mid-term evaluation of regional venture capital funds

Date

September 2011

MID-TERM EVALUATION OF REGIONAL VENTURE CAPITAL FUNDS IMPLEMENTATION AND LESSONS LEARNT

Regional Venture Capital Funds Mid-term evaluation

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Contents Abstract 4 1. Introduction 7 1.1 Background – on publicly-financed venture capital funds 7 1.2 Ongoing evaluation 10 1.3 This year’s evaluation 11 1.4 Data sources 13 1.5 Explanation of concepts 15 1.6 Conclusions from first year of ongoing evaluation 17 1.7 Report structure 18 2. InternationAL AND SWEDISH EXPERIENCES 18 2.1 International experiences 19 2.2 Swedish pilot projects 24 3. venture capital fund operationS in the pAst year 29 4. The venture capital funds’ INVESTMENTS 32 4.1 The venture capital funds’ investment activity 33 4.2 The venture capital funds’ investment activity and portfolio compositions 37 4.3 Expected investment activity during 2012-2014 61 5. DEVELOPMENT AND ADDITIONALITY OF THE COMPANY 66 5.1 Description of the companies 66 5.2 Achievement of objectives 69 5.3 Additionality in companies 74 5.4 Summary and discussion 74 6. PrivatE CO-INVESTORS 76 6.1 Description of private co-investors 76 6.2 The private co-investors and the investment’s achievement of objectives 78 6.3 Additionality – does the investment contribute to an increase in access to capital and

willingness to invest/investment activity? 81 6.4 Summary and discussion 82 7. REGIONAL COOPERATION 84 7.1 Forms and degrees of cooperation 85 7.2 Factors affecting the degree of cooperation 86 7.3 Summary and recommendations 88 8. DisCussion AND CONCLUSIONS 90 8.1 Results and recommendations 90 8.2 Ongoing evaluation work in 2012-2014 96 9. APPENDICES 98 9.1 Appendix 1: The investment’s programme logic 98 9.2 Appendix 2: EVCA:s industry sector classification 100 9.3 Appendix 3: Delayed, changed and additional investment decisions101 9.4 Appendix 4: Venture capital funds’ investment processes 102 10. ReferenCES 107

List of tables and figures Table 1. Mid-term evaluation’s topics, questions and data collection methods ................................... 12 Table 2. Non-response analysis of companies.............................................................................. 13 Table 3. The venture capital funds’ accumulated rate of investment up to and including June 2011 ...... 34 Table 4. Horizontal criteria....................................................................................................... 37 Table 5: Forecast of disbursed EU funds..................................................................................... 62


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Table 6: Required future investment rate for four venture capital funds........................................... 64 Table 7: Forecast of decided EU funds........................................................................................ 65 Table 8. Investments in companies divided into industry sector, stage and size in June 2011 .............. 67 Table 9: Has the company brought in further external capital since financing from the investment fund has been received?................................................................................................................. 73 Table 10. Private co-investor’s incentive to invest together with venture capital fund ......................... 77 Table 11. The venture capital fund’s contribution to the private co-investments’ development in different areas (1=no contribution at all; 4=very high contribution) ............................................................ 80 Table 12: Venture capital funds and co-financiers in the regions..................................................... 84 Figure 1. Map of fund portfolios for regional funds.......................................................................... 9 Figure 2. Invested EU-funds as a percentage of target for the whole project period ........................... 36 Figure 3: Rate of investment and portfolio composition (Almi Invest Östra Mellansverige)................... 39 Figure 4: Rate of investment and portfolio composition (Almi Invest Stockholm) ............................... 41 Figure 5: Rate of investment and portfolio composition (Almi Invest Småland och Öarna)................... 43 Figure 6: Rate of investment and portfolio composition (Almi Invest Västsverige).............................. 45 Figure 7: Rate of investment and portfolio composition (Almi Invest Västsverige - Värmland).............. 47 Figure 8: Rate of investment and portfolio composition (Almi Invest Norra Mellansverige) .................. 49 Figure 9: Rate of investment and portfolio composition (Almi Invest Partnerinvest i Norr)................... 51 Figure 10: Rate of investment and portfolio composition (Partnerskapsfonden Mittsverige - Saminvest) 54 Figure 11: Rate of investment and portfolio composition (Mittkapital Jämtland/Västernorrland) ........... 55 Figure 12: Rate of investment and portfolio composition (SEF I)..................................................... 58 Figure 13: Rate of investment and portfolio composition (SEF II-III)............................................... 59 Figure 14: Reasons behind choice of external equity capital financing.............................................. 68 Figure 15: Risks associated with investment ................................................................................. 1 Figure 16: Overall risk of investment........................................................................................... 1 Figure 17: Areas of application of capital investment .................................................................... 71 Figure 18: To what extent will the company use the capital investment for different purposes (average divided per fund).................................................................................................................... 72 Figure 19: Additional impact of the additional capital.................................................................... 73 Figure 20: The private co-investors’ expections of a return............................................................ 77 Figure 21. Co-investors’ expected contribution to company’s development and company’s expectations (1=no contribution at all; 4=very high contribution)..................................................................... 79 Figure 23: Degree and form of cooperation................................................................................. 85 Figure 24: Regional structures and processes.............................................................................. 87


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ABSTRACT

This is a mid-term evaluation of the initiative comprising twelve nationwide regional venture capital funds, which are operated in the form of ERDF-funded projects with regional co-financing. The background to the initiative is the interest expressed by the European Commission and national and regional players in working with revolving financial instruments in the form of equity capital, in order to address the identified lack of capital for financing small and medium-sized enterprises (SMEs) with growth ambitions. The aim of the venture capital funds, which were founded in 2009, is to increase access to equity capital for small and medium-sized enterprises in Sweden. Because the venture capital funds are run as projects, they are referred to as fund projects. The project period is from 01/01/2009 to 31/12/2014. The project owner must submit a final report on the use of ERDF funds in the project by 31/03/2015. ERDF funds that have not been invested in portfolio companies at least once prior to 31/12/2014 must be paid back to the EU Commission. Available funds that are not liable for repayment are retained after the final accounting for the region. During the project period, funds can be reallocated from fund projects to other structural fund projects. The initiative is subject to ongoing evaluation, which means that its progress will be regularly monitored and evaluated. This will contribute to learning about the initiative's implementation and results. Ramböll Management has been commissioned to conduct the ongoing evaluation of the twelve fund projects between autumn 2009 and spring 2015. The ongoing evaluation is summarised in a yearly report, and this present report constitutes the ongoing evaluation for 2011 and the mid-term evaluation of the, initiative. 1 The mid-term evaluation was conducted and the report written by Sofia Avdeitchikova PhD (external project manager, CIRCLE, Lund University), Ulrika Ekström (internal project manager, Ramböll Management) and Martin Fröberg and Marcus Holmström (both at Ramböll Management). The Swedish Agency for Economic and Regional Growth Report and the CEOs of the venture capital funds were consulted during the mid-term evaluation process. The CEOs also received a written version of the report on which they were able to submit comments. The purpose of the mid-term evaluation is to provide the Swedish Agency for Economic and Regional Growth, the venture capital funds and other stakeholders with early indications of how the initiative stands in relation to defined goals and to highlight any difficulties in the implementation process. The mid-term evaluation is about how the involved players (project owners, funded companies, regional and private co-financiers) are working within the framework of the fund projects and their perception of the value of the initiative in areas such as investment activity, development of companies and the initiative's capacity to increase access to capital in the regions. The mid-term evaluation also highlights cooperation in the regions and identifies challenges and success factors in the continuing work with the funds, in order to provide knowledge about the initiative's long-term effects on capitalisation in the region. Consequently, the mid-term evaluation has been designed to answer the following overarching questions:

• Where do the venture capital funds stand in relation to the defined rate of investment goals? • What is the status of the venture capital funds' portfolios with regard to the initiative's mission,

the size of the companies, the stage of development, industry diversification etc.? • What do the companies get out of the investors' involvement? Can a positive development in the

companies be observed? • Are there signs that the venture capital funds are helping to improve the capital position of

companies; in other words, is the initiative creating additionality? • How is the cooperation with the regional co-financiers working?

1 The first ongoing evaluation report, Start av regionala riskkapitalfonder (Start of regional venture capital funds), was issued in 2010 (Swedish

Agency for Economic and Regional Growth Report 0072).


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When the first evaluation of the regional venture capital fund initiative was made halfway through 2010 as part of this ongoing evaluation assignment, most of the venture capital funds were still in a start-up phase. Several venture capital funds had a slow start, which was largely due to delays in disbursement of the regional co-financing, the need to develop procedures for the assessment and implementation of investments and long-drawn-out recruitment processes. The economic situation in Sweden and the world was relatively uncertain which meant that many companies were cautious about investing in expansion and there appeared to be relatively little capital in the market available for new investments. Generally speaking, many venture capital funds saw it would be a challenge to ensure a sufficient flow of good potential deals and suitable investment partners, particularly in regions dominated by large companies and industrial environments which have not historically had a culture of venture capital financing. In addition, regulations governing the activities of the ERUF-financed venture capital funds were perceived as creating ambiguities, which took up a great deal of time and led to frustration and unnecessarily long investment processes. The venture capital funds appear to have made a good start to their activities during the last year, and most of them are in line with or close to the planned investment rate. The composition of the venture capital funds' portfolio is generally good, which means the investments have largely focused on small enterprises in early development stages. This is in line with the overall objective of the initiative, which is to address the gap in the supply of capital to small and medium-sized enterprises and to do so in a market-complementary way, i.e., not competing with the private market. The mid-term evaluation includes an assessment of whether the venture capital funds' rate of investment by the end of 2011 will be in line with the accumulated investment plan which runs until the end of December 2011 (short-term) and also an assessment of whether it is likely that the venture capital funds will manage to invest the entire capital base made up of EU funds during the full project period (long-term). In the short term, it is Ramböll's view that there is a risk that the rate of investment, particularly for Almi Invest Småland & Öarna, Almi Invest Västsverige Värmland, Partnerinvest i Norr, Mittkapital Jämtland/Västernorrland and SEF II-III, may be below the projected rate of investment at the end of 2011. This assessment is based on the EU funds paid out by the venture capital funds up until the end of Q2 2011 and the size of any additional investment decisions. Other factors considered in the assessment include the dealflow, and qualitative aspects such as the investment climate in a particular region, perceived access to private capital and the intensity of the funds' marketing and networking efforts. On the basis of the venture capital funds' average monthly EU funds disbursement since the initiative started in 2009, it is Ramböll's assessment that there may be a long-term risk that Almi Invest Östra Mellansverige, Almi Invest Småland & Öarna, Almi Invest Västsverige Värmland and Almi Invest Norra Mellansverige will not manage to invest the entire capital base made up of EU funds before the end of the project period. However, if the assessment takes into account whether the above-named venture capital funds have entered into legal agreement to pay out additional EU funds, this risk is eliminated or at least significantly reduced. On the basis of the venture capital funds' total investment decisions, the funds are all expected to be able to use the entire capital base made up of EU funds before the end of the project period. However, the decision as to whether the venture capital funds will be liable for repayments to the European Commission is not based on their investment decisions, but on their actual disbursement of funds to portfolio companies. However, given that the venture capital funds also pay out the funds for which decisions have been made, the results indicate that they should all be able to invest their EU funds during the project period.

Several venture capital funds report that interest from the companies has exceeded expectations. Because the majority of the venture capital funds have existing and established local networks in their regions, only a relatively low level of resources has needed to be channelled on marketing, and the funds have experienced a positive attitude and confidence from companies and private co-investors alike. A number of the venture capital funds' CEOs say they have been pleasantly surprised at the relatively high


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quality of the investment objects and the good industry diversification, even outside the large urban areas. The companies which have received funding under the initiative are generally highly satisfied with their relationship with both the venture capital fund and the private co-investors. The companies have used the capital primarily for market development, product development and skills acquisition, and the majority of companies that have received funding from the venture capital funds are experiencing a high investment value. Companies are tending to find that the investment has contributed to faster expansion, more opportunities to obtain other external financing, a higher ambition level, increased production capacity and professionalisation of board work. Many of the companies also believe that the investment will ultimately lead to increased expertise and better profitability. One-third of the companies that participated in the evaluation process have received additional equity capital from new external shareholders after the initial investment has been made, suggesting that the companies have become more attractive to investors. Consequently, there is evidence that the initiative is making a positive contribution to the companies' growth and to increasing knowledge about venture capital, thereby contributing to the achievement of the initiative's objectives.

The private co-investors are experiencing a number of values and benefits in investing with a public venture capital fund. For example, the portfolio companies benefit from their venture capital fund's investment procedures, expertise and professionalism, and the risk associated with private capital is shared. In addition, the private co-investors report that the cooperation has increased their knowledge and skills in the area of implementation of investments and that they have developed wider networks. This must be seen as a good testimonial for the initiative and is in line with its overall objective, namely to contribute to the development of private co-investment partners.

Cooperation between the venture capital funds and regional co-financiers differs from region to region and even within regions. The degree of contact and cooperation also differs among regional co-financiers. Structural conditions such as the region's industry structure, market maturity and equity financing experience, and other factors such as support-building efforts when the venture capital fund was established, common goals and personal abilities affect cooperation between a private equity fund and its co-financiers. This in turn affects the possibilities for establishing a sustainable venture capital arena.

The overall question of whether the capital supply situation for businesses and the capital market has improved as a result of the initiative is difficult to answer, although there are indications that the initiative has helped to address the equity gap identified in the companies that have received funding and has also attracted private capital. Just over one-fifth of the companies that participated in the Ramböll evaluation decided to go ahead with the venture capital fund investment as no other source of investment was considered possible. A further quarter of the companies said that other investment sources were available but that they did not offer equivalent conditions. These figures together provide a certain indication that the initiative has filled a market need. Almost half of the private co-investors who participated in the evaluation said they would probably not have made the investment at all without the venture capital fund's co-investment. Almost ten percent said they probably would have made an investment, but the amount would have been lower. This indicates that the initiative has resulted in an increased volume of private capital investment. Consequently, there is at present no evidence that the investment has crowded out the private capital.


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1. NTRODUCTION

In 2009, twelve regional public venture capital funds were set up in Sweden. The venture capital funds are run as projects within the framework of the eight regional Structural Fund programmes and financed by the European Regional Development Fund (ERDF) and a number of regional financiers. Several actors have been commissioned to be project owners and operate one or more of these projects: Innovationsbron, Almi Invest, Saminvest, the Norrland Fund (Norrlandfonden) and the Sixth AP Fund (Sjätte AP-fonden). The regional investments are therefore called “fund projects” whose overall aim is to “offer market complementary instruments within the framework of the Structural Fund programme” and to examine how different forms of public investments can contribute to an increase in the availability of equity capital for small and medium-sized enterprises (SMEs) in Sweden. Ramböll has been commissioned to carry out an ongoing, learning review and evaluation (ongoing evaluation) of the twelve fund projects between autumn 2009 and spring 2015. The ongoing evaluation is summarised in one report per year and this report is the ongoing evaluation report for 20112. This year’s report is also the mid-term evaluation of the initiatives prescribed by the guidelines of the Swedish Agency for Economic and Regional Growth. The mid-term evaluation is an integrated part of the ongoing evaluation report and is in practice an analysis of the first two years of operation of the fund projects. The mid-term evaluation aims to provide the Swedish Agency for Economic and Regional Growth, the venture capital funds and other relevant actors with early indications of how the investments stand in relation to the objectives set and highlight weaknesses in the implementation process. The mid-term evaluation looks at how the actors involved (project owners, portfolio companies who received funding and private co-financiers) are operating within the framework of the fund projects and their perceived value of the investment with regard to for example investment activity, company development and the investment’s ability to increase the availability of capital in the regions. The mid-term evaluation will also highlight cooperation in the regions and identify challenges and success factors in the continued work with the funds. This is done in order to provide knowledge about the long-term effects of the investment on the supply of capital in the regions.

1.1 ackground – on publicly-financed venture capital funds The European Regional Development Fund (ERDF) aims to strengthen the economic and social cohesion in the EU by correcting imbalances between its regions. Through the fund a number of different types of aid were distributed during the year: various types of financing instruments, direct financing aid for companies, aid for infrastructure investments and more. During the 1994-1999 programming period, the number of Structural Funds that were used for venture capital funds in Europe grew from being almost non-existence. The background to this was the assessment that there was a shortage of venture capital available for small and medium-sized enterprises with growth ambitions. Before the 2000-2006 programming period, investments of ERDF-financed venture capital funds increased. The Commission also encouraged member countries to re-orientate company-focussed financing investments away from traditional grants to other forms of financing, like venture capital. Part of the argument for this re-orientation was the lack of venture capital; a structure of revolving venture capital funds can provide less reduction of competition whilst opening the way for a reflux of capital (venture capital funds can provide returns that in turn can be reinvested). Moreover, there were positive experiences of ERDF-financed venture capital funds. In the present 2007-2013 programming period more venture capital funds than ever were invested in SMEs. 2 The ongoing evaluation’s first report in Swedish was published 2010, Start av regionala riskkapitalfonder, Swedish Agency for Economic and

Regional Growth 0072


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In Sweden, the first ERDF-financed venture capital funds were set up in 2005 when a decision by the government and parliament made these types of investments possible. The initiative was taken after the European Commission in a report from 2002 identified Sweden as one of four countries that still only applied direct grants in its various Structural Fund programmes. Three pilots involving regional partnership funds were launched within the then Objective 2 in West Sweden, Gotland and Mid-North Sweden3, where regional Almi companies set up subsidiaries that managed the partnership funds. The pilots were structured so as to promote a change from being a passive partner to an active private co-investor and were based on a model for public venture capital funds that was developed in Scotland. The pilots were concluded in June 2008, with the exception of follow-up investments in existing portfolio companies.4 In 2006, the European Investment Fund (EIF) carried out an analysis of the need and opportunities to enhance SMEs’ access to capital with Structural Funds in Sweden with the JEREMIE initiative (Joint European Resources for Micro to Medium Enterprises)5. The initiative aims to stimulate development of SMEs by improving access to microcredits, venture capital and loan guarantees. The basis for the financing from the ERDF comes with the requirement of both national public co-financing and private co-financing.6 The ERDF also opens up other ways of working with the supply of capital for SMEs. As an alternative to JEREMIE, the Structural Fund partnerships of the eight programme areas and Nutek/the Swedish Agency for Economic and Regional Growth (in its capacity as the managing authority for ERDF) provided financing actors with the opportunity to apply for ERDF funds for part-financing of guarantees or venture capital funds. Like JEREMIE, this approach aims to create revolving financing tools for equity that goes into SMEs with growth ambitions. The announcement resulted in twelve regional venture capital funds being established.

3Almi Företagspartner Örebro Ab started the wholly-owned subsidiary Vestra Partnerinvest, Almi Företagspartner Mitt AB the wholly-owned

subsidiary Saminvest and Almi Företagspartner Gotland AB started Region Invest AB. 4 See Chapter 2.2 for a summary of the results from the pilot initiative in 2005-2008. 5 JEREMIE is a joint initiative from the European Commission and the European Investment Fund which was introduced in October 2005. 6 EIF identified shortages in the supply of capital and recommended that Sweden invests in a national JEREMIE fund. There was also found to be

great interest in venture capital investment, but also major problems in obtaining national co-financing in certain regions. In addition, the

applicable legislation (including the Public Procurement Act) made it technically very complicated to establish a JEREMIE fund in Sweden.


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Figure 1. Map of fund portfolios for regional funds

Source: The Swedish Agency for Economic and Regional Development

In Mid-North Sweden - Jämtland and Västernorrland Counties – there are two active venture capital funds within the investment: Partnerskapsfond Mittsverige and Mittkapital. In practice, the twelve fund projects are treated as ten venture capital funds, because Sydsvensk Entreprenörskapsfond II and III are operated as one fund and the same also applies to Almi Invest Västsverige and Almi Invest Värmland. The project period runs between 01-01-2009 and 31-12-2014 and the project owner must provide a final account of the use of ERDFs in the project. All funds for the fund project are disbursed in advance, so those ERDF funds that are not invested in portfolio companies at least once by 31-12-2014 must be paid back to the European Commission. Available funds which are not repayable shall remain in the region after the final account. During the project period, funds can be reallocated from the fund project to other Structural Fund projects. In the current programming period (2007-2013), the eight regional Structural Fund partnerships therefore prioritised revolving financing instruments; the investment of regional venture capital funds has increased and now covers the whole of Sweden as a result of the twelve regional venture capital funds. Via these projects the market is supplied with venture capital which amounts to around SEK 2.2 billion, including private funds.7

1.1.1 he venture capital funds’ mission The cornerstones of the design of the investments can be summarised as follows8:

• The investments shall go to SMEs that are in the seed, start-up or expansion stages.

7 Swedish Agency for Economic and Regional Growth (2011) Fondprojekt, www.tillvaxtverket.se 8 A statement of the rules and terms that are formulated for this initiative are presented in the Swedish Agency for Economic Growth (2010) Info

0212 Rev A: Conditions for the implementation of fund projects

Partnerskapsfond Mittsverige AB(Saminvest II)Eva Nordlander, MD

Mittkapital i Jämtland/Västernorrland AB(Sjätte AP-fonden)Susanne Olofsson , MD

Svensk Entreprenörskapsfond I -II-III(Innovationsbron) (RA)Per Heander, Investment Manager SEF IPer Aspemar , MD SEF II -III

Partnerinvest i Norr AB(Almi/Norrlands fund + regional actors ) (RA)Ola Rönnqvist, Fund Manager

Almi Invest Västsverige, Värmland AB (RA)Håkan Krook, Fund Manager

Almi Invest Norra Mellansverige AB (RA)Christer Navjord, Fund Manager

Almi Invest Stockholm AB andAlmi Invest Östra Mellansverige AB (RA)Mikael Karlsson, Fund Manager

Almi Invest Västsverige AB (RA)Håkan Krook, Fund Manager

Almi Invest Småland & Öarna AB (RA)Tarja zu dem Berge, Fund Manager


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• The venture capital funds shall be complementary to the market. This means, inter alia, that the venture capital funds shall address a gap in the supply of capital among SMEs with high growth potential and not compete with the private market.

• The venture capital funds shall invest in conjunction with a private commercial independent actor and the investment must be made on equal terms.

• The venture capital funds shall revolve i.e. that when the funds’ holding is realised the funds must be reinvested in the region. This also means that the funds shall strive to maintain their capital base. There shall however be no formal requirement that the venture capital funds must generate a return.

According to the text of the announcement, the goal of the project is that “more companies shall start and grow in the regional programme areas through an improved supply of capital to small and medium-sized enterprises in the early stage.”9. The venture capital funds are also expected to contribute to the development and professionalisation of the venture capital market in Sweden. The formal structure of objectives relating to the results and outcomes that the initiative is expected to produce are presented in Appendix 1.

1.2 ngoing evaluation In principle, all Structural Fund-financed projects with financing from the EU of SEK 10 million or more and projects of “special interest” must implement an ongoing evaluation of itself. The Swedish Agency for Economic and Regional Growth, which is the managing authority for the eight regional Structural Fund programmes in Sweden, has chosen to invest additional funds to commission joint ongoing evaluation of the twelve fund projects in conjunction with the project owners. The aim is to be able to make comparisons between the venture capital funds’ structure, conditions and results, and not least to allow the ongoing evaluation to be an arena for an exchange of experiences between the venture capital funds. The overall approach also provides the Swedish Agency for Economic and Regional Growth with good conditions for learning about how different structures and administrative frameworks impact the venture capital funds’ way of working and what results are generated. Ramböll has been commissioned to carry out the ongoing evaluation of the twelve fund projects between autumn 2009 and spring 2015. The contract was awarded by the Swedish Agency for Economic and Regional Growth’s Evaluation Group for the regional Structural Fund programme, which is also responsible for the ongoing evaluation. The ongoing evaluation will monitor the fund projects on an ongoing basis and will be based on a learning approach where feedback takes place through seminars, workshops and yearly written reports. The yearly reports describe, account for and analyse the implementation and results of the project and discuss current questions in the venture capital funds’ life cycle. The point of evaluating on an ongoing basis is that it provides greater opportunities for learning and development of an investment during its implementation. One problem that the European Commission, the Swedish Agency for Economic and Regional Growth and other actors have noted is that evaluations are often made too late for recommendations to be used for developing and improving investments. In the guideline for evaluation of the Structural Funds for the 2007-2013 period, the Swedish Agency for Economic and Regional Growth states that the overall objective of ongoing evaluation is to create the conditions for continuous learning in the project and that the ongoing evaluation should have a forward-looking and development-supporting approach. The insights and experiences that the evaluation provides will not only be conveyed back to the evaluation object: the venture capital funds’ management, board, employees and financiers. The ongoing 9 http://www.tillvaxtverket.se/download/18.74f57d0f1283a4f88ff800020468/M%C3%A5lindikatorerna+i+fondprojekten.pdf


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evaluation will also actively contribute to a wider public debate concerning financing issues by addressing itself to actors like entrepreneurs, private investors, the Ministry of Enterprise, Energy and Communications, the authority for the Swedish Agency for Economic and Regional Growth, regional stakeholders, researchers in business financing and more. Aside from the ongoing evaluation, the authority also carries out work for Growth Analysis commissioned by the Ministry of Enterprise, Energy and Communications and which involves a further evaluation that includes research overviews, international experiences of venture capital investments, outcome evaluation, etc. Ramböll and the Swedish Agency for Economic and Regional Growth cooperate and work towards maintaining a continuous dialogue that supports both the ongoing evaluation and the future outcome evaluation. During the first year (autumn 2009-spring 2010) the ongoing evaluation fulfilled an ex ante evaluation, which must be implemented before a venture is started in order to analyse the relevance, design and objectives structure of the investment. In the case of this analysis, this was done after the investment had been designed, at the same time that the venture capital funds had begun their operative work. Central questions during the first year of the ongoing evaluation revolved around what the venture funds were to achieve in order to be seen as successful, how the business got started and whether the funds were designed so that they can be expected to achieve success. This mid-term evaluation will provide the Swedish Agency for Economic and Regional Growth, venture capital funds and other relevant actors with early indications of how the investment stands in relation to the objectives set and how the implementation is progressing.

1.3 his year’s evaluation The evaluation work began in autumn 2009 and will be carried out on an ongoing basis until the spring of 2015. During this period the project will continuously be developed and undergo different phases, which means that different evaluation questions will arise at different stages in the development of the venture capital funds. Therefore it is important that the evaluation is designed in such a way that it allows the results to be delivered during the time of the venture capital funds’ life cycle when they can be put to practical use in the project. This means that the ongoing evaluation work has not been planned in detail from the start in terms of precisely stipulating what questions will be answered and how this will be done. Ramböll has therefore created a structure where the ongoing evaluation, in conjunction with the project owners and the Swedish Agency for Economic and Regional Growth, makes decisions about what questions are relevant to ask at different times in order to evaluate the implementation of the fund project’s achievement of its objectives and what methods are appropriate in order to answer these questions in a reliable manner. This year’s evaluation – mid-term evaluation – has been designed to answer the following overall questions: • How do the venture capital funds stand in relation to the targets set with regard to the rate of

investment? • How do the venture capital funds’ portfolios look with regard to the investment’s mission10, the size of

the company, stage of development, industry diversification, etc.? • What did the business gain from the investors’ involvement? Can a positive development of the

company be observed? • Are there signs that the venture capital funds are contributing towards the improvement in the

supply of capital situation for companies, i.e. does the investment create additionality? • How is the cooperation with the regional co-financiers functioning? In order to answer the questions above, the mid-term evaluation is divided according to the different actors that are covered by the investment: venture capital funds, private investors and the companies. In

10 See above in Section 1.1.1 Venture capital funds’ mission


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the table below the topics of the evaluation, questions and data collection methods are presented which are used to answer the respective question. The methodological approaches and the data sources are briefly presented in the next section.

Table 1. Mid-term evaluation’s topics, questions and data collection methods

Area Questions Method/data collection Venture capital funds’ operation during the past year

How did the venture capital funds’ operation proceed? What has happened since the follow-up a year ago? Weaknesses and successes? Lessons from last year?

• Interviews with the venture capital funds’ MDs

• Written communication with venture capital funds’ MDs

How does the venture capital funds’ investment activity stand in relation to the investment targets set? How does the expected investment activity look for the rest of the project period (forecast)?

Venture capital funds’ investments

How are the venture capital funds’ investment portfolios composed? Are the portfolio compositions reasonable in relation to the mission of the investment and overall objectives?

• Interviews with the venture capital funds’ MDs

• The Swedish Agency for Economic and Regional Growth’s summaries of the venture capital funds’ reporting

• Reporting from the venture capital funds to the Swedish Agency for Economic and Regional Growth

Who are the private investors and what characterises their investment behaviour? To what extent can private co-investors contribute to the financed company’s development and how they develop themselves as a result of the investment?

Private co-investors

Has the investment elicited any more new investors in the market and contributed additionality i.e. led to increased investment interest and investment activity among existing investors?

• Questionnaire to private co-investors

• Interviews with private co-investors

Ramböll has carried out the evaluation in four main phases. In Phase 1, the questionnaires sent to private co-investors and companies were designed. In Phase 2, interviews were conducted with venture capital funds, companies and private co-investors. In Phase 3, the venture capital funds’ yearly reports of indicators and investments made were studied and compiled. In the fourth and final phase, the collected material was analysed and the present report was compiled. Work in the different phases has been done in continuous dialogue with the Swedish Agency for Economic and Regional Growth.


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The ongoing evaluation work during 2011 has been carried out by Ulrika Ekström (internal project manager at Ramböll Management Consulting), Sofia Avdeitchikova (external project manager), formerly at Ramböll Management Consulting and now researcher at Lund University, Martin Fröberg and Marcus Holmström at Ramböll Management Consulting. Ingrid Rydell at Ramböll Management Consulting, responsible for method during the first year of the ongoing evaluation rejoined the team during autumn 2011 after parental leave.

