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Financing Entrepreneurial Firms

Explore the sources of financing for entrepreneurial firms, types of innovation, venture capital investment stages, and the relationship between entrepreneurs and investors. Highlight the equity gaps and public policies in European markets.

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Financing Entrepreneurial Firms

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  1. Financing Entrepreneurial Firms Glenda Napier FORA Oslo University - 27 February, 2007

  2. Outline Lecture 1 • Innovation and Sources of Financing • What is Venture Capital (informal and formal) • The Entrepreneur and Investor Lecture 2 • Access to Venture Capital Across Countries • Financing Gaps • The Need for Public Intervention and Policies

  3. Lecture 1 Financing Entrepreneurial Firms

  4. EU's Performance Challenges • The European Commission’s Green Paper on Entrepreneurship: • “to boost the Union’s levels of entrepreneurship, [by] adopting the most appropriate approach for producing more entrepreneurs and for getting more firms to grow”

  5. Types of Innovation • Incremental/linear type of innovation • Radical/systemic type of innovation

  6. Incremental/Linear Approach ENTREPRENEUR INVESTOR INNOVATOR

  7. INNOVATOR ENTREPRENEUR INVESTOR Radical/Systemic Approach

  8. Varying Forms of Innovation Require Different Types of Financing • Incremental/linear innovation → Assets based financing(debt) • Radical/systemic innovation → High Risk Capital= Venture Capital

  9. Risk Financing: Venture Capital

  10. Investment Stages 1 • Seed stage refers to period where the product/service is developed, patens requirements are completed and market surveys and team recruitment are key activities. The funds at this stage predominantly come from the entrepreneurs, their family and friends.

  11. Investment Stages 2 • Start-up stage refers to the period where the entrepreneurs are ready to commence their product/service. Products are launched and therefore investment in follow up product introduction by doing marketing activities, producing more products to be sold, and hiring more people. Since the medium risk is still embedded, hence it is difficult to get the fund supported by formal capital institutions. Thus in this stage, the funds is still mainly provided by informal investors/business angels.

  12. Investment Stages 3 • Expansion refers to the period when the company has gained some orders and starts to expand its current situation. There has been inflow money, but not yet a profit. The fund needed for this stage is used to increase the working capital since production is higher because the demand is increasing and the product/service is more widely known. As business has looked promising, due to the prospect of the market and the product, venture capitalists may take a hand as well as commercial banks. And informal investors also still support in this stage.

  13. Venture Capital Investment Stages .

  14. Types of investors • Friends, families and founders (FFF) • Small money, various types of relation, unprofessional investors • Business Angels • Small money, high-risk investors, active involvement, hands-on investment, including non-financial investment • Venture Capital • Larger amounts, monitoring, board participation, usually high risk investment • Corporate Venture Capital • Industry specific investment and value added • Public Funding Schemes • Early stage, high-risk,

  15. Determinants for Investors (value of firm) • Market size • Sale • Competitive advantage • Skills, experience and track record of the team • Rate of return on investment • Exit opportunities • State of economy and industry • Philanthropic (business angels)

  16. Some Issues between Entrepreneur and Investor • Lacking investment readiness (EN) • Giving space to “externals” and their decision power (EN) • Allowing active involvement (EN) • Managing expectations of investors (EN) • Monitoring and sharing of information (INV) • Estimating value (INV) • Syndications between investors (EN&INV)

  17. Types of Exits (important for investor)

  18. Lecture 2 Financing Entrepreneurial Firms, Equity Gaps and Public Policies

  19. Development in Venture Capital Markets Source: Vækstfonden, 2006

  20. Investment pr. country (total, % of GDP, VC and Buy out) Source: Vækstfonden, 2006

  21. Venture Capital Investment pr. country (total, % of GDP) Source: Vækstfonden, 2006

  22. The Financing Gaps (Sohl, 1999)

  23. Equity Gaps for Entrepreneurs

  24. Explaining the Gaps – Market Failures– Turning to Public Policies..

  25. Explaining the Gaps – Market Failures– Turning to Public Policies..

  26. Explaining the Gaps – Market Failures– Turning to Public Policies..

  27. The Investment Policy Model Framework Conditions for Risk Capital Investment Investment Opportunities Investment Incentives Investment Culture Investment Capital Investment Abilities Private Wealth High-Growth Firms Public Guarantee Schemes Investment values Human Capital Knowledge intensive sectors Private Funds Public co-invest-ment schemes Social capital Commercialisation of Public R&D Taxation Public Funds Administrative Burdens Investment Readiness Regulation Investor Networking Internationalisation of markets Exit Opportunities

  28. Q&A Thank you for your attention

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