Author: Stefano Salvatore Tomasello
Published on Malta Today, 4 March 2015
Venture capital is a form of financing based on the provision of equity capital from an investor, in order to finance the early stages of potential long-term growth companies in high-growth industries (biomedical, IT). These firms are too risky to be financed by banks or standard capital markets and so they need to find the necessary capital for the development of their project in alternative ways.
Sometimes, the contribution that venture capital gives to start-ups is also the managerial and technical expertise necessary to run the business. Most of venture capitals, in fact, are composed of wealthy investors (retired managers for example) or banks that decide to provide their expertise to entrepreneurs that have no access to the credit market or don’t have the knowledge required to manage the firm. On the other hand, the entrepreneur is influenced by the venture capitalists decisions, so he loses some independence.
Venture capital is a kind of private equity, that is to say that category of investments, both equity and debt, that are addressed to firms that are not listed on a regulated market. The main form of return from a venture capital operation is given by the sale of the firm shares to another owner. Sometimes the venture capital divests its participations through the company listing and it happens over a span of 3-7 years.
In Europe, venture capital regulation is contained in the “Regulation (EU) No 345/2013 of the European Parliament and of the Council of 17 April 2013 on European venture capital funds”, which streamlines regulation about venture capital in Europe. Every fund that uses the label “European Venture Capital Fund” (EuVECA) has to direct at least 70% of its aggregate capital contributions and uncalled committed capital in assets that are ‘qualifying investments’. The common regulation wants to encourage the activity of venture capitalists outside the national bounds and all over Europe, in order to attract more capital, and so increase the amount of investments towards small and medium sized enterprises. Another important instrument that is also regulated by Regulation 345/2013 is the EuSEF (European Social Entrepreneurship Found Managers). The aim of EuSEF Regulation is to support the provision of finance to social business in the EU by facilitating the fundraising activity by funds that are specialized in this type of business, for example through helping them in tackling the social consequences of the financial crisis and in reaching the target of smart, sustainable and inclusive growth.
In Italy the competent authorities for the implementation of the Regulation are Banca d’Italia and Consob (Commissione Nazionale per le società e la borsa). In order to operate in Italy Venture capital and private equity funds must be recorded in a special section of the register reserved for Investment Management Companies held by Banca d’Italia, which has the power to delete the fund from the register. In this case the latter cannot be active anymore, but also the Consob must express its opinion. This authority is responsible for communicating special facts regarding the lifetime of the venture capital fund (such as a new domicile or the case in which it wants to sell its products outside the national borders in another European State to the European Security Market Authority (ESMA) and to the interested European States. The EFSM, through communications made by the country competent authorities, like the Consob, must keep a public database in which the list of EuVECA and their managers, as well as the countries in which they operate, are recorded.
Italian venture capital and private equity firms are represented by AIFI (Associazione Italiana dei Private Equity e Venture Capital), established in May 1986 with the aim of developing, coordinating and representing, even in institutional places, the firms operating in these markets. The association annually releases studies and analyses about venture capital and the private equity Italian market. From the report issued for the year 2013 it can be noticed that the number of active agents in this market is increased from 163 to 171 and among them 120 are associated with AIFI. The type of agent that is more recurrent is the IMCO, which represents 47% of the total number, followed by international players (33%) and agents focused on early stage financing (9%). The agents first carry out operations regarding the expansion of the firms, while the ones that operate in MBO and early stage financing occupy the second and third places. As at 31 December 2013 the investments not divested yet totaled 1,364 distributed among 1,189 firms for a total value of EUR 21.8 billion. The investments in Italian companies represented 94% of the total value and 71% of the funds comes from private entities.
The most critical point for Italian private equities is funding, especially the part related to private investors. The total amount invested in 2013 was EUR 4,047 million, indicating an upsurge of almost 200% from a previous year value of EUR 1,355 million. However this value is mainly driven by the operations of Fondo Italiano di Investimento, a holding firm, whose major shareholder is Cassa Depositi e Prestiti, an Italian joint-stock company under public control in which the Italian government holds 80.1% of the share capital and whose resources are used to support the growth of the country. However the amount of funding does not include, for reasons of international methodology, the amount provided by international funds that also operates in Italy.
Funds of funds are the primary tool through which capital is provided to firms (32%), also thanks to public investors, while pension funds provide 18% and insurance companies 13%. The contribution of Banks decreased 2012 from 35% in 2012 to 6%, as well as the weight of bank and academic foundations (from 20% to 3%). The number of venture capital and private equity operations carried out during 2013 was 368, distributed among 281 firms, for a total value of EUR 3,430 million, marking a 6% increase compared to 2012.
In Europe the majority of venture capital resources comes from governmental venture capital funds, which sometimes operate as intermediaries of the EIF (European Investment Fund) or in accordance with one of the programs that it promotes. Often public venture capital funds invest in private ones and these act as intermediaries. In Italy Fondo Italiano di Investimento, the Italian equivalent for EIF, provides funding for venture capital and private equity operations. It has recently reached an agreement with EIF to invest EUR 500-600 million in this type of activities focusing on Italian SMEs and startups.
The perfect example of how a venture capital fund works is given by Mosaicoon. Mosaicoon which is an Italian firm headquartered in Palermo ad with offices in Milan, Rome, London and Madrid. The mission of the company is to develop an integrated model of digital communication through innovative systems of online advertising. The company has collected various prizes, both at national as well as international levels that certify its commitment to innovation.
In 2010 Mosaicoon received an initial seed investment of EUR 650.000 by Vertis Venture fund, thus allowing the company to increase its workforce and boost its revenues. In the same year, Mosaicoon was transformed into a joint-stock company with EUR 200.000 fully paid up capital. By the end of 2011 the company had reached a turnover of EUR 1,000,000, reaching the company break-even point.
In December 2012 there was a new investment round with a lead-investor, Vertis Venture, committing itself in the amount of EUR 600,000 and co-investor, Atlante Ventures Mezzogiorno, with a financial commitment of EUR 1,800,000 bringing the total amount of the investment to EUR 2,400,000. The financial operation was assisted by Milan-based international law firm Bird&Bird.
During the period 2011-2012 the company closed deals with some high end clients, such as Telecom, MTV Italia, Vodafone, Microsoft, Algida, Credem and Renault, growing and hiring new employees and generating a turnover of EUR 2,000,000.
However, even if the Italian venture capital and private equity market has a gap to recover compared to other European countries such as UK, it shows signals of development and the increasing activity of public funds can only improve the start-ups and small and medium enterprises situation.
Author: Stefano Salvatore Tomasello
Published on Malta Today, 4 March 2015.