1.4 ata sources The primary data sources used for this report are telephone interviews with the venture capital funds’ MDs, private co-investors and companies as well as questionnaires to co-investors and companies that received financing. Quantitative data from the Swedish Agency for Economic and Regional Growth and the venture capital funds related to the reporting of indicators and implemented investments has also been analysed. The different data sources are briefly presented below.

1.4.1 uestionnaires Questionnaire to the company The purpose of the questionnaire to the company has been to obtain information about the companies that received financing from the venture capital funds concerning, among other things, their financing history and perceived ”capital gap”, ambitions for growth and vision of the company’s future development, preferences for venture capital as a source of financing and expectations and perceived impact of the investment upon the company’s business. Contact information for the companies that received financing was made available by the regional capital funds. Ramböll received contact details of 87 companies, of which 54 wholly or partially answered the questionnaire, representing a response rate of 62 per cent. The respondents were given three weeks to answer the questionnaire and two reminders were sent out during this time. A good response rate depends on which target group the questionnaire is aimed at, what relationship the sender has to the respondents and how the questionnaire is designed. In the case of online questionnaires response frequencies above 55 per cent are usually considered to be good. All venture capital funds are represented in the company questionnaire11, but in cases where the number of respondents from companies that received financing by a given fund are very few, Ramböll has for privacy reasons chosen not to disclose which fund the company has cooperated with. A non-response analysis was also conducted in order to examine whether there are differences between companies that have answered the questionnaire and non-respondents i.e. how representative the companies that answered the questionnaire are of all companies that the report aims to study. The non-response analysis was done with respect to the variables that were available for all companies: the company’s stage of development, industry sector and size (number of employees). The results are reported in Table 2. Non-response analysis of companies The stage and industry sector distributions used in the table are reported in Appendix 2.

Table 2. Non-response analysis of companies12

Stage Result Expected rate Start-up 14 10 Early stage 22 13 Expansion 15 23

11 The venture capital funds run by Almi Invest are in this respect regarded as one fund as is also the case with Sydsvensk Entreprenörsfond I, II

and III. 12 The analysis was carried out using the Chi-Square function, which compares the distribution of the studied group and the expected distribution

if the two studied groups (respondents and non-respondents) had been identical. The function also calculates the probability (p) that differences

between actual and expected values are by chance. If the probability is less than 5% (p<0.05) differences are usually considered to be significant.


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Mature 3 5 Total 54 p (according to Chi-squared method) 0.008

Industry sector Result Expected rate ITC 21 20 LS 7 3 Ind. 11 13 Trade 8 6 E/ET 6 8 Total 53 p (according to Chi-squared method) 0.213

Size Result Expected rate 1-9 employees 42 32 10-49 employees 9 10 >50 employees 2 5 Total 53 p (according to Chi-squared method) 0.104

The non-response analysis shows that the companies that answered the questionnaire have a similar distribution in terms of industry sector and size as non-responders. As for the stage of development of companies, start-up companies and companies in the early stage have answered the questionnaire to a greater extent than companies in the expansion and mature stages, compared with how the distribution looks among all companies included in the study. While all groups are represented among the respondents, there is therefore a risk that the answers to a greater extent represent the younger companies in the earlier stages of development. In future evaluations it is therefore important to ensure that sufficient portfolio companies (companies) in the expansion and mature stages participate in the review. Questionnaire to private co-investors The purpose of the questionnaire to private co-investors has been to obtain information about the investment’s additionality, the driving forces of cooperation with the venture capital fund and the co-investors’ expectations and perceived benefits and their view of their own role and opportunities to contribute to the financed company’s development. As with the companies, contact details for private co-investors were made available by the regional venture capital funds and the respondents were given three weeks to answer the questionnaire. Ramböll obtained the contact details of private co-investors, of which 31 wholly or partially answered the questionnaire representing a response rate of 62 per cent. Unlike the company questionnaire, not all venture capital funds are represented in the questionnaire that was answered by private co-investors. The number of private co-investors that represent a given fund are in some cases also small. Exactly as with the company questionnaire, Ramböll has therefore chosen not to disclose which fund the co-investors cooperated with. It is important to point out that the total number of co-investors with which the venture capital funds have cooperated is substantially greater than 50. The investors that the venture capital funds have invested in conjunction with, but which are not included in the review are for example those who came into contact with the company directly and did not actively choose to cooperate with the venture capital funds. Some of the venture capital funds have also been cautious about disclosing the contact details of their private co-investors due to the high level of confidentiality that the funds strive for. No regular non-


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response analysis could be done because some background information about the co-investments who did not answer the questionnaire was not available.

1.4.2 elephone interviews Within the framework of the mid-term evaluation, Ramböll has conducted interviews with four groups of respondents:

• Telephone interviews with all fund MDs

• 20 interviews with companies that received financing

• Ten interviews with private co-investors

• 20 interviews with the funds’ regional co-financiers

The companies and private investors who participated in the surveys were asked to state whether they took part in a telephone interview. The selection of interviews with the companies was then done to ensure variation in the companies’ industry sector affiliation and size. All venture capital funds are represented in the interviews with companies, while ten of twelve venture capital funds are represented in the interviews with co-investors. Ramböll has used semi-structured interviews, which means that an interview guide has been used to ensure that the same issues are addressed by all respondents, at the same time as there is room for follow-up questions and further discussion.

1.4.3 he venture capital funds’ reporting In addition to the questionnaires, the venture capital funds reporting to the Swedish Agency for Economic and Regional Growth regarding the implemented investments and other indicators consists of the quantitative data sources in this report. The reporting consists of an account of the investments the venture capital funds have made with information about the companies that received financing. The information includes the venture capital funds’ investment decisions, disbursed investments, number of employees in the company that the venture capital funds decided to invest funds in and certain information concerning horizontal criteria, for example the participating company’s ownership structure according to gender. The reporting for this report was submitted on 23 June 2011 and the funds were given the opportunity to make adjustments relating to activities up to 30 June 2011. These adjustments are presented in Appendix 3.

1.5 xplanation of concepts A number of specialist terms are used in this initiative. We briefly discuss the concepts that are central to this report below. Additionality Additionality is one of the fundamental principles of the European Union’s aid policy, which says that Community aid shall complement the Member States’s own contributions and not reduce them.13 The establishment of public venture capital funds may lead to the private venture capital market developing more slowly or a reduction in the amount of private venture capital.14 Displacement effects like these mean that private venture capital is reduced and replaced with public capital.15 There may also be a risk

13 The Swedish Agency for Economic and Regional Growth (2010) "Staten och riskkapitalet" 2010:01, s. 73 14 Leleux, B., Surlemont, B. och Wacquier, H. (1998) i Reynolds, P.D., Bygrave, W.D., Carter, N.M., Manigart, S., Mason, C.M., Meyer, D.G., Shaver, K.G. (eds.), Frontiers of entrepreneurship research, Babson College, State versus private capital: cross-spawning or crowding-out? A Pan-

European Analysis. 15 Jyoti, K. and Sandler, T. (2000) Partners in giving: the crowding-in effects of UK government grants, European Economic Review, 44.


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that public venture capital funds succeed in financing good projects by not requiring as high a return as private venture capital funds and thereby out-compete private investors who have to settle for inferior objects.16 Business angel A business angel is a private person who directly or through a company invests in companies. The business angel invests equity capital and provides business knowledge, skills and contacts to unlisted companies. This may for example be a person who sold his or her company and now wants to invest some of the capital of the company. Business angels act as a complement to formal venture capital in that they usually go in at the early stage of the company’s growth phases than risk capital investors. "Private investor" is a broader concept than business angel. 17 Pari passu The venture capital funds’ investments must be made together with and on equal terms (pari passu) as one or more private independent co-investors. The private co-investors must stand for at least 50 per cent of the investment, but can stand for more. On equal terms means that the fund project and private investors invest with the same requirements and rights. A private independent commercial co-investor is in normal circumstances expected to be a venture capital company or a business angel i.e. a private person who invests his or her own funds for a share in the ownership of the company or a company that wants to invest in another company.18 In Paragraph 5 of the fund project’s special conditions it states: "To ensure that the project owner's individual investments are made on a commercial basis, at least one private commercial operator must invest at the same time in the portfolio company with at least the same amount and on equal terms." Investments in the fund project must therefore be co-financed on equal terms between the public and the private commercial venture capital.19 Mittkapital Jämtland/Västernorrland, which are owned by the Sixth AP Fund (Sjätte AP-fonden) and Sydsvensk Entreprenörsfond (SEF) I are however exceptions to this rule. Venture capital Venture capital is investment in companies not listed on a public list (i.e. stock exchange or another marketplace). The main part of a venture capital investment in general is made up of so called "equity", but it is also common for some intermediate forms between equity and loan capital to exist, such as convertible loans. A venture capital investment therefore means that the investor is, or has the potential to become, a part-owner of the company. Venture capital is not only a capital investment, but also assumes that the investor gets actively involved in the ownership, for example, through representation on the company’s board. Venture capital investment is also often limited in time so that the venture capital company has a goal to dispose of their investment in the foreseeable future (usually 5-7 years). Venture capital investments are typically minority investments in unlisted companies, often young companies in the early stage but also companies in their expansion phase. Venture capital is often

16 Manigart, S., De Waele, K., Wright, M., Robbie, K., Desbrières, P, Sapienza, H. and Beekman, A. (2001) Determinants of required returns in

venture capital investments: A five country study, Journal of Business Venturing, 17(4). 17 Expowera (2008) http://www.expowera.se/mentor/ekonomi/finansiering_affarsanglar.htm, obtained on 17-05-2011, The Swedish Agency for

Economic and Regional Growth (2011)

http://www.tillvaxtverket.se/huvudmeny/insatserfortillvaxt/kapitalforsorjning/affarsanglar.4.21099e4211fdba8c87b800017075.html, obtained on

17-05-2011, Företagande.se (2011) http://www.foretagande.se/Om-affarsanglar.html, obtained on 17-05-2011 18 Mittkapital Jämtland/Västernorrland is however an exception to this rule. 19 The Swedish Agency for Economic and Regional Growth (2010) Diskussionsunderlag för fondprojektens genomförande: Regionalfonderna i

Sverige 2009-2014, Info 0212, s. 15


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invested by a specialised manager who hopes to maximize the return on investment (ROI). Because the risk the investor takes on is relatively large, they generally go into a company only if they believe they can obtain a quick and large return20. Risk capital The term "risk capital" refers to the financing of a company’s equity capital during the early growth stages (seed, start-up and expansion stages), such as informal investment by business angels, venture capital and alternative stock markets that specialise in small and medium-sized enterprises, including growth companies21. The companies’ stages of development The European Union uses the following definitions for the different stages at which the investor may enter: seed capital, start-up capital, expansion capital and replacement capital22, of which the latter is not covered by venture capital definitions (see above). The different terms are defined in order below. Seed capital Financing of analysis, assessment and development of a new concept prior to start-up. Start-up capital Financing of product development and initial marketing for companies that have not sold their product or service commercially and are not yet generating a profit. Expansion capital Financing of growth and expansion in a company that may break even or go into profit – the financing is used to increase production capacity, for market or product development or as additional working capital. Replacement capital Purchase of existing shares in a company from another private equity investment company or from another or other shareholder(s) - Replacement capital is also called "secondary purchase." The European Private Equity and Venture Capital Association (EVCA) uses similar subdivisions, but chooses instead to separate the stages as start-up, early-stage, early expansion and mature companies. The exact definitions are presented in Appendix 2, in which EVCA’s industry sector classification is also shown. In this report, EVCA’s definitions are used because the venture capital funds have chosen to document their investments based on these, which is also industry practice.

1.6 onclusions from first year of ongoing evaluation The aim of the ongoing evaluation during 2009 and 2010 was to analyse the venture capital funds’ mission, design and objectives structure, to illustrate how the venture capital funds started their activities and to define the key success factors of the venture capital funds’ work and the challenges ahead. The dialogue with the venture capital funds’ MDs and with the Swedish Agency for Economic and Regional Growth revealed that the investment tussled with a number of problems which delayed the start of the venture capital funds and took the focus away from core activities. The biggest problem was a delay in disbursement of regional co-financing, problems in recruiting MDs for all of the venture capital funds, lack of clarity and disagreement about the chief objectives and mission of the venture capital funds and uncertainty regarding how the rules should be interpreted. The latter was perceived as a big problem because interpretation of the rules was done afterwards i.e. when the venture capital funds had already started and were then applied retrospectively.

20 Isaksson, A. (2000) Venture capital – begrepp och definitioner. Published in The Swedish Private Equity & Venture Capital Association’s (SVCA) Register of Members 2000/2001. 21 The Swedish Agency for Economic and Regional Growth (2010) Info 0212 Rev A: Förutsättningar för fondprojektens genomförande. 22 The Swedish Agency for Economic and Regional Growth (2010) Info 0212 Rev A: Förutsättningar för fondprojektens genomförande.


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Other challenges that have affected and continue to be expected to be central to the venture capital funds' operations are primarily the difficulty in finding good investment objects and financially strong and competent private co-investors and finding ways to "invest right" - in line with the guidelines for the venture capital funds’ work and with the potential of a good return. While the first two challenges have been experienced more in regions with a less developed private equity market and whose business structure is based on companies that have traditionally not been the subject of venture capital financing, it seems that the final challenge has applied to all regions. Despite the challenges the funds experienced a lot of interest and a positive reception from companies, private investors and regional actors and had a good belief in the future. There seemed to be a confidence in the initiative and in the organisations that are implementers of fund projects. During the first year of operation (the majority of venture capital funds have been running for less than that), 759 investment proposals were received and 59 investments were implemented, amounting to a value of SEK 277 million, including private co-investment. All venture capital funds intended to make up for the delay which occurred during the first year and over time invest in line with their planned investment rate. Based on the conclusions of the ongoing evaluation in 2009 and 2010, it is of major importance, within the framework of this mid-term evaluation, to answer how the problems and challenges outlined above have been handled by both venture capital funds and the Swedish Agency for Economic and Regional Growth.

1.7 eport structure This report consists of eight chapters. The next chapter presents international and previous Swedish experiences of similar public investments in capital and the supply of expertise to small and medium- sized enterprises in the early stages. After that, in Chapter Three, an overall picture is given of the venture capital funds' activities during the past year. Chapter Four deals with the venture capital funds, investment activity and forecasts for the remaining project period are presented. The portfolio compositions of the venture capital funds are presented and discussed, with respect to the financed company’s stage of development, size and industry sector affiliation. Chapter Five deals with the consequences of the investment in terms of development and additionality of the financed companies, while Chapter Six deals with the private co-investors’ perceived value of the investment and contributions to the development of the financed companies. Chapter Seven discusses regional cooperation and, finally, in Chapter Eight, the report's final discussion and conclusions are presented, in which the long-term impact of the initiative on access to capital for companies and investment activity of private investors is discussed.

2. NTERNATIONAL AND SWEDISH EXPERIENCES

This chapter summarises the initial experiences of public investments of capital and the supply of expertise to companies in the early stage in Finland, Scotland and Norway. Secondly, it presents a summary of the contents of Ramboll Management's evaluation of the Swedish pilot investments in three regional venture capital funds from April 201123, focusing on the conclusions drawn about the pilot fund's achievement of its objectives, models and lessons learnt prior to today's twelve fund projects.

23 Ramböll (2011) Utvärdering: Pilotsatsning på regionala investeringsfonder


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2.1 nternational experiences This section is a brief summary of a draft report written in Norwegian that the Swedish Agency for Growth Policy Analysis (Growth Analysis) compiled.24 The section in its entirety is therefore Ramböll’s rendering of the draft that Growth Analysis provided.25 Growth Analysis will deliver its final version of the report that is reproduced here. Finland – The VIGO programme In Finland, public and private actors have desired a stronger coordination of existing financing instruments for companies in the early stage, at the same time as they saw that potential growth companies, in addition to capital, have a need for the supply of expertise. Inspired by the Israeli Yozma "business incubator" model, the Finnish Ministry of Employment and the Economy launched the VIGO programme in 2009. The programme The goal of VIGO is to stimulate the growth of new technology-based growth companies and establish a "fast track" to financing, at the same time companies are provided with expertise. After a bidding competition involving 43 participating networks, the programme selected six networks, consisting of serial entrepreneurs, investors and business developers with international experience. The main idea is that when a certified VIGO incubator chooses to engage in a project with its own time and money, this triggers support from Tekes’ YIE programmes and investment from the Seed Fund Vera26. The experienced business developers contribute to a more rapid and better development of companies and help them in their internationalisation process. In their investments the individual VIGO actors focus on specific industries. There are no geographic restrictions, but the idea is that industry diversification will contribute to geographic distribution. A steering committee composed of representatives from venture capital environments, the Ministry, Tekes and Vera Venture is responsible for the programme’s development. The programme has therefore been developed in collaboration between the private and public actors. The VIGO programme is thus operating outside the traditional structures in Finland. Since VIGO does not contribute any financing, the input of public resources to run the programme was relatively small. The individual VIGO networks have slightly different models, but usually partners in an individual VIGO network invest their own time and money in the portfolio company and usually have a stake of around 20 per cent. The incentive for the partners in a VIGO network is primarily a return on investments, but they can also get parts of their salaries covered by the contribution that companies get through a management fee. VIGO however receives no public funding. Experiences so far The first two years of the programme have been far from trouble-free. The idea was that each VIGO network would create a "fast track" to public financing, but from the incubator’s point of view the decision-making processes were found to be slow and not at all predictable. The VIGO network first does its own evaluation of the project and after that Tekes and Seed Vera Venture do their own evaluations of each individual project. The result is a turnaround time of at least two to three months and less predictability. The private actors believe that decisions should essentially lie with them but entrusting decisions to private actors radically goes against how both Seed Veraventure and Tekes usually work. But the decision process as it is done now appears to be inefficient in that the three actors are doing their 24 The Swedish Agency for Economic and Regional Growth (2011) Staten och riskkapitalet, delrapport 2 25 Ramböll Management has therefore not made any of its own analyses of the content. 26 Tekes, The Finnish Funding Agency for Technology and Innovation, supports R & D and develops instruments to support the commercialisation

of high technology companies. This has largely taken place through different types of financial contributions to potential growth companies.

Through the initiative of Young Innovative Entrepreneurs (YIE) from 2008, young businesses can receive up to one million Euros in financial contributions and loans (contributions makes up about 75 per cent). Seed Fund Vera was founded in 2005 by Finnvera, a state-owned

organisation that since 2003 gradually took over the role of Finland’s financing actor in the seed stage. Seed Fund Vera has 96 million Euros in

management capital and in 2011 expanded with capital from the ERDF.


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evaluations independently of each other. The private actors are sceptical about giving Tekes a more central role in the programme for fear that the programme will become bureaucratic, as this is one of "many" programmes that Tekes manages. The public actors for their part emphasise that this is taxpayers' money and that the types of decisions that are made must be quality controlled. Tekes also points out that they have a role in protecting the entrepreneur's interests as otherwise there is a risk of them being steamrollered by the private VIGO network. The VIGO programme has only been in operation for a short time but there are some indications that the programme has had some success. One is international financing, where several companies have attracted international venture capital financing. This indicates that the international network is very useful when it comes to strengthening the legitimacy of the potential growth company in the international market. The way forward The VIGO programme was initially set up for a period of three plus a further three years, which means that it will be evaluated after three years. In addition, it experimented with the setting up of a "micro-seeding fund" linked to the individual VIGO networks in 2011. The funds will be set up in cooperation with Seed Veraventure and have a budget of 5 million Euros. In 2011, a number of VIGO networks wanted to expand, but in this context a larger diversification of industry sectors is preferred (of the six existing VIGO networks three focus on ICT). All the parties involved expressed strong interest in developing the concept further and look at this first period as a pilot initiative, in which actors test things out and try to adapt the system to the Finnish context. Scotland – Scottish Co-Investment Fund The Scottish Co-Investment Fund (SCF) was launched in 2003 with a capital of 48 million pounds, including financing from the ERDF. The fund provided equity capital to companies with good growth potential and often with their own technology. SCF acted as a fund on commercial grounds and thereby expected to generate a financial return (through share dividends, partial exits, etc). What was special about SCF was that it was a co-investment fund, which means that its own equity was invested on equal terms (pari passu) with investors from the private sector and followed the private actor’s investment decisions. SCF was a passive investor and owner (so-called sleeping partner). Due diligence and the investment decisions were carried out by the co-investors themselves, given that the investment fulfilled the SCF’s basic investment criteria. The fund participated in investments of up to two million pounds and co-invested amounts between 100 000 and one million pounds. The SCF started with 15 partners and twelve investors in 2003 and has since developed to a level of around 55-60 investments a year and 28 partners. Most partners are syndicates of business angels. Two key conditions for the establishment, design and later success of the SCF was that there were substantial tax incentives and an infrastructure that attracted private co-investors. Through the Enterprise Investment Scheme (EIS) investors receive tax reductions when they went in with new equity into small companies. Under certain conditions the investor can get back 20 per cent of the invested sum, a level which was raised to 30 per cent in 2011. It is also possible to avoid taxation of profits or write off the loss in order to get reduced income tax when the equity stake is sold. Evaluation of the Scottish Co-Investment Fund The Centre for Strategy and Evaluation Services carried an evaluation of the SCF in 2007, based on analyses of the venture capital funds’ data and results, questionnaires to the funds and companies and interviews. The evaluation showed that the venture capital funds in the SCF had addressed areas that are characterised by market failure. The funds have involved additionality because companies that did not have access to financing alternatives or needed additional funds received financing. The first Growth


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Analysis Interim Report27 however established that no connection had been made between the received aid and the company’s development in terms of size, growth and profitability. The funds were also assessed to have contributed to the strengthening of the regional finance markets. By making public funds available, regional willingness to invest increased. Because the SCF is a co-investment fund, the private investors obtained both financial leverage on the invested funds and a spreading of risk. In the evaluation, the conclusion was drawn that the projects the SCF co-financed would not have been carried out by investors without aid. The form of co-investment also means that the SCF is primarily attractive to informal venture capitalists, such as business angels and networks. In 2006 and 2007, Scottish Government Social Research also carried out an evaluation which, among other things, pointed out that, since the SCF follows the private actors’ investment decisions, the geographical distribution of the investments is largely influenced by where the private actors are located. This is considered to have resulted in a large proportion of the investments initially being made in eastern Scotland around Edinburgh, where there were already active investment environments. The Centre for Strategy and Evaluation Services also found in its assessment that an overall displacement of private investors was not likely because the SCF only co-invests in companies in conjunction with other investors. SCF has however had an ambitious returns target and, to achieve this, the SCF makes investments and exits that give the greatest possible return i.e. at a stage when private financiers can take over. This is considered to have involved a substantial risk of direct displacement of private investors - but there is no evidence that displacement occurred. The evaluation also showed difficulties in steering equity investment from the growth regions to regions with little or no growth. Similar difficulties have been noted in Sweden, where there is an in-built conflict of interest where investment companies on the one hand must handle tasks that they consider the market does not manage and, on the other hand, operate under market conditions. The combined effects of the SCF initiative for the Scottish market were, at the time of evaluation, relatively small both in terms of loan and equity capital. The role of the funds in the early stages of owner-financing, however, was significant. The evaluation also established that it was too early to draw any far-reaching conclusions about the sustainability of the investment, that is, whether the funds would be self-sufficient. Probably a long-term public commitment is required since it takes time before the funds generate enough income to become self-sufficient. Growth Analysis points out in Interim Report 2 that, even if the SCF has largely succeeded in building a more well-functioning market for investments in the early stage, the situation is relatively vulnerable since there may be confusion about whether the SCF will exist in future. The question of the fund's long-term existence is a challenge given that the political leadership is something that changes over time. It was further pointed out that, even if the SCF has a good track record in terms of investment, there is greater uncertainty associated with realizing value from their investment portfolio. SCF aims to be "evergreen" (revolving) since revenues from sales cover the need for new investments. The financial crises of recent years has led to the investment cycle taking longer than planned and there are currently only a few examples of investments that have been sold at a profit. Norway – the Norwegian seed capital scheme The first pure private venture fund in Norway was established in the early 1980s. During the following years, a number of funds were established but after ”the crash” in 1987 many of these had problems. When portfolio companies developed poorly, it was difficult to start new funds. But the industry later had a solid growth and before the IT bubble burst in 2001 a robust environment had emerged. This resulted in stronger competition for both capital and projects and contributed to professionalisation and later internationalisation of the industry. In recent years, there has been a very strong growth in the industry. in 2004, the Norwegian funds had NOK 18 billion in assets under management and in 2010 the amount

27 Growth Analysis (2010) ”Staten och riskkapitalet” 2010:01


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had risen to around NOK 60 billion. However, the overwhelming majority of this growth came within ”the buy-out segment” and not within classic venture or in the early stage/seed stage. The growth within seed financing has primarily come through the state-initiated seed stage funds that were established in 1998 and 2006. The public actor, Innovation Norway, has monitoring and management responsibility for the investments. The organisation has a number of instruments to assist both new and established businesses. The first seed fund was established in 1997 as a cooperative project between the Ministry of Trade and industry, The Norwegian Industrial and Regional Development Fund, now Innovation Norway and Norsk Investorforum. Seed Capital 1 – 1997/98 In the first seed capital scheme, the state took part in the financing of a seed fund though the supply of loan capital, while equity capital was to be disbursed by private investors. The seed capital would in this way trigger private capital and supply expertise to companies in the early stages. The first fund to be set up was the nationwide START Fund with a total management capital of NOK 320 million. The state went in with so-called liability loans equivalent to NOK 160 million. In addition to this, five smaller regional funds were established. A traditional model of management (General Partners) and private actors (Limited Partners) were chosen. As a risk-relief element a reserve fund was established. Financial results and lessons learnt The fund’s financial results were considered to be very poor. Some of the reasons for the first scheme’s poor results are assessed to be the following:

• The risk relief was too small • Too little focus on management (lacking expertise) • Very little expertise about exits in management environment • The funds were too small • The model of liability loans has not been successful

The new seed capital scheme (Seed Capital 2) In the second round, 2006-2008, nine new funds were established, of which four are nationwide and five concentrate on different regions. The region-based funds could invest in small and middle-sized enterprises and was consequently not limited to investments in start-up companies. The structure was to provide a combination of equity, expertise and networks to knowledge companies with great potential in regions with weak financial conditions. Growth Analysis points out that there is every reason to question the objective of contributing to the development of companies with growth potential in areas which are threatened by depopulation. The target group for the nationwide funds was innovative projects in the start-up, seed or other early stage. The funds in Seed Capital 2 managed a total of around NOK 2.5 billion. In the establishment of the new funds, account has been taken of the weaknesses that were noted in the first round: the funds became larger and this place greater importance on the choice of manager. Somewhat surprising however is that a model of so-called liability loans was chosen, despite the weaknesses that these were considered to bring about in the first round. At the same time, the regulatory framework changed in such a way that the private investors could also go in with so-called liability loans and, in this way, by a creditor in level with Innovation Norway. A Growth Analysis’ survey has shown that many private actors regarded the investments from a regional development process perspective. The private capital made up a small proportion of the total capital while the private actors had been central in the process to mobilise capital from the international actors. Outcomes and lessons learnt


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The nationwide funds are located in Norway’s four biggest cities and have largely invested in companies that operate in the same cities that the fund has its offices. To the extent the funds invested outside their own region, this was in the form of co-investment with other actors within the segment. It is also clear that a large proportion of the investments had occurred in companies that spring from research environments. In 2008, more than 60 million Euros was invested in the seed segment while, in the first six months of 2010, only 2.6 million was invested. This can be explained by the fact that most of the funds in the second round were in the final stage of investing all of their funds. This can explain why actors in the frontier area of the university world claimed that it was almost impossible to obtain these funds for new projects in the early stages. This illustrates one of the great difficulties of the Norwegian seed capital model. The existing actors within the segment had looked after the interests of the private investors and had funds available for follow-up investments. At the same time, it was unclear where there would be a continuation of the system and which direction such a system would take. Accordingly, it is perhaps logical that the funds made fewer new investments and far fewer investments in the early stages. Evaluation Seed Capital 1 was subject to an evaluation in 2003 and 2008. The first evaluation’s main results were that the system functioned and achieved the objective of supplying capital and expertise to companies. The evaluation in 2008 stated however that Seed Capital 1 had not been very successful.

The rules for Seed Capital 2 showed that the system had to be evaluated, but not when and how this would take place. There were no concrete plans about further evaluation of the Norwegian system. However, Innovation Norway collects data from the funds and reports to the Ministry of Trade and industry twice a year.

The way forward In April 2011, The Ministry of Trade and Industry notified that it wants to continue the initiative of the nationwide fund. It is however unclear which model will be chosen. Discussion28 The main objectives of the investments described here are to:

• Involve private actors to ensure that investments are made in projects with real growth potential • Invest in the early stage, that is, with high risk, which is not always compatible with the private

capital’s risk-taking behaviour • Develop the capital markets through injection of capital and expertise

It is demanding to meet all of these main objectives in one and the same investment. The three different investments that are described have also placed different weight on these, something that in turn has influenced their respective design. In Scotland, there has been a strong focus on developing the capital market in the early stage and on building further on an already established investment in the development of formalised business angel networks. The actors have managed well in creating a pure co-investment model. One prerequisite for success is that it had previously invested in the building up of business angel networks. There were also tax incentives in Scotland for private investors. At the same time, these factors do not resolve the challenge that the investments are made during great uncertainty. In this regard, Scottish Enterprise established a system of grants (proof of concept grants) and its own co-investment model in the early stage for investors of up to £100 000.

