TECHNOLOGY ENTREPRENEURSHIP(ENT600) UNIT 9 : FINANCING TECHNOLOGY VENTURE 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 provide the operating capital for the venture. Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE will 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. Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 3 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). Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 4 warehousing. 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.. Entrepreneurship Dept.) Shortfalls of revenues over expenses: Even before the business becomes profitable. payroll.The Need for Finance (cont. Growth: Expansion of current operations may mean additional costs related to such costs as advertising. FBM (2009) ENT600/UNIT 9 : FINANCE 5 . or research and development.. Entrepreneurship Dept. FBM (2009) ENT600/UNIT 9 : FINANCE 6 . The nature and sources of finance for technologybased ventures will vary through the business development process.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 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. funds for technology ventures are raised in stages.Stages of Financing Generally. 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 Entrepreneurship Dept. 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. FBM (2009) ENT600/UNIT 9 : FINANCE 7 . Stages of Financing PRE-R&D AND R & D PRE-COMMERCIALIZATION Pre-seed financing Entrepreneurship Dept. FBM (2009) Seed financing COMMERCIALIZATION First round financing ENT600/UNIT 9 : FINANCE GROWTH & EXPANSION Second round & Third round financing 8 . FBM (2009) ENT600/UNIT 9 : FINANCE 9 . 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 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. Entrepreneurship Dept. These companies may be in the process of being organized or may have been in business a short time.Stages of Financing Pre. such businesses have assembled key management. Entrepreneurship Dept. FBM (2009) ENT600/UNIT 9 : FINANCE 10 . have prepared their initial business plan. products have yet to be sold commercially. •In either case. Generally. and have conducted at least initial market studies.Commercialization Stage Seed Financing •Financing is provided to newly formed companies for use in completing product development and in initial marketing. Stages of Financing 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. FBM (2009) ENT600/UNIT 9 : FINANCE 11 . Entrepreneurship Dept. it may not yet be showing a profit at this stage. Entrepreneurship Dept.Stages of Financing Growth & Expansion 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. FBM (2009) ENT600/UNIT 9 : FINANCE 12 . Entrepreneurship Dept. and working capital or for development of an improved product. a new technology. marketing.Stages of Financing Growth & Expansion Stage (contd…) 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. FBM (2009) ENT600/UNIT 9 : FINANCE 13 . Funds are utilized for further plant expansion. or an expanded product line. FBM (2009) ENT600/UNIT 9 : FINANCE 14 .Stages & Sources of Financing PRE-R&D AND R & D PRE-COMMERCIALIZATION Pre-seed financing Seed financing COMMERCIALIZATION First round financing GROWTH & EXPANSION Second round & Third round financing Self. grants & govt. venture capital funds) Venture Capitals Banks & DFIs Entrepreneurship Dept. Relatives & Friends Angels Financing Government Financing Schemes (loan. Relatives and Friends •During the early stage of business development. supplemented by funds from relatives and friends. Entrepreneurship Dept. hence.Sources of Financing Self. most entrepreneurs rely on their own resources. the entrepreneurs’ access to established sources of external finance is limited. but also their debt capacities in obtaining limited amounts of external finance. •The entrepreneurs’ own resources include not only their personal savings and assets. FBM (2009) ENT600/UNIT 9 : FINANCE 15 . tend to behave like business partners.Sources of Financing Angel Financing •For a new venture based on concepts that require lengthy development efforts. FBM (2009) ENT600/UNIT 9 : FINANCE 16 . •The so-called “angels”. or “business angels”. Entrepreneurship Dept. the earliest source of outside financing can be provided directly by private investors (wealthy individuals). knowledge and capital to the business. They bring with them experience. SME Corp. MOSTI. MTDC. Entrepreneurship Dept. FBM (2009) ENT600/UNIT 9 : FINANCE 17 . •Most funding schemes and grants for technology venture are channeled through MAVCAP. MDeC.Sources of Financing Government’s Financial Assistance •Government’s financial assistance to technology-based companies can be classified into two groups: government funding schemes and grants. •In terms of the stages of financing. most investments made by Malaysian Venture Capital Companies (VCCs) have been in the growth/expansion stage.Sources of Financing Venture Capital (VC) Financing •VC financing has tremendous potential in Malaysia to contribute to the growth of technology and knowledgebased ventures. Investments in the seed and start-up stages are less than 10% of total investments. FBM (2009) ENT600/UNIT 9 : FINANCE 18 . The formal venture capital industry in Malaysia began in 1984 with the establishment of Malaysian Ventures Berhad. Entrepreneurship Dept. Entrepreneurship Dept. FBM (2009) ENT600/UNIT 9 : FINANCE 19 . 