Financing of NH's Entrepreneurial Ventures

Financing of NH’s Entrepreneurial Ventures

Jeffrey E. Sohl

Professor of EntrepreneurshipDirector, Center for Venture Research

University of New Hampshire

NetworkNH White PaperApril, 2005

Center for Venture Research - University of New Hampshire

Alexander Graham Bell – 1874

“Well informed people know it is impossible to transmit the voice over wires, and were it possible to do so, the thing would be of no practical value” Boston Post

Gardiner Green Hubbard, Thomas Sanders

Center for Venture Research - University of New Hampshire

Thomas Edison – 1878

Debut – Paris Exhibition

“When the Paris Exhibition closes, electric light will close with it and no more will be heard of it” E. Wilson, Oxford Professor

J.P. Morgan and Spencer Trask

Center for Venture Research - University of New Hampshire

The Early Stage Market

Linear

vs.

Systemic

Center for Venture Research - University of New Hampshire

Center for Venture Research - University of New Hampshire

Linear

INNOVATOR ENTREPRENEUR INVESTOR

Center for Venture Research - University of New Hampshire

Center for Venture Research - University of New Hampshire

Systemic

INNOVATOR ENTREPRENEUR

INVESTOR

Center for Venture Research - University of New Hampshire

Business Angels

• 2004: 225,000 angels, invest approximately $22.5 billion in 48,000 ventures

• 2003: $18.1 billion in 42,000 ventures,

220,000

• 2002: $15.7 billion in 36,000 ventures, 200,000

Center for Venture Research - University of New Hampshire

Angel Yield Rates# of deals funded / # proposals presented

• 1997: 12.00%• 1998: 14.00%• 2000: 23.26%• 2001: 10.79%• 2002: 7.10%• 2003: 10.3%• 2004: 18.5% 0%

5%

10%

15%

20%

25%

1997 1998 2000 2001 2002 2003 2004

Center for Venture Research - University of New Hampshire

Angel investor population:

Individual growth rate : 15-20% annual

Latent angel membership•2004: 55%•2003: 48%•2002: 40%•2001: 41%•2000: 36%•1998: 32%

Center for Venture Research - University of New Hampshire

Angel Deals

Sector 2003 2004Software 26% 22%Telecommunications 5% 6%Electronics/Hardware 12% 5%Life Sciences 13% 16%Biotechnology 11% 10%Manufacturing 12% 11%IT Services na 8%Financial Services na 8%

Center for Venture Research - University of New Hampshire

NH Business Angels

• 2003/2004: $12-16 million in 30-40 ventures

• 150 active angels

• 4 active angel groups, 70 members

• Yield rate: 17%

National Venture Capital Association

Venture Capital Funds Year Total Deals per Deal

1999 $55.1 billion 5,686 $9.7 million

2000 $106.6 billion 8,221 $13.0 million

2001 $41.3 billion 4,711 $8.8 million

2002 $21.2 billion 3,011 $7.0 million

2003 $18.2 billion 2,715 $6.7 million

2004 $20.9 billion 2,876 $7.3 million

National Venture Capital Association

Venture Capital Funds - NHYear Total Deals per Deal

1999 $211 million 28 $7.5 million

2000 $726 million 55 $13.2 million

2001 $280 million 32 $8.8 million

2002 $208 million 35 $5.9 million

2003 $161 million 32 $5.0 million

2004 $149 million 24 $6.2 million

National Venture Capital Association

The Truth About Early Stage

Seed and Start-up financing –VC

1999 $3.3 b (6.0%) 809 deals (14.2%)

2000 $3.2 b (3.0%) 663 deals (8.0%)

2001 $798 m (2.0%) 249 deals (5.1%)

2002 $303 m (1.4%) 148 deals (4.9%)

2003 $354 m (2.0%) 166 deals (6.0%)

2004 $346 m (1.7%) 171 deals (6.0%)

National Venture Capital Association

The Truth About Early Stage

Seed and Start-up financing –VC - NH

1999 $17 m (8.1%) 5 deals (17.9%)

2000 $22 m (3.0%) 6 deals (10.9%)

2001 $0 m (0%) 0 deals (0%)

2002 $0.75 m (0.3%) 1 deal (2.9%)

2003 $2 m (1.2%) 2 deals (6.3%)

2004 $5 m (3%) 1 deal (4%)

Center for Venture Research - University of New Hampshire

NH Start-ups 2003

• 4600 start-ups, 3.6 per 1000 pop

• Highest per capita rate in NE

• Business churning: starts & failures as a % of existing firms

• NH: 23.4% US: 19.0%

Center for Venture Research - University of New Hampshire

The Gaps

Center for Venture Research - University of New HampshireCenter for Venture Research - University of New Hampshire

StageEarly LaterSeed/ Start-Up

SourceFDRS FFF Angels Venture Funds

Demand$25K $100K $500K $2,000K

Supply ------------------------------------------------------------------

Funding Gap

Equity Capital for EntrepreneursPre Seed

Center for Venture Research - University of New Hampshire

The Gap Dilemma

200443% angel : seed and start-up44% angel : post seed and start –up

2003 2002seed and start-up 52% 50%post seed and start –up 35% 33% (25% increase since 2000)

Center for Venture Research - University of New HampshireCenter for Venture Research - University of New HampshireCenter for Venture Research - University of New Hampshire

StageEarly LaterSeed/ Start-Up

SourceFDRS FFF Angels Venture Funds

Demand$25K $100K $500K $2,000K

Supply ------------------------------------------------------------------

Funding Gap

Equity Capital for EntrepreneursPre Seed

Capital Gap

Center for Venture Research - University of New Hampshire

The Gap Dilemma for NH

Start-up activity

+ angel activity

+ VC investments in later stage

+ funding gaps

= $75 to $165 million seed/start-up funding gap in NH

Give me a lever long enough and a place to

stand and I will move the earth

Center for Venture Research - University of New Hampshire

Archimedes Fund

Angel downside risk protection• a $10 million pool of private/public

sector capital for angels to draw from to complete a deal

• 3 to 1 match

• Self sustaining fund

Center for Venture Research - University of New Hampshire

Supply side

For Entrepreneurs:

• a central place to submit business plans and gain feedback and possible investments

Education

• investor ready education

• latent angel education