WIPO-INSME Training program on the role of intellectual property in raising finance by small and medium-sized

enterprises

Innovation tools to finance innovative SMEs

Geneva, 12.07.2006

Christian SAUBLENS

EBAN

1. Foreword

There is an asymmetry of information between entrepreneurs and investors;

It’s not only a question of access to money but also a question of life cycle of a company and about … sales and market penetration;

Investment readiness is needed;

All money is not the same;

Financial Supply Chain

BanksGuaranties

LeasingFactoring

Infrastructure:business angels networks,

incubators, etc.

Advice: investment readiness, tutorship

Expertise: professional

fund managers

Own resources

FFF VC

Loans on trustPre-seed

Loans for inventorsReimbursable advance

payments University spin offProof of concept

IPOBA

CorporateVenturing

Seedcapital

FFF : Family, Friends, FoundersBA : Business angelsVC : Venture capitalIPO : Initial Public Offering

GrantsMicro-credits

Other public supportSME profitability

Prerequisites

Tools

Mezzanine

The paradox of access to finance

Banks

Venture Capitalists

Stock Exchange

But argue that there aren’t enough good projects

What is a good project?

A project which is not perceived as risky for an investor

Have money

Trial to analyse the equity paradoxSupply:

Is there enough money available for seed and early equity?

Demand:

Are entrepreneurs aware of investors aspirations/ expectations (asymmetric information; all money is not the same)?

Are entrepreneurs ready to receive equity finance (Investment readiness)?

Are entrepreneurs proposals/ideas really innovative for investors?

Venture capital in Europe

3273

3878

0

5000

10000

15000

20000

25000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Millions

of euro

s

Expansion

Start-up

Seed

Source: EVCA

EBAN statistical sample shows:

N° of active angels in the EBAN sample: 12.775

N° of projects received: 9.500

N° of deals done: 580

Size of deals: 25.000 to 250.000 €

Average size: 75.000 €

New trends

B.A. & B.A.N. co-funding vehicles

Proof of concept loans/grants

Repayable advance

Mezzanine

University spin out/off funds

Pipeline research revenue

Non-financial tools

2. Segmentation of the market

Start-up phase First financial round Subsequent financial round Initial and unorthodox sources Public Support Debt finance

N.B: Indirect supports Integrated actions

Start-up Phase

Seed capital fund

Loans without interest and/or guarantee

University and research centres spin off funds

Micro-credit

Public or parapublic funds for creation or innovation

Public grants

Reimbursable loans

Proof of concept

First Financial Round

Business Angels

Seed capital fund

Banks loans/Overdraft

Guarantee funds

Public or parapublic investment funds

Regional Public venture capital

Public grants

Corporate venturing

Subsequent financial round

Private venture capital

Bank Loans

Share subscription bonus

Mezzanine

OTHER TYPES

Leasing

Factoring

Initial an unorthodox ways

Entrepreneurs savings

FFF

Profit reinvestments

Second mortgage

Personal credit cards

Customer advance

Delay of payments

Premises sharing

Employing relatives at below market salaries

Debt finance

Bank credits: Short term Long term Unsecured Micro

Commercial debt (papers) Public/semi public loans Bonds

Public finance

Grants

Reimbursable advances

guarantees

3. Sources of finance All money is not the same!

Business angels (informal risk capital): private individuals investing part of their personal assets in businesses and contributing their managerial skills and experience.

Business Angels Networks (BANs): regional platforms that match business angels with businessmen.

Buyouts: existing investors’ shares in a business are bought by the latter’s own management team (MBO-Management Buy Out) or by another management team supported by a venture capital fund.

Corporate venturing: venture capital supplied by existing companies for the purpose of financing innovative businesses set up by their own personnel or active in industries considered to be of strategic importance.

Development or expansion capital: financing provided for the growth and expansion of a company, which may or may not break even or trade profitably. Capital may be used to: finance increased production capacity; market or product development; provide additional working capital.

Early-stage finance/Start-up: funds invested downstream of research and development, in businesses that need additional finance to start marketing their products and services.

Equity: Ownership interest in a company, represented by the shares issued to investors.

Expansion: growth, bridging or restructuring capital. Factoring: a technique whereby SMEs sell invoices to

specialised firms. Financial package: a combination of various sources of

finance.

Grants: subsidies paid - without an obligation to refund – by public authorities to companies investing in a region for the purpose of facilitating their establishment or expansion.

Leasing: hire/purchase of capital goods.

Loans and debt: the main sources of funding for SMEs.

Mezzanine: intermediate layer of financing products (between equity and debt). Interest rates are often quite high.

Proof of concept: fund provided by public bodies to a research team in order to assess the viability of a new enterprise.

Quasi-equity investment instruments: instruments whose return for the holder (investor/lender) is predominantly based on the profits or losses of the underlying target company, are unsecured in the event of default and/or can be convertible into ordinary equity.

Replacement capital (also called secondary purchase): purchase of existing shares in a company from another private equity investment organisation or from another shareholder or shareholders – an investor buys another’s stake.

Risk capital: equity and quasi-equity financing to companies during their early-growth stages (seed, start-up and expansion phase) in the hope of a return on investment (ROI) that is both large and speedy, on a par with the level of risk taken. It includes: informal investment by business angels; venture capital; alternative stock markets specialised in SMEs and high-growth companies.

