1. Financing Entrepreneurial Firms Glenda Napier FORA Oslo University - 27 February, 2007

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

3. Copyright 2006 © FORA, Langelinie Allé 17, 2100 Kbh Ø - www.foranet.dk Lecture 1 Financing Entrepreneurial Firms

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

5. Copyright 2006 © FORA, Langelinie Allé 17, 2100 Kbh Ø - www.foranet.dk Types of Innovation >Incremental/linear type of innovation >Radical/systemic type of innovation

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

7. Incremental/Linear Approach INNOVATOR ENTREPRENEURINVESTOR

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

9. Radical/Systemic Approach INNOVATOR ENTREPRENEUR INVESTOR

10. Copyright 2006 © FORA, Langelinie Allé 17, 2100 Kbh Ø - www.foranet.dk Varying Forms of Innovation Require Different Types of Financing >Incremental/linear innovation → Assets based financing (debt) >Radical/systemic innovation → High Risk Capital = Venture Capital

11. Copyright 2006 © FORA, Langelinie Allé 17, 2100 Kbh Ø - www.foranet.dk Risk Financing: Venture Capital

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

13. Copyright 2006 © FORA, Langelinie Allé 17, 2100 Kbh Ø - www.foranet.dk Investment Stages 2 >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.

14. Copyright 2006 © FORA, Langelinie Allé 17, 2100 Kbh Ø - www.foranet.dk Investment Stages 3 >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.

15. Copyright 2006 © FORA, Langelinie Allé 17, 2100 Kbh Ø - www.foranet.dk Venture Capital Investment Stages. SeedStart-upEarly StagesExpansionLater 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 > 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 > Completed R&D > Manufacturing and sales > No profit > Increase in production capacity > Increase R&D and marketing > Break even or profit 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 > 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

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

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

18. Copyright 2006 © FORA, Langelinie Allé 17, 2100 Kbh Ø - www.foranet.dk Some Issues between Entrepreneur and Investor > 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)

19. Copyright 2006 © FORA, Langelinie Allé 17, 2100 Kbh Ø - www.foranet.dk Types of Exits (important for investor) Exits/ 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 IPO 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&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-off Reduction in the value of an investment Secondaries When a private equity firm acquires existing shares in a company from another private equity firm or from another shareholder or shareholders.

20. Copyright 2006 © FORA, Langelinie Allé 17, 2100 Kbh Ø - www.foranet.dk Lecture 2 Financing Entrepreneurial Firms, Equity Gaps and Public Policies

21. Copyright 2006 © FORA, Langelinie Allé 17, 2100 Kbh Ø - www.foranet.dk Development in Venture Capital Markets Source: Vækstfonden, 2006

22. Copyright 2006 © FORA, Langelinie Allé 17, 2100 Kbh Ø - www.foranet.dk Investment pr. country (total, % of GDP, VC and Buy out) Source: Vækstfonden, 2006

23. Copyright 2006 © FORA, Langelinie Allé 17, 2100 Kbh Ø - www.foranet.dk Venture Capital Investment pr. country (total, % of GDP) Source: Vækstfonden, 2006

24. Copyright 2006 © FORA, Langelinie Allé 17, 2100 Kbh Ø - www.foranet.dk The Financing Gaps (Sohl, 1999)

25. Copyright 2006 © FORA, Langelinie Allé 17, 2100 Kbh Ø - www.foranet.dk Equity Gaps for Entrepreneurs

26. Copyright 2006 © FORA, Langelinie Allé 17, 2100 Kbh Ø - www.foranet.dk Explaining the Gaps – Market Failures – Turning to Public Policies..

27. Copyright 2006 © FORA, Langelinie Allé 17, 2100 Kbh Ø - www.foranet.dk Explaining the Gaps – Market Failures – Turning to Public Policies..

28. Copyright 2006 © FORA, Langelinie Allé 17, 2100 Kbh Ø - www.foranet.dk Explaining the Gaps – Market Failures – Turning to Public Policies..

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

30. Copyright 2006 © FORA, Langelinie Allé 17, 2100 Kbh Ø - www.foranet.dk Q&A Thank you for your attention