The POWER of venture capital

WHAT IS VENTURE CAPITAL? Venture Capital is capital provided to fast growing companies It is typically an investment activity regarding the acquisition of stakes in equity of unlisted companies The goal is to increase the value of target companies for the purpose of divestiture in the medium to long term

WHAT IS VENTURE CAPITAL? In addition to financial resources Venture Capital investors offer professional and managerial skills (smart money) as well as a network within the financial, corporate, business angel and start-up communities.

VC’s IMPACT ON THE ECONOMIC SYSTEM Venture Capital serves as a country’s engine of entrepreneurship development for several reasons: It supports new ideas VC operators assume risks that other players are not willing to take VC is often faster to identify new market trends in industry and technology Thanks to its intervention, VC creates many jobs

WHY IS VC IMPORTANT? Impact on economic growth Increased profitability of backed companies Employment growth Support for the innovation process Increased skill premium

THE ECONOMIC IMPACT OF VENTURE CAPITAL From 1970 to 2008 every dollar invested in venture capital in the US created 6.36 dollars of revenue Venture backed companies generate 21% of GDP and contribute 11% of total private sector employment Top 1% high growth companies created 40% of the new jobs in the American economy www.kauffman.org

THE ECONOMIC IMPACT OF VENTURE CAPITAL Positive effects associated with investments in venture capital: Employment Growth Revenue Growth

VC’s IMPACT IN EUROPE Approximately 5-6 billion Euros invested every year More than 1 million people employed in VC backed companies Compounded growth of employment, from 1997 to 2004, in European VC – backed companies reached 2,4%, compared to 0,7% for other companies

BENEFITS TO STARTUPS STARTUP View of entrepreneurial landscape Improved managerial culture View of entrepreneurial landscape Visibility Improved relationship with stakeholders

OBJECTIVES OF VC’s OPERATIONS Development of new products / services   Support during market launch   Financing of working capital   Financing of corporate financial transactions   Support and delivery to IPO or other exit

Startup funding cycle

INVESTMENT STAGE VC Operators can be classified according to the stage of development of the target companies they deal with: Micro seed (families & friends): Financing of the idea - the "seed" (pre-prototype)  Seed (accelerator e business angels): financing firms pre-revenues  Start-up Financing (Venture Capital): financing the market launch phase Expansion Financing (Venture capital): financing the expansion phase

ACCELERATOR They are structures that provide a 360 ° range of services to startup to facilitate company acceleration, such as:   Space and logistics   Management Consulting   Training Mentorship   Network inside the incubator   External Network   Financial contributions

INCUBATORS The U.S. counts 8.3 incubators for State on average

BUSINESS ANGELS Informal investors: individuals who invest in startups Deep knowledge of the areas in which they invest Strong relationships / contacts with the target market Business Angels bridge the financing gap existing in the early stages of financing

BUSINESS ANGELS What they look for… A brilliant Management Team An innovative idea Scalable business Economic return in 3-5 years

BUSINESS ANGELS What they do not seek… Teams they do not trust Teams working part time Statements such as: "we have no competitors" "the market is so vast that competition is not an issue” Teams that do not have a clear direction

BUSINESS ANGELS Italian Angels for Growth (IAG), the largest group of business angels in Italy, was founded in 2007 as a nonprofit association by nine Founding Members. IAG now has approximately 100 members. • The activities are promoted and managed exclusively by individual investors. • The ultimate goal of IAG is to offer its members the opportunity to invest in the best startup companies.

IL CLUB DEGLI INVESTITORI WHO DOES VC IN ITALY? 100 360 CAPITAL PARTNERS ATLANTE VENTURES INNOGEST SGR VERTIS SGR PRINCIPIA SGR FONDAMENTA SGR 50 EARLYBIRD 10 NINE POINT CAPITAL CONNECT VENTURES 5 DPIXEL WORKING CAPITAL ANNAPURNA VENTURES ENLABS H-FARM M31 IL CLUB DEGLI INVESTITORI IAG MIND THE BRIDGE Pre-Seed/Incubator Seed /BA VC

