Finance and strategy Innovation Economy and Finance Session 2 How to finance innovative start-ups? Venture capital innovation policies Jacques Darcy / Patrick Terroir 1 1 A complex, iterative
path Stakeholders Stages Origination phase Scientific discovery University scientist/ researcher
Invention disclosure - University scientist/ researcher - TTO staff Concept and opportunity testing phase Evaluation of invention for IP protection
- University scientist/ researcher - TTO staff IP protection Marketing of technology decision to firms - University scientist/ researcher
- TTO staff - University scientist/ researcher -TTO staff - Firms/ entrepreneur Exploitation and start-up phase Licensing agreement
IP transfer to existing firms Spin-off decision Creation of the spin-off - University scientist/ researcher -TTO staff
- Firms/ entrepreneur - University scientist/ researcher -TTO staff - Firms/ entrepreneur Activities IP / Knowledge transfer interlinked
Opportunity identification Opportunity selection Proof-of-concept testing IP protection testing Business concept testing Selection and market confirmation Internal advising Network support Compensation schemes Exploitation decision 2
3 What is an innovative start-up? Everyone has their own definition of just what a startup is, and nearly everyone is wrong Early stage in the life cycle of an enterprise where the entrepreneur moves from the idea stage to securing financing, laying down the basis structure of the business, and initiating operations or trading. http://www.businessdictionary.com/definition/startup.html The Small Business Association sums it up: In the world of business, the word startup goes beyond a company just getting off the ground. The term startup is also associated with a business that is typically technology oriented and has high growth potential. Startups have some unique struggles, especially in regard to financing. Thats because investors are looking for the highest potential return on investment, while balancing the associated risks. Start-ups with employees, i.e. the group of employer enterprises that are up to two years
old, represent between 20% and 35% of all employing firms in the OECD area. High-growth enterprises represent a small share of the total enterprise population, typically between 2% and 6% in most countries. While few in number, fast-growing firms generate employment for a considerable number of persons. High-growth enterprises are enterprises with average annualised growth in the number employees greater than 20% per year, over a three-year period, and with ten or more employees at the beginning of the observation period 4 Key points for financing assessment The management The market (new needs/ new ways of responding needs / improvement) The legal points, the due diligences (law compliance, intellectual property, working contracts, insurance)
Business model (where do the revenue come from, how to find the customers, what will be the marketing costs) Provisional budget, working capital and gap funding The amount needed to cross the valley of no commercialization : many start-up die because of insufficient equity fund 5 VC Private Equity 6 7
8 Venture capital is a subset of private equity (i.e. equity capital provided to enterprises not quoted on a stock market) and refers to equity investments made to support the pre-launch, launch and early stage development phases of a business. Particularly relevant for young companies with innovation and growth potential but untested business models and no track record; it replaces and/or complements traditional bank finance. The development of the venture capital industry is considered an important framework condition to stimulate innovative entrepreneurship. (Entrepreneurship at a Glance 2016, oecd, http://www.oecd-ilibrary.org/docserver/download/3016021e.pdf?expires=1488229072&id=id&accname=guest&checksum=E7945F627FD943E8A7F51BCA791EB83E In 2015, venture capital investments in the United States amounted to USD 59.7 billion and accounted for 85% of total venture capital investments in the OECD. Venture capital investments in Europe amounted to USD 4.2 billion. In the majority of countries, venture capital represents a very small percentage of GDP, often less than 0.05%. The two major exceptions are Israel and the United States, where the venture capital industry is more mature and represents 0.38% and 0.33%
of GDP, respectively. Venture capital investments collapsed in nearly all countries at the height of the crisis and remain below precrisis levels in most countries. By contrast, in Hungary, the United States and South Africa, the recovery has been strong, with 2015 levels nearly twice those of 2007. 9 4 different investor types: Independent VC (US style); Corporate VC: affiliated to a (non-financial) corporation; Bank-controlled VC: affiliated to a bank; Public VC: government owned management company Pattern of investment:
Investee firm characteristics Industry of investee firms Age and size of investee firms Stage of development of investee firms Location of investee firm and distance between investee firm and investor Investment characteristics Syndication Duration Exit mode Source: The economic impact of venture capital Investment in Europe, Massimo G. Colombo, VICO, 2012
