Business Angels and their role for startups

Paolo ANSELMO – IBAN President

September 19th, 2014

www.iban.it

<<Entrepreneurship is the dynamic process of creating incremental wealth. The wealth is created by individuals who assume the major risks in terms of equity, time and/or career commitment and provide value for some product or service. The product or service may or may not be new or unique but value must somehow be infused by the entrepreneur by receiving the necessary skills and resources>>

Virtanen, 1997

Entrepreneurship: a definition

One of the major challenge confronting SMEs (which make up for 98% of enterprises in Europe) is getting access to financial resources, particularly in their seed, startup, and growth phases.

Not least as they are often considered as a high-risk investment, with potentially low returns which only materialise in the medium to long term.

Access to financial resources

• Own founder money

• LOVE money (family & friends)

• Bank loans & overdrafts (with or without guarantees)

• Public grants & micro credits (local/national government)

• INFORMAL INVESTMENT - BUSINESS ANGELS (SMALL EQUITY)

• Venture capital or Corporate venturing (larger equity)

• Public shares issue (equity, IPO – Initial Public Offering)

There are several possibilities of financing a company

EQUITY and/or DEBT

Funding options for an entrepreneur

• Business Finance is dominated by major banks • Finance provided to entrepreneurs is predominantly debt finance • EU Banking for small/new businesses is treated as retail • There are gaps in the “package” of support (growing or new firms) • SME’s market segment seen as high risk with high transaction costs • Debt finance usually requires some form of security or collateral (intangible assets are not security) • European Angel market (solo BA, syndications and networks) still immature and oriented to small investment

Current European Union situation

Entrepreneurs & investors The “traditional” finance gap

The Funding Gap

Pre-seed

Stage

Seed/Startup

Stage

FUNDING

GAP

Early

Stage

Later

Stages

3 F

Founders

Family &

Friends

(or Fools)

Angel Investors

(or Clubs)

Very few angel deals done above

€ 0,5 M

Very few VC deals done

below € 1 M

Venture

Capitalists

€0 €100 K €0,5 M €1 M €5 M up

PROs

– No cost of interest and no fixed repayment schedule

– Stronger financial position

– Reduced financial pressure

– Access to professional network and coaching

Cons

– Loss of management/

ownership control

– Request for a strong financial discipline

– Influence on management and strategic decisions

– Exit route (for investor) to be prepared

Equity Providers

VC – Easy to find via directories.

– Your request is only 1 among

many hundreds a VC receives.

– Can often provide large investment, e.g. via syndication.

– Thorough and formal due diligence and investment process.

– Exit route very important.

BA – Difficult to find.

– Request often a strong

personal involvement.

– Limited amount to invest

– Investment decisions often quick and less formal.

– Syndication more and more usual.

– Exit route less in focus

Venture Capital Vs Business Angels

“A Business Angel is a middle aged male with reasonable net income, personal net worth, previous start up experience, who makes one investment a year, usually close to home or office, prefers to invest in high technology and manufacturing ventures with an expectation to sell out in three to five years time” (Kelly and Hay, 1996) ”Business angels (informal investors, independent investors) are investors who provide risk capital directly to new and growing businesses in which they have no prior connection” (Harrison and Mason, 1996)

Business Angels - definition

Business Angel: private individual investing own wealth in early stage businesses PLUS own expertise and network of contacts

• Investment 25.000 – 250.000 Euro

• Equity investors

• Willing to share managerial skills, specialist knowledge and networks

• No sector preference

• Often prefer to invest in their region of residence – local investors

• Seeking profit, but also fun and adventure

• Usually total investments below 25% of wealth

• Can become involved in the business management (“active Angel”) or not (“passive Angel”).

Business Angels - Identikit

Venture Capitalists: MAKE MONEY !

Angels are a blend of the following:

Return on Investment

Staying involved (high sense of usefulness)

Give back (social approach)

Affection for Start-Uppers

Motivation: Risk and Rewards

• Board of Directors (non executive director)

• Advisor, mentor, coach

– Of CEO, of management team

• Step in during crisis (temporary), IF

• Assist in raising additional money

– Another Angel round

– VC money

• Tee up the company for the exit

Angel Roles in Portfolio Companies

• 5-10% of net worth invested (asset allocation approach)

• 8-15 investments (risk diversification)

• High tech, low tech, no tech (your choice)

• Variety of involvements

– Lead investor

– Board, advisor

– Passive

• Most of ROI from 1 - 2 of 10 companies

An Angel Portfolio Strategy Portfolio Considerations

What a Business Angel is looking for

• A compelling and sustainable business plan • A strong and engaged management team • High growth, scalability, strong financial projections • Prototype/Product/Service readiness • Operational involvement of the Angel investor • Adequate and objective pre-money valuation

Perceived return

Perceived risk

High

Low

Medium

Low Medium High

Banks

Friends&Family

Entrepreneur

Nasdaq

S&P500

Business Angels

Venture Capital

Investors

An Angel Portfolio Strategy What a Business Angel is looking for

• VCs exit in 3-5 years (assume 5)

• Angels invest earlier and expect to exit in 5-7 years (average assume 7)

• A balanced angel portfolio contains ten companies

• Consequently, angels should invest in 2-3 companies per year

– Build to ten company portfolio gradually

– A portfolio of companies in all stages of development

– Good balance for investors time and management commitment

An Angel Portfolio Strategy Integration Exits into Portfolio Strategy

16

Investor’s key drivers

Industry Sector Market growth potential

Exit Strategy

Expected revenues/return

Management team

Product/Service uniqueness

Managerial support

Fiscal purposes

Special driver -> startup a «vocazione sociale», a company operating in the following sectors: educational, cultural services, renewable energy, etc. - according to the Italian legislation.

