fund raising

Classroom Training Modules - November, 2011

Fund Raising

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Classroom Training - Agenda

Participants’ presentation, organization and instructions

Module I: Fund Raising context & process Financing typologies Private funding Private Investors Understand investor needs How to choose the right investor Tools needed Negotiation Due diligence Negotiation closing Vehicle definitions and typologies The “vehicle” of an investment

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Fund Raising: financing typologies

Public funding– refers to public funds that are available to support the start up and development of the enterprises, such as: European funds: the European Commission has the objective

of creating a favorable environment for SMEs, existing and potential, through projects of cooperation, awareness and financing. At present the principal programs that support entrepreneurship are the following: Structural Funds, such as JEREMIE (Joint European

Resources for Micro-to-Medium Enterprises); Financial Instruments, such as CIP (Competitiveness and

Innovation Framework Programme); Other financial instruments, such as FP7 (The Seventh

Framework Programme). National funds: refers to financial contributions of provincial,

regional or national origin which resources come from national or European funds. This kind of contribution never cover the full funds needed from the enterprise and are allocated as free grants and/or subsidized credits.

Private funding– refers to funds that are acquired by the enterprise as Debt capital and / or Risk capital to support their start up and development.

Often Public and Private funding coexist in the life of a company.

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Debt capital – refers to the capital that a business raises by taking out a loan. The main characteristics are: The subscribers of the loan, typically banks, are creditors; The loan has to be repaid following an amortization schedule

that depends on the tools adopted and agreement with the subscribers ;

The loan has to be repaid considering the agreed interests that represent the subscriber gain.

Risk capital – refers to the capital that a business raises by selling its shares . The main characteristics are: The buyers of the shares, the investors, become partners of

the company (shareholders); The investors could require the direct involvement in the

management of the company (see following); The shares follow the life of the company and, theoretically,

have to not be repaid. Normally the investors require the payback of their investment following a fixed period of time (3-5 years);

The capital gain, capital invested plus extra value, represents the returns of the risk capital over a period of time.

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Fund Raising: private funding

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The election between Debt capital – and Risk capital depends mainly from the following elements:

Life cycle of the venture; Risk evaluation; Securities requested; Economic convenience; Fiscal implications; Control requirements; Compatibility and financial equilibrium.

As source of funding, Debt capital is mainly used when the company business is quite consolidated. Risk capital is more adequate in the high growth phases of the company business.

Both source of funding can be utilized at the same time by the enterprises.

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Fund Raising: private funding

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Basic

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Identified innovation

s PoC

• Entrepreneur / Family / Friends• Business Angels

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Public Funding

Start upStep

growthConsolidati

on

Pre-SEED Funding

SEED Funding

• Business Angels• Public Agencies

• Business Incubators• investment funds • industrial partners

• Venture Capital

• Public Agencies• Investment funds • Industrial partners

• Venture Capital

• Investment funds • Industrial partners

• Venture Capital• Private Equity

Fund Raising: private investors

• Entrepreneur

DevelopmentFunding

Full Dvlp Funding

Expansion

• Self financing• IPO

• Private Equity• Industrial partners

Expansion Funding

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Entrepreneur / Family / FriendsAt the very beginning of the new venture the first private investors to be involved are the same entrepreneur and the close network he/she is able to involve in the business. The entrepreneur is the one that believes the most in the project and he / she is the one that will risk the most for it. Business AngelsWealthy people that invest in one or more venture with high potential growth, bringing capital (financial business angel) and, in some cases, industry competences (industrial business angel) . These subjects can operate on their own (usually locally) and / or in organized network (e.g.: www.iban.it; www.eban.org; www.italianangels.net). The investment return for the BA usually is the capital gain but, in some cases, also the revenues generated by the venture. Usually, in Italy, the BA invest “small” amount of money and privileges ventures which products / services time to market is quite short. -7-


Start up Step growth

Consolidation

• Business Angels•Public Agencies


•Venture Capital

•Public Agencies• Investment funds • Industrial partners

•Venture Capital

•Investment funds • Industrial partners

•Venture Capital•Private Equity

Expansion


• Private Equity•Industrial partners

Identified innovations

PoC

• Entrepreneur / Entrepreneur / Family / Family / FriendsFriends•Business Business AngelsAngels

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Public AgenciesLocal Financial Investment Agencies (e.g. www.filas.it; www.finlombarda.it) with the mission to promote the local enterprises development. These entities usually manages special funds of the related Region , that have EU origin, with matching fund objectives (stimulate further risk capital). Public Agencies usually invest in companies from their start up phase until their step growth phase.

