Business Angels –

Partners (not only) for financing

Innovation Thursday 29.5.2008

Introduction

Dr. Silke Horáková, PhD

• Commercial Banking, Investment Banking

(Asset Management), Project Finance,

• Private Equity SME

• start ups/ early stage

Foreword

� There is an asymmetry of information between

entrepreneurs and investors

� It’s not only a question of access to money but also

a question of life cycle of a company and about …

sales and market penetration

� Investment readiness is needed

� All money is not the same

Financing Cycle of a Company

• friends and family = seed capital, start-up

• business angels = start-up, early stage

• venture capital / debt = expansion, buy-outs

• financial markets (private & public)

• strategic partners

Risk/Financing Relationship

Capital Needs

Time

Seed Start-up Early Growth Sustained Growth

High

Risk

Low

Risk

Friends,

Family & Founders

Business

Angels

Formal Venture

Capital

IPO

0

Angels help

fill the ‘Equity Gap’

What is a Business Angel?

• Investment 25 000 - 250 000 euro

• Willing to share their managerial skills, specialist knowledge

and networks

• No sector preference

• Often prefer to invest in their region of residence

• Seeking profit, but also fun

• Usually total investments below 25% of wealth

Business Angel =Private individual investing own wealth in early stage businesses AND own expertise and network of contacts (EBAN)

What “sort”of Business Angel?

Motivation Drivers…

Guardian angelEntrepreneur angel

Serial lead investor

“job-seeker”

Archangel

Virgin angelWealth maximising angel

Lotto investor

Love money

Tax driven investor

Passive portfolio builder

Role of the Angel Investor

• Partner for discussions – strategy/ business

model/ know how

• Contacts

• Financial control

• Exit

Investment Strategy

• 1-5 investments you want to get heavily involved (hands on)

• Portfolio investment (hands off)

• One sector or a spread of sectors

• High tech/low tech? how “green“ are you?

• One stage or a spread of stages

• Local or national or even international?

• Co-investors? (VC, BA, experts)

• Deal Structure/Instruments/ How to earn money?

“Attractive” Investments

• Innovative business idea/Unique position on the market

(Seed- or start up phase)

• Developed product / service with sales

• Current & comprehensive Business Plan

• High growth / scaleable / strong business forecast

• Angel involvement welcome

• Realistic pre-money value

• Strong committed management team !!!

How to approach a partnership with an BA?

Perspective of Investor

• Create a relationship, confidence – investment in people, convince with your personality (complementary team)

• Perfect knowledge of your business, market and your competition

• Have a vision (and ideas how to get there)

• Demonstrate your business model and a clear competitive advantage

• Be either 50% cheaper or 50% better

• Be open to advice

• Valuation !!

Valuation – a critical issue

• Major problem: high degree of uncertainty

• Use of “classical valuation techniques”? (Pay

back period, NPV, IRR) - quality of data

• Exit multiples

• How to take into account different views of

entrepreneur and investor?

How to find Angel Investors in the

Czech Republic

• business angel networks

(www.aia.cz,www.bids.cz

(BANET),www.bacz.cz, www.ceag.cz)

• small business consultants

• CzechInvest Financni fora, Investicni fora

• EBAN/Easy Project

Economic Importance of BA Investments

� Originally from US:

� 250.000 business angels invested in 2005 an overall amount of 24 billion US$

� Finance ca. 60% of all American Technology Start-up’s

� Europe: estimate 2006:

� 50.000/75.000 angels investors

� 2-3 billion€ invested (10% of the American BA activities)*

* According to EBAN (European Angel Network) estimates

Sector distribution - UK experience

Sector Volume

Telecommunications 1

Media & Communications/films 11

Agriculture & distribution technology &

industrials

5

Software for businesses

/other business services

10

Consumer software & leisure & tourism 8

Pharma & healthcare 2

TOTAL 37

£5.6m:

201

investments by

100-150

angels

A typical network over the last 3 years

Deal size typically under £250,000, but can be upto £1mmedian investment per angel is £25,000*

About 20.000 BA, of which are c.7.000 organized in

50 BA networks

Sector distribution - UK experience

Sector Volume

Telecommunications 1

Media & Communications/films 11

Agriculture & distribution technology &

industrials

5

Software for businesses

/other business services

10

Consumer software & leisure & tourism 8

Pharma & healthcare 2

TOTAL 37

£5.6m:

201

investments by

100-150

angels

A typical network over the last 3 years

Deal size typically under £250,000, but can be upto £1mmedian investment per angel is £25,000*

About 20.000 BA, of which are c.7.000 organized in

50 BA networks

Germany

• About 1000 investors organized in BA networks holding 3,8 investments in average*

• Average investment size EUR 100.000*(high variation), giving an overall financing volume of about EUR 400million (compared to the new “Hightech-Founders Fund” of the government amounting to EUR 262million)

• *Estimates according to BAND (German Angel Networks Org.)

