Public Private Partnership in PreSeed Funding

October 27th, 2006

Risto KalskeSITRA, Finnish National Fund for Research and Development

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Contents

− Observations about General CIP principles of public financing− A practical example of Public Private Partnership

in PreSeed Funding in Finland− Towards Pan-European Market Place in Start-Up Financing

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Community guidelines on state aid to promote risk capital investments in small and medium-sized enterprises

− Scope: Risk capital and companies with perceived high-growth potential at their early growth stages

− Demand from companies with high-growth potential that do not have sufficient access to capital markets

− Supply of risk capital comes from investors ready to take high risk in exchange of potentially above-average returns from the equity invested

− Aided risk capital funds – low overall profitability

− Ensure that profit-driven and professional investment decisions are strengthened in order to further encourage private investors to co-invest with the State

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Community guidelines…

− Supply side: The investor needs to make a careful analysis not merely of any collateral being offered (as a lender does) but the entire business strategy to estimate the possibilities of making a profit on the investment and the risks associated with it.

− Demand side: The enterprise must understand the benefits and risks associated with external equity investment to pursue the venture and to prepare sound business plans to secure the necessary resources and mentoring

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Community guidelines…

− State aid for risk capital must result in a net increase in the availability of risk capital to SMEs, in particular by leveraging investments by private investors

− State aid will be inefficient if it goes beyond what is needed to induce more risk capital provision. To ensure that aid is limited to the minimum, it is crucial that there is significant private participation and that the investments are profit-driven and are managed on a commercial basis

− The presence of publicly supported measures may discourage other potential investors from providing capital

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Community guidelines

− The Commission considers that the main source of market failure relevant to the early stage risk capital markets relates to imperfect or asymmetric information. Potential investors face difficulties in gathering reliable information on the business prospects of a new company.

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Non-functioning private capital

marketLack of

capital

Corrective Measures:

• State Aid

• State Funds

Market Failure in Risk Capital Markets

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Non-functioning private capital

market

Lack of

capital

Market Failure in Risk Capital Markets

Lack ofinformation

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Better functioning

p rivate c apitalmarket

Lack of

capital

Market Failure in Risk Capital Markets

Lack ofinformation

Public Capital:

Goal-oriented Funding

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Lack of

capital

Market Failure in Risk Capital Markets

Lack ofinformation

Public Private Venture Capital

Public Capital:

Goal-oriented Funding

Better functioning

p rivate c apitalmarket

INTRO Market Place

A Finnish Five Years’ Experience in Public Private Partnership in Funding Early Stage Growth Companies

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Start-upCompanyStart-upCompanyDIILI

Human Resources

INTRO

Capital

LIKSABusiness Concept

It’s not all about money

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SITRA and business angel network

− In-depth public / private partnership with business angels since 2001:– A deal-flow development program– INTRO-market place as a trade point– Offers syndicate partnership– ”sales competence as sweat equity” scheme

− Coordinates the investment process− A national network of 450 business angels− Initial funding for pre-seed technology companies

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LIKSA

•Focus on acquiring market information

•20 … 70 k€ and up to 24 months

•Resulting in a high quality business plan

•Sitra and TEKES financing in cooperation

DIILI

•Sales competence as sweat equity

•Resource: experienced business professionals

•Objective: to speed up the investment process

PreSeed: integrated investment readiness scheme for start-ups

INTRO

•Marketplace for early stage investments

•Private persons (business angels) as investors

•Aiming at syndication

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Stepping stone to venture capital

• I nternet access• V enture forums• I nvestment negotiations• Syndicates

DIILI sweat equity

resources

D eal flow

LIKSA funding business

plans

Businessangels

SITRAPreSeed

-VC funds

Microsoft IP Ventures

technology

Dealflow

INTRO

200 40 20

VERIFICATION

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INTRO – a true value-adding market place

− Funding the business plans− Addressing sales forces on sweat equity basis− Screening enterprises – screening business angels – screening

sales forces− Conducting investment process− Legal support – shareholders’ agreements− Stepping stone to VC markets− Public/private syndicates

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Proven results

LIKSA

• 600 LIKSA applicants instructed

• Funding to 160 start-ups

• Accelerates the commercialisation of the company

• Improves the target company’s possibility for receiving first investment

INTRO

• Private investors organised as an industry

• A growing community of 350 private investors (business angels)

• 35% investment ratio• Added impact from

private and public venture capital investments

DIILI

• A renewing group of 100 knowledge capital investors (1700 knowledge years)

• 25 investments carried out

• Expedites investment negotiations has opened up

• A new path to entrepreneurship

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Sitra’s objectives for co-partnering

− Need to create a strong Business Angel domain− Establish a well functioning pre-Venture Capital market

immune to VC fluctuations− Reduce the discontinuity in exit routes− Address BA domain as part of the VC chain− Improve Sitra’s success rate through BA / Sitra syndicates

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PreSeed – integrating value for the start-ups − Initial results are promising:

– First 50 investments in 4 years– 70% funded by BA/VC coalitions alone– 25 sweat equity investments in the first 24 months– 8 VC funds participated in the syndicates– Significantly accelerated investment process

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INTRONationwide network of business angels and

investee companies in one database

National and local network – at the same time

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EASY-projectEuropean-wide Cross-border

network of business angels and investee companies, 2007-2008, 11 Member

Countries, 5,2 M€ Budget

Future potential: cross-border network

Thank you!

Contact: risto.kalske@sitra.fi