Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public...

57
Venture financing Prof. Antonio Renzi Entrepreneurship and new ventures finance

Transcript of Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public...

Page 1: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Venture financing

Prof. Antonio Renzi

Entrepreneurship and new ventures finance

Page 2: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Overview

Venture financing: introduction

Venture investors

Firm life cycle and firm financing

2

Venture capital return

An introduction to IPO

Venture capital structure

The investing process

Page 3: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Venture financing: introduction

The equity role

EquityFirm’s start up and

development Firm’s risk coverage

Financial restructuring

Page 4: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

• The equity employed for financing the start up phase and thedevelopment of firms. For this reason, it arises on the one hand asdevelopment capital on the other as patient capital.

• The availability of financial intermediaries, which supplydevelopment capital, is an alternative to the more traditionalrelationships between commercial banks and firms.

• There is a positive relationship between the diffusion of developmentcapital and the knowledge development.

Venture financing: introduction

The equity role

• The equity employed for financing the start up phase and thedevelopment of firms. For this reason, it arises on the one hand asdevelopment capital on the other as patient capital.

• The availability of financial intermediaries, which supplydevelopment capital, is an alternative to the more traditionalrelationships between commercial banks and firms.

• There is a positive relationship between the diffusion of developmentcapital and the knowledge development.

Page 5: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Bank lendingCurrent account overdraftsShort-term loansMortgage Loans

Firm financial need :Cash need;Working capital needConservative investments

Coverage

The inadequacy of bank lending

InadequacyStartup investmentsR&D Investments

Equity financingSelf-financing

Coverage

Venture financing: introduction

Inadequacy

Credit constraints• Maintaining of a minimum level of liquidity• Capital adequacy to the credit risk.

Startup investmentsR&D Investments

Page 6: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

• Bank lending framework is not consistent with strategic investments of newinnovative businesses.• The mortgages are too rigid than the dynamic of innovative investments.• Normally the financing of startups is too risky in relation to the creditconstraints.

The inadequacy of bank lending

The bank loan of a start up impliesnegative effects in relation to:

1. The amount of capital that can beacquired;

2. The probability of obtaining aproper financing;

3. The entrepreneurial creativity;4. The business innovation;5. The business size.

Venture financing: introduction

The bank loan of a start up impliesnegative effects in relation to:

1. The amount of capital that can beacquired;

2. The probability of obtaining aproper financing;

3. The entrepreneurial creativity;4. The business innovation;5. The business size.

However, in the entrepreneur perspective,the bank loan implies the following

advantages:1. Better protection of the business idea.2. Better protection of firm ownership3. More decisional power in relation to both

the governance structure andorganizational choices.

4. A lower capital cost

Page 7: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

•Systems that are mostly oriented to venture financing are moreexposed to the economic conjuncture: they amplify the effects both incase of a growth phase and in case of a negative conjuncture.

• the diffusion of the venture financing increases the volatility of thefinancial system, due to high default probability associated with newventures and to a lack of control on operators/investors

Venture financing: introduction

Venture financing and volatility

•Systems that are mostly oriented to venture financing are moreexposed to the economic conjuncture: they amplify the effects both incase of a growth phase and in case of a negative conjuncture.

• the diffusion of the venture financing increases the volatility of thefinancial system, due to high default probability associated with newventures and to a lack of control on operators/investors

Page 8: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

• The fund raising of equity resources is harder in Italy, than in Usa orin other European Countries.

• Proprietary rights of Italian firms have a high rate of concentration:family firms are the most common ones.

• Most of Italian firms are of a small size: the 95% of them has lessthan 10 employees.

• The financial system is mainly bank-based.

• Italian firms’ financial structure is very often characterized by a highrate of financial leverage. The short-term debt weigh heavily on thefinancial structure, as well.

Venture financing: introduction

Venture financing diffusion: the case of Italy

• The fund raising of equity resources is harder in Italy, than in Usa orin other European Countries.

• Proprietary rights of Italian firms have a high rate of concentration:family firms are the most common ones.

• Most of Italian firms are of a small size: the 95% of them has lessthan 10 employees.