28 This section is also Ramböll’s rendering of the work of the Swedish Agency for Economic and Regional Growth.


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With the establishment of the VIGO programme in Finland, companies with good growth potential should obtain a "fast track" to financing. Another feature of the investment is that the VIGO incubators focus on specific industries. Compared with the Scottish model, it is obvious that this investment focuses on companies in the very early stage, almost in the incubator stage. The Norwegian model is presumably the one that to a large extent covers all three main objectives. The first round, Seed Capital 98, contributed to a small extent to a lasting build-up of capital and expertise in the regions. In the second round, the focus on expertise became clearer. This partly placed demands on the managers to have a skills base from day one and partly it had put the focus on competence transfer between the funds. A further interesting difference is that round two clearly distinguished between the regional and nationwide funds, where the regions could invest in all of the small and medium-sized enterprises in its region. These funds at the time had a role that went against being a regional development actor in terms of capital. The nationwide funds, however, have an objective to supply capital and expertise to innovative start-up projects in the early stage, preferably companies with their origins in research environments. These funds are in Norway’s four largest cities and the investments have largely been made in the fund’s geographical vicinity. Although the portfolio companies are in the early stage, many actors claim that the funds do not make investments in projects with genuine uncertainty. The funds themselves acknowledge that they gradually made fewer investments and a smaller proportion of investments in the early stage. The funds are of the opinion that this is because they had invested their funds quickly and there must be funds for follow-up investments in future years. Criticism has been expressed about the lack of predictability of the Norwegian initiative, something that is regarded as contributing towards the funds becoming more cautious in their choice of investment objects. The lack of predictability has also led to Norway being far slower at building robust and lasting management environments than for example Scotland.

2.2 wedish pilot projects Within the scope of Ramböll’s evaluation from April 2011, three pilot investments of public venture capital funds were examined: Saminvest Mitt, Partnerinvest i Mellansverige (formerly Vestra Partnerinvest) and Regioninvest Gotland. The three venture capital investments were started in 2005 within the then Objective 2 in West Sweden, Gotland and Mid-North Sweden29, where regional Almi companies set up subsidiaries that managed the partnership funds. The pilots were structured so as to promote a change from being a passive partner to an active private co-investor and were based on a model for public venture capital funds that was developed in Scotland. The pilots were concluded in June 2008, with the exception of follow-up investments in existing portfolio companies.30 The three pilot funds The overall aim of the pilot projects was to increase access to equity capital in small and medium-sized enterprises and thereby facilitate loan financing. Particular ambitions were to create financing solutions for companies in the early stage of development, environmentally-driven companies and companies owned or run by women in accordance with the objectives set in the regional growth programme. The venture capital funds were also to effectively interplay with other venture capital actors firstly within the region but also outside and structured so that withdrawal from the agreed company involvement is facilitated. The venture capital funds were to only invest in small and medium-sized enterprises and the investment on each occasion amounted to a maximum of 50 per cent of the total investment. Within the national aid area, the investment company received up to a maximum of SEK 5 million, while the limit was SEK 4.5 million outside the national aid area. The owner received up to 30 per cent of the total equity capital and corresponds to a maximum of 30 per cent of the votes. The investments that were made by the regional

29Almi Företagspartner Örebro AB started the wholly-owned subsidiary Vestra Partnerinvest, Almi Företagspartner Mitt AB the wholly-owned

subsidiary Saminvest and Almi Företagspartner Gotland AB started Region Invest AB. 30 See Chapter 2.2 for a summary of the results from the pilot initiative in 2005-2008.


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partnership funds were to be invested on the same terms as the private capital each time an investment was made. The pilot projects were implemented in 2005-2008 but continue to exist thereafter with management and realisation of investments may be implemented as late as 31 December 2015 when the venture capital funds will be wound up. The final report from 2008 showed that the three pilot projects had implemented a total of 71 investments totalling SEK 112 million in 62 companies. The investments were made in conjunction with 49 partners. Saminvest and Partnerinvest first managed to get underway relatively quickly and implemented investments as early as 2005 and went on to achieve a good and relatively even rate of investment in 2006-2008. Regioninvest Gotland initially found it harder to get started due to difficulties in identifying private partners. All three venture capital funds invested in start-up and expansion stages. Partnerinvest implemented more investments in the expansion stage, while Saminvest and Regioninvest Gotland largely invested in the start-up stage. The greater part of all companies that received investments were micro-enterprises with 0-9 employees. Conclusions from the evaluation of the pilot initiative The regional pilot funds were successful in terms of achievement of objectives The evaluation of the pilot initiative assessed the achievement of the objectives of the pilot funds’ operations as good. All three venture capital funds largely achieved the objectives set. In the short term, it was assessed that the venture capital funds had stimulated the supply of capital to the regions. Investments were implemented and brought forward in relation to whether the venture capital fund had not existed. In the evaluation the assessment was also made that the volume of venture capital for SMEs increased in the regions as a result of the establishment of the pilot funds. The venture capital funds further managed to find investment objects at the early stage, in the start-up stage and in the early phase of development. The distribution of investments was not however even and some parts of the regions did not take part in any investment. The evaluation also made the assessment that the availability of business and financial expertise in the regions increased with the establishment of venture capital funds. Knowledge of the region was provided by investors domiciled in the region and in other regions. Ramböll noted a significant difference in how the regional actors saw the venture capital funds’ contribution to regional development and the more concrete objectives that the venture capital fund had for their investments. In other words, there may be a regional expectation of regional balance and indirect effects on business and the labour market, while the venture capital fund has focused on creating a profitable investment with a good exit. This creates questions about what type of objectives should be set for this type of venture capital fund. The model for co-investments seemed to work well and was appreciated by the actors involved The model used by the regional pilot funds responded to a need that existed and was appreciated by fund managers, co-investors and companies. The venture capital funds were found to be working in a relatively non-bureaucratic manner and were appreciated for their flexibility and short decision paths. The function of co-investors seemed in most cases to provide companies with both expertise and networks. Companies and their boards had an injection of not only of capital but also of business and industry knowledge that the public funds would not otherwise have been able to provide, but in this way this type of expertise was brought into the companies. Recruitment of partners/co-financiers took place through networks since a traditional tender procedure did not yield any positive results. The network recruitment seemed to result in the venture capital funds finding partners who, in turn, could find interesting investment objects. It is very probable that network recruitment of venture capital actors is also the most successful way to reach out to for example private individuals with capital (business angels). The evaluation however highlights that this model can create


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certain risks in terms of distribution of industry sector affiliation in the investment portfolio. If the objective is to contribute to development and growth in different types of industry sectors, it is important to recruit partners/co-financiers with knowledge of different types of entrepreneurship. Interplay between return and risk There are positive as well as negative examples of divestments by the venture capital funds. If the venture capital funds are assessed based on the returns today, the results are negative. However, this is not reasonable because the venture capital funds are still managing their holdings and the final results cannot be assessed before 2015 – the venture capital funds have operated on the basis of this time period. The requirement of a return threatens to make the venture capital funds averse to risk making it difficult to reach the target group, while a return is a condition for attracting private co-investors. This would be a challenge for existing venture capital funds. If the ambition is that the capital which should be revolving will be just as large as the capital invested from the beginning, it is a requirement that the venture capital funds overall give a profit. Even so, either the European Commission or the Swedish Agency for Economic and Regional Growth has required that the venture capital funds generate a return. Almi Invest however had such a requirement for its newly-started venture capital funds, where the objective was that the venture capital funds would generate a return of two per cent (which in practice means five per cent including the administrative costs). Opinions differ as regards if and in such case which expectation one can have on the return from these types of venture capital funds. The benefits of public investments in venture capital should not be directly evaluated in the same way as private investments. The objectives chosen and the indicators that the venture capital funds monitored should be carefully considered based on the social objectives and the value that the investments can generate.

No evidence of negative side-effects In the evaluation there were signs that suggested that public venture capital could contribute to crowding out private investors. Within the framework of the evaluation no evidence was found of negative side-effects, such as displacement of private actors. Judging from the interviews conducted as part of the evaluation, the fund managers seemed to be well aware of the risks of displacement and stated that they were prepared to step to one side in cases where a private investor wanted to take the entire investment themselves. Regional and local anchoring was a success factor The three regional pilot funds and the regions they acted in have different business structures and venture capital markets. In the evaluation it was clear that regional and local knowledge was an important success factor in the pilot funds’ work. The fact that the venture capital fund had a regional basis and that the venture capital fund in many cases cooperated with investors from its own region meant that, all in all, the parties could obtain good knowledge and insight into the invested company and in the entrepreneur as a person. Initial planning for exit is of great importance An important lesson learnt is that it is of utmost importance to have already initially planned exits. The possibility to exit can for example be safeguarded through exit agreements, in which the possibility to exit is established. Without such agreements, the venture capital funds risk having difficulty in divesting their holding in a satisfactory manner. The three venture capital funds in interviews expressed varying concerns related to the possibility of divesting their holdings. The funds commented that they later realised the importance of already initially planning for exit possibilities. Saminvest were of the opinion that they did not initially devote sufficient attention to the matter of exits when the structure of the venture capital fund was made. During the pilot funds’ operational period a discussion with the partners was held about divestments, but the issue was not clearly laid down in the


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cooperative agreement. Another problem that Saminvest encountered was that they invested in very young companies where it was not possible to execute an exit as long as the company carried out new issues. Partnerinvest had a strategy that the investments would have a running time of three to five years, where one chooses to invest in companies as long as this strategy was considered to be feasible. Exits as a rule took place through the venture capital fund selling its holding to existing owners. It can also be added here that many of the divestments were delayed or did not occur as a result of the weak economic trend during 2008 and 2009. One result of the running time being limited to five years was that they could not go into companies that were in the initial stages of development. Regioninvest Gotland also said that an important lesson in the pilot project was to plan strategies for exits as early as before the investment is implemented, something that is regarded as particularly important when it comes to small companies at the early stage. To attempt to draw up an exit agreement with the company’s owners and to a greater extent make use of convertible shares are two ways that, according to the venture capital fund’s management, can increase the possibility of a return. The administrative costs that exist after the investment period (between 2008 and 2015) had not been planned or budgeted for in the pilot funds. There are today examples that this was resolved by financing the administration of regional project funds. In this context, it is important to analyse what the alternative investments of these project funds could have been. Limited contact between the three venture capital funds The three pilot funds appear to have had limited contact with each other. There would be considerable potential in exchanging knowledge such as information on potential investment objects and private investors – in order to improve the matching process between them. Further analyses should be conducted to examine to what extent such exchange could be fostered in today’s fund projects. Summary of the lessons learnt for today’s twelve venture capital funds To sum up, there are several lessons to take note of for today's twelve venture capital funds. Through the current fund projects the market supplied venture capital equivalent to around SEK 2.2 billion, compared with the 112 million that was supplied through the pilot funds, at the same time as the ceiling of investments was raised. It is therefore important that the venture capital funds in this round of projects are even more vigilant about not displacing private investment interests. Another difference is the role of Almi in today’s venture capital funds. Almi Invest operates six of the twelve venture capital funds, which provides the company with a central role that should be able to be exploited with the aim of achieving a successful implementation of all twelve venture capital funds, through knowledge dissemination and promotion of an open learning environment between the different venture capital funds. Within the framework of the evaluation of the pilot initiative it was not possible to examine the driving forces of all private co-investors. It is therefore of interest to more deeply examine who the private co-investors are and what it is that makes them willing to invest in conjunction with a public venture capital fund. With more in-depth knowledge about these actors the venture capital funds can work better to maximise the social benefits of their investments. Other key issues that were touched upon were the importance of planning for the financing of the period after the active investment period, to plan early and ensure exit opportunities and to ensure a variation and breadth among private co-investment partners.


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3. ENTURE CAPITAL FUND OPERATIONS IN THE PAST YEAR

This chapter aims to provide a picture of the venture capital funds’ operations during the past year and highlight what has happened since the review a year ago, the difficulties and successes that the venture capital funds have had and what are the most important lessons learnt from the past year. The chapter is primarily based on interviews with the funds’ MDs that were conducted during late spring 2011. When the review of the investment of regional public venture capital funds was carried out in mid-2010 within the framework of this ongoing evaluation assignment, most of the venture capital funds were still in the start-up stage. Several of the venture capital funds were late in starting which, among other things, was due to delays in the disbursement of regional co-financing, procedures for the assessment and implementation of investments needed to be developed and that the recruitment process dragged on. The economic situation in Sweden and the world was relatively uncertain which meant that many companies were wary about investing in expansion and there appeared to be relatively little capital in the market that was available for new investments. In general, many of the venture capital funds realised that it would be a challenge to ensure sufficient flow of good objects and suitable investment partners, particularly in large enterprise-dominated regions and industrial environments which historically did not have a culture of venture capital financing. Also, the regulations governing the venture capital funds’ operations were found to create ambiguities that took a long time and led to frustration and unnecessarily long investment processes. Over the past year, the venture capital funds seem to have started their operations in a positive manner and most of the venture capital funds are in line with or close to the planned rate of investment. Many of the venture capital funds found that interest from companies has exceeded expectations. Due to the established local networks that the majority of the venture capital funds previously had in their regions, they have been able to implement marketing with relatively small funds and the venture capital funds have experienced a positive attitude and confidence from both companies and private co-investors. Several of the venture capital funds’ MDs stated that they have been pleasantly surprised at the relatively high quality of the investment objects and the good industrial diversification, even outside metropolitan regions. During the year, they have also gradually dealt with the challenges identified in the first year’s ongoing evaluation, although some of the challenges are structural in nature and are expected to be important in the future. Inflow of objects The majority of the venture capital funds are experiencing a great deal of interest from companies in the region and the inflow of new objects is good. Far from all objects however meet the requirements set by the venture capital funds, including the requirement of high growth potential and exit within 4-7 years. Many companies seeking capital are still at the very early stage and are referred to other financiers. There are however signs that companies that have come forward in their development sometimes look back to the venture capital funds, which provides hope of a good investment flow in the long-term. Some venture capital funds emphasise the fact that they intentionally maintain the future investment flow by keeping in contact with such companies, actively cooperating with incubators like Venture Cup, Connect’s springboard process, etc. Several venture capital funds also state that they invest in companies at the early stage and implement smaller investments than initially planned, including as a result of the demand (capital gap) looking different from what they originally thought. This however means that they need to implement more investments to meet the planned rate of investment.


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There also seem to be large differences between and within regions in terms of the interest of companies in seeking venture capital and investments tend to mainly go to regional centres and university towns, although the majority of MDs of the venture capital funds aim for a more even distribution of investments. In terms of the inflow of companies that are run by women and people with a foreign background, this aspect is described as negligible. The proportion of investment proposals from women-led companies however appears to have increased in comparison with the pilot investments. In all, the venture capital funds have received 1 467 investment proposals and made investment decisions in 124 companies. The proportion of proposals that resulted in a positive decision lies at between four and 18 per cent. Access to private co-investment capital As was feared at the initiation of this investment, the venture capital funds in several regions experienced a shortage of private co-investment capital. This shortage also stems from the nature of the investment, because the investment was initiated as a response to poor regional access to capital. Lack of local co-investment capital is one of the contributory reasons for the investments having been concentrated for the most part in larger towns. In regions where access to local capital is worst, several venture capital funds have specifically worked on increasing capital access. This has primarily taken place through attempts to attract private capital from other regions and by trying to attract ”new” investors locally. Several venture capital funds have found that their activities have resulted in new investors coming forward. In addition to this, the venture capital funds experienced a marked increase in activity among existing private investors in the past year, something which is expected to benefit the project. The regulatory framework Most of the venture capital funds that participated in the dialogue with the Swedish Agency for Economic and Regional Growth and took part in the ongoing evaluation report and the clarification which was distributed by the Swedish Agency for Economic and Regional Growth, today consider that the rules concerning investments are clear. The venture capital funds that have been started in the shortest time can however experience difficulty in easily communicating to their investment partners how the venture capital fund may and may not invest. In 2010, a few isolated investments stopped because these were not in conformity with the regulations. Other factors that were important to the venture capital funds’ operations during the year were the efficiency of the board’s work, decision processes regarding investments and strategies for exits. The venture capital funds’ staffing Because of the relatively ”slimmed” implementing organisations, it became clear in the dialogue with the venture capital funds that they are very dependent on the number of staff available and therefore the venture capital funds became sensitive to temporary fluctuations. Several venture capital funds, among them SEF II-III, Almi Invest Stockholm and Östra Sverige and Almi Invest Norra Mellansverige, have been understaffed for much of the past year. In Almi Invest Norra Mellansverige the situation was exacerbated by the venture capital fund’s extensive involvement in the companies’ boards of directors, which limits the time that can be devoted to finding and implementing new investments. Investment process – length and procedures The venture capital funds’ activities during last year have demonstrated the importance of having good and efficient procedures in terms of decision processes about investments. Effective work in terms of the investment process was characterised by the boards (and in existing cases investment committees) possessing the necessary competence to make decisions about investments and acting to support the MD but also showing commitment to its mission. In general, venture capital funds whose boards are composed based on the competence profiles of the board members found that their investment process was more efficient than the venture capital funds whose boards were politically appointed. Other points raised by the venture capital funds’ MDs as being important for efficient investment processes were


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transparency (it should be clear on what grounds the board makes investment decisions), that the dialogue with the board is conducted at the right time (that the board has the opportunity to speak up on investment proposals at an early stage and raise relevant questions) and flexibility (it should be possible to make decisions in for example a telephone meeting). The differences between the length of investment processes between different cases are obvious. All venture capital funds report that investment procedures take around two to six months to implement. In practice, however, it has taken from one month to over a year. In addition to the procedures of the board’s and investment committee’s work, there are other factors that appear to be crucial for the length of the process, such as whether the co-financing is in place, how extensive the Due Diligence process is and how long negotiations concerning contract terms with the company take. The investments that are implemented early in the venture capital funds’ operations have taken longer i.e. there is a certain learning effect. The venture capital funds’ investment processes are presented in Appendix 4. Exit strategies The majority of venture capital funds stated that awareness about future exits is constantly present in their process, both as a part of investment appraisals (there must be an idea about how exits can be made), in negotiations with the companies and private co-financiers (it is important that the parties are agreed on the type of exit that the investors seek and within what time frame) and as a part of active ownership after the investment has taken place (in the form of dialogue with potential ”takers” i.e. investors who are potentially interested in going in when the venture capital fund is to make an exit and awareness of their interest and investment criteria). Often terms regarding future exits between the investments are formalised within the framework of the shareholders’ agreement including in the form of ”drag along” clauses31. The importance of early planning for exits is something that is clearly evident in the evaluation of pilot projects. Compared with the pilot investment the new venture capital funds seem to have a clearer focus on the implementation of exits within a limited period. The rules that have been drawn up in connection with the extended investment in venture capital funds also contribute to this, where it is required that the funds should have formalised exit plans. In the majority of cases, future exits are also regulated between the venture capital funds on the one hand and private co-investors on the other hand e.g. the likely exit modes being described in the owner directive. This is important since it creates a consensus between the investors about when and how exits may be implemented. Furthermore, since many of the investments are made at the very early stage, several of the venture capital funds choose to incorporate the possibility of an early exit into their agreement with the company, by agreeing on the possibility of the company buying back their shares and the investor selling back to the company at a specified price.

31 If a shareholder sells to the other shareholder it is also obliged to sell on equal terms.


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4. HE VENTURE CAPITAL FUNDS’ INVESTMENTS

Introduction The regional venture capital funds are financed by the EU’s Structural Funds and regional public financiers in the respective regions. The project period runs from 01-01-2009 to 31-12-2014 and the project owners will make a final report on the use of the EU funds in the project on 31-03-2015. EU funds that are not invested in portfolio companies at least once by 31-12-2014 must be paid back to the European Commission. Within the framework of the Structural Funds project it is possible to reallocate funds during the programming period from the fund project to other Structural Fund projects. The Swedish Agency for Economic and Regional Growth can, in its capacity of managing authority, make assessments as to whether funds should be transferred back to the respective programme. A quarterly reconciliation is therefore done between the venture capital funds and the respective programme office as to whether the rate of investment is maintained. In addition, this mid-term evaluation provides a deeper analysis of the venture capital funds’ investment rate where deviations from the investment plan are discussed and forecasts of the investment rate for 2012-2014 are presented.

Apart from the actual investment rate, other factors can come into play in the decisions about withdrawing funds and continuation. These, for example, concern whether the monies were invested in line with the investment’s long-term objectives, whether the demand for venture capital in the region is considered to be sufficient or whether there are other obstacles to the projects’s effective implementation.

The investment’s structure – background to the assessment of the venture capital funds’ operations The investment plans that have been drawn up by the venture capital funds in dialogue with the Swedish Agency for Economic and Regional Growth take into account that the venture capital funds’ operations will have a different focus at different stages of the project’s life cycle. During the first year of the project period the venture capital funds will focus on new investments, while the work with management and divestments will take up more time and resources later on. Therefore the investment plans are ”front-end heavy” i.e. approximately 70 per cent of the funds are expected to be invested during the first three years of the venture capital funds’ lifetime. At the same time, it is known from both international experiences and earlier Swedish initiatives that it takes time for venture capital funds to get started – recruit key personnel, establish procedures for the investors’ assessment and implementation and establish contact networks with local partners.

Furthermore, the Swedish Agency for Economic and Regional Growth has chosen to finance different fund models (where Saminvest and Mittkapital primarily differ from other venture capital funds) knowing that these can function well in a different way. The aim was, among other things, to try out different approaches and be able to learn about how the different working models function in the Swedish context and in the regions where they operate. In addition to differences in structure, it can be expected that an effective implementation organisation with clear and efficient processes will be crucial to the venture capital funds’ operations.

With regard to the geographic coverage of the initiative, the Swedish Agency for Economic and Regional Growth has chosen to invest in regional venture capital funds in all programme areas. It is however known that different regional factors can be of critical significance for the venture capital funds’ ability to invest the venture capital funds during the project period. First and foremost, the demand from the companies for this type of capital varies, as well as access to co-investment capital, interest from regional partners and politicians. Therefore it is natural that the venture capital funds’ basic conditions


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will differ between the regions. This also means that other actors in the regional innovation system play an important role in the venture capital funds’ success.

When it comes to the type of object that venture capital funds will invest in, the investment allows a fairly large spread. In terms of industry sectors, it is in principle up to the funds to decide where the greatest need is and which companies can potentially provide the ratio of capital that the venture capital investments require. One can expect that the portfolio composition as regards industry sectors will vary and follow the industry structure that exists in the respective region, which several of the venture capital funds have also noted in their applications. In terms of at which stages the venture capital funds will enter, the expectation is that the investments will mainly take place in the early stage, which in practice can vary from entirely newly-started companies and products and technology development to expansion. The investments’ overall objectives can provide guidance here, which stipulate that venture capital funds are to act as a complement to the market and fill a capital gap for the companies, which in practice will probably mean that the venture capital funds will invest in objects where market actors have difficulty in entering themselves due to the high risk. At the same time, it should be noted that some variation within the portfolio with regard to the companies’ stages of development is desirable based on the portfolio’s life cycle perspective. Investments in slightly later stages provide opportunities for faster exits, which in turn frees funds for new investments and follow-up investments.

The venture capital funds’ investments at the start of the initiative in 2009 to June 2011 are presented and discussed in this chapter. The aim of the chapter is to provide a picture of the venture capital funds’ investment activity and to answer the following questions:

• How does the venture capital funds’ investment activity stand in relation to the investment targets set?

• How do the venture capital funds’ investment portfolios look? Are the portfolio compositions reasonable in relation to the investment’s overall objectives?

• How does the investment activity look for the rest of the project period (projection for 2012-2014)?

The first part of the chapter takes a general look at the venture capital funds and gives an overall description of their investment rate, while the second part deals with each fund separately and in more detail. After that, an assessment of the venture capital funds’ future investment activity is presented based on an extrapolation based on the venture capital funds’ existing investment activity.

4.1 he venture capital funds’ investment activity All figures in this chapter are accumulated, that is, they are added together after the start of the investment in 2009. The review formally focuses on assessing disbursements as part of the venture capital funds’ capital base that is made up of EU funds. Other key figures are also very important in order to understand the venture capital funds’ operations thus far and to make an assessment about future development. One such key figure is the investment decisions, that is, investments that the venture capital funds have decided on but are still not disbursed yet, because this gives an indication about future disbursed investments, usually within a few months. Another is the total investments that also include the private components. This is because several of the venture capital funds have attracted more private capital than what is formally necessary, which of course increases the entire investment’s impact, visibility and conditions for the achievement of objectives.

4.1.1 he venture capital funds’ rate of investment up to and including June 2011 The table below presents all of the funds’ actual investment rates from the beginning of 2009 up to and including June (second quarter) 2011. The table contains the investment’s central variables such as the


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venture capital funds’ total disbursements (EU funds + public co-financing), private co-financing and the total investment, that is, all public financing and private co-financing. The total investment up until now can also be compared with the accumulated investment plan up to and including December 2011, which is also included in the table.32 With the number of investments made (column 3), the number of companies for which investment decisions exist are referred to, even if the disbursement has still not been distributed yet. In order to illustrate differences in when venture capital funds get started with their operations the date of the first investment is also presented.

Table 3. The venture capital funds’ accumulated rate of investment up to and including June 2011

Source: The venture capital funds’ reporting to the Swedish Agency for Economic and Regional Growth, June 2011 *Figures are rounded up, which means that totals may differ

32The investment plans of all funds are available for download at the website of the Swedish Agency for Economic and Regional Growth

http://www.tillvaxtverket.se/download/18.74f57d0f1283a4f88ff800042793/Investeringsplan_fondproj.pdf 33 Mittkapital has received 68 proposals directly from companies and a further 60 investment proposals have been received by the venture capital

fund’s investment partners ("Growth Funds"). When these are added together the number of investment proposals is 128. For more information

about Mittkapital’s Growth Funds, see Chapter 4.2.9.

Name of the venture capital fund

Number of

received inv.

props.

Number of inv. decs.

Total disburs’d (ERDF+ public) SEKm

Private co-

finance SEKm

Grand tot. inv.

(public + private) SEKm

Inv. plan up to and

including Dec

2011 SEKm

Date of first inv.

ALMI Invest Östra Mellansverige

177 12 27 31 59 100 28-04-2010

ALMI Invest Stockholm 274 13 48 75 123 116 03-07-2009

ALMI Invest Småland & Öarna

93 14 14 24 39 82 18-12-2009

ALMI Invest Västsverige

179 12 39 51 90 108 30-06-2009

ALMI Invest Västsverige, Värmland

48 3 5 5 10 24 03-09-2010

ALMI Invest Norra Mellansverige

97 9 15 18 33 66 29-12-2009

Partnerinvest i Norr AB 125 15 35 37 72 114 15-10-2010

Partnerskapsfonden MittSverige

120 21 48 55 104 116 08-06-2009

Mittkapital Jämtland/Västernorrlan

d AB

12833 5 48 44 91 67 14-06-2010

Sydsvensk Entreprenörskapsfond I

110 14 14 44 57 18 21-10-2009

Sydsvensk Entreprenörskapsfond

II+III

116 6 34 75 109 110 22-12-2009

Total 1 467 124 328 458 786 921


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The venture capital funds’ investment rates show relatively large variations, with reference to several variables. For example, the number of proposals resulting in investment varies from four per cent (Almi Invest Östra Mellansverige and Mittkapital Jämtland/Västernorrland) to 18 per cent (Partnerskapsfonden Mittsverige). There are also large differences between when venture capital funds made their first investment. Two of the venture capital funds got underway during the first six months of 2009, five during the second half of 2009, two during the first half of 2010 and two during the second half of 2010. Accordingly, the majority of venture capital funds, seven in number, made their first investment during the first year of the initiative and four venture capital funds made their first investment during the second year. Ten of the twelve funds’ missions required private co-financing of at least half of the investment amount. Mittkapital Jämtland/Västernorrland is the exception to this requirement34 as is Sydsvensk Entreprenörsfond (SEF) I, with regard to the part of the operation that is made up of conditional loans. The table above shows that the majority of the venture capital funds have a greater ratio of private funds than required by the rules. The proportion of private co-financing of the venture capital funds’ disbursed funds varies between 48 per cent (Mittkapital) and 76 per cent (SEF I). The average of all venture capital funds is 57 per cent. There are also differences in how the venture capital funds stand in relation to the accumulated investment plan for the fourth quarter of 2011 in terms of the total invested public and private capital. Three venture capital funds have, as early as the second quarter of 2011, invested more than what was planned for the year’s fourth quarter (Almi Invest Stockholm, Mittkapital and SEF I), while the other eight venture capital funds are variously far from the plan. For example, Almi Invest Västsverige Värmland’s total disbursed investment up to and including June amounts to 42 per cent of the investment plan for the fourth quarter of 2011, while SEF II-III in conjunction with private co-investors has disbursed a sum that is equivalent to 99 per cent of the plan for the whole year. It should however be noted on the other hand that there are disbursements of EU funds (and not total disbursements) which are critical for the decision about the project’s continuation. The figure below illustrates how large a proportion of EU funds that the venture capital funds disbursed for the second quarter of 2011, their own forecast for the fourth quarter of 2011 and the investment plan for EU funds up to and including the fourth quarter of the year.

34 Mittkapital is managed by the Sixth AP Fund and is under another regulatory framework than the other actors. The Sixth AP Fund is a public

commercial venture capital actor which means that the Swedish Agency for Economic and Regional Growth does not have any grounds for

imposing requirements on it to syndicate with private commercial actors.


36

Figure 2. Invested EU-funds as a percentage of target for the whole project period

Source: own processing of the venture capital funds’ reporting to the Swedish Agency for Economic and Regional Growth, June 2011 As seen in the figure above the proportion of EU funds that the venture capital funds managed to invest varies greatly, from approximately 13 to 58 per cent of the total capital base was made up of EU funds. The average for all venture capital funds amounted to 28 per cent. It should however be pointed out that the majority of venture capital funds, all but two, have made investment decisions that have yet to be disbursed, which will be highlighted later on.

