Tidlige fase finansiering hva er det private markedets oppgaver og hvor br det offentlige spille en

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Tidlige fase finansiering - hva er det private
markedets oppgaver og hvor bør det offentlige
spille en rolle ? Erfaringer fra Northzone
Ventures.

• Tellef Thorleifsson, Partner
• Nordic Industrial Fund Conference 15-16 October
  2002

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Agenda

• Northzone Ventures
• The Nordic Venture Market
• What should be the role of the Government ?

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Northzone Ventures

• Established in 1996, 3 funds to date
• Capital injected into 30 early stage companies
• Total funding of EURO 100 mill. provided by large
  Nordic and International professional investors
• A team of 10 professionals with extensive
  entrepreneurial experience
• Main focus on the Nordic market with offices in
  Oslo, Stockholm and Copenhagen
• Specialisation on ICT
• Proven track-record and high ROI
• Strong international network

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Northzones investment strategy
Specialize on high-growth wireless, broadband,
software and services opportunities in an
increasingly networked society
Focus on the Nordic region to ensure volume of
high quality deals and draw on regional
competence base
Concentrate on the early stages to leverage the
teams ability to add value and thereby maximize
returns
Focus on scalable business models with an
international scope and high value potential
Emphasize pro-active search for value creation
opportunities arising from market
shifts/transformations
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Agenda

• Northzone Ventures
• The Nordic Venture Market
• What should be the role of the government ?

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A choppy ride
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European Funds Raised and Investments
m

• Reduction from 2000 to 2001 was modest compared
  to the US
• Figures from Q102 indicate a major reduction in
  2002

Source EVCA
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Investment Trends in Europe by Stage

• The trend from Q102 indicate that we might be
  back to 96/97 activity levels
• Largest reduction in Seed and Start-up

Source EVCA
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Private Equity investments as of GDP
2001
gt Sweden stands apart from the other Nordics
Source EVCA
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The Nordic Venture Capital Scene

• NORWAY
• The Internet Hype didnt last for very long
• Healthy economy, but large dependence on oil
• VC Capital is still available, but the main VCs
  are funding few new cases,
• The Grey Market is gone
• Many VCs have changed focus from ITTelco to
  energy and life sciences

• FINLAND
• The Nokia effect has tampered off
• The rush of international wireless VC funding
  is no longer available
• Back to basics
• The major VCs are well funded

• SWEDEN
• Europes Silicon Valley during the Internet hype
• The Internet consultants all the new VC players
  are gone
• Ericssons demise is having severe repercussions
• VC funding is still available, early stage cases
  are struggling hard to get funding

• DENMARK
• Healthy economy
• Never really a part of the Internet and the
  wireless boom
• Institutions dominate the VC space
• Strong technology competence, but still
  relatively few entrepreneurs ( VCs)

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Agenda

• Northzone Ventures
• The Nordic Venture Market
• What should be the role of the government ?

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Chief Priority To focus on the business climate,
stability, and infra-structure

• The public sector has historically been a poor
  player when targeting investments and sectors
• Early stage financing - the responsibility of
  the private sector
• The market will over time bring about the most
  efficient allocation of capital
• Friends, Family Fools , Private investors,
  angels, venture funds and growth funds should be
  responsible the financing and growth of new
  companies.
• THE MAIN ROLE OF THE GOVERNMENT TO PROVIDE A
  STABLE CLIMATE AND GARDEN ASSISTANCE
• Make it as simple as possible to start a new
  company (i.e. reduce the number of reports
  imposed on a small limited company.)
• Provide practical assistance to Start ups
  reduce red tape
• Reduce tax on employment options
• Emphasize the basics - There is too much focus on
  agencies, aid, packages and schemes

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However, dont leave the market all by itself,
because there is an equity Gap

• Business Angels have been playing a limited role
  in the Nordic countries.
• In the US wealthy individuals last year invested
  about USD 20 bill. while the venture funds
  invested about USD 10 bill. 
• In the Nordic countries such private funding is
  much less important
• Grey Markets have been buoyant during Hype times,
  but provide fragile funding for early stage tech
  companies, and fraud cases have been prevalent.
• Right now the Grey Market is more or less
  non-existent. 
• The availability of early stage financing from
  VCs such as Northzone is very limited.
• The incubators are gone
• The magnitude of the Equity Gap will depend on
  the market where we are in the cycle.
• The equity gap will be widened in the period we
• are now entering into 

Mind the Gap
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..and us Nordics are also struggling with an
Attitude Gap 

• With the exception of Finland, where are
  remarkable changes have taken place during the
  last 10 years, the other Nordic countries are
  still facing a large competence and attitude gap
  between the RD circles/the government officials
  and the commercial forces/venture funds.
• Most administrative RD staff have to be more
  commercially minded
• The Public Sectors understanding of
  international business is not strong enough
• Likewise, the Business Communitys understanding
  of political priorities, its constraints and how
  the political system works is far too weak.