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. and positive cash flow. However.Sources of Financing Banking and Development Financial Institutions (DFIs) Banking institutions and DFIs have been providing financial facilities to small and medium enterprises (SMEs). profits. 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. FBM (2009) ENT600/UNIT 9 : FINANCE 20 . Technology and Innovation (MOSTI) • SME Corporation Malaysia (SME Corp) formally known as SMIDEC Entrepreneurship Dept. Government Financing Schemes for Technology Venture in Malaysia Malaysian Venture Capital Management Berhad (MAVCAP) As a unique venture capital company. Entrepreneurship Dept. 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. FBM (2009) ENT600/UNIT 9 : FINANCE 21 . FBM (2009) ENT600/UNIT 9 : FINANCE 22 .Government Financing Schemes for Technology Venture in Malaysia Malaysian Venture Capital Management Berhad (MAVCAP) 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. Entrepreneurship Dept. Rapid and Mature Growth Entrepreneurship Dept. Early Growth.Government Financing Schemes for Technology Venture in Malaysia Malaysian Venture Capital Management Berhad (MAVCAP) Two main types of funding offered by MAVCAP: • Seed Venture Fund: Idea/Pre-Start-Up Stage • Direct Venture Fund: Start-Up. Expansion. FBM (2009) ENT600/UNIT 9 : FINANCE 23 . 000 . bringing them to fruition through its service-oriented approach of partnership investment.000 to RM500. other than start-up . Size of direct investment : start-ups .between RM50. FBM (2009) ENT600/UNIT 9 : FINANCE 24 .ranging from RM500.Government Financing Schemes for Technology Venture in Malaysia MAVCAP: Seed Venture Fund: Idea/Pre-Start-Up Stage The fund focus particularly on start-up and early-stage highgrowth companies.RM10 million Entrepreneurship Dept.000. FBM (2009) ENT600/UNIT 9 : FINANCE 25 . Entrepreneurship Dept.000 for the development of prototype. biotechnology and high growth areas. It makes the idea more valuable to the venture capital and later stage funding. and new areas of growth in the field of science and technology with interesting innovative idea and technology. proof of concept or the preparation of business plan.Government Financing Schemes for Technology Venture in Malaysia MAVCAP: Cradle Investment Program [CIP] •The objective of CIP is to generate ICT. •CIP provides pre-seed funding of up to RM50. Government Financing Schemes for Technology Venture in Malaysia 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. U-CIP specifically funds the development of prototypes.000. Entrepreneurship Dept. FBM (2009) ENT600/UNIT 9 : FINANCE 26 . proofs of concept and the preparation of business plan. U-CIP provides pre-seed funding of up to RM50. as a first step in the commercialization. •To this end. Government Financing Schemes for Technology Venture 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 Entrepreneurship Dept. FBM (2009) ENT600/UNIT 9 : FINANCE 27 . Government Financing Schemes for Technology Venture 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.2 million whichever is lower. Entrepreneurship Dept. FBM (2009) ENT600/UNIT 9 : FINANCE 28 . The amount of the grant approved will be determined by the merits of each case. •The MGS will provide a grant of up to 50% of the approved total project cost or RM1. •The size of funding is up to a maximum of RM150. Entrepreneurship Dept.Government Financing Schemes for Technology Venture 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. FBM (2009) ENT600/UNIT 9 : FINANCE 29 .000 for development up to 12 months. Government Financing Schemes for Technology Venture 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 Entrepreneurship Dept. FBM (2009) ENT600/UNIT 9 : FINANCE 30 . FBM (2009) ENT600/UNIT 9 : FINANCE 31 .Government Financing Schemes for Technology Venture 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 Entrepreneurship Dept. Government Financing Schemes for Technology Venture in Malaysia Malaysian Technology Development Corporation (MTDC) Two types of financial assistance offered by MTDC: • Venture Capital Funds • Special-Purpose Government Grants Entrepreneurship Dept. FBM (2009) ENT600/UNIT 9 : FINANCE 32 . In order to diversify its risks. FBM (2009) ENT600/UNIT 9 : FINANCE 33 .Government Financing Schemes for Technology Venture in Malaysia MTDC: Venture Capital Funds •MTDC invests in early. growth and late-stage technology-based businesses. •The investment horizon is limited up to five years. the equity stake in any investment is limited to around 30 percent. Entrepreneurship Dept. assisting their companies to be at the technological forefront pursuing market reach with their products/services.provides partial grants to qualified R&D projects for commercialization. • Commercialization of Research & Development Fund (CRDF) . • Technology Acquisition Fund for Women (TAF-W) provides partial grant to promote efforts by women entrepreneurs.facilitates the acquisition of strategic and relevant technology. FBM (2009) ENT600/UNIT 9 : FINANCE 34 .Government Financing Schemes for Technology Venture in Malaysia MTDC: Special-Purpose Government Grants • Technology Acquisition Fund (TAF) . Entrepreneurship Dept. FBM (2009) ENT600/UNIT 9 : FINANCE 35 . Technology and Innovation (MOSTI) Funds offered by MOSTI: • InnoFund • Technofund • Content Fund Entrepreneurship Dept.Government Financing Schemes for Technology Venture in Malaysia Ministry of Science. micro enterprise. •The