• The financial system is mainly bank-based.

• Italian firms’ financial structure is very often characterized by a highrate of financial leverage. The short-term debt weigh heavily on thefinancial structure, as well.

Page 9: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

External equity resources for European start up firms:20% USA: 15% Asia; 12% France; 9.4% Scandinavia; 9% Germany.

The contribution of Italy is only secondary and it is classified underthe category “others” (Source: EVCA, 2011).

Venture financing diffusion: the case of Italy

Venture financing: introduction

In spite of above data, in the last years, there was a positive trend inItaly for what concerns private equity and venture capital investments.This phenomenon was having different positive effects, both ineconomic and social terms.

Page 10: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Venture Investors

Informalinvestors

• BusinessAngels

• Businessincubators

InstitutionalInvestors

• VentureCapitalists

• PrivateEquityFunds

Otherinvestors

• CorporateVentureCapital

• MerchantBanks

• PublicInvestors

• BusinessAngels

• Businessincubators

• VentureCapitalists

• PrivateEquityFunds

• CorporateVentureCapital

• MerchantBanks

• PublicInvestors

Page 11: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Informal investors

The business angels are those backer using their own equity tofinance a venture. Often, they are individuals (as retiredentrepreneurs, managers, professionals) who own large amounts offinancial resources, and who have specific competencies in the sectorwhere they are going to invest.

Business incubators provide a support to those start-ups operating ina specific technology sector or region. More precisely, with the termincubator, we refer to those institutions that interact with potentialentrepreneurs, supplying them some specific services, and,sometimes, also providing financial resources. Their aim is to promotethe entrepreneurship, providing all those resources that arenecessary both in the start up and the developing phases.

Venture Investors

Informal investors

The business angels are those backer using their own equity tofinance a venture. Often, they are individuals (as retiredentrepreneurs, managers, professionals) who own large amounts offinancial resources, and who have specific competencies in the sectorwhere they are going to invest.

Business incubators provide a support to those start-ups operating ina specific technology sector or region. More precisely, with the termincubator, we refer to those institutions that interact with potentialentrepreneurs, supplying them some specific services, and,sometimes, also providing financial resources. Their aim is to promotethe entrepreneurship, providing all those resources that arenecessary both in the start up and the developing phases.

Page 12: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Institutional investors (prive equity and venture capital)

They operate in an organized manner, thanks to a durable economiccoordination: they raise the funds from different backers and, then,they invest them to increase the economic value of a firm. Later, theysell their stake to maximize the profit.To reach the economic value creation, the private equity backerpushes toward to a fast growth of the firm and to high returns, to theend of realizing a capital gain with the later divestiture of its stake.

Venture Investors

Institutional investors (prive equity and venture capital)

They operate in an organized manner, thanks to a durable economiccoordination: they raise the funds from different backers and, then,they invest them to increase the economic value of a firm. Later, theysell their stake to maximize the profit.To reach the economic value creation, the private equity backerpushes toward to a fast growth of the firm and to high returns, to theend of realizing a capital gain with the later divestiture of its stake.

Page 13: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Institutional investors (private equity and venture capital)

In general, the private equity backer activity consists in an acquisition of astake in a target firm. In this way, the backer becomes a partner of the firm.Hence, the backer contributes to firm growth not only with financialresources, but also with his bundle of managerial capabilities andcompetencies, pro-actively promoting firm’s development.Firm’s objectives are determined in advance, in accordance withshareholders.

The venture capital activity is a specific kind of private equity investment, or,in other terms a specific business segment. According to the Europeanapproach to venture capital, this last type of backer is dedicated to earlystages of start up firms’ life cycle.

Venture Investors

Institutional investors (private equity and venture capital)

In general, the private equity backer activity consists in an acquisition of astake in a target firm. In this way, the backer becomes a partner of the firm.Hence, the backer contributes to firm growth not only with financialresources, but also with his bundle of managerial capabilities andcompetencies, pro-actively promoting firm’s development.Firm’s objectives are determined in advance, in accordance withshareholders.

