientific dimension” vs the “economic/financial dimension”)
Prospective revenues (strong influence of the state of development of the product/service with respect to the market)
CRITERIO 1: si stima il valore in ragione del costo storico o del costo di sostituzione degli asset aziendali
CRITERIO 2: si stimano con criteri finanziari il rendimento atteso, oppure si integrano le valutazioni finanziarie tenendo conto del valore strategico dell’investimento
Per entrambi è fondamentale il contesto di riferimento applicativo
Il PRIMO, va meglio per i settori tradizionali e conduce a stime + pessimistiche
Il SECONDO è applicabile quando gli investimenti effettuati in risorse intangibili sono rilevanti. In questo caso ci si propone di considerare i benefici attesi dagli investimenti sostenuti
La forte incidenza degli intangibili nelle imprese science based rende poco significativa la valutazione basata sui costi e, complessa ed arbitraria la valutazione basata sul valore:
Fattori immateriali non brevettabili: include la capacità dell’impresa di trattenere le risorse chiave al proprio interno
Valore commerciale dei brevetti: passare dal piano squisitamente economico-finanziario a quello qualitativo-scientifico
Le prospettive reddituali sono tanto + facilmente stimabili quanto l’impresa è prossima alla fase di commercializzazione

20. THE INDIVIDUAL-ORIENTED APPROACHES
Approaches based on qualitative variables (subjectiveness of the proposers):
Demographic variables of the entrepreneur
Social variables such as political editorials
The context: academic or industrial origin (technical-scientific and managerial capacity)
N.B. THE CRITERIA OF EVALUATION DEPEND ON: THE TIMING OF THE FINANCIAL INTERVENTION (enterprise’s phase); QUALITATIVE JUDGEMENT OF THE INDIVIDUALS (human capital); QUANTITATIVE ESTEEM OF THE ENTERPRISE (the reputation of the enterprise).
Variabili demografiche:
età
provenienza
titolo di studio
che attestano la propensione al rischio – le competenze manageriali – le competenze scientifiche del TEAM
Variabili sociali:
il grado di visibilità dei fondatori nella comunità scientifica
la rete di relazioni
la prossimità al contesto economico
la capacità di accesso al business network

21. ROLE OF THE SCIENTIFIC COMMUNITY
(+) the KNOWLEDGE WORKERS “attracted”, why?
opportunity to increase technical competences
opportunity to enrich one’s CV
to increase the visibility in one’s community
access a global scientific network
able management of eventual elitist attitude
(-) the intrinsic mobility of KNOWLEDGE WORKERS (generation of a risk of unstable knowledge and/or cessation of know how to third parties)
La reputazione dell’impresa rappresenta una variabile fondamentale e critica anche per i ricercatori ed i tecnologi che intendono aderire all’iniziativa imprenditoriale. Oltre alla fattibilità economica del progetto ed alle potenzialità competitive dell’impresa assume particolare rilevanza la fattibilità scientifica del progetto e la sua attrattività
La capacità attrattiva è fondamentale per acquisire risorse finanziarie !!!
La capacità di gestire gli atteggiamenti elitari agevola i processi di creazione e di diffusione dell’ organizational knowledge che facilita le fasi + critiche dello sviluppo aziendale

22. THE REPUTATION OF THE ENTERPRISE
An extremely important resource in phase of start up in order to limit the environmental pressures and to attract the necessary resources
How it is constructed:
Collaborated vertical agreements (University, enterprises)
Relational systems and participation in networks (social capital)
N.B. More social relations form an enterprise, the potential for the reputation and confidence should mature over time.

23. LEGITIMIZATION STRATEGIES
SEARCH FOR CONSENT - RELATIONAL CONTEXT (in order to increase the level aperture towards the outside world)
Access to scientific networks (in order to acquire qualified human resources)
Access to financial networks (to acquire financial resources)
Access to business networks (in order to acquire managerial resources)
STRATEGIES
Passive attitude (patenting of research results)
Active attitude (localization near innovation locations)
Proactive attitude (communication of the scientific successes obtained)

24. Thank you for listening!
BAN – THE NETWORK
Venture Capital, Business Angels
and Banks
Network of Intermediaries and Universities
BAN
Universities, Research Centers and technology companies
Professional Services and Business Support Organizations
Thank you for listening!

25. Thanks for your attention
Ing. Paolo ANSELMO
IBAN – Italian Business Angels Networks
c/o Centro Sviluppo Spa
Via Lavoratori Vittime Col du Mont, 24
11100 Aosta – Italy
T: – F: