Unit 9 Finance (Final Version)

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
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.
(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 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.
(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
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.

(2009)
17
Venture Capital (VC) Financing
VC
financing has tremendous potential in Malaysia to

contribute to the growth of technology and knowledgebased 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
(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
(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.

(2009)
22

in Malaysia
(MAVCAP)
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 focus particularly on start-up and early-stage highgrowth 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

(2009)
24

in Malaysia
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.

(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 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.

(2009)
26

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

(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 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.
(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

(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

(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
Enterprise Innovation Fund (EIF) assists individuals/soleproprietor, 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).
(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,
commercialisation 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
spin-offs/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 RM 40,000

(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 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 Finance (Final Version)

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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

Entrepreneurship Dept, FBM

Second round &

Pre-R& D and R & D Stage

Pre- Commercialization Stage

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

During the early stage of business development,

the entrepreneurs access to established

entrepreneurs own resources include not

Entrepreneurship Dept, FBM

a new venture based on concepts that

so-called angels, or business angels,

Entrepreneurship Dept, FBM (2009)

funding schemes and grants for

Entrepreneurship Dept, FBM

financing has tremendous potential in Malaysia to

terms of the stages of financing, most investments

Entrepreneurship Dept, FBM

Government Financing Schemes for Technology Venture

Government Financing Schemes for Technology Venture

Entrepreneurship Dept, FBM

Government Financing Schemes for Technology Venture

Communications and networking

Entrepreneurship Dept, FBM

Government Financing Schemes for Technology Venture

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

Entrepreneurship Dept, FBM

Government Financing Schemes for Technology Venture

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

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

development of prototype, proof of concept or the

Entrepreneurship Dept, FBM

Government Financing Schemes for Technology Venture

U-CIP works together with researchers in public and private

universities and colleges. The primary aim of U-CIP is to

end, U-CIP specifically funds the development of

Entrepreneurship Dept, FBM

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)

A total sum of RM120 million has been allocated for the

Entrepreneurship Dept, FBM

Government Financing Schemes for Technology Venture