Trends in Angel Investments

• IT, internet services, biotechnology, medical

technology, ecology

• CR: much larger range, services in particular

GRISOFT - A Czech Success Story

�AVG Anti-Virus/Firewall/Anti –spyware�Today: one of the fastest growing ITcompanies in the world� 40 million users worldwide

History:�Founded in 1991 by two Czech entrepreneurs�1992: start of AVG sales (CZK 2,3m annual sales)�1997/1998: expansion to Germany, GB, US�2001: company acquisition by group of BA under leadership of Benson Oak Capital�2006: sale of majority stake (65%) of the company to Enterprise Investors/Intel for USD 52m�2006: acquisition of ewido networks (anti spy-ware)�2006 annual sales: about CZK 1.000m

How to encourage BA investments?

• Promote a general entrepreneurial atmosphere

• Investment Readiness programmes –get

entrepreneurs ready for investments (business planning

advise, coaching, structured/unstructered training)

• Investors Readiness programmes – educate investors

• Syndication/BA networks

• Co-investment funds/seed capital funds

• Fiscal incentives (capital gain or loss exemption from tax,

equity guarantees)

EBAN statistics 2007

• Study based on 117 responses from a total of

234 networks(excl. Russia, Turkey, Israel) in

Europe (activities in 2006)

• Number of networks (mid-2006): 234

• Number of angels active in the networks: 10.331

• Number of projects received: 13.189

• Number of deals done: 843

• Average amount of the deal: EUR 177.311

Number of BA Networks in Europe

(1999-2005)Country 1999 2000 2001 2002 2003 2004 2005 2006 2007

Czech R. 0 0 0 1 1 2 2 2 1

Denmark 0 1 4 6 8 8 8 7 7

France 4 13 32 48 48 40 38 35 41

Germany 1 43 36 40 40 40 43 41 38

Hungary 0 0 0 0 0 1 1 1 2

Italy 2 5 12 11 10 12 12 11 10

Spain 0 1 1 2 3 11 20 21 33

Sweden 1 2 2 2 93 28 28 23 21

Switzerl. 1 3 3 2 3 7 7 7 6

NL 1 1 2 2 3 3 5 4 5

UK 49 52 48 48 51 51 35 34 36

Europe 66 132 155 177 197 230 227 211 243

Transn. 0 0 0 0 0 1 1 3 4

Historical Trends

(all figures based on responding networks only)

Angels

1996 1997 1999 2001 2002 2003 2004 2005 2006

470 742 1487 3129 4347 13218 12773 8227 10331

Projects

1996 1997 1999 2001 2002 2003 2004 2005 2006

545 769 872 10248 11333 10951 12415 n.a. 13189

Deals

1996 1997 1999 2001 2002 2003 2004 2005 2006

42 281 320 454 573 300 580 653 843

Qualitative Aspects - main reasons for

project rejection (1)

(67 networks answered)

Two outstanding reasons :

• Problems related to the management team

(47 answers)

• Weak business model/no clear Unique Selling Point

(USP) (48 answers)

Qualitative Aspects - main reasons for

project rejection (2)

Other important factors included:• Weak business plan (14 answers)

• Issues with the pre-money valuation (14 answers)

(70% over-valued)

• The project does not belong to the target group/sector of the investor (s)

(18 answers)

• The stage of development is too early or too advanced (12 answers)

• Lack of investment readiness (9 answers)

• Capital needs exceed funding capacity of the business angels (5 answers)

• Too short time to investment, too high risk (5 answers)

• The rest of the answers (from 1 to 4 answers) included the following perceived pitfalls: lack

of strategy, not in the regional focus, lack of availability of the investors, lack of financial

commitment from the founders, inability to scale the business, communication weaknesses.

Sectors of investments (2006)(52 networks responded)