Business IncubatorsFacilities where the entrepreneurs find business support resources and services, offered both in the incubator and through its network of contacts. Incubators, public or private, vary in the way they deliver their services, in their organizational structure and in the types of clients they serve. The Incubators can provide risk capital to their incubated companies directly or through their network with other private investors. (e.g.:www.almacube.com; www.biclazio.it) -8-


Step growth

Consolidation


•Venture Capital



Expansion




PoC

• Entrepreneur / Family / Friends•Business Angels

Start upStart up

• Business AngelsBusiness Angels•Public AgenciesPublic Agencies

• Business IncubatorsBusiness Incubators• investment funds investment funds • industrial partnersindustrial partners

•Venture CapitalVenture Capital

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Investment fundsMerchant banks that have venture capital funds dedicated to the support to the innovation and development of the enterprises (e.g. Atlante Ventures – gruppo Intesa Sanpaolo – www.group.intesasanpaolo.com). Usually they operate in pool with other private investors, can be generalist or specialized funds and tend to invest in companies starting from their late stage of the start up phase until their consolidation phase. In terms of requested clauses, the Investment funds tend to operate as the Venture Capitalist do (see following). Industrial PartnersIndustries can bring risk capital either through the acquisition of companies shares or through other financing operation like merger & acquisition. The latter carry ownership structure and corporate governance change. Furthermore, company A that acquire the shares of company B usually request special agreements related to the business of company B (e.g. Exclusivity in the areas of R&D, production, business development). This kind of investment can occur all along the venture life. In addition to the funds, Industrial partners usually bring in their field competences.

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Step growth

Consolidation


•Venture Capital



Expansion




PoC


Start upStart up




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Venture CapitalInstitutional operators dedicated to risk capital investments that consist in the temporary acquisition of a participation in the capital of companies target, with the objective of realizing a capital gain in a medium / long period of time (3 – 5 years). Usually the venture capitalist, in addition to the funds, brings in managerial competences (although not interested in taking care of the corporate governance), financial network for the further growth of the company target and, in some cases, also technological network. The VC can be either generalist or market specialized. VC requests clauses such as: lock up of the entrepreneurs / initial shareholders; right of pre-emption; tag along; drag along; entrepreneurs / management commitment to the 100% of their professional time plus no competition clause. The VC tend to invest in risk capital from the start up phase to the consolidation phase of the companies.(For a full list of VC operating in Italy: AIFI – Italian Private Equity and Venture Capital Association – www.aifi.it).

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Step growth

Consolidation


•Venture Capital



Expansion




PoC


Start upStart up




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Public Agencies

Investment funds

Industrial partners

Venture Capital

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Consolidation



Expansion




PoC


Start up



•Venture Capital

StepStep growthgrowth

•Public AgenciesPublic Agencies• Investment funds Investment funds • Industrial partnersIndustrial partners


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Investment fundsIndustrial partners Venture Capital Private EquityThese entities develop the same kind of activity as the VC, investments in risk capital, but their companies target are already in their consolidation phase and the value of the operation is usually bigger than the one realized by the VC.

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ConsolidationConsolidation

•Investment funds Investment funds • Industrial partnersIndustrial partners

•Venture CapitalVenture Capital•Private EquityPrivate Equity

Expansion




PoC


Start up



•Venture Capital

Step growth


•Venture Capital

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Industrial partners Private Equity Self financingThe expansion phase can be financed by the companies also from the profits that they are able to generate. IPOAn initial public offering (IPO), is the first sale of stock by a company. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises. The listing in a securities market, usually, open to the venture the access to a stable channel of financing because they can collect risk capital from a bigger number of investors. Each security market has its own rules for the listing of the companies. Nevertheless to be listed the companies have to adopt tight rules of corporate governance. Smaller companies tend to be listed in “alternative” markets (e.g. AIM - London Stock Exchange’s international market for smaller growing companies; MAC – Mercato Alternativo del Capitale).

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ConsolidationConsolidation



ExpansionExpansion

• Self financingSelf financing• IPOIPO

• Private EquityPrivate Equity•Industrial partnersIndustrial partners


PoC


Start up



•Venture Capital

Step growth


•Venture Capital

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Understand investor needs means understand their principle objectives: Institutional investors (Venture Capitalist, Private Equity, Investment Fund): capital gain in the medium / long period (3 – 5 years) due to the cede of the acquired stake in the companies. Business Angels: capital gain from the investments but also, especially for industrial BA, a personal satisfaction deriving from the entrepreneurial activity developed. Public Agencies and Business Incubators: capital gain and promotion of local entrepreneurial activity.

Consequently the following needs are true for all the private investors described but with different importance for each category considered. In particular: Investors fund cycle; Investors realize temporary investment Investors fund focus; Investors request tight clauses to the founders / management of the company; Investors request due diligence. -14-

Fund Raising: Understand investor needs

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The entrepreneur has to feel comfortable with the financing solution chosen and has to seek investors suitable with his / her project. The research of the best solution for the venture financing needs has to be focalized and has to consider the following elements:

Investors track record in terms of kind and size of operations realized (e.g.: life cycle of the target venture; amount of funds invested; size of the target venture);

Market and geographical area focus;

Acquisition of majority or minority stake of the company.