VC: PROJECT SELECTION CRITERIA Management Team Quality Product and target market Technology and competitive advantage Potential sales and expected returns

MANAGEMENT TEAM QUALITY VC SELECTION CRITERIA MANAGEMENT TEAM QUALITY The quality of the Team is the key determinant for a Startup:   Industry Experience   Entrepreneurial skills (track record, determination in the conduct of the project, etc. ..) PRODUCT & TARGET MARKET The company should aim to become an actor of reference in its field The market must be scalable and global

POTENTIAL SALES & EXPECTED RETURNS VC SELECTION CRITERIA TECHNOLOGY Technology is a major source of competitive advantage for startups: innovation sustainability defensibility POTENTIAL SALES & EXPECTED RETURNS IRR (internal rate of return): 50% - 100% per year Exit timing commensurate with investor’s horizon Potential buyers (number of operators and their positioning in the market)

VENTURE CAPITAL INVESTMENT PROCESS: Structuring & Execution a venture capital investment

WHAT VENTURE CAPITAL INVESTOR ARE LOOKING FOR Team Product / Service Market - growing markets - emerging markets - market share, size Return Balance of risks and chances (risk /rewards) Innovation rather than imitation Trust

VENTURE CAPITAL PROCESS There are a number of myths & thruths about the venture capital industry and the process of securing investment from a venture capitalist that are important to understand

IT’S A NUMBERS GAME VC’s assess a very large number of new prospects, his highest priority is his own time management This means that his work is mostly focused on eliminating 99% of the business plan received as quickly as he can The «game» becomes looking for reasons why not to invest Due diligence proceeds only when a VC feels strongly that an investment might make sense Due diligence is usually a late phase in the process

WHAT TO DO AND NOT TO DO? DO DON’T Make your approach and presentation as friendly and easy to understand Assume anything from a VC beyond normal. Waste no one’s time Even technically VC’s want to start with a quick appreciation of why you believe your company deserves funding Save the technology details for responding to question Demonstrate the uniqueness and credibility of the business

WHAT TO DO AND NOT TO DO? SUGGESTIONS Get to the point as quickly as possible: a successful elevator pitch must describe the company’s value clearly, in no more than 1 minute. A typical VC’s attention span is less than 2 minute

RISK / REWARD PROFILE Many entrepreneurs believe that VC’s like to take big risk in making their investments. Most VC investors are actually very risk-averse, which makes sense when you perceive the environment to be full of uncertainty and unknow factors The major categories of risk are: people (team, investors) technology (products) market opportunities (emerging or established) stage of growth (includes financial history) valuation

WHAT TO DO AND NOT TO DO? DO DON’T Support your aggressive projections with a credible plan for execution Emphasize how conservative your projections are Present an honest, realisitc, and complete assesment of challenges Understimate or downplay any risk

INVESTMENT IS ABOUT THE PEOPLE Most VC today understand that really investing in people, in the company management, directors, investors, partners, etc. They comfort level increases proportionately to their familiarity with the people achieve directly or indirectly by reputation Venture Capital firms first preference is to invest in companies run by people they have backed before, especially in successful companies The next level of preference is to invest alongside the best VC firms

WHAT TO DO AND NOT TO DO? DO DON’T Hire the best people you can find Compromise on the quality of your people Network costantly , to establish a pesonal contact Develop relationships through your corporate legal counsel, accounting firms, bank, investors, advisors, and all employees (you never knows where the most useful introductions will come from)

BIG MARKET OPPORTUNITY The ideal proposed market for the products or services should be already identified, rapidly growing (more than 25% per year), and not dominated by any other company. The products should have a significant barrier to entry by possible future competitors The company management and growth strategies should be strong enough to support the proposed plan. VC’s want to back companies they believe can and will dominate market niches

WHAT TO DO AND NOT TO DO? DO DON’T Be specific and clear about a particular market segment as possible Present gross number for a total availabe market, with an expectation of gaining 1% market share Include throughout discussion of why your products will dominate over competitive products

BIG MARKET OPPORTUNITY For every company this market issue is critical and one of the most important to address In the first couple of meetings, a VC is testing for general credibility (how believable is the plan, how good is the technology, how much market share is actually possible, how strong is the management) The reason is that if any of the assessment of these issues is negative, it will be easy for the VC to decline to invest. SUGGESTIONS Be prepared with due diligence materials that support your view of the market opportunity – references, market studies, customer indications, media pubblications, etc.

