Funding of High Tech Start-Ups Telecom Forum 2003 Helsinki University of Technology, 14 October 2003 Vesa Sadeharju Director, 3i Finland
Vesa Sadeharju - My background • MSc. (Eng.) and MSc. (Econ.) • responsible for technology investments in 3i Finland • seven years experience on venture capital business. Co- founder and Director in IT and Telecommunications with SFK Finance Oy • joined 3i in 2000 when 3i acquired SFK Finance Oy • has been involved in the industrial electronics and automation industry since 1982 in division management, profit centre managment, product development and marketing with ABB • has been a board member of 14 technology companies, currently e.g. in Meridea Financial Software Oy and Mitron Oy. 2
3i the Leading Venture Capital Company • Founded in 1945 • FTSE 100 and Eurotop 300 member • Invested over £15 billion in more than 14.000 businesses • 3i’s portolio, as at 31st March 2003, consisted of investments in over 2,000 businesses, with a combined valuation of £5 billion including co-investment funds • Approx. 900 employees across the world 3
3i Technology Facts • In the 12 months to 31st March 2003, 3i invested 249 MEUR (including co-investment funds) in the 183 technology businesses. This represents almost 19% of total investment in the period. • In the 12 months to 31 March 2003 3i invested on average approximately 1 MEUR in technology based businesses each working day (including co-investment funds). • 3i has investments in 500 early stage technology companies which at the year-end were valued at almost 847 MEUR, representing approximately 15% of the total 3i portfolio value. 4
Funding of High Tech Start-Ups • Why funding • Funding sources • VC business in the US and in Europe • What should a high tech start-up company expect from a VC • What does a VC expect from a high tech start-up company, investment criterias • Funding process • Value growth • Cases • Final thoughts 5
How to start? Overall portfolio increased to €3.8bn in 783 companies 6
Why Funding? + Cashflow 1 2 3 4 5 6 Time / years _ 7
Funding Sources • Own or family pocket • Business angels • Government institutions − SITRA − National Technology Agency of Finland − Finnvera − Finnish Industry Investments Oy • Venture funding − private independent firms − subsidiaries of banks − corporate venturing • Banks • IPO, Initial Public Offering 8
Terms • Business angel • Venture capital • Private equity • Ordinary shares • Preference shares • Pre-money value • Post-money value • Exit 9
VC Business in the US and Europe Christopher Columbus was the first to explore uncharted seas to the West – backed by venture capital – and options. A crew of 87 experienced seamen accompanied Christopher on the Nina, Pinta, and Santa Maria 10
NASDAQ Performance From 1996-2002 US Venture Capital Activity 1995-2003 $ 6 ,0 0 0 $ 5 ,0 0 0 99.6 100 Daily Trading Volume (000's) 90 Daily Closing Stock Price $ 4 ,0 0 0 Billions of $ invested 80 70 60 $ 3 ,0 0 0 52.4 50 36.5 40 $ 2 ,0 0 0 30 21.2 19.2 14.4 20 10-16 9.6 10 5.1 $ 1 ,0 0 0 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 $ 0 Est. 1 /2 /9 6 6 /6 /9 6 1 1 /8 /9 6 4 /1 7 /9 7 9 /2 2 /9 7 2 /2 7 /9 8 8 /4 /9 8 1 /8 /9 9 6 /1 6 /9 91 1 /1 8 /9 94 /2 6 /0 0 9 /2 9 /0 0 3 /8 /0 1 8 /1 3 /0 1 1 /2 4 /0 2 11
The US Venture Industry Capital Under Average Management Capital $’s Billion Per Firm #VC Firms 1970 28 1 $35 1980 87 3 $34 1990 386 32 $82 2002 892 253 $283 200X est. 500 150 $300 12
Expected Allocation of Funds Raised in 2002 € 2.2 Billion available for Hitec Start-Ups in Europe High-Tech Expansion/Development 7,5 % Non High-Tech Early-Stage Non High-Tech 2,1% Expansion/Development High-Tech Early-Stage 13,4% 7,9% Not Available 2,7% Buyout 66,3% Source: EVCA 13
Investments 1991 – June 2003 in Finland M€ / Nbr 500 462 449 M€ 418 450 391 Nbr 400 340 325 397 350 300 265 285 226 250 205 192 200 177 137 136 122 150 115 100 84 38 28 50 17 27 19 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 14 Source: FVCA
