Unit 9 ENT600 Finance

TECHNOLOGY ENTREPRENEURSHIP
(ENT600)
UNIT 9 :
FINANCING
TECHNOLOGY VENTURE
Entrepreneurship Dept, FBM

(2009)
ENT600/UNIT 9 : FINANCE
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:
Entrepreneurs 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.
(2009)
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.
(2009)
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).
(2009)
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.
(2009)
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 technologybased 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.
(2009)
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.
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
(2009)
Stages of Financing
PRE-R&D
AND R & D
PRE-COMMERCIALIZATION
Pre-seed
financing

(2009)
Seed
financing
COMMERCIALIZATION
First round
financing
GROWTH &
EXPANSION
Second round &

Third round
financing
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. The funded
work may involve product development (as opposed
to "pure" research), but it rarely involves initial
marketing.
(2009)
Stages of Financing
Pre- Commercialization 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.

(2009)
10
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.

(2009)
11
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, it may not yet be
showing a profit at this stage.

(2009)
12
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. 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.

(2009)
13
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, Relatives & Friends

Angels Financing
Government Financing Schemes (loan, grants & govt. venture capital funds)
Venture Capitals
Banks & DFIs

(2009)
14
Sources of Financing
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.
(2009)
15
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.
Entrepreneurship Dept, FBM (2009)
16
Governments Financial Assistance
Governments
financial assistance to technologybased 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.

(2009)
17
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.
(2009)
18
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.
(2009)
19
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

(2009)
20

in Malaysia
Malaysian Venture Capital Management Berhad (MAVCAP)
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.

(2009)
21

in Malaysia
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.

(2009)
22

in Malaysia
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

(2009)
23

in Malaysia
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

(2009)
24

in Malaysia
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.

(2009)
25

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, 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.
(2009)
26

in Malaysia
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

(2009)
27

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.

(2009)
28

in Malaysia
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.

(2009)
29

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
(2009)
30

in Malaysia
Malaysian Technology Development Corporation (MTDC)

MTDCs 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

(2009)
31

in Malaysia
Malaysian Technology Development Corporation

(MTDC)
Two types of financial assistance offered by MTDC:
Venture Capital Funds
Special-Purpose Government Grants

(2009)
32

in Malaysia
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.

(2009)
33

in Malaysia
MTDC:
Special-Purpose Government Grants
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.
(2009)
34

in Malaysia
Ministry of Science, Technology and Innovation
(MOSTI)
Funds offered by MOSTI:
InnoFund
Technofund
Content Fund

(2009)
35

in Malaysia
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/soleproprietors, micro and small businesses to develop new or
improve existing products, process or services with elements
of innovation for commercialization.
(2009)
36

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,
commercialization prospect, and financial capability.

(2009)
37

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 spinoffs/licensing; and
To enhance global competitiveness and R&D culture

among Malaysian medium and large enterprises.
(2009)
38

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.
(2009)
39

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.
(2009)
40

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

(2009)
41

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 RM40,000

(2009)
42

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 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
(2009)
43

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
(2009)
44

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, 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.
(2009)
45
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

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

(2009)
46
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.

(2009)
Equity financing forces

the entrepreneur to
relinquish some
degree of control.
47
Debt vs. Equity

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.

(2009)
48

Unit 9 ENT600 Finance

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TECHNOLOGY ENTREPRENEURSHIP

Entrepreneurship Dept, FBM

The Need for Finance

The Need for Finance (cont...)

Research & Development: Pre-seed financing

Entrepreneurship Dept, FBM

Second round &

Pre-R & D and R & D Stage

Pre- Commercialization Stage

Financing is provided to newly formed companies for use

In either case, products have yet to be sold commercially.

Entrepreneurship Dept, FBM

Entrepreneurship Dept, FBM

Growth & Expansion Stage

Entrepreneurship Dept, FBM

Growth & Expansion Stage (contd)

Entrepreneurship Dept, FBM

Stages & Sources of Financing

Self, Relatives & Friends

Entrepreneurship Dept, FBM

the early stage of business development,

The entrepreneurs own resources include not only

For a new venture based on concepts that require

The so-called angels, or business angels, tend

to behave like business partners. They bring with

financial assistance to technologybased companies can be classified into two groups:

funding schemes and grants for technology

Entrepreneurship Dept, FBM

financing has tremendous potential in Malaysia to

In terms of the stages of financing, most investments made

by Malaysian Venture Capital Companies (VCCs) have been

Government Financing Schemes for Technology Venture

Entrepreneurship Dept, FBM

Government Financing Schemes for Technology Venture

As a unique venture capital company, MAVCAP is

Entrepreneurship Dept, FBM

Government Financing Schemes for Technology Venture

Its investment focus is in the following areas:

Communications and networking

Entrepreneurship Dept, FBM

Government Financing Schemes for Technology Venture

Two main types of funding offered by MAVCAP:

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

Direct Venture Fund: Start-Up, Early Growth,

Entrepreneurship Dept, FBM

Government Financing Schemes for Technology Venture

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

The fund focuses particularly on start-up and early-stage

Entrepreneurship Dept, FBM

Government Financing Schemes for Technology Venture

Cradle Investment Program [CIP]

The objective of CIP is to generate ICT, biotechnology and

provides pre-seed funding of up to RM50,000 for the

Entrepreneurship Dept, FBM

Government Financing Schemes for Technology Venture

University Cradle Investment Program [U-CIP]

U-CIP works together with researchers in public and private

this end, U-CIP specifically funds the development of

Government Financing Schemes for Technology Venture

The MSC Malaysia R&D Grant Scheme (MGS)

Technopreneur Pre-Seed Fund Program

Entrepreneurship Dept, FBM

Government Financing Schemes for Technology Venture

The MSC Malaysia R&D Grant Scheme (MGS)