UNIVERSITI TEKNOLOGI MARA FAKULTI KEJURUTERAAN KIMIA

PROCESS ENGINEERING LABORATORY III(CPE612)

FINANCING TECHNOLOGY VENTUREINTRODUCTION

A technology venture can only grow as fast as its capital allows. Venture capital (VC)

is financial capital provided to early-stage, high-potential, high risk, growth startup

companies. The venture capital fund makes money by owning equity in the companies it

invests in, which usually have a novel technology or business model in high technology

industries. The typical venture capital investment occurs after the seed funding round as the

first round of institutional capital to fund growth in the interest of generating a return through

an eventual realization event, such as an IPO or trade sale of the company. Venture capital is

a subset of private equity. Therefore, all venture capital is private equity, but not all private

equity is venture capital. Generally, capital can be obtained from atleast 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).

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

Financ

eItisimportantthat,aspartofthebusinessblueprint,theentrepreneursidentifyandquantifytheirfinan

cingneeds.Theywillneedfinancingforsomeorallofthefollowingreasons:

Todeterminestart-upcost:

Theinitialinvestmentintothebusinessmightinclude:

One-timestart-

upcosts(suchas:research&developmentcosts,incorporationcosts,rental&utilitydeposits,fixtures

&equipment,andrenovation);and

Initialworkingcapital(inventory,rent,utility,advertising,andofficesupplies).

Shortfallsofrevenuesoverexpenses:

Evenbeforethebusinessbecomesprofitable,theentrepreneurswillstillneedtopaythesuppliersan

dfixedcostsofrunningthebusiness.

Fixedassetsreplacement:

Eventually,thefixedassetswillbreakdownorbecomeobsoleteandtheentrepreneurswillhavetore

investinnewfixedassets.

Growth:

Expansionofcurrentoperationsmaymeanadditionalcostsrelatedtosuchcostsasadvertising,payr

oll,warehousing,orresearchanddevelopment.

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.

Stages of Financing

Generally,fundsfortechnologyventuresareraisedinstages.Stagingoffinancingallowsinvestorst

odealwiththeuncertaintyofthevalidityoftheideaandtheuntestednatureofthemanagementintheco

mpany.

Financingstagesaretypicallytiedtothefollowingstagesofbusinessdevelopment:

•Research & Development: Pre-seed financing

•Pre-Commercialization: Seed financing

•Commercialization: First round financing

•Growth &Expansion: Second & Third round financing

Stages of Financing

Pre-R& D and R & D Stage

Pre-SeedFinancing

Arelativelysmallamountofcapitalisprovidedtoaninventororentrepreneurtoproveaspecificconce

ptforapotentiallyprofitablebusinessopportunitythatstillhastobedevelopedandproven.Thefunded

workmayinvolveproductdevelopment(asopposedto"pure"research),butitrarelyinvolvesinitialm

arketing.

Stages of Financing

Pre-Commercialization Stage

SeedFinancing

•Financingisprovidedtonewlyformedcompaniesforuseincompletingproductdevelopmentandini

nitialmarketing.Thesecompaniesmaybeintheprocessofbeingorganizedormayhavebeeninbusine

ssashorttime.

•Ineithercase,productshaveyettobesoldcommercially.Generally,suchbusinesseshaveassembled

keymanagement,havepreparedtheirinitialbusinessplan,andhaveconductedatleastinitialmarketst

udies.

Stages of Financing

Commercialization Stage

First-RoundFinancing

Financingisprovidedtocompaniesthathaveexpandedtheirinitialcapitalandnowrequirefundstoini

tiatecommercial-scalemanufacturing

Stages of Financing

Growth & Expansion Stage

Second-RoundFinancing

Workingcapitalisprovidedfortheexpansionofacompanywhichisproducingandshippingproducts

andwhichneedstosupportgrowingaccountsreceivableandinventories.Althoughthecompanyclea

rlyhasmadeprogress,itmaynotyetbeshowingaprofitatthisstage.

Third-RoundFinancing

Fundsareprovidedforthemajorexpansionofacompanywhichhasincreasingsalesvolumeandwhic

hisbreakingevenorwhichhasachievedinitialprofitability.Fundsareutilizedforfurtherplantexpans

ion,marketing,andworkingcapitalorfordevelopmentofanimprovedproduct,anewtechnology,ora

nexpandedproductline.

Stages & Sources of Financing

Self,RelativesandFriends

•Duringtheearlystageofbusinessdevelopment,theentrepreneurs’accesstoestablishedsourcesofe

xternalfinanceislimited;hence,mostentrepreneursrelyontheirownresources,supplementedbyfun

dsfromrelativesandfriends.

•Theentrepreneurs’ownresourcesincludenotonlytheirpersonalsavingsandassets,butalsotheirdeb

tcapacitiesinobtaininglimitedamountsofexternalfinance.

AngelFinancing

•Foranewventurebasedonconceptsthatrequirelengthydevelopmentefforts,theearliestsourceofou

tsidefinancingcanbeprovideddirectlybyprivateinvestors(wealthyindividuals).

