An Introduction to Venture Capital

1. VENTURE CAPITAL
FINANCING : AN
INTRODUCTION
Prof.Stephen Ong
BSc(Hons)Econs (LSE), MBA (Bradford)
Visiting Professor, Shenzhen University
Academic Fellow, Entrepreneurship & Innovation,
The Lord Ashcroft International Business School,
Anglia Ruskin University Cambridge UK
MSCTECHNOPRENEURSHIP

2. • Getting Funding for
Technology Start-Ups
1
• Sources ofVenture
Capital Financing2
• Case Discussion :
APPLE iPOD3
Today’s Overview

3. LEARNING OBJECTIVES
1. To explore funding options for
financing technology start-ups.
2. To understand the business cycle and
conditions to qualify for equity
financing.
3. To discuss success factors required to
secure venture capital funding.
4. To discuss issues and challenges faced
by entrepreneurs and business founders
funded by venture capital.

4. Are you a
Venture
Capitalist?

5. A27 year old graduate in
Electrical & Electronic
Engineering from local
Technical College,
with 7 years working
experience. With a
partner, started up a
computer repairs shop
to make Chinese
language computers
in Chinatown.
B26 year old drop-out
from local university,
working with a
company making
calculators. With a
partner, started
making computer
parts at home for a
newly opened
computer shop.
C20 year old drop-out
from local university,
working with a local
software company.
With two partners,
started up data
processing service
for local government
using computers at
the school library.
ENTREPRENEURS

6. A
6,000
(from
combined
savings)
B
1,300
(from sale
of car)
C
25,000
(from
Family)
START-UP CAPITAL

7. A27 year old
classmate from local
Technical College,
holder of Diploma in
Electrical &
Electronic
Engineering. He
holds strong beliefs
in living life without
regrets and making
the world a better
place.
B26 year old high school
leaver, from average
family, whose step-
father is a mechanic
and carpenter. He has
been a drug user, a
follower of Eastern
religions like Hinduism
and Buddhism, and
always short of
money. He believes in
changing the world.
C17 year old drop-out
from local university,
working with a local
software company.
He comes from a
middle-class family
and strongly believes
in intellectual
property rights.
CO-FOUNDERS

8. A
• Copied 2
patents from
US Competitor
and had to buy
Company.
• Owned 1
patent copied
by US
Company and
wins damages.
B
• Copied 1 patent
from US
Company
• Copied 1 patent
from foreign
Company and
legally forced to
pay damages for
licence.
CBuys 1
exclusive
licence from US
Competitor and
sells non-
exclusive
licences to
customers.
INTELLECTUAL PROPERTY

9. A
A 60-year old
company
with a
network of
3,000
computer
stores
B
A new local
computer
store and
friends.
C
A 70-year old
company with
its own sales
force, own
stores and
reseller
agents
MARKETING PARTNERS

10. A
232m
Customers
in USA
B
0.3m
Customers
in USA
C
6m
Customers
worldwide
INITIAL MARKET SIZE

11. Is your FACE,
your FORTUNE?

12. A B26 year old drop-out
from local university,
working with a local
company making
calculators. With a
partner, started up
small manufacturing
of computer parts at
home for local newly
opened computer
shop.
C20 year old drop-out
from local university,
working with a local
software company.
With two partners,
started up data
processing service
for local government
using computers at
his parent’s school.

13. A B C

14. B

15. GETTING
START-UP
FUNDING

16. Raising Capital
 Raising capital to launch or expand
a business is a challenge.
 Many entrepreneurs are caught in a
“credit crunch.”
 Financing needs in the
RM100,000 to RM2 million
range may be the most
challenging to fill.

17. Why Most New Ventures Need
Financing or Funding

18. The “Secrets” to
Successful Financing
1. Choosing the right sources of capital is a
decision that will influence a company for a
lifetime.
2. The money is out there; the key is knowing
where to look.
3. Raising money takes time and effort.
4. Creativity counts. Entrepreneurs have to be
as creative in their searches for capital as
they are in developing their business ideas.