10 Private equity attracts a range of different investors, as it offers them the possibility to diversify their portfolios, earn attractive returns and reach investment opportunities which may not be available to them otherwise, such as investing in young and fast-growing firms. As shown in the figure 30% of funds raised by the private equity industry between 2007 and 2012 came from institutional investors (i.e. pension funds, insurance companies, academic institutions, and endowments and
foundations). https://www.investeurope.eu/media/61219/Frontier_Economics_Report.pdf 11 VC global picture http://www.ey.com/Publication/vwLUAssets/ey-global-venture-capital-trends-2015/$FILE/ey-global-venture-capital-trends-2015.pdf 12 The growing share of alternative new start up financing initiatives Angels
Business angels are private individuals who provide smaller amounts of funding, often at earlier stages of innovation than private equity firms will consider. Business angels vary considerably in terms of their areas of interest and appetite for risk, and are often more hands-on than other forms of equity investors. Crowdfunding Crowdfunding utilises social networking websites and social media to connect large numbers of potential investors with ventures looking for funding. Ventures can come from the commercial or community sector. This approach is generally more suitable if you need to attract small amounts of one-off funding, although there are examples of crowdfunded investments of hundreds of thousands of pounds. In the community sector, crowdfunding is attractive to individuals who want to see a direct relationship between what they give and the difference it makes. Often, information and updates on progress is a sufficient return for their investment. In the commercial sector, you will need to be flexible in terms of how you reward your investors. Generally, ventures offer a return that varies according to
the level of investment given. For example, you might offer certificates, credits on your website, or samples of your product or service. To secure this type of funding, you need to post an engaging description of your venture on a crowdfunding website for a fixed period of time. You will need to include an outline of how much money you are looking to raise and how you will use the funds. Generally you must reach your target level of funding within the timescale given or all offers are withdrawn. The platform which hosts the crowdfunding market place will charge a percentage of the funding you raise as a fee. For examples of crowdfunding websites, look at Kickstarter, which launched initially in the USA or Bloom, a relatively new UK-based platform. Large companies funds Mutual funds Hedge funds. 13
Angel investors, who are often experienced entrepreneurs or business people, have become increasingly recognised as an important source of equity capital at the seed and early stage of company formation. With fewer and fewer venture capitalists investing at the early stage, the equity funding gap between individual angel investment and venture capital has grown dramatically. Angel investors have sought to fill this gap by investing with other angel investors through groups and syndicates, increasing the total deal size for companies seeking early-stage financing. 14
VC MYTHS 15 (EIF report) Venture capitalists play a crucial role in removing information asymmetries as intermediaries, through activities of screening, contracting and monitoring and thus being able to assess the quality of small businesses. However, the costs of performing due diligence are significant and it is often more cost effective for investors to concentrate their investing to later-stage companies where better information is available, bigger investments can be made and relative costs are lower. Indeed, over the past years, VC investors became more risk-averse and focused more on later stage investments (Wilson, 2015b). Hence, economies of scale have deteriorating effects on early stage ventures and their investors. 16
Six Myths About Venture Capitalist , Diane Mulcahy, Harvard business review, May 2013 Myth 1-Venture Capital Is the Primary Source of Start-Up Funding Venture capital financing is the exception, not the norm, among start-ups. Historically, only a tiny percentage (fewer than 1%) of U.S. companies have raised capital from VCs. And the industry is contracting: After peaking in the late 1990s, the number of active VC firms fell from 744 to 526 in the decade 20012011, and the amount of venture capital raised was just under $19 billion in 2011, down from $39 billion in 2001, according to the National Venture Capital Association (NVCA). But less venture capital doesnt mean less start-up capital. Non-VC sources of financing are growing rapidly and giving entrepreneurs many more choices than in the past. Angel investorsaffluent individuals who invest smaller amounts of capital at an earlier stage than VCs dofund more than 16 times as many companies as VCs do, and their share is growing Myth 2: VCs Take a Big Risk When They Invest in Your Start-Up VCs are often portrayed as risk takers who back bold new ideas. True, they take a lot of risk with their investors capitalbut very little with their own