The venture capital activity is a specific kind of private equity investment, or,in other terms a specific business segment. According to the Europeanapproach to venture capital, this last type of backer is dedicated to earlystages of start up firms’ life cycle.

Page 14: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Corporate venture capitalists

The Corporate Venture Capitalist is when a corporation acts like aventure backer investing part of its funds in external ventures. Its aimis both to realize a profit and to develop critical synergies with internalcorporate activities, at a business level.

Venture Investors

Page 15: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Creation ofa fund

dedicated toinnovation

Internalproductionor externalacquisition

of new knowledge

Ext.Financial

need

Developm

entC

apital

The logic of the corporate venture capital and the “extended financialneed”

Venture Investors

Creation ofa fund

dedicated toinnovation

Internal orexternal

innovativeprojects

AntecedentKnowledge

Capital

Knowledge

Development

Ext.Financial

need

Page 16: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Business Angel Goals: investment return maximizationand/or philanthropic goals

Venture Investors

Venture Capitalist Goal : investment return maximization inspecific period

Corporate Venture Capitalist Goal: development of strategicand technological synergiesCorporate Venture Capitalist Goal: development of strategicand technological synergies

Page 17: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Merchant Bank

The venture financing is just one kind of the overall activities that amerchant bank carries on. They supply a bundle of financialresources and consultancy services, to facilitate firms to resort to afurther fund raising on public markets, in a later moment.

Venture Investors

Page 18: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Government agencies

Sometimes, also Government agencies can step in capital markets tosupport specific kinds of business, with the aim of stimulating thegrowth of the overall economic system and of the employment rate.

Venture Investors

Page 19: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

The three types of public policies to sustain venture financing

1. Direct action policies, aimed to financing a specific kind of

businesses and projects.

2. Indirect action policies, aimed to promote the venture capital

activity.

3. Indirect action policies, aimed to promote the development of

favorable environment, at a geographic level, and based on the

reinforcement of the availability of financial and other real services

for start up firms.

Venture Investors

The three types of public policies to sustain venture financing

1. Direct action policies, aimed to financing a specific kind of

businesses and projects.

2. Indirect action policies, aimed to promote the venture capital

activity.

3. Indirect action policies, aimed to promote the development of

favorable environment, at a geographic level, and based on the

reinforcement of the availability of financial and other real services

for start up firms.

Page 20: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Venture financing: the capital at risk (12/15)

Direct policies Indirect policies

• They allow a direct control by theState

• They determine a situation for whatthe entire cost of financing and its riskare carried by the State

• They amplify a static condition of thefinancial system

• They are not indicated to promotethe knowledge sedimentation andintegration

• They do not allow a direct control bythe State

• They allow the risk sharing betweenprivate and public capital

• They promote the sedimentation andthe integration of the knowledge overtime

• They reduce a static condition of thefinancial system

A comparison between direct and indirect policies

Venture Investors

• They allow a direct control by theState

• They determine a situation for whatthe entire cost of financing and its riskare carried by the State

• They amplify a static condition of thefinancial system

• They are not indicated to promotethe knowledge sedimentation andintegration

• They do not allow a direct control bythe State

• They allow the risk sharing betweenprivate and public capital

• They promote the sedimentation andthe integration of the knowledge overtime

• They reduce a static condition of thefinancial system

Page 21: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Funds of funds

Fund offunds

Public Capital

ClosedFund

Seed and start upfinancingActivities

Venture Investors

Fund offunds

Private Capital

ClosedFund

Seed and start upfinancingActivities

Page 22: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Avvio Sviluppo Espansione Maturità Declino

Vendite

Flussi di cassa

Profitti

BusinessAngels

VentureCapital

PrivateEquity

OperatoriPubblici

MerchantBank

Incubatorid’Impresa

Banche

Start up Development Expansion Maturity Decline

Sales

Cash Flow

Profits

Firm life cycle and firm financing

Avvio Sviluppo Espansione Maturità Declino

Vendite

Flussi di cassa

Profitti

BusinessAngels

VentureCapital

PrivateEquity

OperatoriPubblici

MerchantBank

Incubatorid’Impresa

Banche

Sales

Cash Flow

Profits

BusinessIncubators

Banks

PublicInvestors

Page 23: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Finanziamentodell’Avvio

Finanziamentodello Sviluppo

Finanziamentodel Cambiamento

Venture Capital Private Equity

Replacement

Buy-out

Delisting

Turnaround

Seed Financing

Start-up Financing

I-stage Financing

II-Stage Financing

III-Stage Financing

IV-Stage Financing

Start up Financing Development Financing Change Financing

Firm life cycle and firm financing

Finanziamentodell’Avvio

Finanziamentodello Sviluppo

Finanziamentodel Cambiamento

Venture Capital Private Equity

Replacement

Buy-out

Delisting

Turnaround

Seed Financing

Start-up Financing

I-stage Financing

II-Stage Financing

III-Stage Financing

IV-Stage Financing

Page 24: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Early stage financing

The early stage financing is characterized by a lack of financialresources and of managerial ones.

In general, during the seed financing phase – a sub-phase of theoverall process – the firm has no business plan at all; or it has one,but it must be improved. The investor (usually, a business angel)supports the firm also during the planning phase.

Firm life cycle and firm financing

Early stage financing

The early stage financing is characterized by a lack of financialresources and of managerial ones.

In general, during the seed financing phase – a sub-phase of theoverall process – the firm has no business plan at all; or it has one,but it must be improved. The investor (usually, a business angel)supports the firm also during the planning phase.

Page 25: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Early stage financing

Information Flow

InvestorDevelopmentCapital

Firm

Firm life cycle and firm financing

Early stage financing

DevelopmentCapital

Firm

Strategy co-definition

Managerial Capabilities

Page 26: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Early stage financing

Seed FinancingIt supports financial resources for the business idea, before thelaunch phase. Investors (business angels; business incubators;venture capitalists) contribute both with financial resources and withtheir managerial competencies, with the aim of converting thebusiness idea into a feasible business model.

Start up financingType of financing (typically, venture capital) that allows for the startup phase of the business, as depicted in the business model.

Firm life cycle and firm financing

Early stage financing

Seed FinancingIt supports financial resources for the business idea, before thelaunch phase. Investors (business angels; business incubators;venture capitalists) contribute both with financial resources and withtheir managerial competencies, with the aim of converting thebusiness idea into a feasible business model.

Start up financingType of financing (typically, venture capital) that allows for the startup phase of the business, as depicted in the business model.

Page 27: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Early stage financing

I-stage financingThis phase concerns the financing with external equity resources ofthe later stage, following the start up phase. The risk of this phase islinked to a lack of information on the product/service’s sales potential.Further investments can be required and in addition to promote thesale development with financial or commercial debt.

Firm life cycle and firm financing

Early stage financing

I-stage financingThis phase concerns the financing with external equity resources ofthe later stage, following the start up phase. The risk of this phase islinked to a lack of information on the product/service’s sales potential.Further investments can be required and in addition to promote thesale development with financial or commercial debt.

Page 28: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Early stage financing

Seed financing

Financing the planning phase

Start up financing

Financing the start up phase and the launch of the production

Firm life cycle and firm financing

Early stage financing

Start up financing

Financing the start up phase and the launch of the production

First stage financing

Financing sales development and/or firm’s lack of debtresources

Page 29: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Expansion financing

II -stage financingIt supplies equity resources aimed to increase firm’s efficiency,through the exploitation of the productive capability, realizingeconomies of scale/scope.With this kind of financing, the objective is shifted from themaximization of sales to the maximization of returns.

Firm life cycle and firm financing

Expansion financing

II -stage financingIt supplies equity resources aimed to increase firm’s efficiency,through the exploitation of the productive capability, realizingeconomies of scale/scope.With this kind of financing, the objective is shifted from themaximization of sales to the maximization of returns.

Page 30: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Expansion financing

III-stage financingIt provides financial sources to promote the firm development throughM&A operations.

It could lead to:• core business reinforcement;• related diversification;• non related diversification.