Finnish VC Companies 3i Finland Oy NEST Management Oy Aboa Venture Management Oy Nexit Ventures Oy ACR Capital Oy Nordea Capital Oy Ahlström Capital Oy Nordia Management Oy Amanda Capital Oyj Nordic Mezzanine Oy Ab Aura Capital Oy OKO Venture Capital Oy Baltcap Management Oy Panostaja Oyj Bio Fund Management Oy Privanet Capital Oyj CapMan Capital Management Oy Proventure Oy CIM Creative Industries Management Oy Sentio Invest Oy Conventum Capital Oy Siemens Mobile Acceleration Finland Danske Venture Partners SnV Partners Oy Emerging Power Partners Oy Solaris Asset Management Oy EQT Partners Oy Sponsor Capital Oy Eqvitec Partners Oy Startupfactory Oy Euroventures Advisors Oy Stratos Ventures Ltd Oy Fenno Management Oy Suomen itsenäisyyden juhlarahasto Sitra Head Industrial Partner Oy Suomen Teollisuussijoitus Oy Helmet Business Mentors Oy Teknia Invest Oy Holtron Ventures Oy Teknoventure Management Oy Innofinance Oy Veraventure Oy InnovationsKapital Virtaa Hämeeseen Ky MB Rahastot Oy VNT Management Oy Menire Oyj Wedeco Management Oy Ab Midinvest Management Oy Neomarkka Oyj 15
Venture Capital in 2001 Average per round US x 5.4 Europe Finland 0 1 2 3 4 5 6 7 €Millions 16
What does make VC´s cautious? Lack of good exit routes 17
The IPO window has closed 250 IPO Activity in 2000-2001 Filings Pricings Withdrawals 125 0 1Q 00 2Q 00 3Q 00 4Q 00 1Q 01 Information provided by Broadview 18
Technology - related M&A 2301 250 # of Deals 2067 Average Deal Size 1836 200 1421 150 ( $ M M ) 1042 100 50 0 1Q 00 2Q 00 3Q 00 4Q 00 1Q 01 Information provided by Broadview 19
How does a VC company operate? Structure of a VC company Partners Investments, management, exits Management Oy Limited partneships Fund I Ky Fund II Ky Fund III Ky - 10 year funds Commitments 2…4% Investors Investments in cash Insuarance companies, pension funds, corporates, government Final returns after closing the funds 20
The Investment Process 2-4 weeks 6-8 weeks 2-4 weeks 6-8 weeks Due diligence Transaction Agreement of - commercial Preliminary Closing Closing agreements, key terms - financial analysis Financing - legal Signing of Letter of binding Intent agreement - In case everything is fine: 2-3 months - But in practice 6-16 month cycle including networking, iteration and sharpening of business plan 21
Entrepreneur’s view Practical process by entrepreneur • Set your priorities and criterias • Make a list of potential investors − focus, expertise, networking, hands-on or hands-off, capacity for further rounds, persons • As integrated activities − write a business plan and outline financial projections − contact potential investors • Presentations, negotiations • Sign the Term Sheet • As integrated activities − Due Diligence − Negotiate Share Holders´ Agreement • Signing 22 Source: Mårten Mickos, MySQL
Entrepreneur’s view Why to have a VC? A simplified model • Exit • Company (originally) − turnover € 5m − turnover € 1m − P/S now 3 − founders own 100% − valuation € 15m • Investment − founders´ stake € 9m − valuation according P/S − venture capitalist share € 6m (price per sales) om 1,5 • What this would have been − pre-money € 1,5m without vc? − investment of € 1m − turnover maybe € 3m − post-money € 2,5m − P/S about 2 − founders´ stake 60%, − valuation € 6m – founders venture capitalist 40% get all − conclusion: founders earn € 3m for sharing their power 23 Source: Mårten Mickos, MySQL
What does a VC Company Look For? High Market size Basically the VC looks for high market potentials with high probability of success Low High Low Probability of success Lähde: Advent International 24
Technology Investors Look For Entrepreneurs and his team - commitment to management excellence Business concept -how to make money - visio - strategy - execution - timing Market Technology - disruptive, sustainable compelling advantage - a growing market with big need - change market or create a new one - global in nature 25
Development Phases of New Business Index Phases: 100 90 - 1-3 Forming 80 - 4-5 Technology Leader 70 - 6- Market Leader 60 50 Risks: 40 30 - first increases and then decreases 20 rapidly 10 0 Value explodes: 1 2 3 4 5 6 - 1. Technology Leader Capital Value Risk - 2. Market Leader Source: Atlas Ventures 26
Funding to Milestones Technology A Customer Idea is Works Buys Feasible P(success) = 80% Req’d IRR = 30% Valuation P(success) = 50% Req’d IRR = 50% P(success) = 40% Req’d IRR = 70% P(success) = 30% Req’d IRR = 100% Risk (ß) Capital Seed R&D Go-to-Market Expansion 27 Funding Capital Capital Capital
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