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Fund Raising: how to choose the right investor

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The entrepreneur has to have ready the following tools to start the fund raising campaign:

Non Disclosure Agreement ; Elevator Pitch & Short Presentation (non conf.); Business Plan &, Project Presentation (conf.); Product/s Investigator Brochure/s (conf.); Due Diligence Package; Investment Structure (& Term Sheet).

Be sure that external people, not of the venture team, are able to understand and navigate the documents. Very important the first approach and the way the entrepreneur present himself / herself and the company / project proposal. Consider to engage supports.

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Fund Raising: tools needed

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To start the negotiation with the investors the entrepreneur has to have decided the following main elements:

Stake of the company to offer to the investor; Pre-money evaluation of the venture; Availability to cede control; Availability to be involved in the company business at 100% of his / her professional time; Financing needs (amount and time distribution) and use of funds raised; Founding shareholders and governance with reference to the funding process have to be ready; Put in place a process to collect all the shareholders requests and “deleghe”.

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Fund Raising: negotiation

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The due diligence is an investigating process related to the operative and economic – financial structure of the company target . The Investors request the due diligence to find confirmation of the real situation of the company target and its potential. The process of the due diligence starts from the beginning of the negotiation but gets to its core activity following the signature of the term sheet (TS), usually in a “data room”. Usually the DD is developed with external professional support. The principal areas that are investigated are:

Market (DD at the beginning of the negotiation); Scientific / Technological (DD at the beginning of the negotiation); IP (DD following the signature of the TS); Financial (DD following the signature of the TS); Tax (DD following the signature of the TS); Legal (DD following the signature of the TS). The results of the DD can influence the final decision / investment contract.

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Fund Raising: due diligence

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The term sheet is the document where the guide lines of the investment are described (e.g.: pre-money evaluation; funds to be raised; stake of the company to be given to the investors; others). Following the signature of the TS a formal DD is developed. The subsequent steps are:

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Fund Raising: negotiation closing

DDDD

Positive

Negative

InvestmentInvestment ContractContract: the contract where the investment structure : the contract where the investment structure agreed in the TS are converted in legal terms.agreed in the TS are converted in legal terms.Shareholders Agreement: Shareholders Agreement: the agreements between all the the agreements between all the shareholders of the company -including the new shareholders, the shareholders of the company -including the new shareholders, the investors- ruling what agreed in the Term Sheet in terms of investors- ruling what agreed in the Term Sheet in terms of governance, shares categories and management of the way-outs.governance, shares categories and management of the way-outs.

NegotiationNegotiation

Positive

NegativeInvestors Investors withdrawwithdraw

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The “vehicle” of an investment is the legal entity of the initiative, that has to permit the entrance of a new shareholder (the investor /investors) in the company structure.

In Italy the two main categories of vehicle are:

Società di capitali: Società a responsabilità limitata Società per azioni Società in accomandita per azioni

Società di persone: Società semplice Società in nome collettivoSocietà in accomandita semplice

Other legal forms are usually not applicable to a venture initiative (e.g. cooperatives, individual firm, …).

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Fund Raising: “Vehicle” definition and typologies

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The choice of vehicle for the investment has to take in consideration:

The entrepreneur and investors risk has to be limited to their participation in the venture (“società di capitali”); Rules / constrains eventually in in place (such as standard relationship with the “mother” research entity); Minimum amount of capital requested by law; Corporate governance roles established by law; Future development of the company structure and possibility to become publicly traded enterprises.

At the beginning of the venture life cycle often the Srl vehicle is more common. In the later stages of the life cycle the common vehicle is the S.p.A.

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Fund Raising: the vehicle choice

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S. Bellomo, C. Giacchè, 2007. “La finanza straordinaria come mezzo di crescita per la Piccola Media Impresa”. FrancoAngeli. R. A. Brealey, S. C. Myers, 2001. “Principles of corporate finance”. McGraw-Hill. K. Campbell, 2008. “Smarter ventures. A survivor’s guide to venture capital through the new cycle”. Financial Times Prentice Hall. C. Compagno, D. Pittino, 2006. “Ricerca Scientifica e nuove imprese”. ISEDIS.Harvard Business Review on Entrepreneurship, 2000. Harvard Business School Press. IBAN, 2008. “Guida pratica allo sviluppo di progetti imprenditoriali”.

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Fund Raising: Bibliography

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Expert in the technology transfer (TT) field with extensive

experience in the management of companies in the life science

area and development of TT projects for academic institutions.

At present Ms Gioia manages different projects related to the

following areas: fund raising campaigns; business development

activity; growth strategy activity.

Ms Gioia has been CFO of Lay Line Genomics S.p.A. (Italy),

biotech company, Manager of the TT area at SGC Sviluppo

Gestione Controllo S.r.l. Member of Eurogroup Consulting

Alliance (Italy) and Credit Analyst at Banco di Sicilia - London

Branch (UK).

Ms Gioia has an International MBA at Instituto de Empresa,

Madrid (Spain).

[email protected]

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Fund Raising: Roberta Gioia Biosketch

fund raising

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