Firm life cycle and firm financing

Expansion financing

III-stage financingIt provides financial sources to promote the firm development throughM&A operations.

It could lead to:• core business reinforcement;• related diversification;• non related diversification.

Page 31: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Expansion financing

IV-stage financingThis kind of financing is directed to support the firm’s listing on thepublic market.

The Fourth-stage Financing is also named Bridge Financing, and itsobjective is to organize the IPO, as quickly as possible.

The management of the IPO (Initial Public Offering) is assigned to theprivate equity investor.

Firm life cycle and firm financing

Expansion financing

IV-stage financingThis kind of financing is directed to support the firm’s listing on thepublic market.

The Fourth-stage Financing is also named Bridge Financing, and itsobjective is to organize the IPO, as quickly as possible.

The management of the IPO (Initial Public Offering) is assigned to theprivate equity investor.

Page 32: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Change Financing

Replacement capitalIt refers to the exit of minority shareholders, and it could imply somechanges at an organizational and managerial level.

In this case, the remaining part of shareholders could be unwilling topurchase the minority stake or could not have the financial resources.Those two situations justify an intervention of a private equity fund..

Firm life cycle and firm financing

Change Financing

Replacement capitalIt refers to the exit of minority shareholders, and it could imply somechanges at an organizational and managerial level.

In this case, the remaining part of shareholders could be unwilling topurchase the minority stake or could not have the financial resources.Those two situations justify an intervention of a private equity fund..

Page 33: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Change Financing

Buy – outThe investor offers both a financial and a managerial support to promote aradical change in the ownership structure. The main types of buy-outoperations are the followings:

• management buy out (MBO – internal managers assume the control of thefirm);• management buy in (MBI – external managers assume the control of thefirm);•buy in management buy out (BIMBO – both internal and external managersassume the control of the firm);•employee or worker buy out (EBO or WBO – the new ownership structuresincludes part of the employees).

Firm life cycle and firm financing

Change Financing

Buy – outThe investor offers both a financial and a managerial support to promote aradical change in the ownership structure. The main types of buy-outoperations are the followings:

• management buy out (MBO – internal managers assume the control of thefirm);• management buy in (MBI – external managers assume the control of thefirm);•buy in management buy out (BIMBO – both internal and external managersassume the control of the firm);•employee or worker buy out (EBO or WBO – the new ownership structuresincludes part of the employees).

Page 34: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Change Financing

DelistingThe delisting is when a company, which assets are traded on a publicmarket, opts for a private ownership and becomes unlisted.

Turnaround financing

This kind of investments recurs in case of firm crisis, when there is aneed for change, whether in the ownership structure and in themanagerial board.

Firm life cycle and firm financing

Change Financing

DelistingThe delisting is when a company, which assets are traded on a publicmarket, opts for a private ownership and becomes unlisted.

Turnaround financing

This kind of investments recurs in case of firm crisis, when there is aneed for change, whether in the ownership structure and in themanagerial board.

Page 35: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

•Close-end funds: with the model of the investment company, this lastone manages the close-end fund. This kind of model is common inItaly and in many other European Countries..

• Limited partnership: this type is based on the presence both ofpartners with limited responsibility (limited partnership – LP), andpartners with unlimited responsibility (general partner – GP).This is common in US and some European Countries (UK; Sweden)

Venture capital structure

•Close-end funds: with the model of the investment company, this lastone manages the close-end fund. This kind of model is common inItaly and in many other European Countries..

• Limited partnership: this type is based on the presence both ofpartners with limited responsibility (limited partnership – LP), andpartners with unlimited responsibility (general partner – GP).This is common in US and some European Countries (UK; Sweden)

Page 36: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

A brief introduction to private equity funding (3/3)

Structure of a limited partenership

General partner (venture capitalist)• opportunities selection• deal structuring• control and advisory• disinvesting

1%-2%Capital

of the fund

20%-30%Capital gains

AnnualManagement

Fee 2-3%

Limited partner• Endowments• Life insurance companies• Big corporations• Other investors

