Unit 9 ENT600 Finance

UNIT 9 : FINANCING

TECHNOLOGY VENTURE

TECHNOLOGY ENTREPRENEURSHIP (ENT600)

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 1

IntroductionA technology venture can only grow as fast as its capital allows.

Generally, capital can be obtained from at least three categories of resources, either solely, or a combination of the three:Entrepreneur’s own resourcesResources from external investorsGovernment financing schemes (loans, grants & government venture capital funds)

Eventually, internally generated revenue will provide the operating capital for the venture.


Availability of Finance

The availability of finance is a key factor in the development of a new technology-based venture.

However, entrepreneurs with technology-based ventures can face major challenges for financing the start-up and operating capital needs of these ventures.

Since investments in technology-based ventures carry significant risks, the investors’ expectation of returns on their investments can be high.


The Need for Finance

It is important that, as part of the business blueprint, the entrepreneurs identify and quantify their financing needs. They will need financing for some or all of the following reasons:

To determine start-up cost: The initial investment into the business might include:

One-time start-up costs (such as: research & development costs, incorporation costs, rental & utility deposits, fixtures & equipment, and renovation); and

Initial working capital (inventory, rent, utility, advertising, and office supplies).


The Need for Finance (cont...)Shortfalls of revenues over expenses:

Even before the business becomes profitable, the entrepreneurs will still need to pay the suppliers and fixed costs of running the business.

Fixed assets replacement: Eventually, the fixed assets will break down or become

obsolete and the entrepreneurs will have to reinvest in new fixed assets.

Growth: Expansion of current operations may mean additional

costs related to such costs as advertising, payroll, warehousing, or research and development.


Methods of Financing

The choice of financing method is an important determinant of whether an idea or product can reach the market quickly and successfully.

The nature and sources of finance for technology-based ventures will vary through the business development process.

The financing of this process requires a series of injection of money and failure to finance adequately any part of the process may cause the business to fail.


Financing stages are typically tied to the following stages of business development:

Research & Development: Pre-seed financingPre-Commercialization: Seed financingCommercialization: First round financingGrowth & Expansion: Second & Third round financing

Stages of Financing

Generally, funds for technology ventures are raised in stages. Staging of financing allows investors to deal with the uncertainty of the validity of the idea and the untested nature of the management in the company.


Stages of Financing

PRE-COMMER-CIALIZATION

COMMER-CIALIZATION

GROWTH &EXPANSION

Pre-seed financing

Seed financing

First round financing

Second round &Third round

financing

PRE-R&DAND R & D


Pre-Seed Financing

A relatively small amount of capital is provided to an inventor or entrepreneur to prove a specific concept for a potentially profitable business opportunity that still has to be developed and proven. The funded work may involve product development (as opposed to "pure" research), but it rarely involves initial marketing.

Stages of Financing

Pre-R & D and R & D Stage


Seed Financing

• Financing is provided to newly formed companies for use in completing product development and in initial marketing. These companies may be in the process of being organized or may have been in business for a short while.

• In either case, products have yet to be sold commercially. Generally, such businesses have assembled key management, have prepared their initial business plan, and have conducted at least initial market studies.

Stages of Financing

Pre- Commercialization Stage


First-Round Financing

Financing is provided to companies that have expanded their initial capital and now require funds to initiate commercial-scale manufacturing and sales.

Stages of Financing

Commercialization Stage


Second-Round Financing

Working capital is provided for the expansion of a company which is producing and shipping products and which needs to support growing accounts receivable and inventories. Although the company clearly has made progress, it may not yet be showing a profit at this stage.

Stages of Financing

Growth & Expansion Stage


Third-Round Financing

Funds are provided for the major expansion of a company which has increasing sales volume and which is breaking even or which has achieved initial profitability. Funds are utilized for further plant expansion, marketing, and working capital or for development of an improved product, a new technology, or an expanded product line.

Stages of Financing

Growth & Expansion Stage (contd…)


Angels Financing

Self, Relatives & Friends

Government Financing Schemes (loan, grants & govt. venture capital funds)

Banks & DFIs

Venture Capitals

PRE-COMMER-CIALIZATION

COMMER-CIALIZATION

GROWTH &EXPANSION

Pre-seed financing Seed financing First round financing Second round & Third round financing

Stages & Sources of Financing

PRE-R&DAND R & D


Self, Relatives and Friends

•During the early stage of business development, the entrepreneurs’ access to established sources of external finance is limited; hence, most entrepreneurs rely on their own resources, supplemented by funds from relatives and friends.

•The entrepreneurs’ own resources include not only their personal savings and assets, but also their debt capacities in obtaining limited amounts of external finance.

Sources of Financing


Sources of Financing Angel Financing

•For a new venture based on concepts that require lengthy development efforts, the earliest source of outside financing can be provided directly by private investors (wealthy individuals).

•The so-called “angels”, or “business angels”, tend to behave like business partners. They bring with them experience, knowledge and capital to the business.


Government’s Financial Assistance

•Government’s financial assistance to technology-based companies can be classified into two groups: government funding schemes and grants.

