European Experience developing

Business Angel Ecosystems

Paulo AndrezBusiness AngelPresident of Cascais Business Angel Club (PT)EBAN President (EU)

Moldova, 17th April, 2013

Start Ups Valley of Death

time

Cash flow

Start-up

Imagine that you have 1.000.000 MDL in a safe bank, and you have 8% of interest rate for your deposit.

Would you invest in a start up with no clients, no proven

business plan…if the most you can get as return, would be 9%

annually ?

Hi, My name is Zephyr, and I want you to invest in my new fantastic Start Up ! I guarantee you 9%

annually.

But if the World Bank guarantees you that if Zephyr’s new venture doesn’t pay you the 9%, they will pay it immediately to you, would you invest ?

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Risks: Market, Team, Legal, Financial e Operational

BankMutual Guarantee

Venture Capital

Business AngelsFamily, Fools & Friends and State

100%

Capital Needs

Time

Seed Start-up Early Growth Sustained Growth

Higher Risk

Lower Risk

Friends, Family & Founders

Business Angels

Venture CapitalFunds

IPO

0

Angels help fill the ‘Equity Gap’

Early stage and seed

venture funds

Equity Gap

European Angel market size is bigger than the Early Stage VC market

Business angel

networks

Federations of networks

Individual angels

Associate members

In Europe, it is estimated that the Early Stage Investors...... invest 5 Billion Euros per year in start ups.

Seed funds

EBAN RESEARCH

EBAN

Created in 1999 by Eurada with the support of European Commission

+ 100 members (BANs, Federations…)…and growing

28 countries

1

2

3

Not for profit organization based in Brussels

4

4

12 Congresses and 11 Winter Universities

Part IIThe Business Angel

Business Angels’ value chain

Source: EBAN RESEARCH COMMITTEE

A VERY COMPETITIVE PROCESS

100Deals

Business Plans received

Due diligence

Investment1-5 Investments

Pre-screening

Screening

Terms Sheet

• Membership: Business Angel investors• Fees: Annual membership fee and sometimes % success deal fee.

Sponsors, grants from the governments, BA certifications, services....• Seeks & filters applications from entrepreneurs• Allows selected entrepreneurs to pitch to investors• May also: provide training (to entrepreneurs and Angels), opportunities

to syndicate

BANs - “Private or semi-public body whose aim is to match entrepreneurs looking for equity with business angels”

• More Deal Flow, means reducing the risk of the investments• Share the workload of due diligence, terms sheet negotiations...• Share knowledge in specific areas of expertise• Get specific training• Learn with more experienced angels investors• Get co-investors in the BAN, in the Country or internationally• Get information of the market (laws, new co-investment funds...)• Peers networking can facilitate exits (start ups)

Advantages to be member of a Business Angel Network

An Early Stage Investor can invest

• Alone directly in the start up• Through a personal

investment holding• With Other investors directly

in the start up• Through an Angel Fund

• Equity or quasi equity• Loan• Giving assets as collaterals

Alone/together Types of investments

BA life cycle and the purpose of a BAN

Ripening process

MEGA-ANGEL

MILESTONES

VIRGINAngel

STARTINGAngel

Reading articles

First Investment

4/5 Investments

BAN or BA ACADEMY

PortfolioManagement

ACADEMY

LOSS-EXPERIENCED

Angel

NETWORKING Angel

SYNDICATION Angel

First loss

Source: Rudy Aernoudt, EBAN Winter University 2005

• Loan (partial). If it is a pure loan (or Bonds) with fixed interest rate, it is not considered an Angel Investment

• Convertible Debt• Equity deal or priced Rounds (usually common stock)• Preferred Shares and liquidation preference(e.g. 3X,6X)• Options Based• Revenue Capital

Agreements between Angels and Entrepreneurs. Pre-Money valuations.

1. Alternatives are so risky as investing in start ups: real estate, sovereign debts, stock market investment, gold, oil…have the same or higher risk than early stage investing

2. Scarce Credit : Good entrepreneurs that before the crisis would rely on credit, are approaching angels bringing good deals. Profitable companies that without credit can not grow, are approaching angels

3. Talent widely available at low cost: It is easier to recruit good staff at lower costs than 3 years ago

4. Pre-Money Valuations are lower : Valuations done by the entrepreneurs are much lower than 3 years ago and entrepreneurs are more flexible on the terms sheets

5. Negotiation Power is bigger before suppliers : It is cheaper to buy equipments and services from suppliers. And they are more

available to share some more risks than 3 years ago•

5 Reasons to start investing today, as a Business Angel

Part III Policy Maker

• Does the country need new companies ? New jobs ? Does the country need to export more ?

• Who is going to fund the new innovative start ups ? The Government ? The Banks ? The VCs ? Or the Business Angels ?

• It is important to incentivise wealthy people that invest in non productive assets (real estate, stock market, derivatives, sovereign debts...), to invest in start ups , creating jobs...

Rationale for the policy makers to support initiatives for the development of the Business Angel Communities

24

HIGH AND MODERATE GROWTH COMPANIES ARE THE ONES THAT BUSINESS ANGELS ARE LOOKING

FOR

Fuente : Ernst & Young and Endeavor 2011

OECD study launched in December 2011

PARTS OF THE OECD STUDY

WHAT CAN POLICY MAKERS DO?By priority order

SUPPLYBringing more

investors

DEMANDQuality deal flow

MARKETImpact and sustainability

6.Fiscal incentives 4. Investment readiness (incl. sector specific)

1.Support the creation of BANs

2. Co-investment funds

9. Teach entrepreneurship and access to finance very early in schools

10.Data collection

5. Investor readiness training sessions

8. Have incubators and other facilitators to educate and prepare entrepreneurs

6.Local BA/VC forums

7.Media campaigns 3.Light regulation for early stage investment market

• If in any country per each 100.000 euros that a company invests, the state receives 30%-40% in taxes during the first year, it means that the state can implement a BA tax break of 30%-40% without loosing revenues

• Instead of giving companies, grants for free, countries can transform it in VC money, creating Co-Investment funds with Business Angels and Early Stage VCs.

Rationale for the policy makers to support initiatives for the development of the Business Angel Communities

Note: This is a pessimistic scenario. But the State always gets its money back…

State return in € per each € invested by State in a BA Co-investment scheme

State Tax level/Rate of Return for State in the Co-Investment Fund 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

30% 1,20 € 1,30 € 1,40 € 1,50 € 1,60 € 1,70 € 1,80 € 1,90 € 2,00 € 2,10 € 2,20 €

35% 1,40 € 1,50 € 1,60 € 1,70 € 1,80 € 1,90 € 2,00 € 2,10 € 2,20 € 2,30 € 2,40 €

40% 1,60 € 1,70 € 1,80 € 1,90 € 2,00 € 2,10 € 2,20 € 2,30 € 2,40 € 2,50 € 2,60 €

45% 1,80 € 1,90 € 2,00 € 2,10 € 2,20 € 2,30 € 2,40 € 2,50 € 2,60 € 2,70 € 2,80 €

Source: EBAN 2013

Scenario (50% of the investment is done by BA+CO-investment fund. Start up ceases activity after the investment)

Do you want to know more ?

Michelson Diagnostics

While, some wait for the Future, the Business Angels are creating it!

paulo.andrez@eban.org