Venture capital fund98%-99%

Capitalof the fund

70%-80%Capital gains

Forestieri (2011)

Page 37: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

• Selection of the target firm/business• Evaluation of the entrepreneurial idea• Evaluation of the target firm/business• Definition of the financial structure of the investment• Definition of the purchase price• Investment monitoring• Disinvestment

The investing process

• Selection of the target firm/business• Evaluation of the entrepreneurial idea• Evaluation of the target firm/business• Definition of the financial structure of the investment• Definition of the purchase price• Investment monitoring• Disinvestment

Page 38: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Selection of the target business

• Usually, in Countries as Us or Uk, where there is a greateravailability of equity funds, the selection of the business is somewhateasier than elsewhere, since entrepreneurs are used to propose theirbusiness to potential investors.

• For other Countries, where is less common for entrepreneurs to goin search for investors, there is a different mechanism of businessselection.

• The process of selecting a business target can be based on a singleor multiple sectors, according to investor’s characteristics.

The investing process

Selection of the target business

• Usually, in Countries as Us or Uk, where there is a greateravailability of equity funds, the selection of the business is somewhateasier than elsewhere, since entrepreneurs are used to propose theirbusiness to potential investors.

• For other Countries, where is less common for entrepreneurs to goin search for investors, there is a different mechanism of businessselection.

• The process of selecting a business target can be based on a singleor multiple sectors, according to investor’s characteristics.

Page 39: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

The evaluation of the entrepreneurial idea• It is direct toward the verification of entrepreneurial team reliability;competencies, and reputation..

The evaluation of the target business

• Strategic Evaluation• Technologic Evaluation• Financial and Economic analysis• Default probability analysis• Risk-return analysis• Enterprise value estimate

The investing process

The evaluation of the entrepreneurial idea• It is direct toward the verification of entrepreneurial team reliability;competencies, and reputation..

The evaluation of the target business

• Strategic Evaluation• Technologic Evaluation• Financial and Economic analysis• Default probability analysis• Risk-return analysis• Enterprise value estimate

Page 40: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Definition of the purchase price• Theoretical value• Price negotiation• Timing and steps of the financing process

Monitoring Phase•Analysis of the gap between firm ongoing performance and thebussiness plan, as initially forseen.• In case of any correction is needed, implementation of change atstrategic, organizational, or financial level.

The investing process

Definition of the purchase price• Theoretical value• Price negotiation• Timing and steps of the financing process

Monitoring Phase•Analysis of the gap between firm ongoing performance and thebussiness plan, as initially forseen.• In case of any correction is needed, implementation of change atstrategic, organizational, or financial level.

Page 41: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Disinvesting• IPO (Initial Public Offering);• The stake could be also sold to another investor;• Buy-out.

The investing process

Disinvesting• IPO (Initial Public Offering);• The stake could be also sold to another investor;• Buy-out.

Page 42: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

• The IPO (Initial Public Offering) is when firm’s assets are publiclytraded.

• With the IPO, the firm is going to be listed on one or more publicmarkets.

• The process is extremely affected by information asymmetries.

• The IPO process can take from 6 to 12 months.

An introduction to IPO

• The IPO (Initial Public Offering) is when firm’s assets are publiclytraded.

• With the IPO, the firm is going to be listed on one or more publicmarkets.

• The process is extremely affected by information asymmetries.

• The IPO process can take from 6 to 12 months.

Page 43: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

.

An introduction to IPO

IPO main objectives

• Managing of the financial structure.

• Exit way for shareholders.

• Development, innovation or internationalization strategies.

• As a way to enhance the firm status: for instance, investing in itsreputation.

• Managing of the financial structure.

• Exit way for shareholders.

• Development, innovation or internationalization strategies.

• As a way to enhance the firm status: for instance, investing in itsreputation.

Page 44: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

.

An introduction to IPO (3/6)

Main risks of an IPO

• Short-termism

• The firm can be taken over

• Greater exposition to systematic risk

• Since the decision process becomes extremely formal, there’s aprobability of loosing part of entrepreneurial creativity.

• High costs for the internal control system.