•Most funding schemes and grants for technology ventures are channeled through MAVCAP, MDeC, MTDC, MOSTI, SME Corp.



Venture Capital (VC) Financing

•VC financing has tremendous potential in Malaysia to contribute to the growth of technology and knowledge-based ventures. The formal venture capital industry in Malaysia began in 1984 with the establishment of Malaysian Ventures Berhad.

•In terms of the stages of financing, most investments made by Malaysian Venture Capital Companies (VCCs) have been in the growth/expansion stage. Investments in the seed and start-up stages are less than 10% of total investments.



Banking and Development Financial Institutions (DFIs)

Banking institutions and DFIs have been providing financial facilities to small and medium enterprises (SMEs). However, commercial banks and DFIs typically do not invest in start-up technology-based companies because of the high level of risk of the business and the absence of a track record in terms of assets, profits, and positive cash flow.



Government Financing Schemes for Technology Venture in Malaysia

Main agencies that provide government financial assistance:

• Malaysian Venture Capital Management Berhad (MAVCAP)

• Multimedia Development Corporation (MDeC)• Malaysian Technology Development Corporation (MTDC)• Ministry of Science, Technology and Innovation (MOSTI)• SME Corporation Malaysia (SME Corp) formally known as

SMIDEC


As a unique venture capital company, MAVCAP is committed purely to the technology sectors and will invest in a mix of local and overseas businesses to bring together a successful blend of technologies and entrepreneurial skills.

Malaysian Venture Capital Management Berhad (MAVCAP)

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE


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Its investment focus is in the following areas:

• Communications and networking• Electronics• Semiconductor• Internet• Information technology• Bio-tech and life sciences• Medical and health services and device/equipment• Other new areas of high growth.




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Two main types of funding offered by MAVCAP:

• Seed Venture Fund: Idea/Pre-Start-Up Stage

• Direct Venture Fund: Start-Up, Early Growth, Expansion, Rapid and Mature Growth




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MAVCAP: Seed Venture Fund: Idea/Pre-Start-Up Stage

The fund focuses particularly on start-up and early-stage high-growth companies, bringing them to fruition through its service-oriented approach of partnership investment.

Size of direct investment : Start-ups - between RM50,000 to RM500,000. Other than start-ups - ranging from RM500,000 - RM10 million



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MAVCAP: Cradle Investment Program [CIP]

•The objective of CIP is to generate ICT, biotechnology and high growth areas in the field of science and technology with interesting innovative idea and technology.

•CIP provides pre-seed funding of up to RM50,000 for the development of prototype, proof of concept or the preparation of a business plan. It makes the idea more valuable to the venture capital and later stage funding.



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MAVCAP: University Cradle Investment Program [U-CIP]

•U-CIP works together with researchers in public and private universities and colleges. The primary aim of U-CIP is to facilitate the transformation of research outputs into marketable products/services, as a first step in commercialization.

•To this end, U-CIP specifically funds the development of prototypes, proofs of concept and the preparation of a business plan. U-CIP provides pre-seed funding of up to RM50,000.



Multimedia Development Corporation (MDeC)

MDeC has been entrusted to manage the following funding scheme and grant and oversees the progress and completion of funded projects:

• The MSC Malaysia R&D Grant Scheme (MGS)

• Technopreneur Pre-Seed Fund Program



MDeC: The MSC Malaysia R&D Grant Scheme (MGS)

•A total sum of RM120 million has been allocated for the MGS to support R&D initiatives within the MSC.

•The MGS will provide a grant of up to 50% of the approved total project cost or RM1.2 million whichever is lower. The amount of the grant approved will be determined by the merits of each case.



MDeC: Technopreneur Pre-Seed Fund Program

•This program is targeted to local entrepreneurs whose ideas have been developed into a business plan and require further development to produce commercialized project with ready prototype suitable for seed/start-up funding.

•The size of funding is up to a maximum of RM150,000 for development of up to 12 months.



MDeC: Technopreneur Pre-Seed Fund Program (cont)

Project proposals eligible for consideration to fall under any of the following clusters and qualifying activities:

•Creative media and content development•Software development•Internet-based businesses•Support services•Shared services outsourcing•Hardware design



Malaysian Technology Development Corporation (MTDC)

MTDC’s investment criteria are focused on the following:

•Non-ICT sector – focusing on life sciences sector•Strategic technologies•High Investment return•Clear and defined business vision•Credible management team



• Venture Capital Funds• Special-Purpose Government Grants

Malaysian Technology Development Corporation (MTDC)

Two types of financial assistance offered by MTDC:



• MTDC invests in early, growth and late-stage technology-based businesses. In order to diversify its risks, the equity stake in any investment is limited to around 30 percent.

• The investment horizon is limited up to five years.

MTDC: Venture Capital Funds



• Technology Acquisition Fund (TAF) - facilitates the acquisition of strategic and relevant technology.

• Commercialization of Research & Development Fund (CRDF) - provides partial grants to qualified R&D projects for commercialization.

• Technology Acquisition Fund for Women (TAF-W) - provides partial grant to promote efforts by women entrepreneurs, assisting their companies to be at the technological forefront pursuing market reach with their products/services.

MTDC: Special-Purpose Government Grants



Ministry of Science, Technology and Innovation (MOSTI)

Funds offered by MOSTI:

• InnoFund • Technofund• Content Fund



MOSTI: InnoFund - EIF

•The quantum (maximum) and duration of funding will be based on the merits of each application: individual, RM20,000 (12 months); sole-proprietor, RM20,000 (12 months); micro enterprise, RM50,000 (12 months); and small enterprise RM250,000 (18 months).

•Enterprise Innovation Fund (EIF) assists individuals/sole-proprietors, micro and small businesses to develop new or improve existing products, process or services with elements of innovation for commercialization.



MOSTI: Enterprise Innovation Fund (EIF)

• Technology clusters to be considered: Agriculture, Information and Communication Technology (ICT), Biotechnology, Industry.

• Criteria for approval: Innovativeness of project proposal, credibility of project proposal, appropriateness of methodology, appropriateness of milestone, commercialization prospect, and financial capability.



MOSTI: Technofund

• To stimulate the growth and successful innovation of medium and large enterprises

• To increase capability and capacity of Malaysian Government Research Institutes (GRI) and Institutions of Higher Learning (IHL) to undertake market driven R&D and to commercialize the R&D findings through spin-offs/licensing; and

• To enhance global competitiveness and R&D culture among Malaysian medium and large enterprises.



MOSTI: Technofund (cont)

• Two types of funding: Type A - Pre-Commercialization

(funding up to a maximum of the total project cost or RM 5 million whichever is lower).

Type B - IP Acquisition (Laboratory Scale) (funding up to a maximum of 100% of the total acquisition cost or RM 2 million whichever is lower)

• Project eligible for consideration: Agriculture, Biotechnology, Information and Communication Technology (ICT), and Industry.



MOSTI: Content Fund• This fund is especially created to develop content mainly for

entertainment, training and learning, culture and heritage, and information-based.

• The technology required is either in a form of animation, games, simulation/virtual reality or portal/web-based. The contents should be able to run on multiple platforms either on 3G/mobile phone, Internet, or other media such as PDA and TV.

Allocation: Quantum (i) Team – up to RM90,000. (ii) Micro-Enterprise - up to

RM500,000. (iii) SME – up to RM6,000,000.



SME Corporation Malaysia (SME Corp):Grants offered by SME Corp:

• Matching Grant for Business Start-ups

• Matching Grant For Product And Process Improvement



SME Corp: Matching Grant for Business Start-ups

• Assistance is given in the form of a matching grant where 50% of the approved project cost is borne by the Government and the remainder by the applicant.

• For enterprises in the manufacturing sector, incorporated under the Registration of Business Act 1956, assistance is given up to 80% of the approved cost. The maximum grant allocated per application is RM40,000



SME Corp: Matching Grant for Business Start-ups (cont.)

• Sector coverage includes manufacturing and manufacturing related activities such as product/process development, software development, and product and process design.

• Eligible expenses incurred in starting up a business includes: preparation of a Business Plan, related Feasibility Studies, rental of incubators and business premises up to 24 months, rental of equipment and machineries, development of prototype, product sample and testing



SME Corp: Matching Grant for Product And Process Improvement

• This scheme provides matching grant to SMEs for improvement and upgrading of existing products, product design and processes upgrading.

• Assistance is given in the form of a matching grant where 50% of approved project cost is borne by the government and the remainder by the applicant. The maximum grant allocated per application is RM500,000



• Sector coverage includes manufacturing and manufacturing related activities such as product/process development, software development, and product and process design.

• Eligible expenses incurred in starting up a business includes: technology feasibility studies, fees for technology transfer, development of prototypes and system design, product testing, product registration, marking and labeling.

SME Corp: Matching Grant for Product And Process Improvement (cont..)




AGENCY FINANCING SCHEMEMAVCAP •Seed Venture Fund

•Cradle Investment Program (CIP)•University Cradle Investment Program (U-CIP)

MDeC • MSC Malaysia R&D Grant Scheme (MGS)

• Technopreneur Pre-seed Fund Program

MTDC •Venture Capital Funds•Special Purpose Government Grants1.TAF2.TAF-W3.CRDF

MOSTI • InnoFund: Enterprise Innovation Fund (EIF)

• TechoFund• Content Fund

SME Corporation Malaysia •Matching Grants1.For Business Start-ups2.For Product & Process Improvement

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Debt vs. Equity

DEBT FINANCE

Debt financing involves a payback of funds plus an interest.

Debt places a burden of repayment and interest on the entrepreneurs.

EQUITY FINANCE

Equity financing involves the sales of some of the ownership in the venture.

Equity financing forces the entrepreneur to relinquish some degree of control.


In the extreme, the choice for the entrepreneur is either

(1)to take on debt without giving up ownership in the venture or

(2)to relinquish a percentage of ownership in order to avoid having to borrow. In most cases, a combination of debt and equity proves most appropriate.

Debt vs. Equity


Unit 9 ENT600 Finance

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