4.1.2 orizontal criteria The venture capital funds are expected to observe and actively work with horizontal criteria, that is, their impact and work on equality, integration and diversity as well as the environment. In the application, measurable targets are required and activities in order to work on the horizontal criteria and a description about how the venture capital fund is expected to affect the horizontal criteria. As pointed out in Ramböll’s first yearly ongoing evaluation report in 2010, the horizontal criteria is an area which produced many questions and much discussion. The wording which has especially elicited questions is the wording concerning objectives in the applications which are obtained from the operative programmes. The objectives differ slightly in level between the regions, but are perceived as problematic and unrealistic by the venture capital funds’ MDs. However, all MDs are of the opinion that it is important to attend to the issues behind the horizontal criteria and the venture capital funds have different strategies and plans for how the venture capital funds can invest in companies that are run by women, young people, people of with a foreign background and in the environment area. The ongoing evaluation will follow how the venture capital funds work with the horizontal criteria, but the applications’ wording on objectives for female ownership and the like will be a reference point for success.


37

The table below presents the venture capital funds’ reporting of the horizontal criteria with regard to ownership structure of the portfolio company for which investment decisions exist.

Table 4. Horizontal criteria

Name of the venture capital fund

Number of participating companies

Number of companies with mixed ownership

Number of companies owned by

men

Number of companies owned by

women ALMI Invest Östra Mellansverige 12 12 0 0 ALMI Invest Stockholm 13 13 0 0 ALMI Invest Småland & Öarna 14 14 0 0 ALMI Invest Västsverige 12 12 0 0

ALMI Invest Västsverige, Värmland

3 3 0 0

ALMI Invest Norra Mellansverige 9 9 0 0

Partnerinvest i Norr AB 15 14 0 0 Partnerskapsfonden MittSverige 21 6 13 2

Mittkapital Jämtland/Västernorrland AB

5 5 0 0

Sydsvensk Entreprenörskapsfond I 14 3 7 0

Sydsvensk Entreprenörskapsfond II+III

6 4 2 0

Total 124 95 22 2 Source: the venture capital funds’ reporting to the Swedish Agency for Economic and Regional Growth, June 2011 The table shows that only two of 124 participating companies were owned by women, while 22 companies were owned by men and 95 have a mixed ownership structure.35 The same picture emerges in interviews with the venture capital funds’ MDs who highlight the shortage of investment objects from women entrepreneurs. Some improvement may however be in sight. Among other things, Saminvest notes that the proportion of investment proposals from women entrepreneurs appears to have increased in comparison with the pilot initiatives. In the next section the investment rate of each fund is presented, together with an account of the venture capital fund’s portfolio composition i.e. disbursed investments with reference to the financed companies’ industry sector, stage and size (number of employees). The industry sector distribution and stage distribution used were obtained from EVCA (The European Private Equity and Venture Capital Association). The industry sectors and stage classifications are described in Appendix 2.

4.2 he venture capital funds’ investment activity and portfolio compositions In this section the investment rate is presented in relation to the plan, portfolio composition, an assessment of the risk that the venture capital funds’ investments will be in line with the investments’ overall objectives and the risk that the investment rate at the end of 2011 will be below what was planned. The assessment of the risk that the fund’s investments will not be in line with the investment’s overall objectives is based on the cornerstones of the design of the initiative (see Chapter 1.1.1) which, among other things, stipulates that the venture capital funds should invest in small and medium-sized enterprises in the early stage and complement the market, that is, address a capital gap without 35 The total of companies with mixed ownership (95), owned by men (22) and owned by women (2) amounts to 119, while the number of

participating companies amounts to 124. The difference, which amounts to five, is because the SEF has invested in 14 companies, of which one

was sold on 16 June and one has gone bankrupt. The remaining difference of three companies is due to a lack of data in the funds’ reporting.


38

competing with the private market. The private equity fund market complementary role is clearly associated with a focus on industry and stage of funds, where the market is expected to better care for more mature firms and companies in traditional industries. The venture capital funds’ market complementary role clearly maintains the same focus with respect to industry sector and stage that the funds have, where the market is expected to better able to take care of more mature companies and companies in traditional industries. The assessment of the risk that the investment activity at the end of 2011 will be below what was planned is based on how much of EU funds the venture capital funds have disbursed up to and including Q2 2011 and the size of any additional investment decisions. This is put in relation to the accumulated investment plan up to and including Q4 2011 and the venture capital funds’ own forecasts up to and including Q4 2011. The assessment is based on the data the funds have reported to the Swedish Agency for Economic and Regional Development by 23 June. Each fund has also been given the opportunity to explain and discuss deviations from the investment plans and also supplement this with any investment decisions. Dealflow and qualitative aspects, as well as the perceived investment climate in the region, the experienced access to private capital and the intensity of the funds’ work on marketing and network building are also considered in the assessment.

4.2.1 lmi Invest Östra Mellansverige As shown in Table 2, Almi Invest Östra Mellansverige made its first investment in April 2010. The venture capital fund has received 177 investment proposals and invested in twelve companies. They disbursed public funds amounting to around SEK 27 million and private co-financing amounting to SEK 31 million, giving a ratio equivalent to SEK 1.15 of private funds for each invested crown. The total investment (public + private) amounted to around SEK 59 million and the venture capital fund’s investment plan up to and including December 2011 amounts to SEK 100 million. The bar chart below illustrates the venture capital fund’s investment rate as regards EU funds, while the pie chart shows how all public financing was disbursed in terms of the financed companies’ stage and size (both in amount and as a percentage of the total public investment). The allocation of the disbursed public financing according to the companies’ industry sector affiliation is reported in tabular form at the end of this section. The pie chart shows that Almi Invest Östra Mellansverige invested the bulk of the public funds (ERDF + public co-financing) in micro-enterprises and companies in the early expansion stage. In terms of industry sector affiliation, the largest investment amount went to companies within the Industry/Transport sector, which received 26 per cent. In second place was Life Science with 24 per cent and after that Trade with 19 per cent. Almi Invest Östra Mellansverige has disbursed almost SEK 14 million in EU funds, which is equivalent to 19 per cent of the target set for the venture capital fund to invest SEK 73 million of EU funds over the whole project period. There were also investment decisions for EU funds of a further SEK 9.7 million. This means that the venture capital fund invested 32 per cent of its EU funds. The venture capital fund’s forecast for invested EU funds up to and including the fourth quarter of 2011 amounts to SEK 29.4 million, which exceeds the investment plan for the venture capital fund.


39

Figure 3: Rate of investment and portfolio composition (Almi Invest Östra Mellansverige)

Investment rate EU funds Disbursed according to stage

Disbursed according to size

SEK + 9.7m

decided

0

5

10

15

20

25

30

35

SEK

mil

lio

n

Disbursed as of Q2

Forecast as of Q4

Investment plan as of Q4

SEK 10.1m; 37%

SEK 16.7m; 61%

SEK 0.5m; 2%

Early stage

Early expansion

Mature

SEK 18.6 m; 68%

SEK 8.2m; 30%

SEK 0.5m; 2% Micro enterprise

(0-9)

Small enterprise (10 -49)

Medium-sized enterprise (50 -249)

Industry sector Amount

(SEK million) Share (%)

IT/Telecommunications 3.8 14 Life Science 6.7 24 Industry/Transport 7.2 26 Trade 5.1 19 Energy/Environmental Technology 4.5 17 Other 0 0 Reasons for deviations:

• Dealflow not in accordance with target group. Most of the investment proposals that were received were from companies that were looking for another SEK two million. The venture capital fund wants to invest in companies that are looking for SEK 10-15 million, of which the venture capital fund takes half.

• Heterogeneous region. In certain parts of the region there was an experience of and a natural demand for venture capital, but not in others. It is easier to find objects in Östergötland and Uppsala than in, for example, Södermanland. A lot of proactive work is required.

• Understaffing. The venture capital fund has had a reduced number of staff during 2010, which has resulted in a lower inflow of objects and fewer investments. Because of the increased number of objects, more time is spend on administration and the venture capital fund will need new employees during 2011 in order to increase capacity.


40

Assessment: Risk that the fund’s investments will not be in line with the investment’s overall objective: LOW Explanation: The venture capital fund’s investments have thus far focused on micro-enterprises and small companies in the early expansion and early stages, which is reasonable in relation to the focus of the investment. The portfolio composition also complies with what was considered in the venture capital fund’s application, in which it appears that typical investments for Almi are companies that have reached the commercial stage and the companies that have reached a certain degree of maturity but that need capital to take the next step and expand market-wise or production-wise. The venture capital fund has also invested in a number of industry sectors. Risk that investment activity by the end of 2011 is below that planned: LOW/MEDIUM Explanation: Although the venture capital fund has a very good investment flow and the forecast for investments is good, the venture capital fund got underway fairly late and, at present, the investment rate is slightly different from what was planned. Reasons for this deviation are discussed above. The venture capital fund however states that, as of 30 June 2011, it has signed agreements on disbursing a further SEK 4.15 million in EU funds over and above the disbursed funds, which means that around half of the investment decisions are already realised. Given that the fund has a good investment flow, it is probable that the fund will be able to invest at a higher rate during the second part of 2011. Proposal for action: In order to achieve the desired dealflow the venture capital fund may need to market itself more strongly to companies, the public and potential private co-investors and thereby come into contact with potential investment objects. The venture capital fund states that it operates in a heterogeneous region, in which the experience of and natural demand for venture capital exists in some parts, but not in others. Proactive work and increased visibility may be required in order to also identify investment objects outside the metropolitan regions. The venture capital fund also states that it is trying to work more proactively by meeting people with contacts with potential companies and by submitting articles to newspapers and magazines in the counties of Södermanland, Örebro, Västmanland and Uppsala. The intention is that this work will continue during autumn 2011, when the venture capital fund will further consider implementing its first investment in Södermanland, which would involve investments in the whole region. This ought to increase the venture capital fund’s visibility. The problem of staffing can for example be resolved by bringing in consultants, however the venture capital fund must monitor what a strong organisation brings in the way of administration costs. To sum up, Almi Invest Östra Mellansverige has taken several steps towards improving exposure, which hopefully can increase the demand for venture capital even in those parts of the region where the experiences of these types of financing are fewer. An increased geographical spread of investment objects can hopefully also alleviate the problems concerning dealflow. The venture capital fund is also considering, apart from the investment decisions already made, to invest at least a further SEK 10m in three new companies during autumn 2011.

4.2.2 lmi Invest Stockholm Almi Invest Stockholm made its first investment in June 2009. The venture capital fund received 274 investment proposals and invested in 13 companies. They disbursed public funds amounting to around SEK 27 million and private co-financing amounting to SEK 75 million, giving a ratio equivalent to SEK 1.55 of private funds for each invested crown. The total investment (public + private) amounted to around SEK 123 million and the venture capital fund’s investment plan up to and including December 2011 amounts to SEK 100 million. The bar chart below illustrates the venture capital fund’s investment rate as regards EU funds, while the pie chart shows how all public financing was disbursed in terms of the financed companies’ stage and size (both in amount and as a percentage of the total public investment).


41

The allocation of the disbursed public financing according to the companies’ industry sector affiliation is reported in tabular form at the end of this section. Almi Invest Stockholm invested the bulk of the public funds (ERDF + public co-financing) in micro-enterprises and companies in the early expansion stage. Just over 60 per cent of the disbursed investments have gone to companies within the IT/Telecommunications sector. After that were the Life Science and Trade sectors, both with around 19 per cent. Almi Invest Stockholm has disbursed almost SEK 24 million in EU funds, which is equivalent to 39.5 per cent of the target set to invest SEK 61 million of EU funds over the whole project period. There were also investment decisions for EU funds of a further SEK 4.4 million. This means that the venture capital fund invested 47 per cent of its EU funds. The venture capital fund’s forecast for invested EU funds up to and including the fourth quarter of 2011 amounts to SEK 36.3 million, which exceeds the investment plan that was prepared for the venture capital fund.

Figure 4: Rate of investment and portfolio composition (Almi Invest Stockholm)



SEK + 4.4m

decided

0

5

10

15

20

25

30

35

40

SEK

mil

lio

n

Disbursed as of Q2

Forecast as of Q4


SEK 17.3m; 36%

SEK 30.9m; 64%

Early stage

Early expansion

SEK 33.1m; 69%

SEK 10.2m; 21%

SEK 4.9m; 10% Micro enterprise

(0-9)





IT/Telecommunications 29.9 62 Life Science 9.0 19 Industry/Transport 0 0 Trade 9.3 19 Energy/Environmental Technology 0 0 Other 0 0 Assessment:


42

Risk that the fund’s investments will not be in line with the investment’s overall objective: LOW Explanation: The venture capital fund’s investments have thus far been long focused on micro-enterprises and companies in the early expansion and early stages, which is reasonable in relation to the venture capital fund’s target group and the investment’s overall objectives. The venture capital fund shows some industry sector spread, although the IT/Telecommunications sector dominates (which has links to the industry sector structure in the Stockholm region). Risk that investment activity by the end of 2011 will be below that planned: LOW Explanation: The venture capital fund is in a good position in terms of the investment rate and its seems very probable that the investment plan will be achieved. Almi Invest Stockholm only needs to disburse an additional SEK five million in EU funds during Q3 and Q4, 2011 in order to be level with the accumulated plan up to and including 2011 and there were as of 30 June 2011 already investment decisions equivalent to SEK 4.4 million.

4.2.3 lmi Invest Småland & Öarna Almi Invest Småland & Öarna made its first investment in December 2009. The venture capital fund received 93 investment proposals and invested in 13 companies. They disbursed public funds amounting to around SEK 14 million and private co-financing amounting to SEK 24 million, giving a ratio equivalent to SEK 1.67 of private funds for each invested crown. The total investment (public + private) amounted to around SEK 123 million and the venture capital fund’s investment plan up to and including December 2011 amounts to SEK 82 million. The bar chart below illustrates the venture capital fund’s investment rate as regards EU funds, while the pie chart shows how all public financing was disbursed in terms of the financed companies’ stage and size (both in amount and as a percentage of the total public investment). The allocation of the disbursed public financing according to the companies’ industry sector affiliation is reported in tabular form at the end of this section. The pie chart shows that Almi Invest Småland & Öarna invested just over half of the public funds (ERDF + public co-financing) in medium-sized enterprises and companies in the early expansion stage. 86 per cent of disbursed investments went to companies within the Industry/Transport sector. After that were the Other, Energy/Environmental Technology and IT/Telecommunications sectors. Almi Invest Småland & Öarna has disbursed around SEK 6 million in EU funds, which is equivalent to 15 per cent of the SEK 39 million in EU funds that should be invested over the whole project period. There were also investment decisions for EU funds of a further SEK 6.1 million. This means that the venture capital fund invested 31 per cent of its EU funds. The venture capital fund’s forecast for invested EU funds up to and including the fourth quarter of 2011 amounts to SEK 15.2 million, which exceeds the investment plan that was prepared.


43

Figure 5: Rate of investment and portfolio composition (Almi Invest Småland och Öarna)



SEK + 6.1m

decided

0

2

4

6

8

10

12

14

16

18

SEK

mil

lio

n

Disbursed as of Q2

Forecast as of Q4


SEK 2.0m; 14%

SEK 0.8m;

5%

SEK 8.0m; 55%

SEK 2.8m; 19%

SEK 1.0m; 7%

Start-up

Early stage

Early expansion

Mature

Unknown

SEK 4.5m; 31%

SEK 2.0m; 14%

SEK 8.0m; 55%

Micro enterprise (0-9)





IT/Telecommunications 0,5 3 Life Science 0 0 Industry/Transport 12.5 86 Trade 0 0 Energy/Environmental Technology 0.5 4 Other 1.0 7 Reasons for deviations:

• Poor dealflow. Companies in the region are fairly immature in terms of understanding of and interest in venture capital like financing instruments. It has taken time to bring in good cases. At the same time, the venture capital fund’s management found that the venture capital fund is perceived as a good brand and it has been easy to get to meetings and inform about the venture capital fund’s offering.

• Size of investment less than planned. The average investment is SEK 1m, which is far below what was intended from the beginning. This means that it takes a very long time to invest its capital and the administration costs are soaring. The venture capital fund now plans to implement some larger investments.

• Rather difficult to find independent co-investment partners. In general the venture capital fund found that it was able to find private co-investment partners and there appears to be a great deal of interest in co-investing with the venture capital fund. The venture capital fund also found that many private investors want to bring them back, especially investors outside the region. The requirement of independence has however led to difficulties. Often potential investors have had previous interest in the company.


44

The venture capital fund’s MD points out that a lot of resources have been required for start-up but that there will be a return on its groundwork and that the venture capital fund will deliver in line with the investment plan. Another factor that may be of significance to decisions about the venture capital fund’s continuation is that the venture capital fund’s MD considers that the ”additional investment wave” will start during the latter part of 2011 and that this will contribute to a recovery in the investment rate. Assessment: Risk that the fund’s investments will not be in line with the investment’s overall objective: LOW Explanation: Investments in Industry and Transport dominate the venture capital fund’s investment portfolio today. This is reflected in the fact that almost a fifth of the venture capital fund’s total invested funds have gone to companies in the mature stage and over half of the capital has gone to companies with more than 50 employees. The portfolio composition is not however unreasonable bearing in mind the region’s business structure, which is characterised by a relatively large proportion of industrial production with the manufacturing industry which is an important engine for export and trade. There is also a spread in the portfolio e.g. the larger part of the fund, 55 per cent, was invested in companies in the early expansion sector. With reference to size almost a third of the disbursements have gone to micro-enterprises with 0-9 employees, which is in line with the investment’s overall objective. Risk that investment activity by the end of 2011 will be below that planned: MEDIUM Explanation: Despite the good forecast for the half-year of 2011 and a fairly good investment flow, the time-lag between actual and planned disbursements of EU funds’ continues to be large. Some possible reasons for the deviations are discussed above. Despite this the fund is assessed to have relatively good possibilities of being at a level of the accumulated plan for Q4 2011 at the end of the year, among other things, due to additional investment decisions equivalent to SEK 6.1 million that existed as of 30 June 2011, that the fund appears to have carried out a lot of groundwork for companies and private investors in the region and that some additional investments are expected during the latter part of 2011. Proposal for action: In the region the experience of venture capital is small, which is why the venture capital fund needs to work proactively in order to be seen. The venture capital fund states that in its agreements it always integrates a clause that provides the companies with the opportunity to buy back the venture capital fund’s shares, which can be a good strategy in a region with limited experience of this type of financing. The venture capital fund should for example strive to submit articles to newspapers and magazines, in which the mentioned strategy is presented and marketed. A further course of action is to try to come into contact with potential investment objects via private co-investors (there are good established contacts here) i.e. allow investment partners to largely ”do the footwork”. This model has proved to be successful in Jämtland/Västernorrland.

4.2.4 lmi Invest Västsverige (V. Götaland & Halland) Almi Invest Västsverige (Västra Götaland & Halland) made its first investment in June 2009. The venture capital fund received 179 investment proposals and invested in twelve companies. They disbursed public funds amounting to around SEK 39 million and private co-financing amounting to SEK 51 million, giving a ratio equivalent to SEK 1.29 of private financing for each invested crown. The total investment (public + private) amounted to around SEK 90 million and the venture capital fund’s investment plan up to and including December 2011 amounts to SEK 108 million. The bar chart below illustrates the venture capital fund’s investment rate as regards EU funds, while the pie chart shows how all public financing was disbursed in terms of the financed companies’ stage and size (both in amount and as a percentage of the total public investment). The allocation of the disbursed public financing according to the companies’ industry sector affiliation is reported in tabular form at the end of this section.


45

The pie chart shows that Almi Invest Västsverige invested the lion’s share of funds, 92 per cent, in micro-enterprises. Almost half of the funds were invested in companies in the early expansion stage and a third of companies in the early stage. With regard to industry sector affiliation, the venture capital fund invested relatively similar amounts in the IT, Life Science, Industry/Transport and Energy/Environmental Technology sectors. Almi Invest Västsverige has disbursed almost SEK 12 million in EU funds, which is equivalent to 36 per cent of the capital base made up of EU funds i.e. SEK 33 million36. There were also investment decisions for EU funds of a further SEK 4.2 million. This means that the venture capital fund invested 49 per cent of its allocated EU funds. The venture capital fund’s forecast for invested EU funds up to and including the fourth quarter of 2011 amounts to SEK 16.9 million, which exceeds the venture capital fund’s investment plan.

Figure 6: Rate of investment and portfolio composition (Almi Invest Västsverige)



SEK + 4.2m

decided

0

2

4

6

8

10

12

14

16

18

SEK

mil

lio

n

Disbursed as of Q2

Forecast as of Q4


SEK 3.3m; 8%

SEK 12.4m; 32%

SEK 19.5m; 49%

SEK 4.2m; 11%

Start-up

Early stage

Early expansion

Mature

SEK 36.3m; 92%

SEK 3.1m; 8%





IT/Telecommunications 8.4 21 Life Science 10.7 27 Industry/Transport 8.9 23 Trade 0 0 Energy/Environmental Technology 11.4 29 Other 0 0 Assessment: Risk that the fund’s investments will not be in line with the investment’s overall objective: LOW

36 The reason the objective for disbursement of EU funds is relatively low is that in Almi Invest Västsverige (West Götaland & Halland) it is only 30 per cent of the venture capital fund’s public capital base that is made up of EU funds.


46

Explanation: The venture capital fund has in its investments focussed on companies in the start-up stage and both young and slightly mature small businesses, which is in line with the venture capital fund’s target groups and the incentive’s overall objectives. The portfolio shows good variation in terms of industry sector and the company’s stage of development. Risk that investment activity by the end of 2011 is below that planned: LOW Explanation: The venture capital fund has at present investment decisions which are sufficient to meet the investment targets for 2011. In addition, the venture capital fund has a good investment flow. It is very likely that the venture capital fund will be able to maintain the planned investment rate.

4.2.5 lmi Invest Västsverige (Värmland) Almi Invest Västsverige Värmland made its first investment in September 2009. The venture capital fund received 48 investment proposals and invested in three companies. They disbursed public funds amounting to around SEK five million and private co-financing amounting to SEK five million. The total investment (public + private) thus amounted to around SEK ten million and the venture capital fund’s investment plan up to and including December 2011 amounts to SEK 24 million. The bar chart below illustrates the venture capital fund’s investment rate as regards EU funds, while the pie chart shows how all public financing was disbursed in terms of the financed companies’ stage and size (both in amount and as a percentage of the total public investment). The allocation of the disbursed public financing according to the companies’ industry sector affiliation is reported in tabular form at the end of this section. The pie chart shows that Almi Invest Västsverige Värmland has invested the entire amount in companies in the early stage and 85 per cent in micro-enterprises (0-9 employees). The venture capital fund has invested its funds in companies in two different industry sectors, 60 per cent of the funds in IT and 40 per cent in Trade. Almi Invest Västsverige Värmland has disbursed around SEK 2.5 million in EU funds, which is equivalent to 13 per cent of the target to invest SEK 19 million over the whole project period. There were also investment decisions for EU funds of a further SEK 1.65 million. This means that the venture capital fund invested around 22 per cent of the EU funds. The venture capital fund’s forecast for invested EU funds up to and including the fourth quarter of 2011 amounts to SEK 6.75 million, which exceeds the investment plan.


47

Figure 7: Rate of investment and portfolio composition (Almi Invest Västsverige - Värmland)



SEK +1.65m decided

0

1

2

3

4

5

6

7

8

SEK

mil

lio

n

Disbursed as of Q2

Forecast as of Q4


SEK 5.0m; 100%

Early stage

SEK 4.3m; 85%

SEK 0.7m; 15%





IT/Telecommunications 3.0 60 Life Science 0 0 Industry/Transport 0 0 Trade 2.0 40 Energy/Environmental Technology 0 0 Other 0 0 Reasons for deviations:

• Late start. The venture capital fund started with its own MD/investment manager stationed at Värmland on the first of June 2010.

• Poor investment flow. The venture capital fund found it problematic to find a sufficient number of interesting objects. With an investment manager now in place work will start in a better way, but it will take time to find objects, build networks, etc.

The venture capital fund’s management assess that the venture capital fund will come up to the investment plan as early as around the turn of the year 2011/2012, based on present investment opportunities, and that there are good conditions for investing funds up until 2014. Since there is no further information about what was in the reporting from the venture capital fund in June 2011, Ramböll is refraining from making its own assessment as to whether this appears reasonable or not.


48

4.2.6 lmi Invest Norra Mellansverige Almi Norra Mellansverige made its first investment in December 2009. The venture capital fund received 97 investment proposals and invested in nine companies. They disbursed public funds amounting to around SEK 15 million and private co-financing amounting to SEK 17.7 million, giving a ratio equivalent to SEK 1.18 of private financing for each invested crown. The total investment (public + private) amounted to around SEK 33 million and the venture capital fund’s investment plan up to and including December 2011 amounts to SEK 66 million. The bar chart below illustrates the venture capital fund’s investment rate as regards EU funds, while the pie chart shows how all public financing was disbursed in terms of the financed companies’ stage and size (both in amount and as a percentage of the total public investment). The allocation of the disbursed public financing according to the companies’ industry sector affiliation is reported in tabular form at the end of this section. The pie chart shows that the venture capital fund invested about half of the fund in companies in the start-up stage, 45 per cent of companies in the early stage and the remainder of companies in the early expansion stage. 91 per cent of the investment amount went to micro-enterprises with 0-9 employees. The venture capital fund invested a quarter of the fund in companies in IT and 15 per cent in companies within Trade. About half of implemented investments went to the Other category.

37 The venture capital fund’s management does not share Ramböll’s assessment, since it is of the opinion that there are significant investment

opportunities for the fund. Ramböll dos not at present have sufficient basis to make its own assessment that the fund has good conditions for

achieveing the investment plan at the end of 2011.

Assessment: Risk that the fund’s investments will not be in line with the investment’s overall objective: LOW Explanation: Because the venture capital fund has only made a few investments it is difficult to make an assessment of the composition of the portfolio. The venture capital fund’s investments have thus far focussed on micro industries and small companies in the early stage, which is reasonable in relation to the investment’s focus. There also appears to be some spread in terms of industry sector. Risk that investment activity by the end of 2011 is below that planned: MEDIUM/HIGH37 Explanation: Despite the good forecast the actual investments are currently far below the investment plan. The venture capital fund has during the year only implemented two investments and made decisions on one more, which may be a sign that the fund has a long start-up length (that a lot of foundational work is required) or that it presents obstacles to the fund’s operations. There is thus insufficient data at present to ensure that the fund has good conditions to achieve the investment plan for the end of 2011. Proposal for action: Värmland was one of the regions that was included in the pilot investment in regional investment funds between 2005 and 2008. The fund’s achievement of objectives was then assessed as good and it invested SEK 47.5 million during the period. Within the framework of the pilot investment the venture capital fund, Partnerinvest i Mellansverige AB, its main operations in the region and the regional and local anchoring are considered to provide a number of advantages to its operations. At present the venture capital fund is one of two funds in Västsverige, which may have influenced the local and regional anchoring in a negative direction. Almi Invest Västsverige may therefore need to work more proactively in Värmland, a region that lacks a dynamic metropolitan region like Gothenburg, in order to increase the demand for venture capital. In Karlstad there is a university which the fund should be able to take advantage of in its marketing. Experience from other venture capital funds has also demonstrated that more marketing in sparsely-populated regions is required.


49

Almi Invest Norra Mellansverige has disbursed around SEK 7.5 million in EU funds, which is equivalent to 17 per cent of the target to invest SEK 44 million over the whole project period. There were also investment decisions for EU funds of a further SEK 12.2 million. This means that the venture capital fund invested 45 per cent of its EU funds. The venture capital fund’s forecast for invested EU funds up to and including the fourth quarter of 2011 amounts to SEK 22 million, which exceeds the investment plan.

Figure 8: Rate of investment and portfolio composition (Almi Invest Norra Mellansverige)



SEK +12.2m decided

0

5

10

15

20

25

SEK

mil

lio

n

Disbursed as of Q2

Forecast as of Q4


SEK 7.0m; 47%SEK 6.7m;

45%

SEK 1.3m; 9%

Start-up

Early stage

Early expansion

SEK 13.7m; 91%

SEK 1.3m; 9%





IT/Telecommunications 3.4 23 Life Science 0 0 Industry/Transport 1.3 9 Trade 3.3 22 Energy/Environmental Technology 0 0 Other 7.0 47


50

Reasons for deviations:

• Staffing and shortage of (competent) private co-financing. The venture capital fund’s MD himself sits on most of the portfolio companies boards. Management of existing companies has taken more and more time and it has been hard to focus on new investments. At the same time, it has not felt confident in delegating this work to the private co-investors. The high level of engagement has been very much appreciated by the companies, but it is important to understand that the administration costs (which are not allowed to exceed 3 per cent) place limits on how active the venture capital fund can be on the companies’ boards. This places a requirement to find another way to provide support for the companies.

The venture capital fund appears to have a good flow of investment objects and assesses that they will be able to manage their investment objectives for 2011 even if no new investment proposals are to come in. Almi Invest Norra Mellansverige is also a fund that actively works on ”maintaining future dealflow”, which means that the venture capital fund keeps in contact with companies that can be interesting potential objects of 1-2 years, cooperates with with incubators, etc. There are therefore reasons to believe that the investment flow will also be good in the long term. The venture capital fund also feels that there is a great deal of confidence in investment among regional actors and the private equity fund has legitimacy.