• Short-termism

• The firm can be taken over

• Greater exposition to systematic risk

• Since the decision process becomes extremely formal, there’s aprobability of loosing part of entrepreneurial creativity.

• High costs for the internal control system.

Page 45: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

.

An introduction to IPO

IPO’s actors

• Bid: offering actors as the issuer (OPS- public offer for subscription);the exiting shareholders, which are going to sell their assets.

• Ask: public investors or individuals.

• Public institutions: control authorities; stock exhange authority

• Bank syndicate: its role is to place the bid, inviting investors tounderwrite a stake. Its technical function can follow two differentways: with or without the underwriting of stakes.

• Bid: offering actors as the issuer (OPS- public offer for subscription);the exiting shareholders, which are going to sell their assets.

• Ask: public investors or individuals.

• Public institutions: control authorities; stock exhange authority

• Bank syndicate: its role is to place the bid, inviting investors tounderwrite a stake. Its technical function can follow two differentways: with or without the underwriting of stakes.

Page 46: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

.

An introduction to IPO

IPO’s actors

• Global coordination: this role is conferred to a merchant bank, whichmanage the overall process, organizing and coordinating bothadvisors and the bank syndicate.

• Other advisors: financial, legals, for shareholders, etc..

• Global coordination: this role is conferred to a merchant bank, whichmanage the overall process, organizing and coordinating bothadvisors and the bank syndicate.

• Other advisors: financial, legals, for shareholders, etc..

Page 47: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

.

An introduction to IPO

IPO pricing

Initial evaluation

Duediligence

Its aim is to collect and to verify information onthe issuer, as property; financial; economics;operating; strategic; fiscal; and environmentalinformation.

Initial general evaluation

Duediligence

Presentationand equity research

RoadshowAnd pub. offering

Pricing

Pre-marketing

Meetings with the financialcommunity to make the initial public offeringand to collect underwritingby institutional investors.

Independet analysts’ analysesand disclosure of results

Meetings with selected investors, aimed toobtain an initial feed-back

Its aim is to collect and to verify information onthe issuer, as property; financial; economics;operating; strategic; fiscal; and environmentalinformation.

Page 48: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

The takeover of a target firm is a typical way to realize an operation ofnew venture financing with external equity funds. The investorpurchase a stake of the target firm, usually an unlisted one, for a shortpredetermined period. Once the firm value has increased, theinvestor sells the stake, realizing a capital gain yield.

Venture capital return

The takeover of a target firm is a typical way to realize an operation ofnew venture financing with external equity funds. The investorpurchase a stake of the target firm, usually an unlisted one, for a shortpredetermined period. Once the firm value has increased, theinvestor sells the stake, realizing a capital gain yield.

Page 49: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

The return for institutional investors: two main alternatives

• IRR (internal rate of return).

• Cash Multiple: this method is based on multiples that measures thereturn of the investment on total capital.

Above methods are generally combined.

However, they can lead to different results, since they are based onheterogeneous logics. In case of a gap of results between the two,the IRR method is weighed more than the Cash Multiple.

Venture capital return

The return for institutional investors: two main alternatives

• IRR (internal rate of return).

• Cash Multiple: this method is based on multiples that measures thereturn of the investment on total capital.

Above methods are generally combined.

However, they can lead to different results, since they are based onheterogeneous logics. In case of a gap of results between the two,the IRR method is weighed more than the Cash Multiple.

Page 50: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Internal rate of return (IRR)

Value creation

InvestmentInitialI

IIRR)(1

CF

0

01

n

tt

t

Venture capital return

Internal rate of return (IRR)

Value creation

(i)capitalofcostyopportunitIRR

Page 51: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Cash Multiple (CM)

NCF = Net Economic Cash flowI = Investment

The CM is a simple method, and, for this reason, is very commonamong professionals. However, it has some strong limits: it doesn’ttake in account the financial expression of time.

INCF

CM

Venture capital return

Cash Multiple (CM)

NCF = Net Economic Cash flowI = Investment

The CM is a simple method, and, for this reason, is very commonamong professionals. However, it has some strong limits: it doesn’ttake in account the financial expression of time.

