1. Public Private Partnership in PreSeed Funding October 27th, 2006 Risto Kalske SITRA, Finnish National Fund for Research and Development

2. 2 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

3. 3 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

4. 4 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

5. 5 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

6. 6 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.

7. 7 Non-functioning private capital market Lack of capital Corrective Measures: State Aid State Funds Market Failure in Risk Capital Markets

8. 8 Non-functioning private capital market Lack of capital Market Failure in Risk Capital Markets Lack of information

9. 9 Better functioning private capital market Lack of capital Market Failure in Risk Capital Markets Lack of information Public Capital: Goal-oriented Funding

10. 10 Lack of capital Market Failure in Risk Capital Markets Lack of information Public Private Venture Capital Public Capital: Goal-oriented Funding Better functioning private capital market

11. INTRO Market Place A Finnish Five Years’ Experience in Public Private Partnership in Funding Early Stage Growth Companies

12. 12 Start-up Company Start-up Company DIILI Human Resources INTRO Capital LIKSA Business Concept It’s not all about money

13. 13 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

14. 14 LIKSA Focus on acquiring market information 20 … 70 k€ and up to 24 months Resulting in a high quality business plan Sitra and TEKES financing in cooperation DIILI Sales competence as sweat equity Resource: experienced business professionals Objective: to speed up the investment process PreSeed: integrated investment readiness scheme for start-ups INTRO Marketplace for early stage investments Private persons (business angels) as investors Aiming at syndication

15. 15 Stepping stone to venture capital Internet access Venture forums Investment negotiations Syndicates DIILI sweat equity resources Deal flow LIKSA funding business plans Business angels SITRA PreSeed VC-funds Microsoft IP Ventures technology Deal flow INTRO 200 40 20 VERIFICATION

16. 16 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

17. 17 Proven results LIKSA 600 LIKSA applicants instructed Funding to 160 start-ups Accelerates the commercialisation of the company Improves the target company’s possibility for receiving first investment INTRO Private investors organised as an industry A growing community of 350 private investors (business angels) 35% investment ratio Added impact from private and public venture capital investments DIILI A renewing group of 100 knowledge capital investors (1700 knowledge years) 25 investments carried out Expedites investment negotiations has opened up A new path to entrepreneurship

18. 18 Sitra’s 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 Sitra’s success rate through BA / Sitra syndicates

19. 19 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

20. 20 INTRO Nationwide network of business angels and investee companies in one database National and local network – at the same time

21. 21 EASY-project European-wide Cross-border network of business angels and investee companies, 2007-2008, 11 Member Countries, 5,2 M€ Budget Future potential: cross-border network

22. Thank you! Contact: risto.kalske@sitra.fi