4.2.7

artnerinvest i Norr AB Almi Partnerinvest i Norr made its first investment in October 2010. The venture capital fund received 125 investment proposals and implemented 15 investments. They disbursed public funds amounting to around SEK 35 million and private co-financing amounting to SEK 37 million, giving a ratio equivalent to

Assessment: Risk that the fund’s investments will not be in line with the investment’s overall objective: LOW Explanation: The venture capital fund’s investments have thus far focussed on micro-enterprises in the early stage, which is reasonable in relation to the investment’s focus. There also appears to be some spread in terms of industry sector. Given the economic structure in the venture capital fund’s geographic operational area, which is largely characterised by a capital-intensive industrial sector, the industry sector distribution in investments appears to be relatively good. The risk that investment activity by the end of 2011 is below that planned: LOW Explanation: The venture capital fund has had a slow start but has increased investment activity substantially during 2011. The investment flow also appears to be good and the venture capital fund states that, over and above the disbursed investments up to and including 30 June 2011, agreements have been signed to disburse a further SEK 10.5 million in EU funds. Taking this into account, the fund has already ensured that the investment plan will be fulfilled as early as the end of Q2. Proposal for action: Since the region does not have well-developed traditions and infrastructure for venture capital, it is important that the venture capital fund continues its work with proactive marketing in the region. As regards private co-financiers, marketing in one's own region is important and more work should also be done with co-investors from other regions. It is also important to work on improving the efficiency of decision processes.


51

SEK 1.07 of private financing for each invested crown. The total investment (public + private) amounted to around SEK 72 million and the venture capital fund’s investment plan up to and including December 2011 amounts to SEK 114 million. The bar chart below illustrates the venture capital fund’s investment rate as regards EU funds, while the pie chart shows how all public financing was disbursed in terms of the financed companies’ stage and size (both in amount and as a percentage of the total public investment). The allocation of the investments according to the companies’ industry sector affiliation is reported in tabular form. The pie chart shows that the venture capital fund invested approximately three quarters of the amount in companies in the early expansion stage. As regards the size of the companies, there is a lack of information on the number of employees in 85 per cent of cases. However, it was established that 15 per cent of the fund went to micro-enterprises with 0-9 employees. The venture capital fund invested in a number of different industry sectors, of which the largest part, 43 per cent, went into Energy/Environmental Technology. After that it was Industry, 22 per cent, and Life Science, 16 per cent. Almi Partnerinvest i Norr has disbursed around SEK 17.4 million in EU funds, which is equivalent to 20 per cent of the target to invest SEK 85 million over the whole project period. There were also investment decisions for EU funds of a further SEK 3.7 million. This means that the venture capital fund invested about a quarter of its EU funds. The venture capital fund’s forecast for invested EU funds up to and including the fourth quarter of 2011 amounts to SEK 38 million, which exceeds the investment plan.

Figure 9: Rate of investment and portfolio composition (Almi Invest Partnerinvest i Norr)



SEK +3.7m decided

0

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15

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30

35

40

SEK

mil

lio

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Disbursed as of Q2

Forecast as of Q4


SEK 2.0m; 6%

SEK 6.4m; 18%

SEK 26.3m; 76%

Start-up

Early stage

Early expansion

SEK 5.3m; 15%

SEK 29.4m; 85%


Unknown



IT/Telecommunications 3.4 10 Life Science 5.7 16 Industry/Transport 7.5 22 Trade 1.4 4 Energy/Environmental Technology 15.0 43 Other 1.8 5


52

Reasons for deviations:

• Delayed start. The venture capital fund started in the middle of 2010, which was because it took time to appoint the MD. Due to the late start, some problems in communications between the Swedish Agency for Economic and Regional Growth and the venture capital fund arose which resulted in the requirements for the fund project’s implementation not being communicated clearly to the MD. After these ambiguities were addressed during 2010, the venture capital fund showed a good and stable investment activity.

• Shortage of private co-financing. It was previously known that access to private co-financing in Norrbotten and Västerbotten is among the worst in the country38. The venture capital fund has therefore needed to make directed efforts to find potential private investors to cooperate with. This also means that Partnerinvest i Norr must take greater responsibility for Due Diligence and agreement issues, since new investments have no experience of the area. At the same time, this work is very important and is in line with the venture capital fund’s and the investment’s objective to mobilise private capital and contribute to professionalisation of the private venture capital market.

The venture capital fund’s MD assesses that the demand for venture capital in the region is very large and emphasises that the venture capital fund has received 126 investment proposals without any active marketing. The demand appears to be spread over the whole region and the venture capital fund points out that they have a good network in both Norrbotten and Västerbotten. Now the venture capital fund has also expanded with an investment manager in order to ensure future investment flow and the capacity to implement and follow-up investments. There appears to be interest among private individuals and companies in the region to invest in conjunction with the fund and Partnerinvest i Norr has up to now managed to link to 50 or so potential co-investors. The internal processes are functioning well. The venture capital fund sees itself as having good communication with its interested parties and board, smooth decision processes and the fund has access to the necessary expetise. Assessment Risk that the fund’s investments will not be in line with the investment’s overall objective: LOW Explanation: The venture capital fund’s portfolio shows a good spread in terms of stage of development and industry sector, which is well in line with the investment’s focus and objective. With regard to the companies’ size, it is difficult to make an assessment since this does not appear to have been documented systematically by the venture capital fund. A small proportion is made up of micro-enterprises and the rest of a mixture of small and medium-sized enterprises, which is in line with the venture capital fund’s target group. Risk that investment activity by the end of 2011 is below that planned: MEDIUM Explanation: After a delayed start, the venture capital fund is showing very good investment activity and the investment forecast for 2011 is far above the planned investment rate. There is also a time-lag between actual and planned investments, which is discussed above. In other words, a great deal of work remains to be done to reach the planned investment rate by the end of 2011. At the same time, the fund is assessed to have reasonably good conditions to manage this. This is because demand for capital seems to be good, a great deal of work has been done to mobilise private capital and the funds’ processes appear to be functioning well.

38 Avdeitchikova, S. (2008) Close-ups from afar: the nature of the informal venture capital market in a spatial context, Thesis, Lund University

Press.


53

Proposal for action: It is important to continue efforts to improve access to private co-financing. Apart from the work in progress today to engage new potential investors/business angels within the region, further efforts can be made to get co-investment capital from other regions. Almi Invest’s network can be used here. Opportunities to ”import” capital to the region will probably increase if the fund finds the opportunity to implement a larger amount of investments.

4.2.8 artnerskapsfonden Mittsverige (Saminvest) Partnerskapsfonden Mittsverige (Saminvest) made its first investment in June 2009. The venture capital fund received 120 investment proposals and invested in 21 companies. They disbursed public funds amounting to around SEK 48 million and private co-financing amounting to SEK 55 million, giving a ratio equivalent to SEK 1.14 of private funds for each publicly-invested crown. The total investment (public + private) amounted to around SEK 104 million and the venture capital fund’s investment plan up to and including December 2011 amounts to SEK 116 million. The bar chart below illustrates the venture capital fund’s investment rate as regards EU funds, while the pie chart shows how all public financing was disbursed in terms of the financed companies’ stage and size. The financed companies’ industry sector affiliation is reported in tabular form. The pie chart shows the venture capital fund invested in companies in all stages. Almost half of the fund was invested in companies in the early stage and the other half in companies in the early expansion stage. In terms of size almost half of the fund was invested in micro-enterprises, almost a quarter in small businesses and 28 per cent in medium-sized enterprises. The venture capital fund invested in a number of different industries, of which the largest part, 33 per cent, has gone to companies in IT. The next most was invested in Energy/Environmental Technology and after that in Industry/Transport. Saminvest has disbursed around SEK 24 million in EU funds, which is equivalent to 57.5 per cent of the target to invest SEK 42 million over the whole project period. There were also investment decisions for EU funds of a further SEK 2.9 million. This means that the venture capital fund invested around 65 per cent of its EU funds. The venture capital fund’s forecast for invested EU funds up to and including the fourth quarter of 2011 amounts to SEK 29.6 million, which exceeds the investment plan.


54

Figure 10: Rate of investment and portfolio composition (Partnerskapsfonden Mittsverige - Saminvest)



SEK +2.9m decided

0

5

10

15

20

25

30

35

SEK

mo

llio

n

Disbursed as of Q2

Forecast as of Q4


SEK 1.5m; 3%

SEK 22.3m; 46%

SEK 22.5m; 47%

SEK 2.0m; 4%

Start-up

Early stage

Early expansion

Mature

SEK 23.1m; 48%

SEK 11.6m; 24%

SEK 13.7m; 28%



Medium-size enterprise (50 -249)



IT/Telecommunications 15.9 33 Life Science 5.0 10 Industry/Transport 9.5 20 Trade 5.7 12 Energy/Environmental Technology 9.8 20 Other 2.5 5 Assessment: Risk that the fund’s investments will not be in line with the investment’s overall objective: LOW Explanation: The venture capital fund has a very well-balanced portfolio in terms of company size, stage of development and sector. Risk that investment activity by the end of 2011 is below that planned: LOW Explanation: The investment rate is good as is the flow of new investment proposals. The venture capital fund is currently slightly below the investment plan for the whole of 2011, even allowing for the investment decisions that have been taken and are still to be disbursed. The main reason however appears to be that the investment plan is set at a very much more ambitious level than the other venture capital funds. It is likely that the venture capital fund will be able to reach the planned investment rate at the end of the year, because the fund has consistently shown an even and high investment rate.


55

4.2.9 ittkapital Jämtland/Västernorrland Mittkapital made its first investment in June 2010. The venture capital fund received 68 investment proposals and implemented five investments. In addition, the venture capital fund’s four investment partners (”Growth Funds”) received 60 investment proposals, making a total number of 128 proposals.39 They disbursed public funds amounting to around SEK 48 million and private co-financing amounting to SEK 44 million, giving a ratio equivalent to SEK 1.15 of private co-financing for each publicly-invested crown. The total investment (public + private) amounted to around SEK 91 million and the total investment plan for the venture capital fund up to and including December 2011 amounts to SEK 67 million. This is explained by Mittkapital’s investment plan as regards investments not presuming private co-financing. Mittkapital has disbursed around SEK 24 million in EU funds, which is equivalent to 29 per cent of the EU funds that the project should in total invest over the whole project period. There are no investment decisions at present. The forecast for invested EU funds up to and including the fourth quarter of 2011 amounts to SEK 33.5 million, which is just below the investment plan for the period which amounts to SEK 34 million. The pie chart shows that the venture capital fund invested the greater part of the fund, 79 per cent, in companies in the mature stage. 77 per cent of the fund has gone to medium-sized enterprises with 50-249 employees and the remaining 23 per cent was invested in micro-enterprises. With regard to industry sector distribution, 60 per cent of the funds were invested in companies in Industry/Transport and 37 per cent in Trade companies.

Figure 11: Rate of investment and portfolio composition (Mittkapital Jämtland/Västernorrland)



0

5

10

15

20

25

30

35

40

SEK

mil

lio

n

Disbursed (and decided) as of Q2

Forecast as of Q4


SEK 4.7m; 10%

SEK 5.2m; 11%

SEK 37.8m; 79%

Start-up

Early stage

Mature

SEK 11.2m; 23%

SEK 36.5m; 77%


Medium-size enterprise (50 -249)

39 Growth Funds is a type of investment company established by private actors who have a co-investment agreement with the venture capital

fund. Growth Funds, two in Jämtland and two in Västernorrland, were set up to implement investments in small companies in the early stage of

development. For more information, see e.g. Mittkapital in Jämtland and Västernorrland, Samarbetspartners, www.mittkapital.eu


56

Industry Amount (SEK million)

Share (%)

IT/Telecommunications 0 0 Life Science 0 0 Industry/Transport 28.9 60 Trade 17.5 37 Energy/Environmental Technology 0 0 Other 1.2 3 Reasons for deviations:

• Initial problems with the rules. The first year of the venture capital fund’s operations took up a lot of time to build up a fund-in-fund solution (”war chests”) which could be used as an instrument to address small enterprises, but which are not admitted according to the rules. When it was clear that the model of ”war chests” could not be applied, the structure was changed in such a way that the private actors established their own ”investment company” without Mittkapital, but with a co-investment agreement with the venture capital fund. When the infrastructure to address smaller enterprises in the early stage was arranged in such a way Mittkapital’s focus was directed towards larger companies, which the pie chart of the portfolio composition above shows. Growth Funds’ investments (in smaller companies in the early stage) have been slow in coming, but the venture capital fund states that several joint investments are expected to be implemented during the coming year.

• The venture capital fund is in the "cross-pressure" between the Sixth AP Fund’s return requirement and the investment’s overall objective. Mittkapital is run by the Sixth AP Fund which is a profit-driven fund and thereby has higher return requirements than other venture capital funds that were studied in the mid-term evaluation. The relatively high return requirement may be one explanation for the portfolio composition, which is characterised by relatively mature companies in traditional industries. These investments can be expected to provide a relatively high return and increased opportunities for exit.

• Poorer regional conditions for venture capital investments. The venture capital fund is limited by the conditions prevailing in the region, in terms of the culture of entrepreneurship and venture capital financing among other things. Commerce in parts of the region, especially in Västernorrland, is dominated by industrial environments and large companies.

Assessment: Risk that the fund’s investments will not be in line with the investment’s overall objective: MEDIUM40 Explanation: The venture capital fund has invested the bulk of the funds in companies in the mature stage, as well as in medium-sized enterprises in traditional industries. The venture capital fund's application states that the venture capital fund will also support start-up and expansion in small companies. This has not yet been reflected in the actual investments implemented. The venture capital fund states that it takes time to process the smaller companies and that the four Growth Funds have several small projects in the pipeline. Furthermore, the venture capital fund in its application identified a number of different target groups, including companies in the IT/Telecommunications and Environment sectors. The actual investment does not reflect this yet. The venture capital fund's portfolio also deviates slightly from the objective of the investment to support businesses in the early stages and focus on areas

40 The venture capital fund’s management does not share Ramböll’s assessment. Two of five investments have been made in medium-sized

enterprises in the mature expansion stage, which is compatible with the investment’s rules. Ramböll’s assessment is however based on the fact

that the venture capital funds must be market complementary i.e. address the gap in capital supply and not compete with the private market. Ramböll assesses that the capital gap is relatively larger in companies with fewer employees than there are here, and that medium-sized

enterprises in the mature expansion stage can more easily receive both private investments and loan capital than small companies in the early

stage.


57

where the equity gap is greatest. This suggests that the venture capital fund in the current situation has some difficulties in investing the funds in an appropriate manner. Risk that investment activity by the end of 2011 will be below that planned: MEDIUM41 Explanation: Although the venture capital fund implemented relatively large investments, in the current situation it lies slightly below the investment plan for the whole of 2011. The forecast for 2011 is slightly below the investment objective. Reasons for these deviations are discussed above. The investment flow is relatively good and the venture capital fund has, as mentioned above, stated that the four Growth Funds have several investments in the pipeline, but since Ramböll has not seen the figures for further investment decisions, the risk that the investment rate at the end of 2011 will be below that which was planned is assessed as medium-high. Proposal for action: The fund is finding the investment and entrepreneurial climate in the two counties as being very different and that it is trying to focus on raising the level of activity in Västernorrland. In connection with this work, the fund should seek to achieve a wider distribution in the portfolio composition in terms of stage and size. It was revealed during the course of the investigation that companies usually appreciate physical meetings and informal communication. As a result of the solution that was chosen involving “Growth Funds”, the cooperation and communication between them and the venture capital fund is strong, so that potential investment objects feel that they are receiving local support from representatives of the venture capital fund. Efforts made to build up the "Growth Funds" mean that the fund in the longer term is expected to ensure good investment flow and build a more balanced portfolio. This is true provided that the co-investment model works, which means that it is of utmost importance that the investments involving "Growth Funds" get underway.

4.2.10 SEF I SEF made its first investment in October 2009. The venture capital fund received 110 investment proposals and invested in 14 companies. They disbursed public funds amounting to around SEK 14 million and private co-financing amounted to SEK 44 million, giving a ratio equivalent to SEK 3.16 of private funds for each publicly-invested crown. The total investment (public + private) amounted to around SEK 57 million and the investment plan up to and including December 2011 in terms of total investments amounts to SEK 18 million. The venture capital fund invested the lion’s share of the fund, 90 per cent, in companies in the early stage. With regard to size, 77 per cent of the fund went to micro-enterprises with 0-9 employees and the remaining 23 per cent was invested in small companies with 10-49 employees. With regard to industry sector distribution SEF invested in all industries. The larger part, 57 per cent, was invested in companies in IT/Telecommunications. SEF I has disbursed around SEK 6.9 million in EU funds, which is equivalent to 46 per cent of the target to invest SEK 15 million over the whole project period. There were also investment decisions of a further

41 The venture capital fund’s management does not share Ramböll’s assessment but considers that at the end of the year it will be at the same level as the plan. Ramböll in its assessment cannot disregard that over and above the disbursed investments there are no further reported

investment decisions that can be expected to be disbursed during Q3 and Q4 2011 and the cooperation with the Swedish Agency for Economic

and Regional Growth has still not resulted in any investment decisions.


58

SEK 1.45 million in EU funds. This means that the venture capital fund invested approximately 56 per cent of its EU funds. The venture capital fund’s forecast for invested EU funds up to and including the fourth quarter of 2011 amounts to SEK 8.75 million, which is almost equivalent to the investment plan amounting to SEK 9 million.

Figure 12: Rate of investment and portfolio composition (SEF I)



SEK +1.5m decided

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1

2

3

4

5

6

7

8

9

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SEK

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Disbursed as of Q2

Forecast as of Q4


SEK 12.3m; 90%

SEK 1.3m; 10%

Start-up

Unknown

SEK 10.5m; 77%

SEK 3.1m; 23%





IT/Telecommunications 7.7 57 Life Science 0.9 6 Industry/Transport 0.7 5 Trade 1.0 7 Energy/Environmental Technology 0.4 3 Other 2.9 22 Assessment: Risk that the fund’s investments will not be in line within the investment’s overall objective: LOW Explanation: The venture capital fund’s portfolio is dominated by micro and small enterprises in the very early stages, which is in line with the venture capital fund’s focus and the venture capital fund’s and the investment’s objectives. There is some distribution in terms of industry sector, although the majority of the investments went to companies within IT/Telecommunications. This however appears to reflect the region’s strong concentration within the area. Risk that investment activity by the end of 2011 will be below that planned: LOW/MEDIUM Explanation: The venture capital fund has a very good investment flow. Despite investments and the forecast for the whole of 2011 appearing to be slightly below the investment plan, the deviation seems to be due to the venture capital fund inviting a maximum of private capital in its investments, which is not a


59

requirement for this fund. There is no reason to doubt that the venture capital fund will take advantage of all the EU funds in the project, through new investments in the existing twelve portfolio companies.

4.2.11 SEF II-III SEF II-III made its first investment in December 2009. The venture capital fund received 116 investment proposals and implemented investments in six companies. They disbursed public funds amounting to around SEK 34 million and private co-financing amounted to SEK 75 million, giving a ratio equivalent to SEK 2.19 of private funds for each publicly-invested crown. The total investment (public + private) amounted to around SEK 109 million and the investment plan amounted to SEK 110 million up to and including December 2011. The pie chart shows that the venture capital fund invested the larger part of the fund, 68 per cent, in companies in the early stage. 70 per cent of the fund has gone to micro-enterprises with 0-9 employees and the remaining 30 per cent was invested in small companies with 10-49 employees. With regard to industry sector distribution, SEF II-III invested in the three industry sectors IT, Life Science and Energy. The larger part of the fund, 68 per cent, has gone to companies within the Life Science sector. SEF II-III has disbursed around SEK 17 million in EU funds, which is equivalent to 17.9 per cent of the target to invest SEK 61 million over the whole project period. The venture capital fund’s disbursed funds was also equivalent to this investment decision. The venture capital fund’s forecast for invested EU funds up to and including the fourth quarter of 2011 amounts to SEK 24 million, which is lower than the investment plan for accumulated EU funds amounting to SEK 34 million.

Figure 13: Rate of investment and portfolio composition (SEF II-III)



0

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25

30

SEK

mil

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Disbursed (and decided) as of Q2

Forecast as of Q4


SEK 10.7m; 31%

SEK 23.3m; 69%

Start-up

Early stage

SEK 24.0m; 71%

SEK 10.0m; 29%




60


(SEK miliion) Share (%)

IT/Telecommunications 6.7 20 Life Science 23.3 68 Industry/Transport 0 0 Trade 0 0 Energy/Environmental Technology 4.0 12 Other 0 0 Reasons for deviations:

• Delayed start. The application assumed that the venture capital fund could begin to invest in July 2009 but the national part-financing and all ERDF co-financing was first approved in November 2009. This meant that the venture capital fund was delayed by almost 6 months.

• Staffing. The venture capital fund has not had full staffing during 2010 and 2011 due to illness, parental leave and staff turnover, which resulted in reduced investment capacity. The staffing problem now appears to be resolved.

• Size of new investments. The application assumed that the average new investment would be SEK 5m per company but up to now it has been SEK 4.5m per company.

• Total investment per company. It is too early to assess what the average investment (i.e. new plus follow-up investments) finally is per company but the venture capital fund now assesses that it will be around SEK 7m per company. The application states SEK 10m per company and thus the venture capital fund will need to implement more new investments than what was assumed in the application which can lead to a higher investment rate in 2013-2014 and lower investment rate in 2011-2012 compared with the application.

Factors that may be important to take into account in the assessment of the continuation of the venture capital fund are that SEF II-III takes care of its market complementary role and lets in lots of private capital in investments. This means that it takes a little longer to invest the venture capital fund’s capital base, but contributes very positively to the venture capital fund’s achievement of objectives in terms of improvement in the capital supply situation for companies, development of companies and development of the private venture capital market. The venture capital fund also appears to be aware of where the actual capital gap exists and revised down the average size of investment to better match this gap. Furthermore, since the venture capital fund has been underway for about two years now, one can expect a wave of follow-up investments that will lead to a recovery in the investment rate. Assessment: Risk that the fund’s investments will not be in line with the investment’s overall objective: LOW Explanation: SEF II-III has focused on investments in companies in the early and start-up stages, which are in line with what was stated in the application and the focus of the investment. The companies are also largely micro-enterprises with 0-9 employees. The venture capital fund has invested a large proportion of the funds in companies in Life Science, which may be a reflection of the region’s strong concentration within the area. Risk that investment activity by the end of 2011 will be below that planned: MEDIUM/HIGH Explanation: Despite the good investment flow, the venture capital fund today lies slightly outside the agreed accumulated investment plan up to and including December 2011. The venture capital fund has not reported any further investment decisions at all that can be expected to be disbursed during Q3 and Q4 of 2011. Furthermore, the fund will be making an investment forecast of SEK 24 million at the end of


61

2011, which is lower than the investment plan of SEK 28 millon in EU funds, which probably means that the investment plan will not be achieved. At the same time, the investment flow is good and there appears to be no shortage of private co-investment capital. One can also expect a wave of follow-up investments which provides hope for a recovery of the investment rate in the long term.

4.3 xpected investment activity during 2012-2014 In order to assess whether the venture capital funds will achieve their objectives, that is, manage to invest their funds (minus administration costs) over the course of the project, Ramböll has conducted linear extrapolations (projections) of the venture capital funds’ average, monthly investment rate from the time of the first investment up until the end of the project in December 2014. Extrapolations have been conducted on the basis of both disbursed investments and investment decisions, with the aim of identifying and discussing any differences in the results. The extrapolations have been made with reference to the investable EU funds, because it is these which must be repaid to the European Commission in cases where they are not invested at least once in a portfolio company by the end of December 2014. The method can be summarised according to the formula below:

where:

= Forecasted accumulated disbursement of EU funds over the whole project period for each fund f

= Accumulated disbursement of EU funds up to and including the second quarter of 2011 for each fund f

= Number of months since the first month for each fund f = Number of months of the project period remaining

= Target set for the accumulated disbursements of EU funds during the project period for each fund f The same methods have also been applied to the venture capital funds’ investment decisions up to and including June 2011.

4.3.1 esults based on disbursed EU funds The results of the linear extrapolation of disbursed EU funds are presented in the table below. The final results of the investigation are shown in the column furthest to the right, where a surplus (+) is to be interpreted as the venture capital fund, given the observed investment rate per month, being able to invest more EU funds than what it was allocated, which means that the venture capital fund is estimated to manage to invest their EU funds up until the end of the project period. Analogously, a deficit (-) means that the venture capital fund is estimated not to manage to invest the declared amount up until the end of the project period.


62

Table 5: Forecast of disbursed EU funds

The venture capital fund’s name

The number of months since first investment

Investment rate of EU funds per month since first investment (SEK th)

Forecasted acc. disburs. of EU funds up to and including Dec 2014 (SEK th)

Total of EU funds to invest (SEK th)

Surplus (+) / Deficit (-) (SEK 1 000)

Almi Invest Östra Mellansverige

14 974 56 564 73 000 -18 43642

Almi Invest Stockholm 23 1 047 68 070 61 000 +7 070 Almi Invest Småland & Öarna

18 322 19 330 39 000 -19 670

Almi Invest Västsverige (V. Götaland & Halland)

24 493 32 514 33 000 +/0

Almi Invest Västsverige Värmland

9 278 14 179 19 000 -4 82143

Almi Invest Norra Mellansverige

18 417 24 995 44 000 -19 00544

Partnerinvest i Norr AB 8 2 171 108 545 85 000 +23 545 Partnerskapsfonden Mittsverige (Saminvest)

24 1 007 60 938 42 000 +18 938


12 1 987 107 295 82 000 +25 295

SEF I 20 345 21 407 15 000 +6 407 SEF II-III 16 1 064 61 700 61 000 +700 With the method used, seven venture capital funds were found to have managed to invest EU funds during the project period, while such was not the case for four venture capital funds. According to the calculation, Almi Invest Östra Mellansverige would need to repay EU funds equivalent to around SEK 18.4 million, Almi Invest Småland & Öarna the equivalent of SEK 19.7 million, Almi Invest Västsverige Värmland SEK 48 million and Almi Invest Norra Mellansverige SEK 21.2 million. Almi Invest Östra Mellansverige has however, as of 30 June 2011, signed agreements to disburse a further SEK 4.15 million

42 Almi Invest Östra Mellansverige has however as of 30 June 2011 signed agreements to disburse a further SEK 4.15 million in EU funds (a total of SEK 8.3 million including regional co-financing). These funds have not yet been disbursed at the time of the mid-term evaluation but are

regarded as used by the venture capital fund, as it has pledged to disburse them. Counting the SEK 4.15 million in the projection the venture

capital fund is set to disburse just over SEK 71 milion over the whole project period, which means that the figure of SEK -18 milion in the table

has been amended to SEK -1.84 million. Wih reference to this, Almi Invest Östra Mellansverige in reality can be expected to disburse nearly the whole capital base over the project period. 43 Almi Invest Västsverge Värmland has however as of 30 June 2011 signed agreements to disburse a further SEK 1.25 million in EU funds (a total

of SEK 2.5 million including regional co-financing). These funds have not yet been disbursed at the time of the mid-term evaluation but are

regarded as used by the venture capital fund, as it has pledged to disburse them. Counting the SEK 1.25 million in the projection, the venture capital fund is set to disburse just over SEK 21 million over the whole project period, which is slightly more than SEK two million more than the

capital base for EU funds of SEK 19 million. 44 Almi Invest Norra Mellansverige has however as of 30 June 2011 signed agreements to disburse a further SEK 10.5 million in EU finds (a total

of SEK 21 million including regional co-financing). These funds have not yet been disbursed at the time of the mid-term evaluation but are regarded as used by the venture capital fund, as it has pledged to disburse them. Counting the SEK 10.5 million in the projection, the venture

capital fund should be able to disburse slightly more than SEK 60 milion in EU funds over the whole project period, which is almost SEK 16 million

more than the capital base for EU funds of SEK 44 million.


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in EU funds. These funds were therefore not disbursed at the time of the mid-term evaluation but are regarded as used for the venture capital fund, since they have pledged to disburse them. Counting the SEK 4.15 million in the projection, Almi Invest Östra Mellansverige is in theory expected to disburse the whole capital base during the project period. Taking this into account, the figure of SEK -18.4 million in the table above can be considered as plus or minus zero. The same thing applies to Almi Invest Västsverige Värmland, which states that agreements were signed to disburse a further SEK 1.25 million in EU funds. Since this amount is included in the projection, the venture capital fund is assessed to be able to manage to disburse just over SEK 21 million in EU funds during the project period, which is slightly more than SEK two million than the venture capital fund’s target. Almi Invest Norra Mellansverige states that there are agreements signed to disburse a further SEK 10.5 million in EU funds. As this amount is included in the projection, the venture capital fund is assessed as being able to manage to disburse almost SEK 60 million in EU funds, which is SEK 16 million more than its target. Given the agreements on disbursements that have been mentioned here, the results of the projection should accordingly be interpreted with care, this is because it only takes into account the funds that the venture capital funds’ office delivered as of 30 June 2011. With the method, seven venture capital funds are calculated as managing to invest EU funds during the project period, whereas this is not the case for four venture capital funds. According to the calculation Almi Invest Östra Mellansverige would need to repay the EU funds, equivalent to around 18.4 million SEK, ALMI Invest Smaland & Öarna equivalent to SEK 19.7 million, ALMI Invest Västsverige Värmland SEK 4.8 million and Almi Invest Norra Mellansverige SEK 21.2 million. Almi Invest Östra Mellansverige has a June 30, 2011 signed an agreement to disburse an additional SEK 4.15 million in EU funds. These funds were not disbursed at the time of mid-term evaluation, but are considered to be disbursed by the venture capital fund, as it has pledged to disburse them. Counting the SEK 4.15 million in the projection Almi Invest Östra Mellansverige is expected in theory to be able to manage to disburse the whole capital base during the project period. Taking this into account, the figure SEK -18.4 million in the above table is only SEK -1.84 million, which in reality can be considered as plus/minus zero. The same goes for ALMI Invest Västsverige Värmland, which states that contracts are signed to disburse an additional SEK 1.25 million in EU funds. As this amount is included in the projection the venture capital fund is calculated to be able to disburse more than SEK 21 million of EU funds during the project period, which is just over two million more than the venture capital fund's target. Almi Invest Norra Mellansverige states that contracts are signed to disburse an additional SEK 10.5 million in EU funding. As this amount is included in the projection, the venture capital fund is calculated to be able to disburse nearly 60 million in EU funding, which is 16 million more than its target. Given the agreement on disbursements that have been mentioned the results of the projection should thus be interpreted with caution, because they only take into account the funds that the venture capital funds has assigned as of 30 June 2011. It should also be pointed out that the method of using the observed, average monthly investment rate governing the venture capital funds’ final, accumulated disbursements is also a simplification of the reality in other respects. Different venture capital funds show different patterns of investment rate and this may very well vary upwards as well as downwards during different stages of the project period. The extrapolation is also less secure for the venture capital funds that have been in operation for a short time, because even relatively few investments can give big results. With regard to the venture capital funds which in the table above are not expected to manage to invest all of the EU funds during the project period, Ramböll has calculated the average monthly investment rate since the first investment and thereafter during the years that follow in order to arrive at a final estimate of the average investment rate per month that is required for the venture capital fund to achieve the target for invested EU funds. The results are presented in the table below.


