Unit 9 Finance (FINAL VERSION) PDF

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 will

provide the operating capital for the venture.
Ismail Ab.Wahab, MEDEC, UiTM 2007 1

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.

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
Stages of Financing
PRE-R&D PRE-COMMER- COMMER- GROWTH &

AND R & D CIALIZATION CIALIZATION EXPANSION
Pre-seed Seed First round Second round &

financing financing financing 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.
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.

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.
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.

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.
Stages & Sources of Financing
PRE-R&D PRE-COMMER- COMMER- GROWTH &

AND R & D CIALIZATION CIALIZATION EXPANSION
Pre-seed financing Seed financing First round financing Second round & Third
round financing
Self, Relatives & Friends
Angels Financing
Government Financing Schemes (loan, grants & govt. venture capital funds)
Venture Capitals
Banks & DFIs

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.
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

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.

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.

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

in Malaysia
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
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
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
Malaysian Technology Development Corporation

(MTDC)
Two types of financial assistance offered by MTDC:
• Venture Capital Funds

• Special-Purpose Government Grants

in Malaysia
MTDC: Venture Capital Funds
•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.

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.

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
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.
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

Debt vs. Equity
DEBT FINANCE EQUITY FINANCE
Debt financing Equity financing

involves a payback of involves the sales of
funds plus an interest. some of the ownership
in the venture.
Debt places a burden
of repayment and Equity financing forces
interest on the the entrepreneur to
entrepreneurs. relinquish some
degree of control.
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.

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TECHNOLOGY ENTREPRENEURSHIP

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

Generally, capital can be obtained from at least

Eventually, internally generated revenue will

Ismail Ab.Wahab, MEDEC, UiTM 2007 1

However, entrepreneurs with technology-based

Since investments in technology-based ventures

The Need for Finance

To determine start-up cost:

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 4

Ismail Ab.Wahab, MEDEC, UiTM 2007 2

Fixed assets replacement:

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 5

The nature and sources of finance for

The financing of this process requires a series of

Ismail Ab.Wahab, MEDEC, UiTM 2007 3

• Research & Development: Pre-seed financing

PRE-R&D PRE-COMMER- COMMER- GROWTH &

Pre-seed Seed First round Second round &

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 8

Ismail Ab.Wahab, MEDEC, UiTM 2007 4

A relatively small amount of capital is provided to

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

•Financing is provided to newly formed companies for use

•In either case, products have yet to be sold

Ismail Ab.Wahab, MEDEC, UiTM 2007 5

Financing is provided to companies that have

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 11

Working capital is provided for the expansion

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 12

Ismail Ab.Wahab, MEDEC, UiTM 2007 6

Funds are provided for the major expansion of a

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 13

Stages & Sources of Financing

PRE-R&D PRE-COMMER- COMMER- GROWTH &

Banks & DFIs

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 14

Ismail Ab.Wahab, MEDEC, UiTM 2007 7

•During the early stage of business development,

•The entrepreneurs’ own resources include not

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 15

•For a new venture based on concepts that

•The so-called “angels”, or “business angels”,

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 16

Ismail Ab.Wahab, MEDEC, UiTM 2007 8

•Government’s financial assistance to

•Most funding schemes and grants for technology

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 17

•VC financing has tremendous potential in Malaysia to

•In terms of the stages of financing, most investments

Ismail Ab.Wahab, MEDEC, UiTM 2007 9

Banking institutions and DFIs have been

Government Financing Schemes for Technology Venture

Main agencies that provide government financial

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 20

Ismail Ab.Wahab, MEDEC, UiTM 2007 10

Malaysian Venture Capital Management Berhad

As a unique venture capital company, MAVCAP is

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 21

Government Financing Schemes for Technology Venture

Malaysian Venture Capital Management Berhad

Its investment focus is in the following areas:

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 22