An Angel Selection Strategy Investor’s key drivers

0-30% 0-25% 0-15% 0-10% 0-10% 0 - 5% 0 - 5%

Management team Size of opportunity

Product & Technology Sales channels

Competitive advantage Size of this round

Need for more funding

An Angel Selection Strategy Angel Rating System

Elevator Pitch

2 minutes verbal summary:

Product, opportunity, differentiation

Attract interest – not closing

Executive Summary

2-4 pages written summary

Balanced presentation

Attract interest – not closing

PowerPoint

20 minute verbal presentation

Cover whole business plan

Find serious investors

Full Business Plan

(write full BP first)

20-50 pages plus appendices

Validation scorecard (due diligence)

Basis for all other plan forms

An Angel Selection Strategy Angel Toolkit

What can stop a positive closing of an investment deal

• Initial screening and meetings

Entrepreneur(s) expectations on start-up value too high;

Limited growth potential;

Lack of affinity between proposer and investor.

• Business plan analysis

un-consistent market projections, lack of data, weak management team

• Letter of intent

Not acceptable valuation/exclusivity terms; IRR/ROI too you

• Technical, legal and financial diligence

Poor IPR, generic financial planning, cash flow burn rate, etc.

• Negotiation on pre- and post-money valuation, equity %

• Closing

An Angel Selection Strategy What can stop a positive closing of an investment deal

IBAN Association Our Network to sustain Informal Venture Capital Market

FINANCING

INSTITUTIONS

NATIONAL AND

INTERNATIONAL

PARTNERS

BUSINESS

ANGELS

SERVICES TO

SME’s

TECHNOLOGY

CENTRES

IBAN

Over the years IBAN has created a strong "relationship network" that provides a common factor to the skills and experiences of many organizations and operators in the sector, covering the entire "value chain" of "early stage” phase of SME’s. In this way IBAN can effectively support the start-up in the process of growth and value creation.

The Association IBAN is the institution that understands and represents the Italian community of the informal venture capital investors.

IBAN Association Objectives reached in more than 15 years of business

1. Improvement of European best practices, through close collaboration between IBAN

and the other partners of BAE

2. The role of business angels, as an economic operator, continues to grow: • sharp increase in the number of deals closed in the last 5 years • recognition of the importance of BA in the financial market

3. The Italian government has approved the tax exemption on capital gains on Angel

Investing (Law 133/08, article 3) 4. During 2012 the Association IBAN has been approached both by Banca d’Italia and by

the Ministry of Economic Development with regard to measures to support the sector (Law 221, 17 december 2012).

4.4. Italian BA Profile BA's personal profile from a recent Survey

IBAN Association

Business Angels & professionals

B.A.N. - regional operating area and

focus on cross-sector businesses

B.A.N. -national/international

operating area ad focus on cross-sector

businesses

Angel Investors Club

IBAN Association Network structure

IBAN has close relationships with leading Italian law firms and fiscal&tax advisors. Thanks to this, IBAN members are entitled to access detailed information on Angel Investing and on legal and fiscal news related to risk capital investing, as well as an operating guide on main contractual obligations and terms that Entrepreneurs and Investors have to agree upon, in preparation to the closing of the deal.

4.4. Italian BA Profile BA's personal profile from a recent Survey

IBAN Association Network structure – BAN Bologna

Example of B.A.N. - regional operating area and focus on cross-sector businesses

• BAN Bologna is a Local Association network founded in 2001 as a result of the cooperation between different kind of Public Authorities and Associations acting in the Bolognese area and since then it is a member of IBAN.

• The business angels network aims to support the development of start-up and early stage enterprises through innovative financial instruments and mentoring activities.

• Sensitize the territory on the culture of venture capital by organizing seminars, conferences, workshops, events, and Investment Forum to facilitate meetings between new businesses and / or project business proposers and BAs (informal investors).

• Promote the economic development of the province of Bologna and the Emilia-Romagna region, with particular attention to the introduction of innovation in SMEs.

11.556

18.700

31.100 31.460 33.334

34.847 33.800

31.857

0

5.000

10.000

15.000

20.000

25.000

30.000

35.000

40.000

Value of Investments (mln €)

2006 2007 2008 2009 2010 2011 2012 2013

Source: IBAN, Survey 2013

The Italian Market of informal venture capital is consolidated in a range of 30 - 35 mln €

Business Angels’ Investments Value of Investments

Source: Iban, Survey 2013

Business Angels’ Investments (3/4) Number of investment by sector Business Angels’ Investments Value of Investments

Source: Iban, Survey 2013

• The typical Italian BA is a 40-50 years old man, he has a high educational degree (82,7%) who mainly lives in Northern Italy.

• Generally is an entrepreneur with past experience as a manager, declare assets lower than € 2 mln and invests 10% of its available “cash” assets in the angel investing market.

Business Angels’ identikit Characteristics and investment behavior

www.iban.it

Via Ampère, 61/A

20131 Milan – Italy

Tel. +39 02 30.51.60.49

Fax +39 02 30.51.60

segreteria@iban.it

Paolo Anselmo - IBAN President

presidenza@iban.it

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