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Table 6: Required future investment rate for four venture capital funds

Name of venture capital fund

Investment rate 2009 (SEK th)



Required future investment rate (SEK th) per month


0 1 200 674 1 413

Almi Invest Småland & Öarna

0* 359 248 790.5


0 407 146 393


0* 221 700 885

*Almi Invest Småland & Öarna and Norra Mellansverige implemented their first investment in December 2009. This has however been calculated for 2010, which gives a fairer picture of the monthly investment rate during the first year. Since the first investment, Almi Invest Östra Mellansverige in 2010 showed an investment rate per month which was nearly twice as high as what has been observed up to now during 2011. In order to be able to manage to invest the target required of SEK 73 million of EU funds, up to and including the third quarter of 2011, an investment rate per month equivalent to around SEK 1.4 million is required. This investment rate is higher than what was shown in 2010. Almi Invest Småland & Öarna, in order to be able to invest SEK 39 million in EU funds, a future investment rate that is more than twice as high as what was observed since the first investment in December 2009 is required. Almi Invest Värmland hereafter needs to invest on average approximately SEK 393 000 per month, which is lower than the average investment rate of 2010, but higher than that which was observed during the first six months of 2011 in order to achieve the target of SEK 19 million. Almi Invest Norra Mellansverige needs to increase the investment rate by approximately SEK 185 000 per month, compared with the investment rate which the venture capital fund had during 2011.

4.3.2 esults based on decided EU funds One way to sensitively test the results of the extrapolation of the venture capital funds’ disbursed EU funds is to do the equivalent for the venture capital funds’ investment decisions. The results are presented in the table below.


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Table 7: Forecast of decided EU funds

Name of venture capital fund

Investment rate for investment decision (SEK th)

Forecast of accumulated decisions on EU funds (SEK th)

EU funds target (SEK th)

Surplus (+) / Deficit (-) (SEK th)


1 668 93 400 73 000 +20 400

Almi Invest Stockholm 1 238 80 445 61 000 +19 445 Almi Invest Småland & Öarna

663 39 800 39 000 +800

Almi Invest Västsverige (V. Götaland & Halland)

668 44 075 33 000 +11 075


692 33 234 19 000 +14 234


1 056 63 333 44 000 +19 333

Partnerinvest i Norr AB 2 628 131 406 85 000 +46 406 Partnerskapsfonden Mittsverige (Saminvest)

1 129 74 531 42 000 +32 531


1 987 107 295 82 000 +25 295

SEF I 418 25 921 15 000 +10 921 SEF II-III 1 064 61 700 61 000 +700 When the projection is instead based on the venture capital investment funds’ investment decisions, it shows that all of the venture capital funds are assessed as being able to manage to invest EU funds in accordance with the targets set. However, there are grounds for problematizing and discussing the results in the table above. Whether the venture capital funds will be repayable to the European Commission is not determined by their investment decisions, but based on their actual disbursements to the portfolio companies. Therefore, strictly speaking, the results in the table above are only a projection of the decisions the venture capital funds can be expected to make, based on the decisions they have so far managed to make during the first two and half years of investment. The results therefore have no connection to whether these decisions have actually resulted in disbursements or not. However, given that the venture capital funds actually disburse the funds for which decisions are made, the results in the table above show that all venture capital funds should be able to manage to invest all of the EU funds during the project period.


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5.

EVELOPMENT AND ADDITIONALITY OF THE COMPANIES

The underlying idea behind the investment in the regional venture capital funds is to complement an imperfect market with access to risk capital. The purpose of the venture capital funds is thus to increase the availability of venture capital in the different regions, which in turn will contribute to new businesses and new job opportunities being established in the region where the investment is made. The purpose of this chapter concerning companies is in three parts. The first purpose is to describe the companies that received venture capital from the venture capital funds. What industry sector the companies operated within, how big they are and what stage of development they are in are reported here. Also described here in connection with the description of the companies is the purpose for which the companies have sought venture capital and also what risks the investors perceive in the company. The second purpose is to discuss how the investments have contributed to the fund initiative’s achievement of objectives. This shows how the companies have used the additional capital, how the injection of capital has contributed to the development of the companies and finally how the investment has contributed to increasing knowledge about external equity capital and enhanced attitudes towards them among companies and in accordance with the investment’s programme logic.45 The third purpose is to analyse whether the investment contributed to creating additionality in the company i.e. added value. The issue here is to examine the extent to which the venture capital funds contribute to improving the supply of capital for companies. Sources used in the chapter on the development of the company and additionality are the individual venture capital funds’ reporting, a questionnaire survey of companies and interviews. The survey was conducted among companies that received funding as of April 2011 and which the venture capital funds submitted contact details for. As a complement to the survey, more in-depth interviews were conducted with 20 selected companies (based on industry and region).

5.1 escription of the companies The next section contains a description of the companies' industry sector affiliation, the stage at which the investment was carried out and the size of the companies. Furthermore, a report on why the company sought venture capital and the risk that the private investors associate with the companies. Definitions of company size, company stages and industry sector classifications can be found in Appendix 2.

5.1.1 ompanies divided into industry sector, stage and size The table "Investments in companies divided into industry sector, stage and size" reports on the types of companies into which the investments were made up to and including June 2011. The accumulated compilation is at the top of the table and after that the investments are divided by industry sector.

As shown in the table, most investments have occurred in companies operating in IT/ Telecommunications (39 companies) and Industry/Transport (23 companies). The sectors that received the least number of investments are Energy/Environmental Technology, Trade and Life Science. In terms of company size, there is an overwhelming majority of companies (75 out of the total of 98 reporting) with fewer than nine employees who received financing. A comparison of companies in various industries with respect to their stage of development and size shows that these are relatively similar. The only industry that stands out is Industry/Transport where companies are on average larger and more mature

45 The investment’s programme logic is described in Appendix 1.


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than companies in other industries.

Table 8. Investments in companies divided into industry sector , stage and size in June 2011

Industry Phase Size

ITC 39 Start-up 25 Micro 75 LS 13 Early stage 35 Small 17

IND 23 Early expansion 36 Medium 6

TRADE 13 Mature 8 Large 0

E/ET 11

OTH 5

Start-up 10 Micro 29

Early stage 17 Small 8

Early expansion 12 Medium 1

ITC

Mature 0 Large 0

Start-up 2 Micro 8



LS

Mature 0 Large 0

Start-up 4 Micro 13



IND

Mature 6 Large 0

Start-up 2 Micro 9



TRADE

Mature 1 Large 0

Start-up 3 Micro 9



E/ET

Mature 0 Large 0

Start-up 4 Micro 4



OTHER

Mature 1 Large 0

5.1.2

easons behind the choice of external equity capital financing In the questionnaire survey the companies were asked why they chose to only search for external equity capital financing instead of another type of financing. It emerged that 25 out of 50 companies who responded to the questionnaire had chosen to search for external equity capital first. Of the remaining companies who investigated other alternatives, eleven answered that no other source of financing was available. Eight of the respondents were of the opinion that no other sources of financing could offer a sufficiently large amount and a further five respondents said that other forms of financing would involve worse terms. The two companies that chose the ”other reason” option stated that the reason for their choice of external equity capital financing was to obtain access to the investment fund’s expertise and


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because the investment fund provided increased outward confidence because the market regarded the venture capital fund as a serious investment partner.

Figure 14: Reasons behind choice of external equity capital financing

N=50 5.1.3

evel and type of risk in the companies A survey of 50 private co-investors was also conducted in parallel with the survey of companies. The survey had a response rate of 62 percent, a total of 31 respondents. When asked what overall risk did the co-investors associate with the investment, 29 out of 31 respondents answered that the investment was associated with medium or high risk. This can be linked to the fact that most companies that venture capital funds invest in are in the early stage, where there is considerable uncertainty and cash flow is often negative, as shown in the table above. With regard to the risks that the private co-investors are experiencing with the investments, it was revealed in the questionnaire that market development and demand for the product were considered to be by far the greatest risks. One co-investor wrote in his response that ”the company’s key people have an over-confidence in their own product and the value of the target group”. Another respondent thought that ”the market is difficult to assess because the company’s products are so innovative”. To sum up, it was found that the level of risk-taking is medium-high to high and this is primarily linked to the fact that investments are carried out in the early stage when uncertainty concerning market development is great. That the key personnel’s competence and abilities are seen as a risk can be linked to the fact that many of the companies are in industries that place high demands on product development and accordingly company expertise. As regards what venture capital funds the co-investors have gone into the investment with, it is not possible to ascertain any difference between the co-investors’ assessment of risk.


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N=31

5.2

chievement of objectives The following section presents how companies have used the investments that they received from the investment fund, how the investment has affected the development of the business and to what extent the investment in the regional venture capital funds influenced the knowledge of and attitude towards equity capital. Also, the questionnaire to companies serves as the basis for the analysis here. In some cases the interviews with companies have been considered in the analysis too. The purpose of this section is to report on whether the investments contributed to the fund’s achievement of its objectives. The objectives set are based on the common programme logic (which is described in Appendix 1) for the regional venture capital funds. The aspects considered in this section are:

• Whether the investment contributes to growth in the company • Whether the investment contributes to creating new jobs • The knowledge of venture capital is increasing among actors (in this case the companies)

5.2.1

se of the additional capital The company mainly uses the additional capital for market development, product development and obtaining expertise. A small number of companies use the additional capital for other items. One conclusion can thus be that the company uses the injection of capital for growth-generating items. An account of how the companies have used the investments follows below:

• Market development: Market development is by far the main purpose for which companies use the invested funds. In the questionnaire 42 out of a total of 51 respondents stated that they largely used the additional capital for market development.

Figure 15: Risks associated with investment

Figure 16: Overall risk of investment


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• Market development is something that helps the company to grow and create new job opportunities to the greatest extent. Market development thus contributes to a very great extent to the venture capital funds’ achievement of objectives.

• Product development: The additional capital contributes to product development to the next greatest extent. Here 30 out of a total of 51 respondents stated that they use the additional capital to a great or very great extent for product development. One reason that such a large proportion of companies state product development could be that many companies are so young. Another reason may also be that around 60 per cent of the investments that are implemented by the venture capital funds are ITC, Life Science and Cleantech industry sectors, industries in which all three place a great emphasis on innovative products.

• Product development contributes to the development of the companies, but it may be the case that additional capital will need to be brought in at a later stage for marketing of the developed product. Production development can be assumed to contribute to the achievement of objectives in terms of growth effects in the company.

• Acquisition of expertise: 24 companies have stated that they used the additional capital to a large or very large extent to acquire expertise. One explanation for this may be that the company wants to grow and feels that they themselves cannot manage to take the business to the next level.

• Solid expertise is a prerequisite for growth and positive development of companies. By acquiring expertise one also creates new jobs, something that in turn contributes to the venture capital funds’ achievement of objectives. In terms of the jobs created which have been reported as a total by the venture capital funds, these amounted to 238 (107 for men, 24 for women and 107 without information). It is difficult at present to determine how many of these took place as a result of the investment, but it can be assumed that the investments in all cases have contributed to the creation of these new jobs.

• Operating costs: Ten companies stated that to a great or very great extent they use the additional capital for operating costs. An underlying explanation for the additional capital being used for operating costs may be that these rise when a company expands.

• In order to assess whether operating costs contribute to the achievement of objectives there must be knowledge about whether these arose as a result of expansion or not. Since this is not clear from the investigation it is difficult to draw any conclusions.

• Investments in machinery, premises, vehicles and suchlike: Seven companies stated that they used the additional capital to a great or very great extent for investing in machinery, premises, vehicles or suchlike. Since it is not exactly clear what the additional capital was used for it is not possible to make any connections to the companies’ industry distribution, size or stage.

• Investments in a new machinery can solve the problem of capacity and be something that generates growth. It is difficult to know exactly how the company has used its additional capital and it is therefore also difficult to draw any conclusions.


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Figure 17: Areas of application of capital investment

N=51

If the respondents are divided per fund certain differences arise. Figure 18: To what extent will the company use the capital investment for different purposes (average divided per fund) shows how the respondents have answered on average to the different items of expenditure. The venture capital funds Partner Invest and Mittkapital have been excluded because they have too few respondents. The ”Other” item of expenditure has been excluded in the analysis for the same reason. Within all companies the items of expenditure appear in the same order i.e. market development/business development is the most important item of expenditure followed by product development and so on. There are however a few differences between the venture capital funds that are worth noting. It can be concluded that companies within Saminvest and SEF invested in market development/business development to a less extent than the companies that Almi Invest has invested in. One explanation for this can be that Saminvest and SEF invested in companies that are on average younger than the companies that Almi Invest invested in. The biggest difference was however found in the ”product development” item of expenditure where the companies that received financing from SEF I-III stand out, with an average value of 3.6 of 4. One explanation for this could be that the investments that were implemented by SEF I-III took place in companies that are on average younger than among other venture capital funds. Companies in the early stages of development can be assumed to be in greater need of product development than companies in later stages. This may affect the venture capital funds’ ability to achieve their objectives in southern Sweden, since it will take a longer time for these companies to grow and generate a positive return to the venture capital fund. As regards the acquisition of expertise, it is clear that companies that received additional capital from SEF I-III and Saminvest put a large proportion of capital investment into the recruitment of new staff. One explanation for these differences may be that the companies that received capital investment from SEF I-III and Saminvest are on average younger than the companies that received additional capital from Almi Invest.


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Figure 18: To what extent will the company use the capital investment for different purposes (average divided per fund)

N=41

5.2.2

elationship with investors Companies saw the investor’s involvement as an opportunity to help the company to expand and the investors can provide the companies with increased opportunities for further external financing. This is something that business leaders believe will in the long term affect their profitability. In terms of how companies believed that the investors had affected and will affect the company, it is clear that the single largest item is more rapid expansion followed by increased opportunities for external financing. In terms of how the investors have affected the companies up until today, 37 of the 44 companies considered that the investors had contributed to more rapid expansion to a great or very great extent. When linked back to the strategic objectives for the venture capital funds, it can be concluded that the investment had made growth possible or potential growth possible for nearly 85 per cent of companies who participated in the survey. 29 of the companies also said that the investment has increased their chances of obtaining external financing to a great or very great extent. Investors also bring about improved competence among businesses. It further emerges in the interviews that it is mainly companies that have been in contact with Almi Invest who highlighted expertise and advice as a perceived value in the relationship with the investor. SamInvest and SEF I-III are also considered to have a good understanding of the companies and their various business models and some industry knowledge, according to the companies. SamInvest was perceived by a couple of companies as being somewhat passive (which is a deliberate choice made by the venture capital fund), otherwise the venture capitals’ involvement was found to be high. Companies in which venture capital funds sit on the board found that they have contributed knowledge in the form of expertise in business development, networking and, to some extent industry knowledge.


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Figure 19: Additional impact of the additional capital

N=44

5.2.3 dditional external equity capital In terms of the companies’ development after they have received capital from the venture capital funds, it can be concluded that 50 per cent of the companies that participated in the questionnaire survey have received additional external equity capital after the capital from the investment fund was disbursed. Sixteen of these 24 have only brought in equity capital in combination with loan capital. One important observation is that 15 companies have succeeded in attracting capital from new external owners after they have received investment from the venture capital funds. This indicates that companies that were financed by the venture capital funds are/will be attractive to new external investors.

Table 9: Has the company brought in further external capital since financing from the investment fund has been received?

Answer options Respondents Yes, in the form of loan capital 10 Yes, in the form of equity capital from existing owners 19 Yes, in the form of equity capital from new owners 15 No 22 Total number of answers 66

N=48 (based on multiple choice questions the number of answers is 66)

5.2.4 he companies’ knowledge and attitude towards external equity capital Development of expertise in external equity capital is an additional objective within the framework of the initiative. The questionnaire answers show that 27 out of 44 respondents had a change in knowledge i.e. increased knowledge of external equity capital, since they made contact with the venture capital fund. In


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the questionnaire answers it emerged that many companies have increased their knowledge about the opportunities and processes concerning external equity capital. One respondents states: ”In general, every contact with the venture capital company provides a great deal of learning. Almi Invest has been very transparent in how they see their investment and how their investment procedures look” As mentioned in the previous section, the venture capital funds’ involvement and expertise contributes to the company’s attitude towards venture capital. One respondent stated that the experience that the investment fund has brought to the company has also been valuable: ”I have realised the importance of having good financiers involved in the company who can not just bring in capital but also knowledge and experiences at different levels” It is still the case that companies are largely positive. The aggregate of 14 out of 48 respondents stated that they have had a more positive attitude to external equity capital since they came into contact with the venture capital fund. A couple of companies however expressed that they found that the process was bureaucratic and slow. Another company felt that the gap between official and entrepreneur is far too large. Furthermore, one company expressed that the venture capital fund’s representatives do not have the skills required to implement a successful partnership. But the negative comments are relatively few in this context.

5.3 dditionality in companies A further issue for discussion is whether the initiative has complemented other initiatives and in the sense that it has generated added value for the company. As noted in Section 4.1, 11 of the 50 respondents chose to proceed with the investment fund because no other source of investment was available. A further twelve respondents said that other investment sources were certainly available but offered less favourable terms. This gives some indication that the investment fulfilled a market need. In the interviews with the companies, it appears that about five out of 20 entrepreneurs say that they have not previously had any experience of external venture capital financing at this level and that it has primarily been private individuals on a smaller scale and in some cases Norrlandsfonden or Länsförsäkringar. One company has only made use of project funds earlier. Otherwise, the previous experience of external venture capital financing has largely centred on business angels. In the survey question on whether the company had sought financing for similar purposes, it appears that three of the respondents had sought but did not receive financing. Another six companies said that they did not get financing to the extent they wished. 26 companies said that they had received financing previously for the same purpose, hence the majority sought equity capital from other sources and some sought loans. 15 respondents had not previously sought financing for the same purpose.

5.4 ummary and discussion

• The majority of companies that received financing from the venture capital funds are micro or small enterprises in the early stages of development (from start-up to early expansion). A large number of industries are represented among the companies, but companies within IT/Telecommunications and Industry/Transport have been able to attract the most investments. The risk level in companies appears to be high and the greatest uncertainty is about the market and the development of future demand.

• Over half of the companies that received additional capital from the venture capital funds had external equity capital as their first choice. Furthermore, 22 per cent considered that external equity financing was the only investment source available to them.


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• Companies mainly use the capital for market development and product development as well as

competence development, which is the area that is most associated with future growth.

• The companies’ relationships with the venture capital funds are generally good and the investors are believed to contribute to more rapid expansion, increased opportunities for external financing and increased profitability.

• Knowledge of venture capital (processes) has increased and attitude is somewhat more positive after having received the additional capital from the investment fund.

• More than a quarter of companies who previously sought financing for the same or similar purposes indicate that they did not not obtain any at all or not to the desired extent.

In the analysis of the companies that received financing from the venture capital funds, it has emerged that the majority of companies are small businesses in the early stages of development. Whether this was a result of the venture capital funds’ work or market is not clear in the survey. If the point is that it is more difficult for small companies than for mature companies to receive venture capital, it is clear that this is something which contributes to the investment’s achievement of objectives i.e. to act as a complementary actor in the market for venture capital. Something this analysis indicated was that 22 per cent of companies in the survey thought that no other financing was available and a further 16 per cent that no other solution could satisfy the companies’ capital needs. Furthermore, the companies to a large extent used the additional capital for growth-promoting activities. Since this in the long term creates jobs and economic growth in the region that the companies are active in, it can assumed that this contributes to the investment’s achievement of objectives. Furthermore, it also contributes to the venture capital funds ability to be revolving. It is possible to see a difference between different funds here, where the companies that received investment from SEF I-II-III to a greater extent use the additional capital for product development. This is something that indicates that the companies are in the early stages and that the time up to divestment is longer than for companies in later stages. During the course of the evaluation it has emerged that the companies were generally very satisfied with the relationship with the various venture capital funds and that the venture capital funds were contributing positively to the companies’ growth. The cooperation with the venture capital funds has contributed to increasing knowledge about venture capital, something which in turn also contributes to the investment’s achievement of objectives. In terms of the additionality which the investment created for the company, it is clear that many companies have gained access to financing for growth-generating measures that were not available to them before the initiative began. With the reservation that the number of respondents in the survey is relatively small, the results in this chapter suggest that the initiative turned out well among the companies and that the achievement of objectives was good.


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6. RIVATE CO-INVESTORS

This chapter is a description and review of the private co-investors that the regional venture capital funds cooperate with in their investments. The purpose of the chapter is threefold. First, it aims to provide a description of the private co-investors, what characterises them in terms of investment behaviour and their expectations of and motive for investing in conjunction with the public venture capital fund. The second aim is to discuss the private investors’ role in the fund initiative’s achievement of objectives, which is linked to the programme logic. As regards the private co-investments, it partly deals with how they themselves developed as a result of the investment. The third and last aim of the chapter is to report on the investment’s additionality, which in this case refers to whether the investment has attracted more new investors in the market and led to an increased willingness to invest among existing investors. The central question here is whether the investment contributed to more private investments being implemented, or if it has instead led to a reduction of private investments, that is, they were displaced.

6.1 escription of private co-investors Within the framework of the mid-term evaluation, Ramböll distributed a questionnaire to private co-investors, of which 31 have answered the questionnaire. Of these 31 investors, 61 per cent, implemented investments together with Almi Invest, 23 per cent with Partnerskapsfonden Mittsverige (Saminvest) and 16 per cent with Sydsvensk Entreprenörsfond. Private co-investors that implemented their investment together with Partnerinvest i Norr or Mittkapital Jämtland/Västernorrland (Sixth) are not included. Of those who answered the questionnaire, ten co-investors were selected for an in-depth interview. The report below is based on what emerged in the questionnaires and in the interviews.

6.1.1 ype of investor, investment size and expected return The majority of the co-investors who answered the questionnaire, 58 per cent, were business angels and slightly more than a third, 36 per cent, represented a venture capital or investment company. The private co-investors’ contact with the venture capital fund has come about in a number of different ways: via private contacts like friends and colleagues, through the company contacting the co-investor and asking if they would be interested in investing in the company together with the venture capital fund, or through the investors being sought by the venture capital funds. Several also mention that they had an established a relationship with the implementer of the fund project as early as when the fund investment was initiated. The average total additional capital the private co-investors provided the financed companies amounted to SEK 2.7 million but the spread is large, from SEK 500 000 up to SEK 7.5 million. In connection with their investment, the private co-investors expect on average an annual return of 20 per cent, but there is a large spread in the group. Slightly more than 40 per cent of the respondents expect an average of 10-19 per cent and almost 20 per cent expect an average annual return of 40 per cent and upwards. Only 13 per cent of co-investors expect an annual average of under ten per cent. This is illustrated below in Figure 20: The private co-investors’ expectations of a return


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Figure 20: The private co-investors’ expectations of a return

N=31

The co-investors’ expectations of a return can be compared with the average of the Swedish stock exchange during the last hundred years that has been ten per cent per year46, which is probably a sign that the investors expect a relatively high risk associated with these instruments. At the same time, the expectations of a return lies slightly under the market return requirement for investments in unlisted companies in the early stage, which according to industry practice lies at 25-35% for business angels and 30-50% for venture capital companies.47

6.1.2 ncentive to co-invest with venture capital funds Co-investors gave a number of different reasons for why they have entered into a cooperation with the venture capital funds. The reasons the co-investors emphasised as particularly important were increased financial strength and endurance, shared risk, the opportunity to take part in the venture capital funds’ established procedures for investment appraisal and agreements, as well as the venture capital funds’ expertise and professionalism. These are described below.

Table 10. Private co-investor’s incentive to invest together with venture capital fund

Incentive Explanation Increased financial strength and endurance

By investing in conjunction with the venture capital funds, the co-investors can ensure that the companies have the capital needed and that there will be the "financial muscle" to implement more financing rounds as needed. Security of future financing provides companies with the opportunity to invest long term, leading to expansion and growth.

Shared risk If more than one – of independent parties – look at the same project and views coincide, the chances a good decision increases, decisions about making an investment as well as refraining from participation. Reducing risk is an important reason for many investors, partly because they can make an investment without having to bear the full investment amount (limit the potential loss) and partly through better investment decisions and monitoring. Where

46 Länsförsäkringar (2010) "Återhämtning efter börsfall", http://www.lansforsakringar.se/privat/bank/aktuellt/nyheter/arkiv_2010/Sidor/aterhamtning-efter-borsfall.aspx 47 DeGennaro & Dwyer (2009) "Expected Returns to Angel Investors"; Wiltbank (2009) "Siding with the Angels: Business angel investing -

promising outcomes and effective strategies".


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more than one – independent party – are looking at the same project and observations coincide, this increases the possibility of a good decision, both the decision to make the investment or to refrain from participation.

Established procedures for investments

Many of the co-investors attracted to the venture capital funds have good established procedures for investment appraisal, agreements that support companies that take place after investments. The co-investors particularly emphasise the value of the analysis of the company, product and board that the venture capital funds conducts. Ready-made templates for contracts also reduce the co-investors’ costs and need for legal support. In this way the investment processes are more rapid.

Expertise/professionalism in relation to the company

The co-investors and companies can derive benefit from the venture capital funds’ previous experience of these types of investments, both within the framework of this initiative and also indirectly through the fact that the venture capital funds’ MDs and Investment Managers often have considerable previous experience.

N=25 Other aspects that have been highlighted were the venture capital funds’ professional manner in relation to their partners, the venture capital industry "healthy" values, local knowledge and presence as well as extensive networks. In the investments in which the venture capital fund acts as a passive party (i.e. according to the model which SamInvest uses), the co-investments saw a value in that they got a heavier mandate in the company while they only had to bear some of the capital. The added values that the venture capital funds created for the private co-investors is in line with the objectives set out in the project fund programme logic (see Appendix 1). These added values are about the fund project contributing to an increased supply of private and public venture capital in the region and increased competence of actors with venture capital, such as private investors and bringing more active actors within private investments in the respective region. It is important to note that some of the private co-investors have become the venture capital funds' partners in a passive way i.e. by the company having conducted an independent dialogue with the various investors. To the extent that such co-investors responded to the questionnaire and interview questions, they could not point out any particular incentive to invest together with these venture capital funds, but referred instead to the overall value of investing with another party.

6.2 he private co-investors and the investment’s achievement of objectives According to the programme logic that has been developed for the investment, it is expected that the private co-investors will contribute to the development of the portfolio company through active involvement. The programme logic also stipulates that the private co-investors that participate in the investment should develop their own knowledge, skills and ability to implement investments, which in the long term will contribute to the strengthening of the venture capital market in Sweden. Whether it is already now possible to see any signs that such a development will occur is discussed below.


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6.2.1 rivate co-investors’ contribution to the company’s development As for the private co-investors’ own expectations of being able to contribute to the financed company’s development through the injection of capital as well as through other assistance, these are high or very high among an overwhelming majority of the private co-investors. Specifically with regard to the ability to contribute things other than money, the co-investors have high expectations of contributing in the form of being a sounding board for ideas, engaging in the strategic management of the company, assisting the company with contacts and networks and offer support in matters relating to finance. However, the co-investors attach less significance to the provision of specific skills within market and product and even to help with the recruitment of key people in the company. The private co-investors stated at the same time that there is a division of responsibility between the investment fund and the co-investor, so that all parties do not need to be involved in all questions but together they can ensure that the company can participate in required competence and resources. They also referred to their networks and that these were actively used to provide the companies with expertise. The areas in which the co-investors are expected to contribute most are in line with the needs and expectations which the companies have of the co-investors’ involvement. The main differences are that the companies seemed to highlight the co-investors’ support in matters of the company’s financing as the single most important contribution, while acting as a sounding board for ideas and involvement in strategic management of the company are seen as slightly less important by the company.

Figure 21. Co-investors’ expected contribution to company’s development and company’s expectations (1=no contribution at all; 4=very high contribution)

Most (80 per cent) of the private co-investors who responded to the questionnaire also indicated that they were sitting on the financed company's board and several of those that do not sit on the board have been involved and appointed one or more external members. The companies that participated in the interviews gave a picture of the private co-investors showing a high level of commitment and believed that the cooperation in general was working well. Several financed companies and co-investors pointed out that the capital injection is the most important contribution that both the public venture capital fund and private co-investor provide the company.


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6.2.2 o-investors’ development and exchange of cooperation The private co-investors who participated in the evaluation generally felt that they had obtained great value through their cooperation with the venture capital funds. In addition to the opportunity to scale up their investments, as previously highlighted as one of the main reasons why the co-investments choose to co-invest with the venture capital funds, a large part of the co-investors saw that their knowledge, skills and ability to implement investments had increased. Of those who answered the questionnaire, 71% indicated that their knowledge and skills in the implementation of investments had increased and just over two thirds indicated that they had a wider network. About half also stated that they had increased their knowledge about investment opportunities in the region and/or had a greater interest in investing in the region. This is illustrated in the table below.

