VENTURE CAPITAL

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VENTURE CAPITAL Powered By Docstoc
					Benedetta L. Romani
Francesco Fiocchetti
   Gennaro Pengue
   Flavia Guagliardo
     Adriano Pisculli
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                     SUMMARY

1. Brief history and definition of Venture Capital;
2. Corporate structure and operation;
3. Italian contest
4. Main European players and relationship with EU
   istitutions
5. New sector of investment and conclusions




                                                      2
      History of Venture Capital
 1946 = first two venture capital firms:
         1. ARDC
         2. J.H Whitney & Company ;
 1960/1970 = Venture Capital as e synonymous with
                technology finance;
 1980 = declining returns caused by the growth of the
          industry;
 1990/2000= The Venture Capital Boom and the
               Internet Bubble.
                                                         3
              Venture Capital

 It’s a private funding used to support risky new
 business and speculative ventures, usually with high
 growth potential.

 A typical venture capital investment usually involves
 the business owner giving up equity to venture
 capitalist in return for funding.



                                                          4
        Venture Capitalists and
           Business Angels
 Venture Capitalists are investment firms that makes
 venture investment, providing capital for start-up or
 expansion.

 They are looking for higher rate of return, bringing
 their managerial abilities to small businesses with
 great potential growth.

 Business Angels are private investor with huge
 personal capital, looking forward to invest their
 money in business which are not helped by financial
 institutions because are too risky.
                                                         5
              Structure of
          Venture Capital Firms
 Venture capital firms are typically structured as
  partnership;

 This comprises both high net worth individuals and
  institutions with large amounts of available capital, such
  as state and private pension funds, university financial
  endowments, foundations, insurance companies, and
  pooled investment vehicles, called fund of funds or
  mutual funds

 VC firms in the United States may also be structured as
  limited liability companies, in which case the firm's
  managers are known as managing members.

                                                               6
             Venture capital funding
 Venture capitalists are typically very selective in deciding
  what to invest in;

 Funds are most interested in ventures with exceptionally
  high growth potential,providing the financial returns and
  successful exit event within the required timeframe
  (typically 3–7 years) that venture capitalists expect.

 Young companies to raise venture capital require a
  combination of innovative technology, potential for rapid
  growth, a well-developed business model, and an
  impressive management team.


                                                                 7
        Venture capital funding
 This sheme meets businesses having large up-front capital
 requirements which cannot be financed by cheaper
 alternatives such as debt.

 Intangible assets such as software, and other intellectual
 property, whose value is unproven,explains why venture
 capital is most prevalent in the fast-growing technology and
 life sciences or biotechnology fields.

 Venture capitalists are expected to nurture the companies in
 which they invest, in order to increase the likelihood of
 reaching an IPO stage when valuations are favorable.

                                                                 8
                   Financing
According to the development of the company, there
   are three types of financing with venture capital:
1. Early
2. Expansion and development
3. Acquisitions and restructuring

To analyze these points, they can be divided in several
  subgroups in order to stress the fact that every step
  in a company lifetime involves a different approach
  by venture capitalists.

                                                          9
                 Disinvestment
 Time of exit from the firm’s capital is almost never
  predetermined, but depends on the development of the
  company.

 In successful cases, divestments take place when the
  company has reached the level of expected development
  and the value of the company and thus the membership,
  has consequently increased.

 Disinvestments happens when the conviction that is no
  more possible to solve the situation created takes hold.



                                                             10
             How to disinvest?
 There are several ways of disinvestment, depending
  on the type of business and operations previously
  put in place and on results achieved. Typical
  channels used by investors to sell shares in their
  possession are:

1. the IPO of the subsidiary titles
2. sale of the securities to another firm or to another
   institutional investor;
3. the repurchase of the participation by the original
   business group
4. the sale to new and old members, resulting from the
   merger of several companies in the meantime
   achieved.
                                                          11
        Just an overview of the
          enviroment in Italy:
 In italy small conpanies are 4 milions and they
  repreasent 99,9% of the companies in Italy;

 81,7 % of the employes in italy are emploied in small
  companies;

 Importance of industrial district in Italy:stream of
  small companies that are emploied in each stage of
  the production.(Ex:knitwear in the district of
  Carpi,engine components in Modena)
                                                         12
Small companies in Italy can be defined
 as having three main characteristics:
• Companies are not quoted on a stock exchange –
  they are “unquoted”

• Ownership of the business is typically restricted to a
  few individuals.

 Family connection between the shareholders

                                                           13
 Why do small companies in Italy find
        financing a problem?
 Small companies rarely have a long history or
 successful track record that potential investors can
 rely on in making an investment;

 Larger companies can easier have access to the
 international finance;

 Banks are particularly nervous of smaller
 businesses due to a perception that they represent a
 greater credit risk;
                                                        14
Why do small companies in Italy
  find financing a problem?
 A common problem is often that the banks will be
  unwilling to increase loan funding without an
  increase in the security given.

 Problem of uncertainty relates to businesses with
  a low asset base. These are companies without
 substantial tangible assets which can be use to
 provide security for lenders.

                                                   15
 How a small company in Italy could
       finance their buiness:
- Existing shareholders and directors funds (“owner
financing”)
- Overdraft financing
-Trade credit
-Equity finance
-Business angel financing
- Venture capital
- Factoring and invoice discounting
- Hire purchase and leasing
- Merchant banks (medium to longer term loans


                                                      16
              Venture capital
 Focus on high potential growth small companies;


 It makes research on the company and it builds a
 business plan fot the small company;

 Often venture capitalists buy company and after
 restiring them,they sell them at an higher price.