•Theso-

called“angels”,or“businessangels”,tendtobehavelikebusinesspartners.Theybringwiththemexpe

rience,knowledgeandcapitaltothebusiness.

Government’sFinancialAssistance

•Government’sfinancialassistancetotechnology-

basedcompaniescanbeclassifiedintotwogroups:governmentfundingschemesandgrants.

•MostfundingschemesandgrantsfortechnologyventurearechanneledthroughMAVCAP,MDeC,

MTDC,MOSTI,SMECorp.

VentureCapital(VC)Financing

•VCfinancinghastremendouspotentialinMalaysiatocontributetothegrowthoftechnologyandkno

wledge-

basedventures.TheformalventurecapitalindustryinMalaysiabeganin1984withtheestablishment

ofMalaysianVenturesBerhad.

•Intermsofthestagesoffinancing,mostinvestmentsmadebyMalaysianVentureCapitalCompanies

(VCCs)havebeeninthegrowth/expansionstage.Investmentsintheseedandstart-

upstagesarelessthan10%oftotalinvestments.

Banking and Development Financial Institutions (DFIs)

BankinginstitutionsandDFIshavebeenprovidingfinancialfacilitiestosmallandmediumenterprise

s(SMEs).However,commercialbanksandDFIstypicallydonotinvestinstart-uptechnology-

basedcompaniesbecauseofthehighlevelofriskofthebusinessandtheabsenceofatrackrecordinterm

sofassets,profits,andpositivecashflow.

Government Financing Schemes for Technology Venture in MalaysiaMain 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

Malaysian Venture Capital Management Berhad (MAVCAP)

Asauniqueventurecapitalcompany,MAVCAPiscommittedpurelytothetechnologysectorsandwil

linvestinamixoflocalandoverseasbusinessestobringtogetherasuccessfulblendoftechnologiesand

entrepreneurialskills.

Malaysian Venture Capital Management Berhad (MAVCAP)

Itsinvestmentfocusisinthefollowingareas:

•Communicationsandnetworking

•Electronics

•Semiconductor

•Internet

•Informationtechnology

•Bio-techandlifesciences

•Medicalandhealthservicesanddevice/equipment

•Othernewareasofhighgrowth.

TwomaintypesoffundingofferedbyMAVCAP:

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

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

MAVCAP:SeedVentureFund:Idea/Pre-Start-UpStage

Thefundfocusparticularlyonstart-upandearly-stagehigh-

growthcompanies,bringingthemtofruitionthroughitsservice-

orientedapproachofpartnershipinvestment.

Sizeofdirectinvestment:

start-ups-betweenRM50,000toRM500,000.

otherthanstart-up-rangingfromRM500,000-RM10million

MAVCAP:CradleInvestmentProgram[CIP]

•TheobjectiveofCIPistogenerateICT,biotechnologyandhighgrowthareas,andnewareasofgrowth

inthefieldofscienceandtechnologywithinterestinginnovativeideaandtechnology.

•CIPprovidespre-

seedfundingofuptoRM50,000forthedevelopmentofprototype,proofofconceptorthepreparationo

fbusinessplan.Itmakestheideamorevaluabletotheventurecapitalandlaterstagefunding.

MAVCAP:UniversityCradleInvestmentProgram

[U-CIP]

•U-

CIPworkstogetherwithresearchersinpublicandprivateuniversitiesandcolleges.Theprimaryaimo

fU-CIPistofacilitatethetransformationofresearchoutputsintomarketableproducts/

services,asafirststepinthecommercialization.

•Tothisend,U-

CIPspecificallyfundsthedevelopmentofprototypes,proofsofconceptandthepreparationofbusine

ssplan.U-CIPprovidespre-seedfundingofuptoRM50,000.

Multimedia Development Corporation (MDeC)

MDeChasbeenentrustedtomanagethefollowingfundingschemeandgrantandoverseetheprogress

andcompletionoffundedprojects:

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

•Technopreneur Pre-Seed Fund Program

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

•AtotalsumofRM120millionhasbeenallocatedfortheMGStosupportR&DinitiativeswithintheM

SC.

•TheMGSwillprovideagrantofupto50%oftheapprovedtotalprojectcostorRM1.2millionwhichev

erislower.Theamountofthegrantapprovedwillbedeterminedbythemeritsofeachcase.

MDeC: Technopreneur Pre-Seed Fund Program

•Thisprogramistargetedtolocalentrepreneurswhoseideashasbeendevelopedintoabusinessplanan

drequirefurtherdevelopmenttoproducecommercializableprojectwithreadyprototypesuitablefors

eed/start-upfunding.

•ThesizeoffundingisuptoamaximumofRM150,000fordevelopmentupto12months.