Table 11. The venture capital fund’s contribution to the private co-investments’ development in different areas (1=no contribution at all; 4=very high contribution)

Area Proportion that answers fairly large or very large contribution (%)

Average value

Knowledge and skills in the implementation of investments

71 % 2.74

Obtained broader network 68 % 2.72 Financial opportunities to invest in the region

61 % 2.85

Knowledge about investment opportunities in the region

52 % 2.55

Interest in investing in the region 50 % 2.57 N=31

The figures in the table above appear to be a good rating of the venture capital funds’ ability to mobilise private capital and, through this increase, the total capital stock and to strengthen the venture capital market in Sweden. This is also discussed in the next section. In interviews with private co-investors it appears that many believe that the venture capital funds have an important role to play in terms of the development and professionalisation of the venture capital market in Sweden. The venture capital funds are in general seen as complementary to the market, by which is meant that they are in and invest in stages where the private sector cannot bear the whole supply of capital. Some also believe that the industry has largely benefited from the practice of appraisal and implementation of investments being established and that knowledge of this is spread among other investors and among companies. When asked whether the private co-investors experienced any problems or disadvantages with investing in conjunction with the venture capital fund the majority answered no. A few problems were however highlighted. One was that the venture capital funds’ international network is relatively small. A larger international network would help the venture capital funds support companies in a better way in terms of international expansion. Another potential problem that is mentioned is that the venture capital funds focus on volume, that is to say, the venture capital funds will invest a certain volume of funds during a specified period, while the co-investor is more interested in what return the investment can generate. The co-investor is of the opinion that the fund investment has the Swedish Agency for Economic and Regional Growth as their primary interest, while its co-investor must report to its owner, who has the focus on the return. A third potential problem which was mentioned is that the venture capital funds and the private co-investors can have different time horizons. A few co-investors perceive a certain lack of clarity concerning the venture capital funds’ long-term behaviour and expect the venture capital funds, due to external pressure, having a limited capital base and return requirement, will seek opportunities for relatively quick exits, which is not always compatible with the private co-investor's objectives. Finally, a


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few co-investors stated that the venture capital funds’ investment process was found to be lengthy and bureaucratic and that there is some concern about making mistakes, which is not compatible with this type of activity. It may be added that this primarily relates to investments that are implemented early on in the lifetime of the fund project.

6.3 dditionality – does the investment contribute to an increase in access to capital and willingness to invest/investment activity? Additionality is about whether the investment’s results and outcomes would have occurred even if it had not existed. Additionality is thus a counterfactual notion, which is applied to private investments about whether they would have proceeded even without the investment. If the investment in public venture capital funds with the requirement for private co-investment has led to an increased willingness to invest and investment activity among private co-investors, the investment has contributed additionality for the private actors. If the private co-investments would have been implemented even without the investment, no additionality occurred for the private co-investors (but in such cases additionality can still have resulted in the financed company, owing to the public venture capital fund's investment). If the investment however led to private investments declining, that is displaced, additionality can be said to be negative. The question about whether the investment contributed additionality with regard to private co-investments is methodologically problematic to answer. But there are a few results in this chapter which give an indication of the conditions for the investment’s additionality. As shown in Section 1.2.2, 61 percent of the co-investors who answered the questionnaire considered that the investment to a large or very large extent contributed to the development of economic opportunities for investing in the region. As regards the benefits of investing in conjunction with the public venture capital fund, several private co-investors also mention that the investment creates a "leverage effect on private capital," which is in line with the overall objective of contributing to the positive development of the market. In order to further try to capture how the investment contributes with additionality, the co-investors were asked in the questionnaire to assess what would have happened with their investment if it was not con-financed with the venture capital fund. The results are presented in the figure below.

Figure 22. Private co-investors’ assessment of what would have happened with the investment without public co-financing


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N=31 45 per cent of respondents said they would probably not have implemented the investment at all and almost ten percent said they probably would have implemented a smaller investment. The results suggest therefore that the initiative has led to an increased volume of investment for the majority of the respondents. 42 percent considered that they would have invested about the same amount, but in the latter case without the venture capital fund's co-investment. For these respondents the initiative has not involved any additionality. Only three per cent considered that they would have invested the full amount, including that which is currently co-invested from the venture capital fund. However, it is difficult to determine whether the venture capital fund actually displaced some of the private investment among these three per cent. With the reservation that the number of respondents in the survey is relatively few, the results suggest that the conditions for the investment to contribute to an increased willingness to invest and investment activity among the private co-investors are relatively good. It would however be desirable to obtain considerably more private co-investors’ assessment of the question.

6.4 ummary and discussion

• A lot of the private co-investors seem to be active and engaged partners in investments who, in addition to capital, also work to support the company in strategic work, acting to support in matters concerning financing and provide expertise through their contacts and networks.

• The private co-investors perceive a number of values and benefits of investing together with the

venture capital fund. Examples of this are that the venture capital fund supplies expertise and professionalism to the company, provides procedures for investments, creates a leverage effect on the investment and shared risk for the private capital. These values are in line with the objectives that are set out in the fund project’s programme logic

• The co-investors stated that their knowledge and skills in the implementation of investments

increased and that they had a broader network. Many also found that they had increased their knowledge and investment opportunities in the region and/or had a greater interest in investing in the region. This may be considered as a good rating for the initiative and is in line with the venture capital funds’ objective to contribute to the development of their co-investment partners.

• In general, there appears to be great confidence in the venture capital funds and the majority of

the co-investors felt that the cooperation was smooth and transparent. In a few cases the process was found to be unnecessarily long and bureaucratic, specifically with regard to early investments. Some co-investors felt unsure about the objectives and time horizons of the venture capital fund and the co-investors coinciding.

The above suggests that the venture capital funds’ long-term approach, professional manner, good procedures and processes are central to building confidence among private co-investors and ensures that there are co-investment partners for the investment. This also places demands on the others involved, including the Swedish Agency for Economic and Regional Growth and regional actors, to promote the venture capital funds’ activities and safeguard their good reputation. This chapter has also discussed the investment’s additionality and the risk that the public funds can hinder the development of an active venture capital market by investing in companies that have received investments even without public involvement. In the evaluation there is evidence to suggest that the public venture capital funds may result in the private venture capital market developing more slowly or


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the amount of private venture capital reducing.48 Crowding-out effects like these mean that private venture capital gets less and is replaced with public capital.49 There can also be a risk that public venture capital funds succeed in financing good projects by not requiring as high a return as private venture capital funds and thereby squeeze out private investors who may settle for inferior objects.50 There are also researchers who looks favourably upon public venture capital investments. If a public investment is designed correctly this type of venture capital can be effective in developing the private venture capital market and thereby contribute to economic growth. From the point of view of the public funds, contributing to this in an effective manner is however not as simple as just supplying capital to the market. Many researchers particularly emphasise that the investments must be long-term and focus on the importance of good knowledge and skills among fund managers, the significance of incentives to stimulate private investments and demand for venture capital. In order to work the public venture capital must act on terms that are similar to the expectations of the private sector, both in terms of investment criteria and expectations of a return. This is a considerable challenge, that capital alone will not contribute to economic growth where the business development knowledge exists in well managed venture capital funds.51 If the public funds can implement venture capital investment in this way a leverage effect is created for private capital and thereby contributes to a positive development of the market and the development of business. With the reservation that the number of respondents in the investigation are relatively few, the results in the chapter indicate that the conditions for the investment to contribute to an increased willingness to invest and investment activity among the private co-investors is good.

48 Leleux, B., Surlemont, B. och Wacquier, H. (1998) i Reynolds, P.D., Bygrave, W.D., Carter, N.M., Manigart, S., Mason, C.M., Meyer, D.G., Shaver, K.G. (eds.), Frontiers of entrepreneurship research, Babson College, State versus private capital: cross-spawning or crowding-out? A Pan-

European Analysis. 49 Jyoti, K. och Sandler, T. (2000) Partners in giving: the crowding-in effects of UK government grants, European Economic Review, 44. 50 Manigart, S., De Waele, K., Wright, M., Robbie, K., Desbrières, P, Sapienza, H. och Beekman, A. (2001) Determinants of required returns in venture capital investments : A five country study, Journal of Business Venturing, 17(4). 51 Mason, C. M. och Harrison, R. T. (2002) Is it worth it? The rates of return from informal venture capital investments, Journal of Business

Venturing, 17(3).


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7. EGIONAL COOPERATION

The twelve regional venture capital funds are established in the eight programme areas with regional Structure Fund partnerships. The programme areas represent the regions of Upper-North Sweden, Mid-North Sweden, North Mid-Sweden, East-Mid Sweden, West Sweden, Stockholm, Småland and the Islands and Skåne-Blekinge. This section aims to explain how the regional co-financiers within each programme area cooperate with the respective fund and highlights what the regional actors can learn from each other in order to increase the opportunities of the venture capital fund to act and contribute to the creation of a long-term and sustainable regional arena for venture capital. The regional co-financiers include the Regional Councils, County Administrative Boards, Almi, Norrlandsfonden and Innovationsbron, Sixth AP Fund and the Swedish Agency for Economic and Regional Growth. The report is based on an analysis of about 20 interviews with regional co-investors and representatives of investment committees. The data is therefore limited, which means that the report below can only provide an indication of how the cooperation is functioning.

Table 12: Venture capital funds and co-financiers in the regions.

Region Fund Co-financier Upper-North Sweden

Partner Invest Norr

County Administrative Board, Västerbotten, Norrbotten Västerbotten Region Almi Företagspartner Nord AB Norrlandsfonden

Mid-North Sweden Saminvest Mittkapital

County Administrative Board, Jämtland County County Administrative Board, Västernorrland County Almi Företagspartner Sixth AP Fund

North Mid-Sweden Almi Invest Dalarna Region Gävleborg Region

East-Mid Sweden Almi Invest Örebro Regional Council County Administrative Board, Örebro County County Administrative Board, Södermanland County Östsam Regional Council County Administrative Board, Västmanlands County Uppsala Regional Council The Swedish Agency for Economic and Regional Growth

West Sweden

Almi Invest Almi Företagspartner Väst AB Almi Företagspartner Halland AB Almi Företagspartner Värmland Region The Swedish Agency for Economic and Regional Growth

Stockholm

Almi Invest Almi Företagspartner AB The Swedish Agency for Economic and Regional Growth

Småland and the Islands

Almi Invest Södra Småland Regional Council Municipality of Gotland Kalmar Regional Council Jönköping Region The Swedish Agency for Economic and Regional Growth

South Sweden

SEF I, II, III Innovationsbron Skåne Region


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Blekinge Region The Swedish Agency for Economic and Regional Growth

7.1

orms and degrees of cooperation What the co-financiers are and the contact and cooperation between them and between the venture capital funds take different forms in the eight regions but also within different parts of the region. Below is a description of the degree of contact and cooperation between the actors, where reporting and information dissemination are the most common forms, while the coordination of the financing areas and close cooperation in the financing process is less frequent.

Figure 22: Degree and form of cooperation

ReportingInformation

disseminationCoordination of co-

financing areasCoordination of co-financing processes

Feedback All co-financiers take part in feedback in the form of financial reports from the venture capital fund’s activities and investments. In most regions feedback takes place at the board meetings where the results from the venture capital fund’s investments are conveyed. It emerged from the representatives of the County Administration Boards and Regional Councils that contact with the venture capital funds primarily takes place at these times of reporting. It is mainly the County Administration Boards that seem to have limited contact with the venture capital funds, which in part could be due to the fact that they often go in with a relatively low capital investment. In Norrbotten, the County Administration Board has, as regional co-financiers for example, chosen to allow the venture capital fund to ”take care of itself” and the County Administration Board’s role is more of a project financier that makes disbursements and synchronises the venture capital fund’s activities with other activities and financing. The danger here is that the regional influence becomes limited and the ability to protect regional interests such as increased employment and horizontal criteria lessens. At the time of the interviews (January 2011) most of the regional co-investors were not yet aware about the venture capital funds’ investments. Generally speaking, there is some dissatisfaction among interviewees from the County Administrative Boards and Regional Councils since the venture capital funds' feedback only took place to a limited extent. Information and knowledge dissemination Another form of contact between the venture capital fund and the co-financier is information and knowledge dissemination about the venture capital fund and its activities in the region. It emerges from the interviews that, even where the venture capital funds report to the regional actors, information is not passed on. It is Ramboll's view that the regional co-financiers play an important role in disseminating knowledge and information about the venture capital fund and venture capital in the region. By disseminating information about executed investments and success stories, there are also opportunities to influence the attitude to venture capital in the areas where this is perceived as a challenge. The politically-driven regional co-financiers have in this context a significant role in representing regional interests too. The regional co-financiers like Almi and Innovationsbron have been well-established names in business development and business financing in the regions and could through their legitimacy and their regular conferences, seminars and client meetings disseminate information and market the venture capital fund. The dissemination of information at Almi also takes place, for example, through a common website and advertisements. However, it is clear in the interviews with the companies that seminars are preferable to advertising when the initial contact is on many occasions based on dialogue and confidence-building. The website does however play an important role in the dissemination of knowledge within the internal organisations and among other regional actors. In some regions (e.g. East-Mid Sweden), due to previous


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experience (the pilot project), they have been careful about disseminating information about the venture capital fund to prevent administrative overload. Dialogue about the financing area Several regional co-financiers, including Almi in West Sweden, East-Mid Sweden, Västernorrland, Östsam and Innovationsbron in South Sweden have, with regard to the dissemination of information, regular meetings with several regional players such as the Chamber of Commerce, the Swedish Trade Council, Business Region Göteborg (BRG), Innovationsbron and, in some cases, also the Regional Councils where they discuss how a common platform for making the venture capital existing in the region visible can be created and where they actively discuss the financing focus. Cooperation in the financing process In some regions (e.g. South Sweden) there is closer cooperation between the regional co-financiers and the venture capital fund, where they also try to link the investments to regional priorities and where they try to make investments based on a strategic process. The regional co-financiers are also active in trying to get in touch with business angels and other private co-financiers and financing objects. For example, in Östsam the business manager actively works to try to find private co-financiers in the Stockholm area who are willing to invest in the region. Almi and Innovationsbron also appear to have a more active role in the investment process, as well as the County Administrative Board's representatives in Västernorrland. It was also apparent in the interviews with the regional actors that in several regions (including South Sweden and Västernorrland) that they have noted that the investment fund has helped to encourage more business angels to dare to invest.

7.2 actors affecting the degree of cooperation How well the cooperation between the regional co-financiers and the venture capital fund functions depends on a number of factors, both structural and more procedural. Below are the factors that have been a success in the cooperation between the regional co-financiers and the venture capital funds and in creating an arena for the growth of venture capital. To discuss the success factors it is required that one has an idea of what a successful cooperation is. As noted in the annual report of 2010, there are differences between the regions in terms of conditions for the venture capital fund's operations. One significant difference lies in the regions’ business structure, access to equity capital financing and the market’s maturity. There are significant differences between rural regions and metropolitan regions. In rural regions the range of commercial partners and investment objects is more limited; companies are often smaller and do not always have growth ambitions. Lack of knowledge and experience in venture capital contributes to a reluctance of companies to bring in external equity capital or for co-financiers to dare. The metropolitan regions, on one hand, have a more developed capital market and more and larger companies with growth ambitions, as well as more investment partners who are willing to invest but, on the other hand, many actors can also create a lack of clarity in the market as to who to turn to. Proximity to universities, incubators and clusters appears to be an important condition for the venture capital funds’ operations. A well built-up and supportive structure for the development of business ideas and innovations in the region with incubators, business parks, and financing and business development support as well as organisations that promote the meeting between academia and industry facilitates the implementation. It is Ramboll's view that the regional co-investors can play an important role in the development of the arena that the venture capital funds operate within. The region's business structure to some extent influences the venture capital fund's ability to operate, but what can be crucial is whether and how the regional actors and thus the regional co-financiers are working with the regional conditions that exist and how the contact and co-operation between the venture capital fund and the regional co-financiers functions. The table below is an attempt to illustrate the factors that influence the success of the cooperation between the venture capital fund and the regional co-financiers, but also factors that influence success in managing the regional conditions in the


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best possible way. The table may serve as a basis for a discussion about those aspects that exist in the different regions or parts of regions in order to determine whether there are factors in both process and structure, but especially the former, which they can influence to improve the opportunities for the growth of a capital arena.

Figure 23: Regional structures and processes

STRUCTURE

Business structure Access to equity

financing Market’s maturity

Anchoring and common strategic objectives

Person: expertise, networks, abilities

The venture capital funds’ visibility and

marketing

P R O C E S S Regional systems:

Function and abilities

Anchoring and common strategic objectives One of the success factors in the cooperation between the regional co-investors, particularly when these have been Regional Councils and County Administration Boards, has been how well the anchoring process with regards to the introduction of venture capital funds was conducted. The cooperation between co-financiers and the venture capital fund is for example more frequent in the regions where the pilot projects took place and where they therefore have had a longer anchoring process, especially Gotland and Västernorrland. In Västernorrland, the discussions in the established Capital Supply Group with different regional actors also played a major role in the anchoring process. In Skåne the discussions have been going on for ten years including within Sydsvenskt Entreprenörskapsforum. The opposite has been the case in Norrbotten where the County Administration Board was previously hesitant about the project but, following pressure from outside, they agreed to participate according to one interviewee. The County Administration Board in Norrbotten also says that they have not had as much of an influence in start-ups and negotiations, which also contributed to the fact that today they do not have any contact with the venture capital fund’s work. A further success factor which is also related to the anchoring process is how the regional co-financiers and the venture capital fund have handled the discussion concerning possible common strategic objectives or tried to integrate their different strategic objectives such as returns and regional growth. In Västernorrland, one interviewee stated that the discussions about creating a good infrastructure related to venture capital rather than high returns have facilitated cooperation. It is Ramböll’s view that, in the regions where there are no common strategic objectives or a dialogue about these between the venture capital fund and regional actors, the cooperation is more limited. Visibility and marketing Further success factors are the visibility of the venture capital fund and the marketing of activities. Media publicity has as much significance as the regions’ publicity and marketing of the venture capital fund internally on the internet and at seminars and conferences. This is connected to how well they work in the region on information and knowledge dissemination both on behalf of the venture capital fund and the regional co-financiers. Visibility in turn contributes to increased knowledge, attitude changes and


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more opportunities to make contact with potential private financiers and investment objects too. It emerged in the interviews that Saminvest has been perceived as being active in being visible in the region. Primarily visibility at the university and various incubators is regarded as important. Almi Invest in Småland has for example also worked on being visible among the municipal business managers. Several regional co-financiers highlight the relationship with banks as being critical in the development of a venture capital market. Banks are for example especially important for inspiring security in the investment when the private co-investor is a business angel. A further factor which appears to influence the venture capital fund’s visibility is how frequent and thorough the venture capital fund has been in reporting the investments that are carried out. For example, in cases where the venture capital fund itself has been active in reporting to regional actors about the investments which have been made, interest and awareness in the region has increased. Visibility is a challenge in the larger regions where distances are long or in the areas where they compete for attention from several other actors. Dependency on personnel and expertise How well the cooperation between the venture capital funds and the regional co-financiers functions also depends largely on the people who represent them and the expertise, contact channels and the approach that the representative has. If it is someone who is interested in venture capital, it is obviously an issue that is placed high on the agenda in the region and also if there are politicians who think it's interesting and believe in it. It is clear from the interviews that there is a shortage of expertise as regards venture capital among actors at the Regional Councils and County Administration Boards and the interest and activities concerning the venture capital fund are therefore only limited. Cooperation between the venture capital funds and the regional actors has also partly been affected by a change of staff or, for example, in cases where they were late in appointing the MD of the venture capital fund. The regional system One factor that largely seems to affect cooperation between the regional co-investors and the venture capital fund is the regional system for business development and venture capital which, to a greater or lesser extent, is established in the regions. Previous efforts and communication links between nodes, alliances and networks in the context of the company’s finance affect how well and effectively actors work with the venture capital funds and how visible the venture capital fund and its activities are. South Sweden, West Sweden, Stockholm, and to some extent Eastern Central Sweden and Västernorrland, have actively worked to shape the longer-term sustainability of work by including the conducting of surveys of regional innovation systems and the roles of various actors within the system. However, these systems are primarily focused on business development and innovation and not as much on financing issues. In a well-developed system there is greater knowledge and understanding of each other’s roles which should lead to less territorial thinking, effective cooperation and the picture of the needs becoming clearer. In regions/parts of the region where contact is limited to the venture capital fund’s reporting on the investment rate and competence and the interest in venture capital is low, the visibility of the venture capital fund is small and the regional system unclear, there is great risk that this type of investment is not favoured in the sense that it should be. There may be reasons to reflect on what regional actors can do to change the situation and take advantage of the opportunities that exist to promote the development of a venture capital market. Another question that arises is whether the region in general is mature for the introduction of venture capital.

7.3 ummary and recommendations The cooperation between the regional co-financiers and the venture capital funds differs between the regions and within parts of the regions. The degree of contact and cooperation differs even more between the County Administration Boards and Regional Councils and co-financiers such as Almi and Innovationsbron. Structural conditions such as business structure, market maturity and equity capital financing, as well as factors such as anchoring work when the venture capital fund was established,


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common strategic objectives, personal abilities, the venture capital fund's visibility and the regional systems they operate within affect the cooperation between the venture capital fund and co-financiers, which in turn affects the ability for a long-term sustainable venture capital arena being established and flourishing. Below are suggestions of measures to develop the regional arena. The recommendations are primarily aimed at regional politically-driven organisations, and the Swedish Agency for Economic and Regional Growth. Create networks and meeting places with key people It is Ramboll's recommendation that networks are created at both the regional and national level as well as meeting places with key people in the venture capital market, business development and innovation, and regional political actors or representatives of regional organisations to take advantage of the expertise available. To some extent this is done by the various regional investment committees, but it could also be done on a national level. These key people should have a good knowledge and understanding from both the regional perspective and businesswise and a drive to want to develop venture capital in the regional arena. Meeting places should be characterised by discussions about concrete cases and strategic development opportunities that are beneficial to all parties. Such a meeting place should also include all the venture capital funds meeting and introducing themselves to regional actors, private investors and entrepreneurs to increase knowledge and encourage the investment climate. Support for the system of cooperation between different actors By providing support for establishing more long-term cooperative platforms and arenas, continuity and a long-term approach to the work is created and different activities become less dependent on single individuals and actors. Through surveys and business intelligence the different actors can get a clearer picture of the regional system and their actors, and thereby clarify roles and functions and different abilities. There is a need for a more in-depth discussion concerning the coordination of efforts to avoid duplication and inefficiency in the cooperation. In such efforts focus is on the process and the cooperation that occurs within the system and eliminates the risk that there are investments that do not favour the regional sustainable development. The process is thus based on both complementarity and on involvement i.e. a breadth of participating actors prioritising high quality both in terms of return and regional benefit. Such a system must also be flexible and open to change to face international competition. Ramboll sees a need today for increased involvement of regional actors representing politically-controlled organisations and for more strategic thinking about venture capital. Link with regional and national strategies In the broader sense, this system should be synchronized with other regional activities and initiatives, and linked to the regional strategic action plans. Furthermore, this type of investment has a long-term strategic connection with a national vision of, for example, that one will invest in companies in a particular industry or a specific area of research, not only in relation to operating in a market complementary manner and invest in those companies that private investors dare not, but also think more strategically long-term without, in so doing, losing professionalism in the investments. The investment should always be executed with the aim of getting a company/industry with potential to grow, not to support an industry with problems. But one can imagine that a focus on some efforts could increase opportunities to become competitive in an international perspective.


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8. ISCUSSION AND CONCLUSIONS

This concluding chapter summarises the results that emerged in this mid-term evaluation which was carried out within the framework of the evaluation’s mission. In addition, conclusions, recommendations and proposals for the design of ongoing evaluation in the coming years are presented. The purpose of this mid-term evaluation is to provide the Swedish Agency for Economic and Regional Growth, venture capital funds and relevant actors with early indications of how the investment stands in relation to its objectives and how the implementation process is working. The evaluation has answered the following questions: • How do the venture capital funds stand in relation to the investment objectives set? • How do the venture capital funds' portfolios look with respect to company size, stage of development and industry sector distribution? • What do the companies get from the investors' involvement? Can a positive development in the companies be observed? • Are there signs that the venture capital funds contribute to the improvement of the capital supply situation for the companies i.e. does the investment create additionality? • How is the cooperation with the regional co-financiers functioning? What the evaluation has shown is briefly presented below.

8.1 esults and recommendations

8.1.1 ow do the venture capital funds stand in relation to the investment objectives set? Several venture capital funds found that interest from companies had exceeded expectations. Through established local networks in the regions, the venture capital funds have been able to market themselves and they have witnessed a positive attitude from companies as well as private co-investors. Several of the venture capital funds’ MDs stated that they had been pleasantly surprised by the high number of investment proposals, the relatively high quality of investment articles and the good industry sector distribution. The exceptions have been Almi Invest Västsverige (Värmland) and Almi Invest Småland & Öarna which have experienced a weaker dealflow. The venture capital funds have generally got started with their instruments in an efficient manner and the majority of them invested in accordance with or close to the investment plan. Based on actual investments up to 30 June 2011 and forecasts for Q3 and Q4 which the venture capital funds have submitted, eight of the funds will reach their planned investment rate, while three (Mittkapital Jämtland/Västernorrland, SEF I and SEF II-III) will be below it. Certainty in the forecasts however varies considerably: • The forecasts of Almi Invest Stockholm, Almi Invest Västsverige (Västra Götaland & Halland) and

Almi Invest Norra Mellansverige are very certain, i.e. it is sufficient if the venture capital funds complete the investment decisions that have already been made.


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• The forecasts of Partnerskapsfonden Mittsverige (Saminvest) and Almi Invest Östra Mellansverige are fairly certain, i.e. the funds are expected within the course of a few months to take decisions on investments in level with the planned investment rate.

• The forecasts of Partnerinvest i Norr, Almi Invest Västsverige (Värmland) and Almi Invest Småland & Öarna are fairly uncertain, i.e. additional efforts appear to be needed to increase the investment rate during 2011.

To sum up, we make the assessment that there is primarily a risk that Almi Invest Småland & Öarna, Almi Invest Västsverige Värmland, Partnerinvest i Norr, Mittkapital Jämtland/Västernorrland and SEF II-III at the end of 2011 could fall below the planned investment rate according to the assessment criteria which are described in Section 4.2. In addition to this, we have made an assessment of the venture capital funds’ requirements to invest EU funds up to December 2014, based on a projection of the funds’ actual investment activity from the date that the first investment was made. According to the calculation, Almi Invest Östra Mellansverige should in December 2014 have EU funds left (and therefore need to repay) equivalent to around SEK 18.4 million, Almi Invest Småland & Öarna equivalent to SEK 19.7 million, Almi Invest Västsverige Värmland SEK 4.8 million and Almi Invest Norra Mellansverige SEK 19 million. However, most venture capital funds, over and above the implemented disbursements, have also signed agreements to disburse some of the additional investment decisions that were made. If the calculation is made based instead on the investment decisions taken, all of the venture capital funds look as though they will manage to decide on investments to the required extent. The latter calculation may be fairer for some of the venture capital funds, especially those that have been started in a shorter time, but at the same time contains some uncertainty since the actual disbursements may be less than those decided. Recommendation(s): A dialogue needs to be conducted between the Swedish Agency for Economic and Regional Growth and the venture capital funds that (i) lie under the investment plan for 2011 (ii) submitted an uncertain forecast for 2011 and (iii) are not expected to manage to invest the EU funds at the end of 2014 about how the continuation will look. The venture capital funds should report on what is required to get back on track and what efforts need to be made internally to increase the investment rate.

8.1.2 ow does the venture capital funds’ portfolios look with regard to, among other things, the company’s size, stage of development and industry sector distribution? At an aggregate level, the venture capital investments funds’ disbursed investments showed a relatively good industry distribution and overall almost half of the venture capital funds’ disbursements have gone to portfolio companies in the start-up stage and early stage and over half to micro-enterprises with 0-9 employees. This indicates that the investments were largely consistent with the incentive’s focus on young, small and medium-sized enterprises. Several of the venture capital funds also believed that they have shifted the focus from the slightly bigger and more established companies to small and micro-enterprises in the initial stages in order to better match the actual need for capital. This creates opportunities for the funds to contribute to the improvement in the supply of capital for companies with the greatest need of capital within many different industries, which is a good rating for the investment and project owners. The focus of the investments largely came to be on the smallest businesses and start-up stages and early stages which at the same time entails certain risks, including greater uncertainty about the future development of the investment object and further need of capital during the investment period, risk of a poor return and a very long time to exit (including the investment period extending beyond the project period). A wider distribution in the portfolio in terms of the development stage of the companies would


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allow quicker exits, lower risk, more resources for follow-up investments and thus a greater chance for revolving and long-term survival of the fund. Mittkapital in Jämtland/Västernorrland appear on the one hand to have the opposite problem, where the bulk of the portfolio (79 per cent) consists of more mature companies in traditional industries. Although such investments can be approved given that they intend to finance expansion, there is a big risk that the companies that participate in the funds are not the primary target group of the initiative and that the overall long-term goal will not be achieved. Recommendation(s): The venture capital funds should work actively to achieve a good spread in the portfolio in terms of company size, stage of development and industry sector and maintain awareness of the actual capital gap in the regions and the venture capital market funds’ complementary role. For project owners who normally work with the smallest businesses and start-up stages and early stages, it can be a challenge to see and be seen outside their own networks in order to reach potential growth companies.

8.1.3 hat do the companies get from the investors' involvement? Can a positive development in the companies be observed? The companies have primarily used the capital for market development, product development and to acquire expertise and the majority of companies that have received financing through the venture capital funds see great value in the investment. The companies largely feel that the investment has contributed to a more rapid expansion, increased opportunities for obtaining other external financing, higher aspirations, increased production capacity and professionalism of the board’s work. Many companies also believe that the investment in the long run will lead to increased knowledge and better profitability. A third of the companies that participated in the evaluation has received additional equity capital from new external owners after the capital from the investment fund was disbursed, indicating that companies have become more attractive to investors. Companies are also generally satisfied with the private co-investors’ involvement and believe that the cooperation between the venture capital funds and private co-investors is working well with regard to how the investments are managed. Recommendation(s): Some of the companies found the investment process to be bureaucratic and slow. It is therefore important that the venture capital funds work towards achieving efficient and fast processes, comparable to private investors. Companies that have a closer and more informal contact with their venture capital fund appeared to be more positive towards the fund’s involvement, found the investment manager/fund manager whom they had contact with as more competent and had the highest expectations of the value that they believed that the investment would bring. This shows that strong local anchoring and presence is of great importance.