LISTEN FOR WHAT IS UNSAID Aggressive Venture Capital can challenge an entrepreneur’s assertions directly. VC’s approach is to listen for what is left unsaid – the implication being that what is unsaid may be more important, and potentially more damaging to the business proposal

WHAT TO DO AND NOT TO DO? DO DON’T Take a layered approach to revealing information Be overconfident about or exaggerate the superiority or your business strategy Be brutally honest with yourself about whatever information you share. Emphasizes strengths, by all means, and stress ways to overcome weakness Find the delicate balance between too little and too much information at any given time. Most VC’s wil not understand the product or the market as well as you do, so they will need some time to absorb how your product and technology can effect the market

WHAT TO DO AND NOT TO DO? SUGGESTIONS Encourage the VC’s to ask question Presentations can be designed to lead the audience to want to ask certain question – for which is good thing prepared convincing responses Credibility is everything, and the VC’s appreciate a strong presentation

EVERYTHING IS NEGOTIABLE With VC’s every interaction is like a move in a chess game, an element of strategy in a game of negotiation Entrepreneur should not be afraid to negotiate, especially on any negative comments offered by a VC While VC’s do not typically lie or try to manipulate entrepreneurs, they are certainly willing to test for knowledge, commitment, or simply confidence. An entrepreneur who automatically and consistently defers to a VC may soon find himself in a very unappelling negotiating position Treat a VC with respect, like a valued customer.

WHAT TO DO AND NOT TO DO? DO DON’T Listen carefully and respond thoughtfully Be overeager to please or defer to whatever a VC say. Sometimes, they are inconsistent or just testing you Show your sense of the value that you believe you have, without appearing unrealistic You want to earn their respect. Being afraid to stand up for youself and your company won’t help Enjoy the negotiation – it’s a learning experience Test the VC’s negotiating skills, you may need his support in later negotiations with other investor or partner

VC’S COMPANY VALUATION BY PERCEPTION OF FUTURE VALUE AT THE NEXT FINANCING Company valuation is one of the subjects of greatest contention between companies and prospective investors The reality of the situation is that the valuation is almost completely determined by the marketplace, whatever an investor or acquirer is willing to assign or pay for you

WHAT TO DO AND NOT TO DO? DO DON’T Prepare as much information to justify whatever valuation you have in mind, but be flexible and open-minded Be stubborn or everly proud about a preconceived notion of valuation There are many ways to interpret valuation, in terms of time-adjusted risk, liquidity, percentage of a larger market opportunity: let the VC make the first move in setting a valuation . Let him show how he is thinking about the issue, what factors are important to him. Then, you will know how to focus your responses

DUE DILIGENCE STRATEGIES The due diligence strategy of a firm established the criteria for screening and evaluating potential investment proposal VC firm typically have a set of investment criteria that define the type of investments that they find attractive. These criteria include the stage of the business, the geographic region, the size of the deal, the industry sector, etc.

SCREENING DUE DILIGENCE The intent of screening due diligence is to quickly flag the deals that either do not fit with the investment criteria of the firm or the criteria that are deemed necessary for success There is no single best approach to screening each has to determine what is critical to its fund and what types of deals will fit. Fit is often characterized by the stage of the business, geographic region, size of the deal, and industry sector In screening for a high quality deal there are a few additional areas of focus Therefore most firms screen based on investment fit and investment potential

INVESTMENT FIT It determines if the investment proposal is consistent with the investment philosophy of the firm. VC’s may be generalist or specialist depending on their investment strategy As generalist, a firm may invest in various industry sector, or various geographic locations, or various stages of a company’s life As a specialist, a firm may invest in one or two industry sectors, or may seek to invest in only a localized geographic area

