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

 Cont’d...
The Need for Finance

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

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 6

 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
Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 7
 Cont’d...
Stages of Financing

PRE-R&D
PRE-COMMER- COMMER- GROWTH &
and CIALIZATION CIALIZATION EXPANSION
R&D
Pre-Seed Seed First Round Second Round &
Financing Financing Financing Third Round
Financing

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

 Stages of Financing
1. 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.

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

 Stages of Financing
2. 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
Entrepreneurship Dept, FBM (2009)
studies.
ENT600/UNIT 9 : FINANCE 10
 Stages of Financing
3. 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.

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

 Stages of Financing
4. 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.

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

 Stages of Financing
Cont’d…Growth & Expansion Stage

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.

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

 Stages & Sources of Financing

PRE-COMMER
PRE-R&D COMMER- GROWTH &
- CIALIZATION
AND R&D EXPANSION
CIALIZATION
Pre-seed Seed First Round Second Round &
Financing Financing Financing Third Round
Financing
Self, Relatives & Friends

Angels Financing

Government Financing Schemes (Loan, Grants & Govt. Venture Capital Funds)

Venture Capitals
Banks & DFIs

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

 Sources of Financing

1. 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
Entrepreneurship Dept, FBM (2009)
finance.
ENT600/UNIT 9 : FINANCE 15
 Cont’d…
Sources of Financing

2. 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) ENT600/UNIT 9 : FINANCE 16
 Cont’d…
Sources of Financing

3. Government’s Financial Assistance

•Government’s financial assistance to

technology-based companies can be
classified into two groups:
- Government Funding Schemes
- Grants

•Most funding schemes and grants for

technology venture are channeled through
MAVCAP, MDeC, MTDC, MOSTI, SME
Corp. 17
Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE
 Cont’d…
Sources of Financing
4. 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
Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 18
total investments.
 Cont’d…
Sources of Financing

5. 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.
Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 19
 Government Financing Schemes for
Technology Venture in Malaysia

Main agencies that provide government financial

assistance:
• Malaysian Venture Capital Management Berhad
(MAVCAP)
www.mavcap.com
• Multimedia Development Corporation (MDeC)
www.mdec.my
• Malaysian Technology Development Corporation
(MTDC)
www.mtdc.com.my
• Ministry of Science, Technology and Innovation
(MOSTI) www.mosti.gov.my
• SME Corporation ENT600/UNIT
Entrepreneurship Dept, FBM (2009)
Malaysia
9 : FINANCE
(SMECorp) formally 20
 Cont’d…
Government Financing Schemes for Technology Venture in
Malaysia

1. 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.

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

 Cont’d…
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
• Semi-conductor
• Internet
• Information technology
• Bio-tech and life sciences
•
Entrepreneurship Dept, FBM (2009)
Medical and healthENT600/UNIT
services 9 : FINANCE
and device/equipment
22
 Cont’d…
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, Early Growth,
Expansion, Rapid and Mature Growth

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 23

 Cont’d…
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

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.

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 24

 Cont’d…
Government Financing Schemes for Technology Venture in
Malaysia

MAVCAP: a. 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.

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 25

 Cont’d…
Government Financing Schemes for Technology Venture in
Malaysia

MAVCAP: b. 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.
Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 26
 Cont’d…
Government Financing Schemes for Technology Venture in
Malaysia

2. Multimedia Development Corporation

(MDeC)

MDeC has been entrusted to manage the 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

 Cont’d…
Government Financing Schemes for Technology Venture in
Malaysia

MDeC: a. 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.

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 28

 Cont’d…
Government Financing Schemes for Technology Venture in
Malaysia

MDeC: b. 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.
Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 29
 Cont’d…
Government Financing Schemes for Technology Venture in
Malaysia

MDeC: Technopreneur Pre-Seed Fund Program (cont’d)

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

 Cont’d…
Government Financing Schemes for Technology Venture in
Malaysia

3. 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, FBM (2009) ENT600/UNIT 9 : FINANCE 31
 Cont’d…
Government Financing Schemes for Technology Venture in
Malaysia

Malaysian Technology Development Corporation

(MTDC)…cont’d

Two types of financial assistance offered by MTDC:

• Venture Capital Funds
• Special-Purpose Government Grants

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 32

 Cont’d…
Government Financing Schemes for Technology Venture 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.

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 33

 Cont’d…
Government Financing Schemes for Technology Venture 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.
Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 34
 Cont’d…
Government Financing Schemes for Technology Venture in
Malaysia

4. Ministry of Science, Technology and

Innovation (MOSTI)

Funds offered by MOSTI:

• InnoFund
• Technofund
• Content Fund

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 35

 Cont’d…
Government Financing Schemes for Technology Venture in
Malaysia

MOSTI: a. 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).
Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 36
 Cont’d…
Government Financing Schemes for Technology Venture in
Malaysia

MOSTI: b. 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.

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 37

 Cont’d…
Government Financing Schemes for Technology Venture in
Malaysia

MOSTI: c. 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 find through
spin-offs/licensing; and fundings
• To enhance global competitiveness and R&D culture
among Malaysian medium and large enterprises.

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 38

 Government Financing Schemes for Technology Venture
in Malaysia

MOSTI: Technofund (cont’d)

•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.

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 39

 Cont’d…
Government Financing Schemes for Technology Venture in
Malaysia
MOSTI: d. 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

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 40

 Cont’d…
Government Financing Schemes for Technology Venture in
Malaysia

5. 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

 Cont’d…
Government Financing Schemes for Technology Venture in
Malaysia

SME Corp: a. 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

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 42

 Cont’d…
Government Financing Schemes for Technology Venture in
Malaysia
SME Corp: Matching Grant for Business Start-ups
(cont’d)
• 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

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 43

 Cont’d…
Government Financing Schemes for Technology Venture in
Malaysia
SME Corp: b. 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.

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 44

 Cont’d…
Government Financing Schemes for Technology Venture in
Malaysia

SME Corp: Matching Grant for Product And Process

Improvement (cont’d)

•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.

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 45

 AGENCY FINANCING SCHEME
• Seed Venture Fund
MAVCAP • Cradle Investment Program (CIP)
• University Cradle Investment Program (U-CIP)
• MSC Malaysia R&D Grant Scheme (MGS)
MDeC • Technopreneur Pre-seed Fund Program
• Venture Capital Funds
• Special Purpose Government Grants
MTDC 1. TAF
2. TAF-W
3. CRDF
• InnoFund: Enterprise Innovation Fund (EIF)
MOSTI • TechoFund
• Content Fund
• Matching Grants
SME Corporation
1. For Business Start-ups
Malaysia 2. For Product & Process Improvement
Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 46
 Debt vs. Equity

DEBT FINANCE EQUITY FINANCE

▪ Debt financing involves ▪ Equity financing

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

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 47

 Cont’d…
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.

Entrepreneurship Dept, FBM (2009) ENT600/UNIT 9 : FINANCE 48