Page 52: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

IRR and CM

In case of a singleinitial investment 1CMIRR

IRR)(1CM1/n

n

Venture capital return

t0 t3NCF 220Initial Investment 100

IRR and CM

03 I100

2.20220

IRR)(1CF

t

t

Initial Investment 100CM=NCF/I 2.2IRR= CM1/3-1 0.300591CM = (1+ IRR)3 2.2

Page 53: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

IRR over time

Venture capital return

Year 1 2 3 4 5 … 20CM IRR1 IRR2 IRR3 IRR4 IRR5 … IRR20

10 9 2.162 1.154 0.778 0.585 … 0.1229 8 2.000 1.080 0.732 0.552 … 0.1168 7 1.828 1.000 0.682 0.516 … 0.1107 6 1.646 0.913 0.627 0.476 … 0.1026 5 1.449 0.817 0.565 0.431 … 0.094

IRR over time

6 5 1.449 0.817 0.565 0.431 … 0.094… … … … … … … …1 0.000 0.000 0.000 0.000 0.000 … 0.000

Page 54: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Internal rate of return (IRR)

Equity Investor

Field of intervention

Venture capital return

Internal rate of return (IRR)

Governance FinancialParameters

IRR

Field of intervention

Objective

Page 55: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Internal rate of return (IRR) and Net Present Value (NPV): theproblem of incongruity

NPV0

1

Ii)(1

CFNPV

n

tt

t

If there are no alternativeprojects; the NPV and IRR giveconsistent output.

In case of alternative projects,the NPV and IRR could havedifferent results.

In case of alternative projects;the maximization of IRR doesn’tnecessary imply themeximization of the investorvalue.

Venture capital return

Internal rate of return (IRR) and Net Present Value (NPV): theproblem of incongruity

iIRR

If there are no alternativeprojects; the NPV and IRR giveconsistent output.

In case of alternative projects,the NPV and IRR could havedifferent results.

In case of alternative projects;the maximization of IRR doesn’tnecessary imply themeximization of the investorvalue.

0i-IRR

Value creation

0i-IRR

Value destruction

Page 56: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

Internal rate of return (IRR) and Net Present Value (NPV): theproblem of incongruity

Venture capital return

Project APeriods 0 1 2 3 4NCF -150 10 10 10 220Discount rate= 0.09Actualization 9.17 8.42 7.72 155.85NPV 31.166

Internal rate of return (IRR) and Net Present Value (NPV): theproblem of incongruity

NPV 31.166TIR 0.1471

Periods 0 1 2 3 4NCF -119 19 50 65 50Discount rate= 0.09Actualization 17.43 42.08 50.19 35.42NPV 26.128TIR 0.1738

Page 57: Prof. Antonio Renzi - uniroma1.it. Ventu… · Venture Capital • Merchant Banks • Public Investors. Informal investors ... and who have specific competencies in the sector where

020406080

100120140160180

Anno t Anno t+1 Anno t+2 Anno t+3 Anno t+5

FATTURATO

05

101520253035404550

Anno t Anno t+1 Anno t+2 Anno t+3 Anno t+5

EBITDA

0

10

20

30

40

50

60

Anno t Anno t+1 Anno t+2 Anno t+3 Anno t+5

PFN

050

100150200250300350400

Anno t Anno t+1 Anno t+2 Anno t+3 Anno t+5

EV

Balanced growth of value

Revenues

Venture capital return

020406080

100120140160180

Anno t Anno t+1 Anno t+2 Anno t+3 Anno t+5

FATTURATO

05

101520253035404550

Anno t Anno t+1 Anno t+2 Anno t+3 Anno t+5

EBITDA

0

10

20

30

40

50

60

Anno t Anno t+1 Anno t+2 Anno t+3 Anno t+5

PFN

050

100150200250300350400

Anno t Anno t+1 Anno t+2 Anno t+3 Anno t+5

EV

CAGR = Compound Annual Growth Rate

1Rev

RevCAGR(Rev)

1/3

2009

20122009/12

As instance: