unit 9 finance

UNIT 9 :

FINANCING

TECHNOLOGY VENTURE

TECHNOLOGY ENTREPRENEURSHIP

(ENT600)

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

Introduction A 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 resources

• Resources from external investors

• Government financing schemes (loans, grants

& government venture capital funds)

Eventually, internally generated revenue will

provide the operating capital for the venture.Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 2

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. Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 6

Financing stages are typically tied to the following

stages of business development:

• Research & Development: Pre-seed financing

• Pre-Commercialization: Seed financing

• Commercialization: First round financing

• Growth & 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&D

AND 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 a short

time.

•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&D

AND 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



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

venture 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


in Malaysia

21

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.


(MAVCAP)



in Malaysia

22

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


(MAVCAP)



in Malaysia

23

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

The fund focus 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-up - ranging from RM500,000 - RM10

million



in Malaysia

24

MAVCAP: Cradle Investment Program [CIP]

•The objective of CIP is to generate ICT, biotechnology and

high growth areas, and new areas of growth 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 business plan. It makes the idea more

valuable to the venture capital and later stage funding.



in Malaysia

25

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 the

commercialization.

•To this end, U-CIP specifically funds the development of

prototypes, proofs of concept and the preparation of

business plan. U-CIP provides pre-seed funding of up to

RM50,000.


in Malaysia


Multimedia Development Corporation (MDeC)

MDeC has been entrusted to manage the following funding

scheme and grant and oversee the progress and

completion of funded projects:

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

• Technopreneur Pre-Seed Fund Program


in Malaysia


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.


in Malaysia


MDeC: Technopreneur Pre-Seed Fund Program

•This program is targeted to local entrepreneurs whose

ideas has been developed into a business plan and require

further development to produce commercializable project

with ready prototype suitable for seed/start-up funding.

•The size of funding is up to a maximum of RM150,000 for

development up to 12 months.


in Malaysia


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


in Malaysia


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


in Malaysia


• Venture Capital Funds

• Special-Purpose Government Grants

Malaysian Technology Development Corporation

(MTDC)

Two types of financial assistance offered by MTDC:


in Malaysia


•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


in Malaysia


• 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


in Malaysia


Ministry of Science, Technology and Innovation

(MOSTI)

Funds offered by MOSTI:

• InnoFund

• Technofund

• Content Fund


in Malaysia


MOSTI: InnoFund - EIF

•Enterprise Innovation Fund (EIF) assists individuals/sole-

proprietor, micro and small business to develop new or

improve existing products, process or services with

elements of innovation for commercialization.

•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).


in Malaysia


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,

commercialisation prospect, and financial capability.


in Malaysia


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.


in Malaysia


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.


in Malaysia


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.


in Malaysia


SME Corporation Malaysia (SME Corp):

Grants offered by SME Corp:

• Matching Grant for Business Start-ups

• Matching Grant For Product And Process

Improvement


in Malaysia


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 RM 40,000


in Malaysia


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 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


in Malaysia


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


in Malaysia


•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)


in Malaysia



AGENCY FINANCING SCHEME

MAVCAP •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

Grants

1. TAF

2. TAF-W

3. CRDF

MOSTI •InnoFund: Enterprise Innovation

Fund (EIF)

•TechoFund

•Content Fund

SME Corporation Malaysia •Matching Grants

1. For Business Start-ups

2. For Product & Process

Improvement

46

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 finance

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