LTT Services for mobile companies

1
LTT Services for mobile companies

• A research and consulting company owned by the
  Helsinki School of Economics.
• Services
• VC-research
• A decade of research and practise
• Business development consulting (Advice)
• Business Models in Transisition (multi-client
  project with e.g. Kone, Nokia, Suunto etc.)
• Marketing development
• Strategy Management development
• Mobiili-Tupas (funded by Tekes)
• e.g. digital marketing, business models,
  multi-company B to C
• Contact Ville Virtanen
• 30 in house researchers network of advisors
  from HSE and foreign universities
• Sales 3,0 million euros (2004)

2
Business Cycle Effects on Start-up Finance in
Finland

• Summary and recommendations
• 25.01.2005

3
Economic Business Cycles Drive Venture Capital

• Declining economy
• Increasing agency (monitoring) costs
• No supply of external finance
• No active exit markets
• Increasing need for VC intermediation

GDP growth

• Improving economy
• Decreasing agency (monitoring) costs
• Good supply of external finance
• Vigorous exit markets
• Declining need for VC intermediation

• Declining economy
• Increasing Risk
• Decreasing Returns

• Improving economy
• Decreasing Risk
• Increasing Returns

• Weak economy
• High Risk
• Low Returns

t
The highest agency costs underscore the
importance of venture capital to ensure external
finance and firm survival
4
A well-functioning VC-industry provides
stability for start-up finance

• Without venture capital high-tech entrepreneurs
  would not overcome problems of external finance
• The role of venture capital is of the highest
  importance in the economic downturn for start-ups
• Venture capital funds might propagate the impact
  of the cycle if venture capital funds are
• over-active at the height of the boom
• over-passive at the bottom of the cycle

5
The downturn has exposed underdevelopmentin
Finnish VC and start-up markets.

• VCs admit theyve contributed to the problem by
  making mistakes during the dotcom hype
• For example, whereas before the focus was on
  technology, the VCs selection criteria has now
  changed to incorporate business models
• In addition, the downturn has uncovered problems
  that have always existed to some extent
• Lack of skilled workers
• Lack of serial entrepreneurs
• Finnish bankruptcy culture may pose a barrier to
  serial entrepreneurship
• Small business angel network (may be due in part
  to lack of serial entrep.)
• Finnish attitudes on risk-taking and wealth
  accumulation
• Taxation

6
An equity gap exists in the financing of early
stage companies

• From VCs
• Theres nobody in the bracket between 200,000
  and 700-800,000 and then at a million you get a
  couple of private investors coming in, but very
  few. (M)
• What were missing from the Finnish market is
  an early stage investor that would be active in
  the current market situation. (K)
• From Start-Up
• The risk out of the venture capital market has
  gone away. So its not venture capital
  anymore.... Finnish VCs are, in my opinion, quite
  toothless...

7
Public and private investors operate under
differing motives that contribute to the equity
gap problem during downturns.
Companies Stop Buying from Start-Ups
Start-Ups Unable to Get Funded
TEKES Cannot Fund RD of Early Stage Cos.
without Private Money
Start-Ups Make Losses
Equity Gap Results
Start-Ups Generate Poor Returns
VCs Investors Shift Funds to Less Risky
Investments
Investors Unable to Exit
VCs Investors Make Losses
VCs Investors Become Risk Averse
8
Finlands social capital has increased, which
will better prepare it for the next downturn in
the business cycle.

• Increased scrutiny and self-reflection
• Learning-by-doing
• VCs more focused on their expertise areas
• Increased experience to weather the next downturn

9
The role of public policy

• Cyclicality is integral part of VC activity it
  cannot be prevented
• Government involvement can include
• Promotion of market efficiency
• Stability of market infrastructure
• It should be kept in mind that the scale of VC
  finance is small
• The total VC funding In Europe is about half of a
  bank lending in the UK
• Policy implementation should be based on
  economic and financial theory whenever possible

10
Direct measures concerning investment activities

• TEKES should engage in steady investment activity
  over time
• Fully counter-cyclical investment policy suffers
  from difficulties in measurement and timing
• Wrong magnitude and timing can lead to
  propagation of the cycle
• Predictability creates stability
• The equity gap can be addressed through
  public/private partnership investments
• The government would make an investment in 3
  domestic VC management teams with the requirement
  that each of them partner with a reputable
  foreign VC as a matching investor and active
  partner
• Winning teams would be selected via competitive
  bidding process
• Asymmetric profit sharing upside to investors,
  restricted losses
• Winning teams would be given the option to buy
  governments shares at cost plus below market
  interest rate for up to 5-7 years.
• Israel and SBIC serve as examples

11
The structure of the fund initiative
The equity gap can be addressed through
public/private partnership investments
Funds lifetime
Government exit 5-7 years in sell-off to managers
Creation of funds

• Competitive bidding process
• Team track record
• Foreign VC
• Asymmetric profit sharing (restricted losses)

7 years
0 year
12
Indirect measures more efficient markets
mitigate business cycles

• Improving competency levels of market
  participants increases market efficiency
• Investors VCs Start-ups
• Improve information flows between Government,
  start-ups and investors via clear and frequent
  communication
• One-stop shopping for funds.
• Re-design of existing government funding
  instruments so that incentives are properly
  aligned and policy instruments achieve their
  desired intent.

13
LTT Services for mobile companies

• A research and consulting company owned by the
  Helsinki School of Economics.
• Services
• VC-research
• A decade of research and practise
• Business development consulting (Advice)
• Business Models in Transisition (multi-client
  project with e.g. Kone, Nokia, Suunto etc.)
• Marketing development
• Strategy Management development
• Mobiili-Tupas (funded by Tekes)
• e.g. digital marketing, business models,
  multi-company B to C
• Contact Ville Virtanen
• 30 in house researchers network of advisors
  from HSE and foreign universities
• Sales 3,0 million euros (2004)