INVESTMENT FIT Stage: not all VC invest in StartUps. Many firms invest at various stage of the business life cycle from seed, to early, or even late stage Geography: often firms prefer to invest in deals that are in their local geographic area. The reason behind a geographic preference tends to simply be a desire to easily manage the investment. If the investment is located within the firms region , it saves time in attending meetings, monitoring the investments and visiting the management team. In addition, location may provide access to resources such as a high caliber labor pool, top law firms, or other needs of a developing business Size: Venture firms will often establish a minimum and / or a maximum amount that they like to invest. The lower bound is often related to the need for the investment to be large enough to justify the involvement of the firm. The firm does not want to dilute their time over a lot of small deals. The maximum amount is often related to the size of the fund as well because the venture firms wants to ensure that the fund remains sufficiently diversified Industry sector: there are venture firms that will be broadly diversified and will invest in industry sectors as diverse as information technology, life sciences and consumer good

INVESTMENT POTENTIAL Once the investment proposal is deemed to «fit» with the philosophy of the firm, a screening is conduced to test the viability of the deal Although screening is unique to a particular firm’s needs, there are some common threads that a firm evaluates

INVESTMENT POTENTIAL Team: generally speaking, one of the most important criteria in the screening process is the quality of management Product / Service: the key to evaluating a product or service is to ask, «what customer problem is being solved?» Once an understanding of the solution is clear, the next question is «can be solved profitably?». The intent is to get a feel for the types of customers and the value that is added by the product or service Market: It is no secret that venture firms looking for large, high growth markets. In facts, it would be surprising to see a business plan that does not suggest a significant market. Most important is being able to explain the competitive landscape. A deep understanding of the competition is a clear indication that one understands the market Business Model: in evaluating the business model, ones wants to determine that the business plan tells a compelling story

BUSINESS DUE DILIGENCE The intent of business due diligence is to verify the potential of the deals that survive the initial screening The business due diligence should test the robustness of the information obtained during the initial screening process

BUSINESS DUE DILIGENCE TEAM Venture firms look for high-energy driven founders who recognize the value of building a world class organization. One of the reason that VC place so much importance on the quality of management is because they know that the environment will change Management will need to react to competitive threats, changing customer demands, new regulations, and other dynamics. Making the right tactical and strategic decision will be vital for a company’s success. VC want to be sure that the management team is up for the challenge

BUSINESS DUE DILIGENCE PRODUCT / SERVICE The companies must describe how their product / service will deliver value to the customer and can not be easily replicated by the competition A platform that can be easily modified in order to meet changing market needs and stay ahead of the competition is important In addition scalability becomes important to the financial success of the venture

BUSINESS DUE DILIGENCE MARKET The business proposal must show it will serve a large, rapid growth market The entrepreneurs must be able to clearly identify their target customers and define strategically how they will reach them In addition it is essential that the competitive landscape is mapped out and action plans developed to minimize competitive threats

BUSINESS DUE DILIGENCE BUSINESS MODEL As mentioned in the screening criteria, understanding how a firm is going to make money is necessary to defining the key financial drivers It is more important to see if the company understands the key components that drive profitability, than to spend time trying to forecast each line item over the next five years The focus is rather on potential for high gross margin and potential for recurring revenue streams. Companies with these two components will be well suited for rapid growth and fierce competition

BUSINESS DUE DILIGENCE ORIGIN OF DEAL Venture firms place significant weight on the origin of the deal. This is because firms often know more about the source of the deal than quality of the deal itself. In fact several firms noted that they would not support a deal that arrived without recommendation SO TRY TO BE CONNECTED!

LEGAL DUE DILIGENCE Venture Capitalist have their lawyers conduct a legal due diligence prior to investing in a company For this legal due diligence, the lawyers check that the company doesn’t have significant legal problems and is being properly operated Target company need to make sure that all your documents are in order. If they are not, financing can be delayed or even killed

LEGAL DUE DILIGENCE Here are some of the main documents that the company should expect to hand over quickly: key contracts employment agreements minutes and contents of the board of directors and shareholder confidentiality and invention assignment agreements with employees corporate charter and bylaws litigation-related documents patents, copyrights, and other intellectual property-related documents tax and financial documents