Then what shall the governments do ?
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1. Improve the risk-reward ratios

• Widespread direct government ownership in early
  stage undertakings is not in the long term
  interest of any economy
• The government can easily find itself being a
  very big fish in a very small pond
• (Rosenberg.) Rather than try to get into the
  business of technology itself by forming
  companies or investment funds or by picking
  industries through trade protection or tax
  incentives, Government helps most when it creates
  mechanisms for improving the risk-reward ration
  for private entrepreneurs. The two main routes
  are
• encouraging private venture capital by passive
  co-investing programs and the likes, and
• by reducing the risk of undertaking RD.
•  

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2. Plant Seeds and Build Green Houses

• Invest heavily in Research Education
• Educate the future work force give them hard
  skills, drive and motivation
• Continue investments in Basic Research, but
• Increase the allocation to Applied Research
  within areas with potential commercial
  applications at the expense of spreading it out
  widely on a wide range of soft areas.
• RD should be seen as an investment for future
  tax income and employment, not just as an
  academic luxury !!
• Educate commercial skills not just accountants
  and economist, but also the techies (such as eg.
  Gründerskolen)
• Create environments which may foster contacts
  between businesses and RD, and international
  links
• - Research Parks
• - Scholarships
• - International cooperation and joint
  ventures

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3. Water the Seeds and Build irrigation networks
tap into private networks

• Enable RD projects with a commercially viable
  basis to continue longer than today. (Large
  public resources are spent on RD, but far too
  little is allocated for developing projects to
  level where they are becoming palatable for the
  investors.)
• - Alone based on milestones, regular scrutiny
  and evaluation by independent committees.
• - Jointly with private sources. Public funding
  only to be released when private sources are
  willing to commit accordingly. With the public
  funding giving some kind of a kicker/leverage on
  the private funding. (and or Reducing the
  downside.)
• - The Yozma Venture Capital project in Israel
• -  Enterprise Irland
• -  Forny-programmet (Norway)
• -  The proposed EFFECT project (Norway)
• NB. Create direct financial incentives to
  Researchers related to patents and license income
  on patents filed. (The Stanford model) Such
  income should not only be allocated to
  departments or faculties, but also to
  individuals.

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4. Encourage irrigation of dry soils through
incentive schemes

• Tax breaks and investment incentives for
  individuals may be cheaper for the government and
  a lot faster to implement than direct government
  investment schemes.
• - In the UK private investors investing in start
  ups, are tax exempted on capital gains if the
  stock is held for more than 3 years
• - 150 000 can be invested for each year with a
  20 tax break
• gt 77 of the British investors utilizing the
  scheme, claim that it has encouraged investments
  that would not otherwise have been done.
• However, the experience from similar types of tax
  incentives in Germany have been more mixed
• In Norway the most tax advantageous area for
  allocation of private investments is real estate.
  Lavish office spending will not bring about
  future growth !!

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5. Apply your fertilisers with caution, focus and
clear goals

• Direct government Investments
• A mixed blessing
• In Norway SND has been imposed rigid regional
  strings. Very few companies now promoted by the
  members of NVK have received funding from SND.
• In the US the Government has played a very active
  role in the technology sector through the SBIC
  and SBIR, but most of this funding has been
  indirect.
• Direct government investments should in principle
  focus on the early stages
• The later stages should be left to the market
• The government is in a position to act
  counter-cyclically

• Draw a clear line between regional development
  aid and profit maximization. (Establish separate
  funds, arms length from the politicians, when
  profit maxi-misation is the goal)
• Most government agencies have been imposed
  impossible, or at times conflicting goals, i.e.
  to both gain high returns and to attain regional
  growth or other softer goals.

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6. ..and if possible distribute fertilizers
through private vehicles

• Fund in Funds
• - The European Investment Fund is a large fund
  in fund investor in the EU
• - Argentum (NOR)/Vækstfonden (DK) are also
  applying the Fund in Fund Model
• - Similar types of fund in fund vehicles should
  also be built up in seed financing set ups
• Loans/Other types of Incentives to venture funds
• US venture funds can access long term loans from
  SBA. 57 of the number of venture firms funded
  in the US last year, was done by VC-firms
  receiving loan financing from SBA (SBIC/SBIR)
• In Norway Startfondet has tested out a similar
  type of model, but ideally this type of schemes
  should be made available to all players
  satisfying the requirements so established.
• Avoid subsidising a few players make it open
  and available to the entire professional market

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Summary

• Basically, governments should focus on the
  general business climate, stability, and
  infrastructure
• However, dont leave the market all by itself,
  because there is an
• Equity Gap
• An Attitude Gap, and
• Very choppy times..
• Hence, as regards early stage funding governments
  have to
• 1. Improve the risk-reward ratios
• 2. Plant Seeds and Build Green Houses
• 3. Water the Seeds and Build irrigation networks
  preferably by tapping into private networks
• 4. Encourage irrigation of dry soils through
  incentive schemes
• 5. Only apply fertilisers with great caution,
  focus and clear goals
• 6. ..and if possible distribute fertilizers
  through private vehicles