Myth 3: Most VCs Offer Great Advice and Mentoring A common VC pitch to entrepreneurs is that the firm brings much more than money to the table: It offers experience, operational and industry expertise, a broad network of relevant contacts, a range of services for start-ups, and a strong track record of successful investing. 17 Myth 4: VCs Generate Spectacular Returns We found that the overall performance of the industry is poor. VC funds havent significantly outperformed the public markets since the late 1990s, and since 1997 less cash has been returned to VC investors than they have invested. A tiny group of top-performing firms do generate great venture rates of return: at least twice the capital invested, net of fees Myth 5: In VC, Bigger Is Better In fact industry and academic studies show that fund performance declines as fund size increases above $250 million. We found that the VC funds larger than $400 million in Kauffmans portfolio generally failed to provide attractive returns:
Just found out of 30 outperformed a publicly traded small-cap index fund. . Myth 6: VCs Are Innovators Any innovation in financing start-ups, such as crowdfunding and platforms like AngelList and SecondMarket, has come from outside the VC industry. The story of venture capital is changing. Entrepreneurs have more choices for financing their companies, shifting the historical balance of power that has too long tilted too far toward VCs. An emerging group of VC 2.0 firms are going back to raising small funds and focusing on generating great returns rather than large fees. VCs will continue to play a significant, but most likely smaller, role in channeling capital to disruptive start-ups. 18 http://www.nesta.org.uk/sites/default/files/ unchaining_investment.pdf
19 EU VC Private Equity in a global economy 20 US / EU economies are similar in size US > EU equity by 2x; 14x when it comes to VC (21x seed; 8x later stage) US > EU debt by 3x Situations differ widely between EU Member States EU has fragmented markets
The problem is particularly acute for SMEs US has structural advantages: 1945 exclusion from Trade agreements Cultural aspects. Risk appetite. 33% of US SME financing comes from individuals vs. 9% in EU 21 Pan-European funds: mostly are US funds This probably is related to growth rates: but where is the causation? China / Asia catching up 22 23
BACK UP SLIDES 24 Banking Disintermediation in Europe--A Slow-Growing Trend, S&P, 25 2015 The unicorn concept A start-up company that has achieved a valuation exceeding $1 billion is called a Unicorn. They can be considered the new "dot-com" startups. In today's business climate, a unicorn is a widely successful company that has attracted venture capital, after which the company is valued (called "post-money"
valuation). According to Fortune's "Unicorn List" in January 2016, Uber, Xiaomi and Airbnb are the top three Unicorns. (http://www.businessdictionary.com/definition/unicorncompany.html) State of the Venture Capital Industry, True Bridge, 2016 Source: EY report global venture capital trends 2015 26 27 VC industry today
Forbes (https://www.forbes.com/sites/truebridge/2015/07/14/2015-state-of-the-venture-capital-industry/#552aabfd5232 ) 7 Our belief that the venture industry is shrinking. The trend is clear: Financing rounds were down 10% Capital invested declined 26% Pre-money valuations dropped 65% IPOs were off 50% (http://www.truebridgecapital.com/PDF/TrueBridge%20Capital%20Partners%20-%20State%20of%20the%20Venture%20Capital%20Industry,%202016.pd 28 VC activity
in Europe 29 30 Venture funds mostly buy-out 31 32 Sources: EY, Invest Europe
33 US versus Europe Venture capital (source: EY) Significant regional differences exist in the types of firms attracting venture capital. In 2015, in the United States the computer and consumer electronics attracted
43.3% of the total, followed by life sciences (19%) and communications (16.5%). In Europe, life sciences was the sector with the highest venture capital investments (34% of the total), followed by computer and consumer electronics (20%) and 34
communications Rationale for public support of VC (http://www.eif.org/news_centre/publications/eif_wp_34.pdf ) What is the economic rationale for public support in this area? the justification for public intervention in the area of SME financing in general is based on the fact that market imperfections or failures do not exclusively affect the economy during a deep recession or a financial crisis, but will instead constitute persistent structural issues. There are several factors contributing to market imperfections and failures in the context of SME financing. - the disproportionality between the cost of assessing a relatively small companys need for finance and the potential financial return (problem of high fixed cost).