                                                     17
              Business angel
 A business angel is an affluent individual who
 provides capital for a business start up;

 Usually in exchange for convertible debt or
 ownership equity;

 A small but increasing number of angel investors
 organize themselves into angel groups or angel
 networks to share research and pool their
 investment capital.
                                                     18
For example…
                                        Business angel activity
  Italian small company
                                       that analize the business
    producing clothes                             plan
 Clothing producer needs cash to       The menbers of the association
  buy a machine for special              analyse the business plan of the
  embroderies;
                                         company;
 The machine costs 20.000 euro         The company falls in a basket with
  and the company needs money to         other purposes of business plans;
  buy it;                               Our company show sthe own plan
                                         ;
 The banks turned down to lend
  money because the company             The association can decide to
  doesn’t meet the requirements.(low     catch or drop the investment;
  asset value)                          If the angels decide to finance
                                         it,the company will be a part of a
 The small company needs an
  angel;                                 basket of investments that the
                                         menbers will enjoy;
                                                                              19
Venture Capital Investment in Europe
 : differences between Germany and
            United Kingdom
 These two countries are very important in Europe:
 they account for over 50% of all venture capital
 investments in the Continent.

 The spread of two countries is due to, most of all, the
 difference in their financial system:
          Germany is Bank-oriented while
          UK is Market-oriented.

                                                        20
GERMANY   UNITED KINGDOM




                           21
  Similarities between Germany
    and The United Kingdom
 In both countries venture capital funds provide
 funding to companies in all stages with a sligh bias
 towards later stages of development.

 Also the distribution of investments across industry is
 surprising similar: manifacturing and chemicals are
 relatively more popular.



                                                        22
 European Institutions and venture
          capital funds
• 1998: The Commission published several documents
 in order to create a “Pan-European Equity Market”
 for innovative companies.

• In the same year was created the EVCA (European
 Venture Capital Association) tend to focus on the
 supply of funds and on the creation of favorable
 structural conditions for enterpreneurship.


                                                     23
       Eurpean Venture Capital
            Association
 It is the largest private equity and venture capital
  member association in the world, with over than
  1200 members.

 It caters for: investors in university spins-out;
            venture and grown capitalists;
            corporate venture capital
            companies;
            mid-markets and larger buyout
            investors;
            miriad advisory members.                     24
The European Investment Fund
In 2000, the Commission restructured the EIF (Euopean
  Investment Found) that provides portfolio guarantees to
  financial insitutions involved in SME finance.
The EIF offers:
 Equity products:              Debt products:

 1. Technology Transfer;       1. Credit enhancement-
                                  securisation;
 1. Lower mid-market;
                               1. Guarantees/counter-
 1. Venture Capital.              guarantees.
                                                            25
      Programming Period 2007-
               2013
Competitiveness and Innovation Framework Programme (CIP):
 this programme aims to facilitate access to loans and equity
 finance for small-medium enterprises where market gaps have
 been identified.

It provides:
• Risk capital for innovative SMEs in their early stage:
   EIF can invest 10 to 25% of the total equity of the intermediary
   venture capital funds, or up to 50% in specific cases;

• Risk capital for SMEs with high growth potential in their
  espansion phase: EIF can invest 7.5 to 15% of the total equity
  of the intermediary venture capital funds, or exceptionally up to
  50%.
       New Sectors of Investment
 Denmark 22.71%
  Germany 38.68%                 Solar 33.22%




                                   Bio-energy 5.79%



United Kingdom 5.79%
                                 Idro-power 14.64%
 France 5.83%
 Spain 12.35%
                         Wind Energy 46.35%
 Austria 14.64%
                                                27
      Renewvables energies:
     an opportunity to catch for
          venture capital
 Venture capitals put their eyes on renewvables
  energies;
 They sat special teams or branches to focus better
  on this special kind of investment;
 U.S and Europe kept investing a lot over the years
  on this new market in order to find new sources of
  energies.


                                                       28
    Renewvables energies:an
    opportunity to catch for the
         venture capital
Three reasons of attractiveness :
1. Governments keep increasing deregulation of the
   market energy;
2. Enviromentalists put the attenction on the need of
   the world of new sources of energies;
3. Increasing costs of the oils.


                                                        29
                      The goals

• Venture capital energy companies invest on projects
 long the value chain,focusing on two directions:

1.Increasing efficiency of the energetic system;


1.Decreasing the use of fossil fuel put down the values
 of the pollutions.



                                                        30
               In recent years
 2006:venture capital invested $7.4 billion on
  renewvables energies winth an increasing of 146%
  respect the last year;
 2008:in the last mounths of the year a drop in the
  market occured
 2009/2010:investments increase again supported by
  the developing countries (China)and U.S.




                                                       31
        Sectors of investment
 Solar and geothermal energies represent two fixed
 points for investments;

 By the way, in recent years wind energy became the
 top ranking, achieving the status of most actractive
 technology among renewvables energies.




                                                        32
     What happens in Europe?
 Europe is one of main area where the VC
  investments on renewvables energies sat;
 Europe represents the 30% of total investments in
  the world, concerning this sector;


  Large stage      Early stage      Borning stage
  65%              20%              15%



                                                      33
                 Conclusions
 From the previous table we noticed that venture
 capitals prefer to acquire energy companies that
 already own high skills;

 This tendency is becaming quite the opposite in this
 last years because of the improving of new
 technologies that allow to manage better the risk of
 borning firms.



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