MDeC: Technopreneur Pre-Seed Fund Program (cont)

Projectproposalseligibleforconsiderationtofallunderanyofthefollowingclustersandqualifyingac

tivities:

•Creativemediaandcontentdevelopment

•Softwaredevelopment

•Internet-basedbusinesses

•Supportservices

•Sharedservicesoutsourcing

•Hardware design

Malaysian Technology Development Corporation (MTDC)

MTDC’sinvestmentcriteriaarefocusedonthefollowing:

•Non-ICTsector–focusingonlifesciencessector

•Strategictechnologies

•HighInvestmentreturn

•Clearanddefinedbusinessvision

•Crediblemanagementteam

Malaysian Technology Development Corporation (MTDC)

TwotypesoffinancialassistanceofferedbyMTDC:

•Venture Capital Funds

•Special-Purpose Government Grants

MTDC: Venture Capital Funds

•MTDCinvestsinearly,growthandlate-stagetechnology-

basedbusinesses.Inordertodiversifyitsrisks,theequitystakeinanyinvestmentislimitedtoaround30

percent.

•Theinvestmenthorizonislimiteduptofiveyears.

MTDC: Special-Purpose Government Grants

•TechnologyAcquisitionFund(TAF)-

facilitatestheacquisitionofstrategicandrelevanttechnology.

•CommercializationofResearch&DevelopmentFund(CRDF)-

providespartialgrantstoqualifiedR&Dprojectsforcommercialization.

•TechnologyAcquisitionFundforWomen(TAF-W)-

providespartialgranttopromoteeffortsbywomenentrepreneurs,assistingtheircompaniestobeatth

etechnologicalforefrontpursuingmarketreachwiththeirproducts/services.

Ministry of Science, Technology and Innovation (MOSTI)

FundsofferedbyMOSTI:

•InnoFund

•Technofund

•Content Fund

MOSTI: InnoFund -EIF

•EnterpriseInnovationFund(EIF)assistsindividuals/sole-

proprietor,microandsmallbusinesstodevelopneworimproveexistingproducts,processorservices

withelementsofinnovationforcommercialization.

•Thequantum(maximum)anddurationoffundingwillbebasedonthemeritsofeachapplication:indi

vidual,RM20,000(12months);sole-

proprietor,RM20,000(12months);microenterprise,RM50,000(12months);andsmallenterpriseR

M250,000(18months).

MOSTI: Enterprise Innovation Fund (EIF)

•Technologyclusterstobeconsidered:Agriculture,Informationandcommunicationtechnology(IC

T),Biotechnology,Industry.

•Criteriaforapproval:Innovativenessofprojectproposal,credibilityofprojectproposal,appropriat

enessofmethodology,appropriatenessofmilestone,commercialisationprospect,andfinancialcapa

bility.

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).

•TypeB-IPAcquisition(LaboratoryScale)

(fundinguptoamaximumof100%ofthetotalacquisitioncostorRM2millionwhicheverislower)

•Project eligible for consideration: Agriculture,Biotechnology, Information and

Communication Technology (ICT), and Industry.

MOSTI: Content Fund

•Thisfundisespeciallycreatedtodevelopcontentmainlyforentertainment,trainingandlearning,cul

tureandheritage,andinformation-based.

•Thetechnologyrequirediseitherinaformofanimation,games,simulation/virtualrealityorportal/

web-based.Thecontentsshouldbeabletorunonmultipleplatformseitheron3G/

mobilephone,Internet,orothermediasuchasPDAandTV.

Allocation:

Quantum(i)Team–uptoRM90,000.(ii)Micro-Enterprise-uptoRM500,000.(iii)SME–

uptoRM6,000,000.

SME Corporation Malaysia (SME Corp):

Grants offered by SME Corp:

•Matching Grant for Business Start-ups

•Matching Grant For Product And Process Improvement

SMECorp:MatchingGrantforBusinessStart-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

SMECorp:MatchingGrantforBusinessStart-ups(cont)

•Sector coverage includes manufacturing and manufacturing related activities such as

product/process development, software development, and product and process design.

•EligibleExpensesincurredinstartingupabusinessincludes:PreparationofBusinessPlan,RelatedF

easibilityStudies,Rentalofincubatorsandbusinesspremisesupto24months,Rentalofequipmentan

dmachineries,Developmentofprototype,Productsampleandtesting

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

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

•Sector coverage includes manufacturing and manufacturing related activities such as

product/process development, software development, and product and process design.

•EligibleExpensesincurredinstartingupabusinessincludes:Technologyfeasibilitystudies,feesfor

technologytransfer,developmentofprototypesandsystemdesign,producttesting,productregistrat

ion,markingandlabeling.

Debt vs. Equity

DEBT FINANCE EQUITY FINANCE

Debt financing involves a payback of funds

plus an interest.

Equity financing involves the sales of some

of the ownership in the venture.

Debt places a burden of repayment and

interest on the entrepreneurs.

Equity financing forces the entrepreneur to

relinquish some degree of control.

Debt vs. Equity

Intheextreme,thechoicefortheentrepreneuriseither

(1)totakeondebtwithoutgivingupownershipintheventureor

(2)torelinquishapercentageofownershipinordertoavoidhavingtoborrow.Inmostcases,acombinat

ionofdebtandequityprovesmostappropriate.