Seed capital: capital required for the purpose of financing projects upstream of product or service marketing. Seed capital is often essential for hi-tech projects in order to allow businesses to study, research and develop prototypes of the products that later come to constitute heir core business.

Start-up capital: financing provided to companies for product development and initial marketing. Companies may be in the process of being set up or may already exist, but have not sold their product or service commercially and are not yet generating a profit.

Venture capital: assets temporarily invested as stock by specialised firms expecting return on investment that is both fast and very substantial, i.e. commensurate with the level of risk. Such specialised investors play a role during both start-up and development.

4. Priorities for equity and loan providers

Equity providers Eligibility Criteria

Family, Friends and Fools Personal relationship based on trust

Business angels orinformal investors and Spin-off corporate venturing

Meeting or matching of individual entrepreneurs with business angels

Atmosphere of trust between individuals Credible business plan in the eyes of the Business

Angel Good management Fiscal incentives Market knowledge of the entrepreneur Availability of exit route Return on investment (capital gain)

Banks Availability of guarantees Perceived ability to repay the loan Company track record Rating

Repayable short-term loans

Innovative nature of business projects Business plan quality Management team

Venture capital andFinancial corporate venturing

Business plan credibility Business plan with patent technology Track record (over previous years) Ability to grow fast and deliver quick ROI Management team quality

Public funding New jobs Investment in productive tools

Guarantees Stamina as well as technical and financial skills/abilities

Loans on trust Business plan credibility Readiness to cooperate with a tutor

Seed capital funds Business plan quality Perception of the innovative nature of the

project Intellectual property High growth potential Government tax policies

Corporate venturing Innovative nature of the project in relation to the company’s core business

Industry-specific usefulness of the project, in particular from a technological standpoint

Business plan quality Good management Tax incentives

Institutional investors Business plan Proprietary technology (IP) High growth Good management Tax incentives from government

Proof of concept Innovativeness Entrepreneurial spirit Team IPR – Valorisation of research results

New capital markets Viability and consolidation At least three years in existence Positive results at least once within twelve

months prior to application More than €1.5 million in shareholder’s equity Ability to publish quarterly results Public recommendation by analyst Positive media attention Government tax policies Capable and experienced management team Prominent Board Experienced team of financial, legal and

underwriter advisers New business concept Large market share Record of high growth or high growth potential

Examples of new trends

Proof of concept

AIM: helping innovative enterprises to develop their products or services until their introduction to the market.

Average of amount provided: 40 to 400.000 €

Mixture of grants and equity

Pre-commercial support to university To prove “market potential” for research idea/invention

Delivery format Up to £200k per award (max 2 years) University team includes academics and commercialisation

practitioners University owns IP generated Only pre-commercial activity permitted £28m spent to date

Programme performance to date 85 projects completed 400 jobs created to date 17 companies formed 22 licensing deals £22m investment into companies

Funded in part with ERDF support from the EU Source: Scottish Enterprise

Mezzanine

AIM: to improve the balance sheet of an enterprise by a combination of subordinated loans or participating

loans and equity.The loans might be either reimbursed or

transformed in shares at a given moment.

Average size of deals:

at regional level: 100.000 to 350.000 € in Wales (UK)

up to 2.225.000 € in Berlin (D)

at private equity level: 20 to 50.000.000 €

N° of deals in Europe: ± 100/year

University spin out/off funds

AIM: to support universities staff & students to start their own businesses. Good tool to support the commercialisation of research results.

Size of funds: in Belgium between 5 and 15 mio €.

All money is not the same

Start-ups are funded from different sources

Ex.1: SuperSonic Imagine (F) creation date: 2005 n° of staff members: 15 founder investment: 50.000 €

1st Round: VC (Auriga Partners) = 500.000 €Sponsorship from:

- National awards = 450.000 € - Regional grants = 550.000 €

2nd Round: 4 investors = 10.000.000 €

- Crédit agricole Private Equity - Auriga Partners - NB6I Ventures - BioAm

Ex.2: MeilleurMobile.com Creation: 2004 Turnover: 1 mio €

1st Round: Founder + BAs 220.000 €2ndRound: Grants from Regional

Innovation Agency 50.000 €3rd Round: Loan on trust 20.000 €4th Round: Loan on trust 20.000 €5th Round: V.C. (Galileo Partners) 1.000.000 €

(March 2006)

Non-financial tools

Investment readiness schemesAim: improve the quality of Business plan and business

presentation in order to attract the attention of potential investors (B.A. – V.C. – …)

Content: - business plan review- knowledge of funding sources- understanding timing and amounts to be expected- needs & expectations of the various potential

investors- how to submit a business proposal.

BA academy Aim: helping potential B.A. to become active angels

Content: - enterprise evaluation - taxation- exit route

Research to Revenue - Pipeline

Pre-commercial

Investment/co-investment

Source: Scottish Enterprise

National High Growth Start Up UnitEnterprise

FellowshipProof of concept

Commercia

l

Success in marketplace

Idea/Invention based on research output

Christian SAUBLENS

EBAN

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