19. The “Secrets” to
Successful Financing
5. The Internet puts at entrepreneur’s fingertips
vast resources of information that can lead to
financing.
6. Be thoroughly prepared before approaching
lenders and investors.
7. Entrepreneurs should not underestimate the
importance of making sure that the
“chemistry” among themselves, their
companies, and their funding sources
is good.
(continued)

20. Options for Raising Money
for a New Venture
Personal Funds Equity Capital
Debt Financing Creative Sources

21. Equity Capital
 Represents the personal investment of the
owner(s) in the business.
 Is called risk capital because investors
assume the risk of losing their money if
the business fails.
 Does not have to be repaid
with interest like a loan does.
 Means that an entrepreneur
must give up some ownership
in the company to outside investors.

22. Sources of Equity Financing
Venture
Capital
Business
Angels
Initial Public
Offerings

23. Preparing to Raise Equity
Financing

24. Matching a New Venture’s
Characteristics with Funding

25. SOURCES OF VENTURE
CAPITAL

26. FIGURE 13.4 Angel Investing and Venture Capital Investing
Source: Robert Wiltbank and Warren Bocker, Returns to Angel Investors in Groups, Angel
Capital Education Foundation, http://www.kauffman.org/Details.aspx?id=1032, and PWC Moneytree
Report, Pricewaterhouse Coopers, https://www.pwcmonnneytree.com/MTPublic/nc/indes.jsp.

27. Business Angels
 An estimated 258,000 angels across the U.S.
invest $26 billion a year in 57,000 small
companies.
 Their investments exceed those of venture
capital firms, providing more capital to 15
times as many small companies.
 Angels fill a gap in the seed capital
market, specifically in the $10,000
to $2 million range.

28. Business Angels
 Average angel investment = $50,000.
 Typical angel invests in 1 company per year,
and the average time to close a deal is 67 days.
 52% of angels’ investments lose money, but
7% produce a return more than 10 times their
original investment.
 Angels can be an excellent source of “patient”
money.

29. FIGURE 13.1 Angel Financing Source: Center for Venture Financing, Whittemore School of
Business,
University of New Hampshire, www.unh.edu/cvr.

30. Venture Capital Companies
 Around 800 venture capital firms operate
across the USA. (vs 25 in Malaysia).
 Most venture capitalists seek
investments in the $2m to 10m range
(vs Rm0.5m to RM5m)
 Target companies with high-growth and high-
profit potential.
 Business plans are subjected to an extremely
rigorous review - less than 1% accepted.

31. Venture Capital Funds
 Venture capital firms are limited partnerships
of money managers who raise money in
“funds” to invest in start-ups and growing
firms.
 The funds, or pool of money, are raised from
wealthy individuals, pension plans,
university endowments, foreign investors,
and similar sources.
 The investors who invest in venture capital
funds are called limited partners. The
venture capitalists are called general
partners.

32. Venture Capital Companies
 Most often, venture capitalists invest in
a company across several stages.
 On average, 98% of venture capital goes
to:
 Early stage investments (companies in the early
stages of development).
 Expansion stage investments (companies in the
rapid growth phase).
 Only 2% of venture capital goes to
businesses in the startup or seed phase.

33. FIGURE 13.2 Venture Capital Funding
Source: Based on PriceWaterhouseCoopers http:/www.pwcmoneytree.com.

34. Venture Capital Focus
 Venture capital firms fund very
few entrepreneurial firms in
comparison to business angels.
 Venture capitalists are looking for
the “home run” and so reject the
majority of the proposals they
consider.
 Venture capitalists fund between
3,000 and 4,000 companies per
year, compared to about 62,000
per year for business angels.

36. Venture Capital Process
 An important part of obtaining
venture capital funding is going
through the due diligence process.
 Venture capitalists invest money in
start-ups in “stages,” meaning that
not all the money that is invested is
disbursed at the same time.
 Some venture capitalists also
specialize in certain “stages” of
funding.

37. Corporate Venture Capital
 About 300 large corporations across
the globe invest in start-up
companies.
 Approximately 6 to 8% of all venture
capital invested is from corporations.
 Capital infusions are just one benefit;
corporate partners may share
marketing and technical expertise.

38. What Do Venture Capital
Companies Look For?
 Competent management
 Competitive edge
 Growth industry
 Viable exit strategy
 Intangibles factors

39. SO WHO GETS
FUNDED ?

40. FIGURE 13.5 Which Factors Are Most Important to Venture Capitalists?
Source: Dee Powers and Brian E. Hill, Venture Capital Survey, The Capital
Connection, http//www.capital-connection.com/survey-value.html.

41. X-Factor Test for
Venture Capital Investor
1. Quality of ManagementTeam
2. Size of market
3. Product qualities (uniqueness, brands,
patents)
4. Intensity of competition
5. Market growth rate
6. Barriers to entry
7. Company’s stage of development
8. Industry where company is

42. Casestudy : Apple iPod
►Background
“The success of the iPod raises the licensing question forApple … again”
Trott,P. (2008). Innovation management and new product development,
(4th
edition). FT Prentice Hall.
Group Discussion
 30 mins discussion in Groups of 7
 5 mins presentation by Group representative
► IndividualAssignment
 Individual coursework (contributes to 15% overall mark of course)
 2 pages written in English in WORD format
►Summary
►Issues discussed
►Solutions proposed

43. SPOT the DIFFERENCE

44. Patent Litigation
44
Source: bbc.co.uk 30th August 2005
Creative wins MP3 player patent
One of Apple's main rivals, Creative Technology, has
been awarded a patent in the US for the interface
used on many digital music players.
"The first portable media player based upon the user interface covered in our Zen
Patent was our Nomad Jukebox MP3 player," said Creative CEO Sim Wong Hoo.
"The Apple iPod was only announced in October 2001, 13 months after we had
been shipping the Nomad Jukebox based upon the user interface covered by our
Zen Patent."
In its press release, Creative said Apple had filed for a patent for a user interface in
a multimedia player in late 2002, but its application had been recently rejected.
On 24 August 2006, Apple and Creative announced a broad settlement to end their
legal disputes. Apple will pay Creative US$100 million for a paid-up license, to use
Creative's awarded patent in all Apple products. As part of the agreement, Apple will
recoup part of its payment, if Creative is successful in licensing the patent.

45. Apple pays US$100m for use
of Patent
45
Automatic hierarchical categorization of music by
metadata
Patent number: 6928433
Filing date: Jan 5, 2001
Issue date: Aug 9, 2005
Application number: 9/755,723
A method, performed by software executing on the processor of a portable
music playback device, that automatically files tracks according to hierarchical
structure of categories to organize tracks in a logical order. A user interface is
utilized to change the hierarchy, view track names, and...
Inventors: Ron Goodman, Howard N. Egan
Assignee: Creative Technology LTD
Source: bbc.co.uk 30th August 2005

46. SPOT the DIFFERENCE
NASDAQ AAPL
Market Cap :
US$308.8 B
PINK CREAF
Market Cap :
US$0.150 B

47. CREATIVE vs APPLE

48. “…IF WE DON’T INVENT THE RIGHT
THING, SOMEONE WILL INVENT THE
RIGHT THING.
SO LET’S GO INVENT THAT THING”
Reid Hoffman, founder of LinkedIn with four friends, starting with
6,000 customers, 10 years ago.
Today, a US$20B company with 225m customers.
CONCLUSION

49. Further Reading
 Scarborough, Norman, M. (2011) Essentials of
Entrepreneurship and Small Business Management.
6th edition. Pearson.
 Brooks, Arthur C. (2006) Social Entrepreneurship : A
Modern Approach to SocialValue Creation. Pearson
 Barringer, Bruce R. & Ireland, R. Duane (2011)
Entrepreneurship – Successfully launching new
ventures 4th edition, Pearson.
 Schaper, M.,Volery,T.,Weber, P. & Lewis, K. (2011)
Entrepreneurship and Small Business. 3rd Asia Pacific
edition. JohnWiley.

50. QUESTIONS?