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Irish Venture Capital Association in association with InterTradeIreland’s Equit

Irish Venture Capital Association in association with InterTradeIreland’s EquityNetwork A GUIDE TO VENTURE CAPITAL 3 Rectory Slopes, Bray, Co. Wicklow T el: 353 (0) 1 276 4647 Fax: 353 (0) 1 274 5915 Email: secretary@ivca.ie Web: www.ivca.ie The Old Gasworks Business Park Kilmorey Street, Newry BT34 2DE, Co. Down Tel: 028 3083 4151 (RoI: 048 3083 4151) Fax: 028 3083 4155 (RoI: 048 3083 4155) Email: equity@intertradeireland.com Web: www.intertradeireland.com THIRD EDITION 1 CONTENTS Foreword by Desmond Fahey, Chairman of the Irish Venture Capital Association 2 Foreword by Barry Fitzsimons, Chair of EquityNetwork 3 An Introduction to Venture Capital 4 • What is venture capital/private equity? 5 • How do I make my company attractive to a venture capitalist or an investor in general? 5 • Benefits of venture capital 7 • Questions to ask before approaching a venture capitalist 8 • The Business Plan 10 The Role of the Non-Executive Director 14 Sources of Venture Capital 15 Glossary of T erms 28 Irish Venture Capital Association Council 33 Irish Venture Capital Association – Associate Members 34 EquityNetwork – Steering Committee 38 – Executive 38 Useful Contacts 40 Third Edition Foreword DESMOND FAHEY Chairman of the Irish Venture Capital Association A GUIDE TO VENTURE CAPITAL The Irish Venture Capital Association represents members who professionally manage over 95% of the €1 billion managed by venture capital funds in Ireland. The Irish VC industry is relatively young by comparison to the U.S.A and Europe but is developing very well. During the last five years, our member VC companies invested over €1 billion into over several hundred Irish enterprises. These companies today employ thousands of Irish graduates and technically qualified personnel. The value added to investee companies by experienced VC professionals is very important for developing enterprises. During 2004 divestments by Irish VC companies yielded €190 million, achieved through trade sales, public offerings, debt repayment and sales to other investors. While an increase in divestment is to be expected at this stage of the venture capital life cycle, it also demonstrates that an exit market is developing, providing the essential disposal mechanisms tothe venture capital industry. Over €150 million of VC money is still available for qualifying entrepreneurs however, the Irish venture capital industry will require significant funding in 2006 if the level of investment in internationally focused Irish enterprises is to continue at the rate required for our knowledge economy. This publication ‘A Guide to Venture Capital’ is published in collaboration with EquityNetwork, gives details of our members, useful contacts, some other sources of financial funding and a glossary of terms. It is an excellent resource for corporate financiers, accountants and lawyers as well as for those seeking venture equity. I hope you find it useful. Foreword BARRY FITZSIMONS EquityNetwork, Vice-Chair of InterTradeIreland IInterTradeIreland’s joint publication with the Irish Venture Capital Association, A Guide to Venture Capital, was first published in 2003. The Guide, the first of its kind, has become the first point of contact for anyone seeking information on venture capital on the island of Ireland. The Guide contains all the sources of funding on the island, it aims to enable the entrepreneur to see what funding is available and give pointers on how to go about sourcing funding. InterTradeIreland’s collaboration with the Irish Venture Capital Association in producing the Guide and in developing other initiatives has certainly strengthened the quality of the service InterTradeIreland is able to offer. As the industry body on the island the IVCA is an excellent partner for EquityNetwork across a range of venture capital initiatives. InterTradeIreland now supports ‘Halo’ business angel networks in Northern Ireland and the Republic. In the north through Investment Belfast in collaboration with Invest NI and the NI Bankers Association and in the south through Dublin Business Innovation Centre with the collaboration of Enterprise Ireland and the regional BICs. Research undertaken in 1999 by InterTradeIreland into private equity provision on the island revealed a dramatic increase in the amounts of private equity raised and invested in the previous decade. However, certain regions showed slower signs of growth and a low level of uptake – due primarily to a shortage of quality deals rather than the availability of funds. The research also highlighted a gap in the supply of equity finance to early stage start up projects. This is not peculiar to the local market but reflects the high level of risk of funding such projects and the cost of managing the investment, relative to the actual funds invested. To address these shortfalls InterTradeIreland developed EquityNetwork. EquityNetwork provides the following services to the business community: •Value added information services to businesses to assist in making them ’investor ready’ •Signposting for businesses seeking equity finance •Support for business angel networks on the north and south of the island •An island-wide education programme to raise awareness of the availability and benefits of using private equity I hope you continue to find the Guide useful. 2 3 A GUIDE TO VENTURE CAPITAL An Introduction to Venture Capital Venture Capital/Private Equity is medium to long-term finance provided in return for a shareholding in unquoted companies. For the purposes of this guide ‘Private Equity’ refers to ‘Venture Capital’ and ‘Business Angel’ investments at stages in a company’s development, from the seed to expansion stages, as well as management buy-outs and buy-ins. The terms Venture Capital and Private Equity should therefore be regarded as interchangeable phrases. The purpose of this booklet is to encourage you to start planning early when seeking finance to accelerate the growth of your business. It will explain how a Venture Capitalist approaches the process of investing equity in a business and what you need to do to improve your chances of raising equity. It gives guidance on what should be included in your business plan, the most important document you will produce when searching for a private equity investor. The guide also demonstrates the positive advantages that venture capital/private equity will bring to your business. The main sources of private equity on the island are Venture Capital Funds, Business Angels (private individuals who provide smaller amounts of finance at an earlier stage than many private equity firms are able to invest at), Government Agencies (depending upon the sector your business operates in, the presence of other investors and where the business is in its development cycle) and Corporate Venturers. Corporate Venturers can be product related or service companies that provide funds and/or a partnering relationship between mature and early stage companies which may operate in the same industry sector. This Guide's principal focus is upon Venture Capital Funds. However, the investment criteria that both Venture Capital Funds and Business Angels apply when assessing potential investee companies is often very similar - therefore the guide will benefit entrepreneurs and their advisers looking for private equity from both these sources. In short, the aim is to help you understand what Venture Capital Funds are looking for in a potential business investment and how to approach them. What is venture capital/private equity? Venture Capital/Private Equity; provides long-term, committed share capital, to help unquoted companies grow and succeed. If you are looking to start up, expand, buy into a business, buy out a division of your parent company, turnaround or revitalise a company, Private Equity could help. Obtaining private equity is very different from raising debt or a loan from a lender, such as a bank. Lenders, who usually seek security such as a charge over the assets of the company, will charge interest on a loan and seek repayment of the capital. Private equity is invested in exchange for a stake in your company and, as shareholders, the investors' returns are dependent on the growth and profitability of your business. The investment is unsecured, fully at risk and usually does not have defined repayment terms. It is this flexibility which makes private equity an attractive and appropriate form of finance for early stage and knowledge-based projects in particular. How do I make my company attractive to a Venture Capitalist or an investor in general? Many small companies on the island do not grow and so do not provide 'upside potential' for the owners other than to provide a good standard of living and job satisfaction. These businesses are not generally suitable for private equity investment, as they are unlikely to provide sufficient financial returns to make them of interest to an external investor. High potential businesses can be distinguished from others by their aspirations and potential for growth, rather than by their current size. Such businesses are aiming to grow rapidly to a significant size. As a rule of thumb, unless a business can offer the prospect of significant turnover growth within three to five years, it is unlikely to be of interest to a private equity investor. This usually means that the market for the product and service will not solely be on the island. Private equity investors are interested in companies with high growth prospects, enjoy barriers to entry from competitors, are managed by uploads/Finance/ guide-venture-capital.pdf