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7 Nov 2011

Funding the Growth II, CCFGB. EP Capital. 7 Nov 2011. Europe needs SMEs …. M. Zuckerberg (30 Oct 2011, Y Combinator ) “ We never went into this wanting to build a company. But a company is the best vehicle in the world to align a lot of people to achieve a mission”.

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7 Nov 2011

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  1. Funding the Growth II, CCFGB EP Capital 7 Nov 2011

  2. Europe needsSMEs… M. Zuckerberg(30 Oct 2011, Y Combinator) “We never went into this wanting to build a company. But a company is the best vehicle in the world to align a lot of people to achieve a mission”. In a mature market, is there any other way to achieve economic growth and create jobs through other means than innovation/entrepreneurship? ... and despite its history, its skilled workforce, France lags behind! Firms of 250+ employees in several EU countries 2 Source : Ernst&Young et ESCP-EAP, Grandir en Europe : hasard ou état d’esprit, 2008.

  3. … and financingiskey • The probability of success of a SME ishighlycorrelated to itsaccess to financing. • Sevenyearsafterlaunch, a UK SME has on average 5x more capital thanits French equivalent and creates 4x more jobs. Evolution of average capital in €K for French and UK SMEs Note : average capital of companies founded in year n, with an initial capital superior to €100K Source : Institut Français pour la Recherche sur les Administrations Publiques (IFRAP), 2008 Survival rate after 3 years for firmscreated in 2006 depending on investedamountatlaunch Evolution of jobs created by French and UK SMEs Note : Jobs created in SMEs created in year n with an initial capital superior to €100K Source : Institut Français pour la Recherche sur les Administrations Publiques (IFRAP), 2008 3 Source : Insee, enquête Sine, interrogations 2006 et 2009.

  4. The startup financing cycle shouldbeEquity, Equity, Equity… thenDebt • The “Valley of Death “ is not - and cannot - be financed through traditional banking services….even for tangible asset intensive SMEs which are increasingly less in the “start up blocks”. • By definition, traditional loans are not adequate for non-mature businesses: expose lenders to all the downside but only limited upside! • Only equity – or convertible loans (if valuation is really un-definable) are adequate. • Who better than ex-entrepreneurs/corp. execs to allocate capital efficiently to new SMEs? • Besides finance, business angels may provide intangible capital (advice, contacts etc...). Early stage: business angels, small VC funds, (grants) Seed stage: savings, FFF, (grants)

  5. Fiscal incentives are crucial to encourage direct investmentintoSMEs… and the UK has understoodit! • One of the main measures undertaken during the last UK Budget (announced on 23 march2011) has been the clear strengthening of the fiscal incentives (EIS) in favour of business angels investing in UK SMEs. • The UK government therefore chose to acknowledge the value added of business angels in the financing of SMEs and the important risk inherent to this asset class (long holding period, lack of liquidity, uncertainty). • The survey undertaken by NESTA et BBAA(a) shows that in the UK, 80% of investors use the EIS and 53% state they would be doing less investment without this fiscal incentive (and naturally these statistics should further increase following this strengthening of the EIS programme). • Via an important ‘PR effect’ these fiscal incentives encourage citizens to discover business angel investing and thus bring the overall population closer to SMEs/innovation. • The maximum annual relief for a French business angel is €45k, vs £300k (i.e. €340k) in the UK. • As of today, the maximum loss that a UK business angel (taxed at 50% level) may incur is 35% of invested capital. (a) Sources: BBAA, May 2009, Business angel investing – promising outcomes and effective strategies (1)EIS post budget 23 March 2001; (2) TEPA post « loi de finances 2011 »; (3)Twice as much for a couple

  6. Examples of entrepreneurs turned ‘Super Angels’An efficient re-allocation of savings Jon Moulton, Better Capital, Alchemy 100+ investments Stake in Ashmore Plc, for example, initially an angel investment, is worth ~ £70m and he admits that “he has made more money as an angel than through working”. However, keen to stress the risk: “lost at least a third of the cash put into angel deals, while a handful of investments have made over a thousand times the money”. Xavier Niel, Free, through Kima Ventures ‘The Most Active Angel Investor In The World’ ‘100 tech startups each year, every year. Forever. In any country in the world.’ Reid Hoffman, Cofounder of LinkedIn; former exec at PayPal 80+ investments ‘After five minutes of a pitch, I know if I’m not going to invest, and after 30 minutes to an hour, I generally know if I will. And hundreds of other entrepreneurs turned full-time business angels in the Silicon Valley: Peter Thiel, Jeff Clavier, Dave McClure......

  7. EP Capital: UK/France venture syndicate Access to an attractive asset classAverage 22% IRR(a)on UK angel deals Benefit from full tax relief UK: 30% on day 1 + no CGT + deductibility on any loss + inheritance tax relief Premium EP offeringFocused screening and facilitated investment process Tax-free capital gains Limited and fair transaction costs Benefit from network’s expertise and credibilityProactive investors focused on nurturing tomorrow’s leaders Build a diversified portfolio of SME investments Widely regarded as the winning strategy You only ‘lock-in’ what you investNo committed funds, therefore low opportunity cost of capital (a) As shown by May 2009 study published by Nesta and BBAA, surveying 158 UK-based angel investors who have invested £134m into 1,080 angel investments between them. www.entrepreneurspartners.com 7

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