20140714 ginsel_finance_as_part_of_entrepreneurial_ecosystems

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The Dutch Financing Ecosystem for ambitious entrepreneurs

14 July 2014

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“Entrepreneurs are simply those who understand that there is little difference between obstacle and opportunity and are able to turn both to their advantage.” ― Niccolo Machiavelli

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Introduction

What we are going to do today:

•  Analyze the financing landscape for ventures in the Netherlands

•  Discussing the challenges that limit access to and availability of finance

•  Come up with some good business ideas and policy recommendations

•  About me:

Technology Financing Strategy Corporate Finance

Venture Capital Fundraising Mentoring Investing

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Some definitions… what is a startup?

•  Steve Blank: “A startup is a temporary organization used to search for a repeatable and scalable business model”

•  In the Netherlands the perception of a startup is often: “een studentenbedrijfje”

•  In Silicon valley people say: “You are a startup until you IPO or get bought.”

•  Especially with regard to the financing challenge, it is easy to only look at the parties that seek or envisage to need

Venture Capital to fulfil their growth ambition. This leaves out several startups according to the definition by Steve

Blanks, but it includes the ones that require the most support.

•  Where do startups come from?

o  University (of applied science) spinout, both by students or employees

o  Company spinout

o  Freelancer, building something scalable

o  An alliance of Freelancers

o  Out of the blue…

∆ Value perception?

Challenge: How to define and track startup companies in the Netherlands?

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Traditional way to treat new projects like startups: linear

•  Since 1986

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Now: Lean startup: lean manufacturing for business models

•  Since 2011

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Lean startup increases chance of success and volatility

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So why does a startup need funding?

•  Costs to be financed

o  Labour cost, management fees or salaries of the founders and employees

o  External hires or outsourced activities (development, marketing, sales, services)

o  IP protection

o  Taxes (labour tax and social premiums)

o  General cost (office, legal, admin support, IT)

•  Capital required

o  Investments (only in cost as depreciation)

o  VAT pre-financing

o  Working capital in case of revenue (government and corporates pay late)

o  Grow the activities before revenues enables for it

•  When a startup decides (and is able to) survive without external funding, this is “called bootstrapping”. Usually

bootstrapping leads to a slower growth path.

Challenge: How to reduce funding need without giving up on ambition, how to communicate on the investment proposition (risk and return for investors)

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Startup funding through it’s lifetime

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Entrepreneurs hold increasingly less of a bigger pie

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Taking other funding sources into account

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Startup funding sources in NL

•  Founders: unemployment wages, golden handshakes, Bonuses, general savings

•  FFF (Friend Family and fools): general savings

•  Qredits: microfinance facility provided by the banks and guaranteed by the government

•  Customers: upfront paying consumers (crowd) or companies (latter usually in pilot projects)

•  Crowdfunding (P2P): four forms that are very different (gifts, equity, upfront revenue, debt)

•  Foundations: some support initiatives and startups especially for social and environment

•  Business angels: earlier mostly old business owners, now more often “managers”

•  Business angel groups: syndicates of Business angels or business angels micro VC’s

•  Micro VC’s: (semi) professional funds up to 25M, mostly local and often Gov’t supported

•  Venture Capital funds: Professional larger investment funds

•  Banks: government guaranteed credits (innovatiekrediet)

Challenge: How to increase knowledge and information on these funding sources and enable easy access

Up to 100k

Up to 200k

Up to 250k

Order of magnitude

Up to 500k

Up to 500k

Up to 1M

Av.150k

Av. 400k

Av. 1M

Av. 5M

Up to 5M

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Business angels volume in Europe is increasing steadily

•  Business angels play an increasing role in funding startups •  New business angels come to the market, less experience •  More often, business angels have not been an entrepreneur themselves •  Relative low number of wealthy serial entrepreneurs returning to invest compared to the USA

http://ec.europa.eu/enterprise/policies/finance/data/enterprise-finance-index/access-to-finance-indicators/business-angels/index_en.htm

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Business angels number of deals grows strong as well

EY: Venture Capital Insights 2013, Global VC landscape, angel and incubator participation trends and exit landscape

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Business angel activity in absolute terms low in NL

NL: € 0,75 per Capita

~1% of total VC spend

Spread over 4500+ angels

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Venture Capital is involved in less deals but spends more

US: $95,- pp

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Europe shows a wide difference in VC spending /GDP

The Venture Capital & Private Equity Country Attractiveness Index Alexander Groh, Heinrich Liechtenstein, Karsten Lieser and Markus Biesinger

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Number and size of VC deals in EU far behind US

Challenge: How to reduce funding need without giving up on ambition, how to communicate on the investment proposition (risk and return for investors)

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Investments in VC hardly reward for the risk

Challenge: How to enable institutional investors (pension funds, insurance companies, family offices) to participate in this asset class

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How investors think and why they seek 10X

•  Long term: What is our final objective, what can we achieve (the opportunity)?

