Public Private Partnership in PreSeed Funding

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Public Private Partnership in PreSeed Funding

• October 27th, 2006
• Risto Kalske
• SITRA, Finnish National Fund for Research and
  Development

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Contents

• Observations about General CIP principles of
  public financing
• A practical example of Public Private Partnership
  in PreSeed Funding in Finland
• Towards Pan-European Market Place in Start-Up
  Financing

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Community guidelines on state aid to promote risk
capital investments in small and medium-sized
enterprises

• Scope Risk capital and companies with perceived
  high-growth potential at their early growth
  stages
• Demand from companies with high-growth potential
  that do not have sufficient access to capital
  markets
• Supply of risk capital comes from investors ready
  to take high risk in exchange of potentially
  above-average returns from the equity invested
• Aided risk capital funds low overall
  profitability
• Ensure that profit-driven and professional
  investment decisions are strengthened in order to
  further encourage private investors to co-invest
  with the State

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Community guidelines

• Supply side The investor needs to make a careful
  analysis not merely of any collateral being
  offered (as a lender does) but the entire
  business strategy to estimate the possibilities
  of making a profit on the investment and the
  risks associated with it.
• Demand side The enterprise must understand the
  benefits and risks associated with external
  equity investment to pursue the venture and to
  prepare sound business plans to secure the
  necessary resources and mentoring

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Community guidelines

• State aid for risk capital must result in a net
  increase in the availability of risk capital to
  SMEs, in particular by leveraging investments by
  private investors
• State aid will be inefficient if it goes beyond
  what is needed to induce more risk capital
  provision. To ensure that aid is limited to the
  minimum, it is crucial that there is significant
  private participation and that the investments
  are profit-driven and are managed on a commercial
  basis
• The presence of publicly supported measures may
  discourage other potential investors from
  providing capital

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Community guidelines

• The Commission considers that the main source of
  market failure relevant to the early stage risk
  capital markets relates to imperfect or
  asymmetric information. Potential investors face
  difficulties in gathering reliable information on
  the business prospects of a new company.

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Market Failure in Risk Capital Markets
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Market Failure in Risk Capital Markets
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Better functioning private capital market
Market Failure in Risk Capital Markets
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Better functioning private capital market
Market Failure in Risk Capital Markets
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INTRO Market Place
A Finnish Five Years Experience in Public
Private Partnership in Funding Early Stage
Growth Companies
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Its not all about money
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SITRA and business angel network

• In-depth public / private partnership with
  business angels since 2001
• A deal-flow development program
• INTRO-market place as a trade point
• Offers syndicate partnership
• sales competence as sweat equity scheme
• Coordinates the investment process
• A national network of 450 business angels
• Initial funding for pre-seed technology companies

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PreSeed integrated investment readiness scheme
for start-ups
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Stepping stone to venture capital
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INTRO a true value-adding market place

• Funding the business plans
• Addressing sales forces on sweat equity basis
• Screening enterprises screening business angels
  screening sales forces
• Conducting investment process
• Legal support shareholders agreements
• Stepping stone to VC markets
• Public/private syndicates

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Proven results
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Sitras objectives for co-partnering

• Need to create a strong Business Angel domain
• Establish a well functioning pre-Venture Capital
  market immune to VC fluctuations
• Reduce the discontinuity in exit routes
• Address BA domain as part of the VC chain
• Improve Sitras success rate through BA / Sitra
  syndicates

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PreSeed integrating value for the start-ups

• Initial results are promising
• First 50 investments in 4 years
• 70 funded by BA/VC coalitions alone
• 25 sweat equity investments in the first 24
  months
• 8 VC funds participated in the syndicates
• Significantly accelerated investment process

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National and local network at the same time
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Future potential cross-border network
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Thank you!
Contact risto.kalske_at_sitra.fi