8.1.4 re there signs that the venture capital funds contribute to improving the capital supply situation for the company i.e. does the investment create additionality? Additionality is about whether the results and outcomes of the investment would have occurred even if it had not existed. Additionality is thus a counterfactual concept which in this case is partly to do with


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whether the companies that received financing had been able to get funds elsewhere, and partly about whether the private co-investors would have implemented the investments even without the investment. The risk is that the establishment of public venture capital funds may lead to the private venture capital market developing more slowly or that the amount of private venture capital is reduced. Displacement effects like these mean that private equity is reduced and replaced with public capital. The question as to whether the capital supply situation for companies and for the capital market has improved as a result of the investment is difficult to answer, because the question itself is counterfactual and very much qualitative in nature. However, the three pilot funds that were in operation in 2005-2008 were considered to have boosted the supply of capital to the regions concerned and there are indications that this initiative has also contributed to additionality of the financed companies and private co-investors. Just over a fifth of the companies that responded to Ramboll’s questionnaire chose to go ahead with the investment fund when no other source of investment was considered to be possible. A further quarter of respondents said that other investment sources were certainly available but that they did not offer equivalent terms. These figures combined give some indication that the investment fulfilled a market need. As for the private investors, nearly half said that they probably would not have implemented the investment at all and almost a further ten per cent said that they probably would have implemented it to a lesser extent, suggesting that the investment seems to have led to an increased volume of investment of private capital. The principal values that the private co-investors got from the cooperation were knowledge and skills in the implementation of investments, broader networks and greater financial opportunities to implement investments. Recommendation(s): It is important that the venture capital funds still continue to recognise their market complementary role and work with companies where the need for market complementary financing market is greatest (given that the companies also meet the requirements of venture capital financing). It is also important that the funds continue to act as professional investment partners and make this type of investment more attractive to private investors.

8.1.5 ow is the cooperation with the regional co-financiers functioning? The cooperation between the venture capital funds and regional co-financiers differs between the regions and also within parts of the regions. The degree of contact and cooperation also differs between different regional co-financiers. Structural conditions such as the region's business structure, market maturity and experience of equity financing as well as factors such as anchoring the work when the venture capital fund was established, common strategic objectives, personal abilities, etc. affect the cooperation between the venture capital fund and co-financiers, which in turn affects the ability to establish sustainable venture capital arenas. Recommendation(s): To develop the regional arena Ramboll recommends that the regional politically-driven organisations and the Swedish Agency for Economic and Regional Growth create networks and meeting places with key people in the venture capital market, business development and innovation and with regional actors to utilize the expertise available. This occurs to some extent through the regional investment committees, but could also occur at the national level. Furthermore, it is recommended that support should be given to the system of cooperation between actors in order to create continuity and sustainability of the work, where different activities will be less


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dependent on single individuals and actors. Through surveys and business intelligence, the different actors get a clearer picture of the regional system and its actors and thereby clarify the roles, functions and different abilities. This system should also be synchronized with other regional activities and initiatives, and be linked to the regional strategic action plans. Furthermore, the investment can develop a strategic link to a national vision of for example investing in companies within a given industry or a particular area of research, not only in relation to acting as a complement to the market. Investments should however always be performed with the aim of getting companies to grow, not to support companies and sectors with problems. Focus on some efforts could strengthen the conditions for competitiveness from an international perspective.

8.1.6 ther issues Through contact with venture capital funds, the Swedish Agency for Economic and Regional Growth and other interested parties within the framework of this mid-term evaluation and on-going evaluation, a number of issues have come up generally that are important to the venture capital funds and the investment’s work and which therefore need to be raised.

o Have the fund project’s implementation and achievement of objectives looked different depending on who is the principal?

The fund project’s implementation and achievement of objectives have looked different, primarily in terms of how well they managed to follow the investment rate, find private co-investment capital and ensured investment flow. There is also some variation in how the investment portfolios look in terms of company development, size and industry affiliation. In such an analysis, it is however difficult to remove the effects of geographic, economic and cultural conditions and relate the differences to what lies behind the venture capital funds. In some respects, there have been more similarities than differences between the funds managed by different principals e.g. that many of the finds have been forced to think about the target group of the investments and about interfering with the upper part of the span that the funds will act within. Limited access to investment opportunities outside the major cities is another problem that is common for many. The differences seen in the current situation are for example that Saminvest, which has chosen a more passive model for its fund, has lower administrative costs and a relatively good investment flow, which is to be expected because much of the work on locating, evaluating and monitoring the object lies with the private co-investors. It also appears that Mittkapital i Jämtland/Västernorrland has another type of portfolio with more mature companies in traditional industries, which for example may have to do with the fund’s ”arms-length” approach to their investments but also with the fund being run by the Sixth AP Fund which functions as a profit-driven fund and therefore has a higher return requirement. Among the factors that appear to be important for the success of venture capital funds, personal skills, experiences, networks and local anchoring appear however to be crucial and how much basic work that the fund's MD and investment managers have carried out, regardless of who is the principal of the venture capital fund. In the future, when more data is available, it will be interesting to follow the differences between venture capital funds in terms of return, types of exits, etc. and relate it to the funds’ way of working.

o ERDF financing requires that the funds are invested by December 2014 at the latest, which places high demands on the venture capital funds to follow their stated investment plans. What are the consequences?


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The requirement to invest money within a certain period of time can lead to negative consequences in terms of the investments opportunities to create value and achieve their long-term goals. This is for example by:

• The quality of the investments may be impaired. In the current situation, the influx of proposals is

good in most regions and the venture capital funds have the opportunity to select objects with great development potential in new and interesting areas. Increased pressure to invest the funds increases the risk that the funds accept a larger share of proposals and that the money goes to companies that are less viable. This in turn reduces the return, or rather increases the risk that the return will be negative, which means that the funds have a smaller capital base to reinvest/revolve.

• Investments can go to other companies involved in the initiative’s primary target. In many regions, venture capital funds have noted that the need for market-complementary financing is greatest among the smallest and newest companies, often in technology-intensive industries. Such investments are time-and resource-demanding and usually also require the active involvement of the funds (board work). Pressure to invest the funds creates an incentive to make fewer, larger investments in more traditional industries. Such companies are often more established and have greater opportunities to find financing elsewhere, which is not fully compatible with the venture capital funds’ market complementary role and additionality requirement in the ERDF=funded projects. This is compounded by the three per cent ceiling on administrative costs, which limits opportunities for involvement on the boards of the companies and in itself creates incentives to invest in more established companies.

• The venture capital funds could make it harder to achieve the horizontal objectives. The venture

capital funds find that the share of investment proposals from women entrepreneurs and entrepreneurs with a foreign background are few. To implement such investments the funds must make significant efforts to increase the flow of investments and actively seek out objects. As time becomes scarce, it is easy for such investments to be prioritised away and investments to go to the objects that are closer to hand.

Beyond this, the venture capital funds’ opportunities to invest their capital, at least in the short term, is affected by all external factors, such as the economic situation and the situation in the financial markets. In today's economic situation for example companies choose to postpone expansion because the uncertainty is too great and investors can choose to delay going into new objects. This could lead to a temporary reduction in the funds' investment activity. The requirements of the investment rate hits the regions especially hard where such fund investments in the long term have the greatest potential to generate benefits, both in terms of financing entrepreneurial ventures and getting new capital on the market, but where the conditions for effective work are currently not built up. This is because more groundwork is needed in these regions, including companies unaccustomed to working with venture capital, where there are too few active private investors in the segment and the investors that exist often lack the skills and procedures for investments and work with a board of directors. Spending time and resources on building such long-term structures improves both the funds’ opportunities to invest their funds in the long run and is in line with the investment’s overall objectives. This places high demands on communication and collaboration between the venture capital fund on the one hand and the Swedish Agency for Economic and Regional Growth and regional co-financiers on the other. Another important issue is whether the cost of this groundwork should only be borne by the venture capital funds, or whether it is possible to distribute it.

o What return is it reasonable to expect the public venture capital funds to generate?


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Previous experience from the pilot projects in 2005-2008 and from similar initiatives in other countries show that the majority of public venture capital funds have difficulty in generating a positive return. Opportunities to generate a return is also greater for those funds that use a passive model where the co-investor takes on the investment appraisal, and takes the active role in the company after the investment, while the fund only contributes money. Although it may prove difficult: the Scottish Co-investment Fund which was established in 2003 showed in May 2008 no return but a reduction of the capital base of 1.8 percent, despite the fact that several good exits had been made. This also suggests that the return in the venture capital funds often follows a so-called J-curve and that five years is too short-term to achieve a positive return. Because the venture capital funds invest in conjunction with private commercial actors, they are by definition seeking the same return as the private investment party, in this case around 20-25% (according to the questionnaire to the co-investors). In order to attract private co-investors, it is also important to signal that the venture capital funds are looking for a return and will work to maximize it and achieve successful exits. From society's perspective, however, negative returns may be acceptable as long as the society's total benefits from the investment outweigh the costs, including for example generated tax revenues from portfolio companies, the value of employment and value for sub-contractors. As noted above, it is important that in the future ongoing evaluation work monitors the returns of the various funds and relate them to the funds' way of working.

o What lessons can be drawn from the international experience of similar public investments?52 The regionalisation of the Swedish venture capital funds creates opportunities to adapt them according to their geographical context, while it is clear that the venture capital funds have very different requirements in terms of access to interesting investment objects. A venture capital fund in a sparsely populated area in northern Sweden has different operating conditions than a venture capital fund in an urban area in southern Sweden. Perhaps it should therefore be accepted that a venture capital fund in rural areas makes investments with a broader focus in terms of both industry sector and stage than in southern Sweden, where the infrastructure of skills and capital is better built up. In southern Sweden, it can be expected that a state-initiated venture capital fund actually focuses on making investments in the very early stage. Overall, Growth Analysis is of the opinion that there should be different expectations and thus different main objectives for the various venture capital funds in different parts of the country. Furthermore, what should be considered is where and how the venture capital funds can interact with other support and capital injection systems. One solution is to coordinate these activities and develop a form of systematised "fast track" to support the companies that have significant growth potential. Such coordination could lead to investors perceiving uncertainty as somewhat lower, which in itself would contribute to the venture capital funds investing more in new and young businesses with growth potential. To the extent that this is possible, collaboration should be with the groups of serial entrepreneurs and professional business developers who can work operationally in potential growth objects. Highlighting the growth objects requires both expertise and capital and it is not realistic to believe that the regional venture capital funds themselves have the capacity and competence to contribute operationally to this work.53

8.2 ngoing evaluation work in 2012-2014 Ramböll proposes that the ongoing evaluation work for 2012-2014 focuses on:

52 The text that as presented here is a representation of the discussion that took place in the draft that the Swedish Agency for Economic and

Regional Growth provided Ramböll in August 2011 (see Chapter 2). 53 The Swedish Agency for Economic and Regional Growth (2011) Staten och riskkapitalet, delrapport 2


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• continuing to follow the venture capital funds’ investments and development of the portfolio company, with the focus on good practice and opportunities for learning between the venture capital funds;

• collaboration between the venture capital funds, regional financiers and national level; • a learning dialogue on strategies and practices for successful exits.

In addition to this, the ongoing evaluation can help to give an updated picture of the regional capital gaps that were identified in 2007 before the launch of the initiative (”gap analyses”), particularly with regard to regional access to seed financing. The ongoing evaluation process will largely follow the established process from previous years. The process consists of four phases: • Phase 1 – the yearly evaluation. This phase of the ongoing evaluation includes implementation of

one or more data collection points with the aim of obtaining information to assess how the project was developed in relation to the the set structure of objectives. Some data collection also concerns more general development e.g. success factors, challenges and risks in the operation and learning opportunities between the venture capital funds.

• Phase 2 – knowledge feedback from the evaluation. This phase includes a yearly meeting when all of

the venture capital funds in the investment and the Swedish Agency for Economic and Regional Growth meet for a joint discussion on the results of the monitoring and evaluation. This phase will normally be implemented in late spring or during early summer in 2012-2014. The primary target group for this meeting is the venture capital funds themselves, but also the Swedish Agency for Economic and Regional Growth and Growth Analysis. The yearly ongoing evaluation report is based on the evaluation’s results and analysis, where the yearly meeting’s discussions are an important part.

• Phase 3 aims for a broader dissemination of the main results and recommendations from the

evaluation. The evaluation’s results are presented to a broader group of interested parties including the regional co-financiers, the programme office and others involved. This phase will tentatively be implemented every autumn 2012-2014, when the yearly report is published and an outward-looking learning seminar is held. In addition to this, the ongoing evaluation team will regularly participate in a wider discussion on public venture capital by participating in conferences, seminars and workshops where the ongoing evaluation’s results are put forward. The aim of this phase is to inform interested parties about the project’s progress and contribute to a public debate and learning.

• Phase 4 concerns preparations for the next year’s evaluation. In this phase the lessons that emerged

during the year are analysed to form the basis for evaluation questions before next year’s evaluation. This phase will be implemented during each late autumn of 2012-2014.

Dialogue with the Swedish Agency for Economic and Regional Growth will be ongoing. The ongoing evaluation’s reference group will be involved when required during the different phases in order to provide input on issues and analyses.


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9.

PPENDICES

9.1 ppendix 1: The investment’s programme logic

Reinvestment in the region

Investment rate according to plan

Activities directed towards horizontal criteria

Fund projects have contacts with actual and potential

private co-financiers

Fund projects have contacts with relevant actors

Active handling of portfolio

Other activities are conducted according to plan

Fund projects have contacts with potential buyers (exit)

Short-term outcome Short-term/medium-term results Medium-term/Long-term results

Fund revolves

Increased private and venture capital for the region

Fund projects are active owners and contribute with e.g. expertise, networking

etc.

Increase expertise for respective fund

Developed network between actors within VC and other actors in the region

Increased expertise for actors within venture capital

More active actors within private Venture Capital (VC) in the region

Development of companies that received VC

Long-term structure for public and private VC

Positive return

Realised holding (exit)

Growth in companies that received VC

New companies

New job opportunities

Increased demand for VC

The diagram above consists of two types of background: white, which illustrates the results and outcomes that the venture capital funds are expected to create in companies and grey which illustrates the results and outcomes that the venture capital funds are expected to create in the region. The venture capital funds’ primary task is the core activity: to invest in relevant objects. In the short term this means that the venture capital funds shall: • Maintain their investment rate. • Manage their investment portfolio actively: have a well-composed portfolio, divesting investments

that are not performing, etc. • Implement its strategies for horizontal criteria: recommend women and people of foreign background

as board members or for positions in the management team of the investment company, process channels to companies concerning the horizontal criteria, etc.54

54 The venture capital funds are therefore expected to observe and actively work with the horizontal criteria. However, there are no targets

beyond activity targets for horizontal criteria which the ongoing evaluation will assess the funds’ success from outside.


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• Carry out other activities in order to recruit projects: marketing, networking, searching activities, etc. In the medium term the venture capital funds’ operations lead to three things: • The range of both private and public equity increases in the region. Private capital is activated

through the venture capital funds’ offer of co-investment that reduces the risk. In some regions the venture capital fund also describes the offer as experience and expertise of equity capital investments over and above risk sharing, making it more attractive to new investors to work with venture capital.

• The projects shall function as active owners in the sense that investment companies shall obtain access to relevant expertise given the company’s situation and networks via the venture capital funds and the venture capital funds will actively set requirements of professional board and management work and implementation of business plans.

• In the longer term access to capital and the active ownership are expected to lead to the development of the investment company through e.g. professionalisation of the board and/or management work, organisational changes, implementation of business plans, etc.

In the long term, the investment companies are expected to grow in terms of for example turnover, profit margin and number of employees. In the further long term, the fund projects are expected to contribute to regional growth in terms of new jobs and new business by contributing to the development of the companies the venture capital funds invest in. The venture capital funds shall achieve returns and reinvest the funds by realising their holdings. When the investment companies can be expected to achieve growth and holdings are realised on which the a return can be expected depends on a number of factors - whether the venture capital funds managed to find good investment objects and private co-investors who can create value for the business, how well the venture capital funds succeeded in managing their holdings, how the market situation looks at the time of exits, etc. The venture capital funds’ operations are also expected to provide important indirect effects upon an infrastructure for venture capital for SMF in Sweden and the Regions, which is an argument behind the investment (the lower, dark grey areas in the figure above). The venture capital funds are not expected to work actively to establish an infrastructure but, through their core activities, they contribute to it. In the short term, the venture capital funds are expected to have contacts with relevant actors such as for example other financing actors: banks, Almi, incubators, relevant public investments, accountants, corporate lawyers, consultants with specific industry expertise, etc. They are also expected to have contacts with persons or organisations that are active in private investments by business angels, venture capital companies, companies that make venture capital investments, etc. The venture capital funds will also have early contact with potential buyers. In the medium term increased private and public venture capital is expected and cooperation between the actor’s co-investment is expected to provide greater expertise and experience concerning equity capital from private and public actors and individuals and not least the venture capital funds themselves. In addition, the network of private and public sectors in company financing and business development have been developed. More actors or individuals are expected to be active in the region, partly through the recruitment of first-time investors and investors from other regions and countries attracted to investments in the region. In the long term it is hoped that the demand for equity capital will increase from companies due to more experience, choice and good examples. Another hope is that a long-term structure for venture capital will be established.


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9.2

ppendix 2: EVCA:s industry sector classification Explanation of industry sector classification, company stages and company size Company size Micro: Company with 0-9 employees Small: Company with 10-49 employees Medium: Company with 50-249 employees Large: Company with more than 249 employees

Company stage (according to EVCA) Start-up: Company that is one year or younger and that hasn’t any revenue Early stage: Company that has existed for one to two years. The company has a little revenue and a negative cashflow Early expansion: Older than two years and a revenue that can be or be close to being cash positive Mature: Traditional operation with stable demand and calculable return

Industry sector classification (according to EVCA) IT/Telecommunications (ITC): Includes data systems, consumer electronics, hardware, electronic components, printed circuit cards, semiconductors, software, other services within IT, radio and TV, publications and manuscripts, communication services, Telecommunications, video conferences, IP telephony, hardware within telecom and internet technology Life Science (LS): Includes biotechnology, biomedical engineering, healthcare services, medical devices with associated software, pharmaceutical products, chemists and other healthcare related services Industry/Transport (IND): Includes chemical products, business-related and industrial products and services, measuring systems, scanning equipment, control systems, manufacturing and transport services Trade (TRADE): Manufacture and distribution of consumer goods and consumer-related services such as training, sport and entertainment, public services and hotels and restaurants Energy/Environmental Technology (E/ET): Includes renewable energy, coal and metallic ore, gas and oil, energy-related services and others within energy and environmental technology Other (OTH): Includes building sector, real estate, financial services and agriculture


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9.3 ppendix 3: Delayed, changed and additional investment decisions Investment decisions that were delayed (and therefore not counted in the report): Fund’s name Company Total investment decisions

(SEK th) Stocksbro AB 3 000 Dala Tekniska AB 1 000


Total 4 000 Bioservo 1 700 Almi Invest Stockholm Total 1 700

Investment decisions that were changed (and therefore changed in the report): Fund’s name Company Total original investment

decisions (SEK th) Total actual investment decisions (SEK th)

ITS brilliant AB 3 000 1 500 Bjursås Resort AB 3 000 10 000


Total 6 000 11 500 BFT Coffee (Barista) AB (additional investment)

1 000 2 000 Almi Invest Stockholm

Total 1 000 2 000 Investments that were added after 23/6 (and included in the report): Fund’s name Company Total investment

decisions (SEK th)

Total disbursed to portfolio companies (SEK th)

Partnerskapsfonden Mittsverige AB

Clavister Holding AB 4 000 4 000


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9.4 ppendix 4: Venture capital funds’ investment processes Almi Invest and Partnerinvest i Norr55 Investment policy established by the RF’s board and shall be compatible with the venture capital fund’s objective and creditor’s terms. RF = Regional Fund IP = Investment’s Proposal FM = Fund Manager IM = Investment Manager IC = Investment Committee Adm = Administrative service

1. Investment Proposal (IP) ”Deal Flow” Resp Time period 1.1 All investment proposals shall be registered and logged IM Ongoing locally. First evaluation is done by RF's management. 1.2 RF’s management considers that IP is interesting and wants FM 2 w to investigate the proposal further. The case shall first be presented at AI’s weekly meeting. IP must be compatible with RF investment policy.

1.3 At the board meeting all IPs are prioritised and board FM 2 w decides which case MD shall go further with or not go further with. 1.4 A calculation for transaction cost shall be prepared. IM 2. ”Due Diligence” Evaluation

2.1 A legal and a financial evaluation shall be carried out. IM 1 - 3 w 2.2 Before the investment decisions of the regional Investments FM 2 - 4 w Committee (IC) an investment PM shall be designed. If the board has not decided on the item under 1.3 PM shall be reported/ approved by the board before IC. The following points shall be described in the PM; Private Commercial Investment Partner - Description of syndication partner (strengths and weaknesses) - Board representation in investment object Investment object - The company’s business proposals. - Company’s management - Future plans and milestones - Risks and feedback from legal/financial evaluation - Financial data (historical and future plans)

55 Partnerinvest has no IC. It is replaced by the board in the process.


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- Terms of current investment - Exit plans - Schedule for agreement, signing and disbursement

3. Investment decision (scheduled every month) 3.1 All investment decisions must be compatible with the venture capital fund’s investment policy (special terms & regulations) 3.2 MD presents investment’s PM to IC FM 1 day 3.3 All investment decisions shall be approved/decided in IC. Secr 1 day The decision shall be entered into the minutes.

4. Agreement & Signature

4.1 The following documents shall be compiled IM1-3 months - Shareholders’ agreement - Acquisition’s/Investment’s agreement - List of subscriptions - Transaction’s specification - Other relevant documents 4.2 Signing of transaction document shall be done by relevant authorised signatory. FM 1 day

5. Disbursement and Archiving 5.1 Disbursements shall be made directly to the other contracted party’s (portfolio company) bank account according to transaction’s CFO 1 day specification.

5.2 The original agreement shall be archived in secure filing FM 1 day cabinet. Working copies shall be available to Finance Department. Adm 1 day


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Partnerskapsfonden Mittsverige (Saminvest)

Evaluation of fulfilment of investment terms

Evaluation of intended partner.

Evaluation of investment. Prioritisation by the board

Party negotiates terms and makes decision about investment

Saminvest makes decision –on equal terms

Investment disbursed

Investment prospectus presented to Saminvest

Procedures for monitoring established*

Cooperative agreement signed

=Saminvest decision

*Partner is added to board

1. 2. 3. 4. 5. 6. 7. 8.

Stage Responsibility Time taken Comments 1-2 FM + IM 1 week 3 FM + IM for evaluation.

FM for signing of agreement

0-1 week Sometimes the cooperation agreement has already been signed for proactive reasons, i.e. the evaluation has already been done.

4 FM Up to one month Prioritorisation= OK for further deepening of the case. Six ordinary board meetings per year, but are often summoned to telephone meetings if a decision is urgent.

5 Partner 1-3 months Takes place in parallel with Saminvest’s evaluation.

6 FM/Board 1-3 months FM presents decision basis and the board decides.

7 FM Often within one week

Depending on how ready the documents are.

8 FM/IM/Partner In parallel with the evaluation

FM = Fund Manager IM = Investment Manager


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Mittkapital Jämtland/Västernorrland Investment decision is received by the board and takes place in the following steps. The normal time taken is 2 – 6 months for final positive investment decision. Rejections are given ”as soon as possible” to give the company the chance to find other financial solutions. 1. Proposal Overview description of the company Indicated investment concept Decision by person in charge: investigate further or say no 2. Results of first investigation Financial position

o Current balance sheet and profit and loss account with comments to the office o Budget o Forecast

Business plan o Incl. market, competitors, business model o Products and calculations o Patent o Organisation

Overview of investment concept o Indicated ”Key Exit Value Driver”

Decision by person in charge: Further develop investment concept or say no 3. Investment concept Overall goal

o ”Key Exit Value Driver” Developed ownership plan (according to KVD format)

o New future business model o Market strategy and plan for investment o Strategy and plan for company development o Strategy and plan for ownership resources

Milestones for the investment Company board

o Shareholders/shareholders' ledger o Reg. certificate o Credit information of company and of key persons o Existing shareholders’ agreement o New shareholders’ agreement o Articles of Association o Board o Reporting

Detailed examination/DD of finance, IP and agreement Investment committee decision: Bring negotiation to a close? Irrefutable terms? Abandon? 4. Decision proposal Report on concluded negotiation of points under 3. Investment concept Capital framework, disbursement Other special terms Nomination of key persons Board decision: Approval/Rejection Decisions are documented continuously in an investment file with the above content.


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Sydsvensk Entreprenörsfond (SEF) Involved Company

A Company

B Company

C Company

D Company

E Company

F

First contact SEF staff 01-07-2009

06-11-2009

01-07-2009

06-05-2010

22-12-2009

15-01-2011

Investment process (dialogue, analysis, negotiation, DD)

SEF staff and

external experts

5 months 1 month 5 months 2 months 4 months 4.5 months

Investment decision

SEF IK 08-12-2009

08-12-2009

08-12-2009

01-07-2010

22-03-2010

01-06-2011

Continued investment process (dialogue, analysis, negotiation, DD)

SEF staff and

external experts

0.5 months

1.5 months

1 month 4.5 months

4 months 1 months

Actual investment

SEF staff 18-12-2009

20-01-2010

15-01-2010

18-11-2010

14-07-2011

21-06-2011


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10. EFERENCES

List of references Websites Expowera (2008) http://www.expowera.se/mentor/ekonomi/finansiering_affarsanglar.htm, obtained on 17-05-2011 Företagande.se (2011) http://www.foretagande.se/Om-affarsanglar.html, obtained on 17-05-2011 Länsförsäkringar (2010) Återhämtning efter börsfall, http://www.lansforsakringar.se/privat/bank/aktuellt/nyheter/arkiv_2010/Sidor/aterhamtning-efter-borsfall.aspx Mittkapital i Jämtland och Västernorrland, Samarbetspartners, www.mittkapital.eu Sjätte AP-fonden (2008) http://www.apfond6.se/sv/Om-Sjatte-AP-fonden/Ordlista/#Såddfas, obtained on 17-05-2011 The Swedish Agency for Economic and Regional Growth:

• The Swedish Agency for Economic and Regional Growth (2011) Fondprojekt, www.tillvaxtverket.se

• The Swedish Agency for Economic and Regional Growth (2010) Diskussionsunderlag för fondprojektens genomförande: Regionalfonderna i Sverige 2009-2014, Info 0212, s. 15

• Venture capital funds’ reporting to the Swedish Agency for Economic and Regional Growth, June 2011

• http://www.tillvaxtverket.se/download/18.74f57d0f1283a4f88ff800042793/Investeringsplan_fondproj.pdf

• http://www.tillvaxtverket.se/huvudmeny/insatserfortillvaxt/kapitalforsorjning/affarsanglar.4.21099e4211fdba8c87b800017075.html, obtained on 17-05-2011

• http://www.tillvaxtverket.se/download/18.74f57d0f1283a4f88ff800020468/M%C3%A5lindikatorerna+i+fondprojekten.pdf, obtained on 22-09-2011.

Publications Avdeitchikova, S. (2008) Close-ups from afar: the nature of the informal venture capital market in a spatial context, Dhesis, Lund University Press. DeGennaro, R.P. and Dwyer, G.P. (2009) Expected Returns to Angel Investors, Working Paper. Federal Reserve Bank of Atlanta. Hayton, K., Thorn, G., Percy, V., Boyd, C. and Latimer, K. (2008) Evaluation of the Scottish Co-Investment Fund. A Report to Scottish Enterprise. Hayton Consulting/GEN. Isaksson, A. (2000) Venture capital – begrepp och definitioner. Published in The Swedish Private Equity & Venture Capital Association’s Directory of Members 2000/2001 Jyoti, K. and Sandler, T. (2000) Partners in giving: the crowding-in effects of UK government grants, European Economic Review, 44. Leleux, B., Surlemont, B. and Wacquier, H. (1998) in Reynolds, P.D., Bygrave, W.D., Carter, N.M., Manigart, S., Mason, C.M., Meyer, D.G., Shaver, K.G. (Eds.), Frontiers of entrepreneurship research, Babson College, State versus private capital: cross-spawning or crowding-out? A Pan-European Analysis. Manigart, S., De Waele, K., Wright, M., Robbie, K., Desbrières, P, Sapienza, H. and Beekman, A. (2001) Determinants of required returns in venture capital investments: A five country study, Journal of Business Venturing, 17(4). Mason, C. M. and Harrison, R. T. (2002) Is it worth it? The rates of return from informal venture capital investments, Journal of Business Venturing, 17(3). Ramböll (2011) Utvärdering: Pilotsatsning på regionala investeringsfonder The Swedish Agency for Economic and Regional Growth (2010) Staten och riskkapitalet, 2010:01, Östersund: Myndigheten för tillväxtpolitiska utvärderingar och analyser The Swedish Agency for Economic and Regional Growth (2011) Staten och riskkapitalet, delrapport 2, Östersund: Myndigheten för tillväxtpolitiska utvärderingar och analyser Wiltbank, R.E. (2009) Siding with the Angels: Business angel investing - promising outcomes and


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effective strategies, Research report.

mid-term evaluation of regional venture capital funds

Documents