•  Medium term: How can we get there and what obstacles (the risks) are on our path?

•  Short term: What do we need to do to get there (the investment)?

•  Average portfolio performance for VC’s,

•  2 /10 make money as they promised

•  2 /10 break even

•  6 /10 are lost

•  For a decent 20% return,

VC’s need to make

at least 6x their investment

in 5 years

Challenge: How to enable investors (also Business angels) to cope with the risks and how to educate entrepreneurs at this game

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Exits have a strong influence on increasing capital

Challenge: How to enable European firms to create more value and thus raise more capital in their life?

There is a strong difference, not only in the number of M&A and IPO exits, but especially the amounts raised prior to an exit as well as the valuations in those transactions are of a different scale in the USA than in Europe

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Government innovation and startup support is available

•  Research grants (STW/NCW): especially commercially oriented grants, mostly tied to a university

•  Development subsidies /tax cuts (WBSO, RDA, innovatiebox): tax reductions for R&D labor spending

•  Commercialization subsidies, loans (MIT etc.): Broad spectrum, relatively low budget

•  Independent entrepreneur / starter tax-reduction: income tax reductions for “ZZP-ers” (so not in BV case)

•  Innovation loans & guarantees (icw banks): loans by private sector banks but guaranteed by the government

•  Environmental subsidies: early write off or other tax reductions for sustainable investments

•  Regional development funds: Mostly Provinces that invest in innovative project, up to 50% per round

•  SBIR: copied from the USA: a small business challenge to involve smaller companies for government innovation

•  Sponsored competition: The government support several startup/innovation challenges (Livewire, NewVenture)

•  Export finance: The Netherlands have a broad scope of export finance (and guarantees) for all companies

Challenge: how to make it easy for potential users to know what their options are and how to optimize the application process and create a total financing mix

Issue: financing is mostly up to a maximum of 50% to avoid illegal government support, so private capital is required for also minimum of 50% of the required investment

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VC attractiveness of the Netherland is quite high (no 14)

IESE VC/PE Country Attractiveness Index: Alexander Groh, Heinrich Liechtenstein, Karsten Lieser and Markus Biesinger

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But what is it that holds us back? +/- +/- ++ +/- -- + Challenge:

What are the most

important bottlenecks for VC investment

in the Netherlands?

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The types of financing a company might use

•  Tax reduction: government driven, mostly administrative risk for entrepreneur

•  Grant: government or foundation driven, mostly administrative risk

•  Soft loan: government driven loan that is flexible on repayment, mostly administrative risk

•  Loan: mostly banks, often with collateral, high risk: lender can call on bankruptcy, worst negotiation position

•  Off balance sheet finance: assets sold to a finance company and then leased. Not often available to startups

•  Subordinated loan: A loan that only will be repaid (including interest) after other loans have been paid

•  Convertible loan: a loan that at certain conditions is converted into shares, often at next funding round

•  Mezzanine finance: a mix of loans and shares/options

•  Preferred shares (typical for VC): with specific rights, usually get fixed (%) dividends, prior to regular shares

•  Regular shares: common shares that give right to dividends when there is profit and the remainder at exit

•  Shares = stock = equity = “aandelenkapitaal” loan = debt = bond = “schuldkapitaal”

Challenge: how to help entrepreneurs (and investors) with choosing the right form of finance given their risk profile and finance need

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Funding process is a tough cookie for entrepreneurs

•  Lack of understanding of the investment process (and an investment perspective) •  Role of an advisor often underestimated

1.  Choosing sources 2.  Choosing preferred structure 3.  Structuring the process 4.  Investment memorandum 5.  Valuation 6.  Term sheet / investment proposal 7.  Roadshow / application 8.  Term sheet negotiation 9.  Exclusivity 10. Due diligence 11. Final documentation negotiation 12. Closing

13. Setting up a working relationship 14. Reporting and Investor relations 15. Next financing round

•  This process works in essence similar with funding from Government agencies, Banks, Investors and new initiatives like crowd funding and credit unions.

Challenge: How to standardize the investing process, limit cost and educate all parties involved

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Summary of the most important challenges

Distribution

Process

Deal structuring

Legal cost

Deal flow

Business plans

Valuations

Understanding

Valuations

Fundraising

Startup challenges

VC challenges

Labor law Capital markets

General challenges

Finance education

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Any questions?

www.capitalwaters.nl

Don Ginsel,

06-24758130

dg@principemanagement.nl

Postbus 77667, 1070 LG Amsterdam

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•  The key elements in a startup ecosystem

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