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.
Venture Capital serves as a countrys 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 VCs IMPACT ON THE ECONOMIC SYSTEM
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
VCs 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 Improved managerial culture View of entrepreneurial landscape Visibility Improved relationship with stakeholders
OBJECTIVES OF VCs 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.
Pre-Seed/Incubator Seed /BA VC 100 50 10 ENLABS H-FARM M31 IL CLUB DEGLI INVESTITORI IAG ANNAPURNA VENTURES 360 CAPITAL PARTNERS ATLANTE VENTURES INNOGEST SGR VERTIS SGR PRINCIPIA SGR FONDAMENTA SGR 5 DPIXEL WORKING CAPITAL NINE POINT CAPITAL EARLYBIRD MIND THE BRIDGE CONNECT VENTURES WHO DOES VC IN ITALY?
VC: PROJECT SELECTION CRITERIA Management Team Quality Product and target market Technology and competitive advantage Potential sales and expected returns
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 VC SELECTION CRITERIA
Technology is a major source of competitive advantage for startups: innovation sustainability defensibility TECHNOLOGY POTENTIAL SALES & EXPECTED RETURNS IRR (internal rate of return): 50% - 100% per year Exit timing commensurate with investors 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
ITS A NUMBERS GAME VCs 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? DODONT Make your approach and presentation as friendly and easy to understand Assume anything from a VC beyond normal. Waste no ones time Even technically VCs 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 companys value clearly, in no more than 1 minute. A typical VCs attention span is less than 2 minute
RISK / REWARD PROFILE Many entrepreneurs believe that VCs 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? DODONT 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? DODONT Hire the best people you can findCompromise 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. VCs want to back companies they believe can and will dominate market niches
WHAT TO DO AND NOT TO DO? DODONT 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 entrepreneurs assertions directly. VCs 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? DODONT 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 VCs 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
SUGGESTIONS Encourage the VCs 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 VCs appreciate a strong presentation WHAT TO DO AND NOT TO DO?
EVERYTHING IS NEGOTIABLE With VCs 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 VCs 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? DODONT Listen carefully and respond thoughtfullyBe 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 wont help Enjoy the negotiation its a learning experience Test the VCs negotiating skills, you may need his support in later negotiations with other investor or partner
VCS 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? DODONT 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