quantum (maximum) and duration of funding will be based on the merits of each application: individual.Government Financing Schemes for Technology Venture in Malaysia MOSTI: InnoFund . RM20. RM50.EIF •Enterprise Innovation Fund (EIF) assists individuals/soleproprietor. Entrepreneurship Dept. sole-proprietor.000 (12 months).000 (12 months). RM20.000 (18 months).000 (12 months). and small enterprise RM250. process or services with elements of innovation for commercialization. FBM (2009) ENT600/UNIT 9 : FINANCE 36 . micro and small business to develop new or improve existing products. •Criteria for approval: Innovativeness of project proposal. FBM (2009) ENT600/UNIT 9 : FINANCE 37 . appropriateness of methodology. and financial capability. Entrepreneurship Dept. Biotechnology. commercialisation prospect. appropriateness of milestone. credibility of project proposal. Information and communication technology (ICT). Industry.Government Financing Schemes for Technology Venture in Malaysia MOSTI: Enterprise Innovation Fund (EIF) •Technology clusters to be considered: Agriculture. and • To enhance global competitiveness and R&D culture among Malaysian medium and large enterprises.Government Financing Schemes for Technology Venture 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. FBM (2009) ENT600/UNIT 9 : FINANCE 38 . Entrepreneurship Dept. Information and Communication Technology (ICT).Pre-Commercialization (funding up to a maximum of the total project cost or RM 5 million whichever is lower).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. Entrepreneurship Dept. Biotechnology.Government Financing Schemes for Technology Venture in Malaysia MOSTI: Technofund (cont) •Two types of funding: •Type A . FBM (2009) ENT600/UNIT 9 : FINANCE 39 . •Type B . and Industry. culture and heritage.000.000. (ii) Micro-Enterprise . Allocation: Quantum (i) Team – up to RM90.000. simulation/virtual reality or portal/web-based. FBM (2009) ENT600/UNIT 9 : FINANCE 40 . The contents should be able to run on multiple platforms either on 3G/mobile phone. games. Internet. Entrepreneurship Dept. training and learning.Government Financing Schemes for Technology Venture in Malaysia MOSTI: Content Fund •This fund is especially created to develop content mainly for entertainment.up to RM500. (iii) SME – up to RM6. or other media such as PDA and TV. and information-based.000. •The technology required is either in a form of animation. Government Financing Schemes for Technology Venture 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 Entrepreneurship Dept. FBM (2009) ENT600/UNIT 9 : FINANCE 41 . •For enterprises in the manufacturing sector. FBM (2009) ENT600/UNIT 9 : FINANCE 42 . assistance is given up to 80% of the approved cost.000 Entrepreneurship Dept. The maximum grant allocated per application is RM 40.Government Financing Schemes for Technology Venture 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. incorporated under the Registration of Business Act 1956. Product sample and testing Entrepreneurship Dept. Rental of equipment and machineries. Related Feasibility Studies.Government Financing Schemes for Technology Venture in Malaysia SME Corp: Matching Grant for Business Start-ups (cont) •Sector coverage includes manufacturing and manufacturing related activities such as product/process development. FBM (2009) ENT600/UNIT 9 : FINANCE 43 . Development of prototype. and product and process design. software development. •Eligible Expenses incurred in starting up a business includes: Preparation of Business Plan. Rental of incubators and business premises up to 24 months. FBM (2009) ENT600/UNIT 9 : FINANCE 44 . •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.000 Entrepreneurship Dept. product design and processes upgrading.Government Financing Schemes for Technology Venture 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. The maximum grant allocated per application is RM500. and product and process design. FBM (2009) ENT600/UNIT 9 : FINANCE 45 .Government Financing Schemes for Technology Venture in Malaysia SME Corp: Matching Grant for Product And Process Improvement (cont) •Sector coverage includes manufacturing and manufacturing related activities such as product/process development. product testing. Entrepreneurship Dept. •Eligible Expenses incurred in starting up a business includes: Technology feasibility studies. software development. product registration. development of prototypes and system design. fees for technology transfer. marking and labeling. 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.For Business Start-ups 2.For Product & Process Improvement Entrepreneurship Dept.TAF-W 3. FBM (2009) ENT600/UNIT 9 : FINANCE 46 .CRDF MOSTI •InnoFund: Enterprise Innovation Fund (EIF) •TechoFund •Content Fund SME Corporation Malaysia •Matching Grants 1. Debt vs. FBM (2009) Equity financing forces the entrepreneur to relinquish some degree of control. Equity financing involves the sales of some of the ownership in the venture. Equity DEBT FINANCE EQUITY FINANCE Debt financing involves a payback of funds plus an interest. Entrepreneurship Dept. ENT600/UNIT 9 : FINANCE 47 . Debt places a burden of repayment and interest on the entrepreneurs. Debt vs. 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. Equity In the extreme. In most cases. Entrepreneurship Dept. a combination of debt and equity proves most appropriate. FBM (2009) ENT600/UNIT 9 : FINANCE 48 .