-asymmetric information (information gap between the potential provider and the potential beneficiary of financing). In particular, start-up companies cannot provide a track record, have no or limited collateral, and often the main assets are the ideas of the entrepreneur - who often holds no proven managerial skills. Combined with uncertainty, this causes agency problems that affect the financing providers behaviour.This can result in an insufficient supply of private capital (OECD, 2006). - the existence of positive externalities (also called spillovers). The theory of public finance mentions that public support can be an appropriate response in relation to activities that generate positive externalities (Lerner, 2002). A vibrant VC industry needs an established institutional environment as well as a critical mass of companies and VC investors. The experience of various countries shows that public support can play an important role as an initiator for a viable VC industry. - The venture capital ecosystem in Europe still experiences high fragmentation across national 35
borders, as well as systematic issues like, inter alia, the risk of double taxation. Hence, there is not However, much depends on how the public support is provided. In particular, governmental VC schemes seem to have been more successful when they acted alongside private investors, which would favour a governmental fund-of-funds set-up over direct public investments. Indeed, the focus of support instruments has shifted from government equity funds investing directly to more indirect models such as co-investments funds and fund-of-funds in OECD countries (Wilson, 2015b). Moreover, Brander et al. (2015), in a continuation of their 2010 study, find that enterprises funded by both governmental VC and private VC obtain more investment than enterprises funded purely by private VCs, and much more than those funded purely by governmental support. eHence, an efficient policy action to crowd-in private investors, catalyse private sector investment
and pursue EIF and European statutory objectives should focus on 1) pan-European-level activities, in order to support the development of a real European VC market, originated by 2) venture capitalists (but also business angels and other types of early-stage investors) as market-oriented professionals. Of course it can be argued that a market which, according to latest data from Invest Europe (formerly EVCA), relies to more than 30%10 on resources from government agencies and public institutions is not healthy and that this percentage of public support is unsatisfyingly high on 36 the long term. 37
Theories of Personality: Carl Jung Who was Carl Jung? Jung was a colleague of Freud He was obsessed with the unconscious mind But, Jung viewed the unconscious mind differently than Freud Jung saw personality development as lifelong process of striving...
Non-relativist (absolutist) Relativist Theories. There are no universal or objective standards of right and wrong, there are no universal duties. ... Ethics is about doing more than you are required to do, but less than you are allowed to do....
American Chemical Society Best Practice: Collaborative Industrial Networking Event Ivan Konstantinov 2015 Chair Brazosport Local Section American Chemical Society * What Industrial Networking Happy Hour Why Collaboration, networking, boost attendance to our events When: 5-7 pm, Spring & Fall, 2012-present...
Naturalistic Driving Studies. The four camera views. CMV Driver Restart Study. CMV Driver Restart Study - Background . Background: The Consolidated and Further Continuing Appropriations Act of 2015 directed FMCSA to conduct a CMV Driver Restart Study.
Science is always changing and evolving. Scientists must always keep an open mind and the ability to accept of new and different ideas. ... Only boys can be athletes. Florida is the best state. All southern boys are rednecks.
In other cases, addressing the problem requires radical innovation, there is no available solution 'on' or 'close to' the market yet.There are different competing potential solution approaches but R&D still needed to de-risk and compare different technological alternatives.Not possible yet...
Pelagic Sediment - Abyssal Clay. 70% clay sized particles. Transported by wind or ocean currents. Contained oxidized iron red clays. ... Sediment Deposition: From Continental Shelf to Ocean Deep. Sedimentation on the shelf is more rapid than in the deep...
L'acqua risulta bluperché quando la luce del sole, che contiene tutti i colori, vi penetra, alcuni colori vengono assorbiti dalle sue molecole, in particolare esse assimilano maggiormente i colori arancione e rosso, quindi quando la luce arriva ai nostri occhi...
Ready to download the document? Go ahead and hit continue!