Dr. Shahram Yazdani Venture Capital Investment Shahid Beheshti University of Medical Sciences School of Medical Education Strategic Policy Sessions: 08

Dr. Shahram Yazdani Pharmaceutical Product Development Timeline 1-5 Years R&D 1: 10,000 $ M Duration Phase Success Rate Investment

Dr. Shahram Yazdani Pharmaceutical Product Development Timeline 1-5 Years 1-2 Years R&D Preclinical 1: 10,000 1: 100 $ M Duration Phase Success Rate Investment

Dr. Shahram Yazdani Pharmaceutical Product Development Timeline 1-5 Years 1-2 Years 1 Year R&D Preclinical Clinical I 1: 10,000 1: 100 1: 10 $ M $ M Duration Phase Success Rate Investment

Dr. Shahram Yazdani Pharmaceutical Product Development Timeline 1-5 Years 1-2 Years 1 Year 1-2 Years 1-3 Years R&D Preclinical Clinical I Clinical II Clinical III 1: 10,000 1: 100 1: 10 1: 5 $ M $ M $ M Duration Phase Success Rate Investment

Dr. Shahram Yazdani A Long and Risky Path A lot of things have to happen to transform a start-up, consisting of a few founders with an idea, into a modern corporation, which is a complex institution.

Dr. Shahram Yazdani Need for Money As a rule of thumb, for every $ spent on R&TD, ten $ will be needed to bring the product into production and as much as one hundred $ to bring it to the market. It follows then that almost any project is going to require additional finance if it is to be successfully exploited.

Dr. Shahram Yazdani Venture Capital A company requires an average of $16 million in venture capital during the first five start-up years,

Dr. Shahram Yazdani A risky investment Christopher Columbus seeking financing from Queen Isabella and King Ferdinand in an early example of venture capital

Dr. Shahram Yazdani Venture Capital Industry History  In the early 1950s and 1960s, individual investors were the archetypal venture investor.  Venture capital has grown from a small investment pool in the 1960s and early 1970s  Currently it is more a mainstream asset class that is a viable and significant part of the institutional and corporate investment portfolio.

Dr. Shahram Yazdani Definition of venture capital Venture capital is a type of financial intermediary that is specialized in the financing of entrepreneurial companies.

Dr. Shahram Yazdani Well-known firms that have received VC financing Apple Cisco Microsoft Netscape Sun Microsystems Staples Starbucks Google Amazon

Dr. Shahram Yazdani Need for Money It is a characteristic of most entrepreneurs that they have very little money; usually they will start their business with whatever they can afford, augmented by loans or investments from family and friends, plus, in many cases finance from regional or national grants or awards.

Dr. Shahram Yazdani Sources of Finance for Innovation In general terms, innovation finance comes from the public sector, banks or from private finance-sources. Which of these is appropriate to a specific case depends on a number of factors:  the stage of development of the project, the size of the innovating company, the amount of money required.

Dr. Shahram Yazdani IPO: Initial Public Offering

Dr. Shahram Yazdani Financial Support Research Grants Research Grants Main Role New Firm Mature SME Large Company Product Researcher Inventor Entrepreneur Businessman Business Plan Propositional Knowledge Propositional Knowledge Prescriptive Knowledge Prescriptive Knowledge Basic Research Basic Research Applied Research Applied Research Product Design & Development Product Design & Development Manufacturing Pre-production Prototype Pre-production Prototype Engineering Prototype Engineering Prototype Financial Supporter Research Founders Research Founders

Dr. Shahram Yazdani Research Stage Funding will come, usually in the form of grants, primarily from:  Public Sector - national governments, regional authorities or the European Commission;  Corporate - industrial/commercial companies, industrial research associations, charities Neither banks nor any form of equity investor is likely to be interested at this stage.

Dr. Shahram Yazdani Public Sector Grants Awards Investment support schemes

Dr. Shahram Yazdani Financial Support Seed Finance Seed Finance Research Grants Research Grants Main Role New Firm Mature SME Large Company Product Researcher Inventor Entrepreneur Businessman Business Plan Propositional Knowledge Propositional Knowledge Prescriptive Knowledge Prescriptive Knowledge Basic Research Basic Research Applied Research Applied Research Product Design & Development Product Design & Development Manufacturing Pre-production Prototype Pre-production Prototype Engineering Prototype Engineering Prototype Financial Supporter Research Founders Research Founders Angel Investors Angel Investors

Dr. Shahram Yazdani Development Stage As the project reaches the stage where a prototype of pilot plant can be built to demonstrate its feasibility.  Seed Capital - venture funds prepared to make pre-start-up investments in the technology. Pre start-up funding may be in the form of loans, convertible to equity when the company is formed.

Dr. Shahram Yazdani Friends And Family A "helping hand" rather than a serious investment Cannot be relied upon for follow-up finance May not have useful commercial contacts Generally less than about $15'000

Dr. Shahram Yazdani Angel Investors or Business Angels 75% invest between $20'000 and $200'000 and up to $1'000'000 Sometime co-financing with others ("syndicated" investments) Usually invest on a very early-stage company (demo, 2-3 employees)

Dr. Shahram Yazdani Angel Investors or Business Angels Wealthy individuals who provide capital for startup and emerging businesses. Usually invest locally and in projects they understand Quick decisions Likely to take a "hands on" approach to their investment

Dr. Shahram Yazdani Angel Investors or Business Angels There are 250,000 or more such wealthy individuals, or angels, in the US, 100,000 of whom are active. Angels invest $5 to $10 billion annually in 20,000 to 30,000 companies

Dr. Shahram Yazdani Financial Support Seed Finance Seed Finance Start-up Venture Capital Start-up Venture Capital Research Grants Research Grants Main Role New Firm Mature SME Large Company Product Researcher Inventor Entrepreneur Businessman Business Plan Propositional Knowledge Propositional Knowledge Prescriptive Knowledge Prescriptive Knowledge Basic Research Basic Research Applied Research Applied Research Product Design & Development Product Design & Development Manufacturing Pre-production Prototype Pre-production Prototype Engineering Prototype Engineering Prototype Financial Supporter Research Founders Research Founders Angel Investors Angel Investors Venture Capital Firm Venture Capital Firm

Dr. Shahram Yazdani Start-up Stage  Finance provided to companies for product development and initial marketing.  Companies may be in the process of being set up or may have been in business for a short time, but have not sold their product commercially.

Dr. Shahram Yazdani Venture Capitalists The Venture Capital Fund Management Company manages the funds of its investors (shareholders) and, in due course, returns the profits, after deduction of expenses and fees, to those investors.

Dr. Shahram Yazdani Venture Capitalists Seek investments in firms with high- growth possibilities Not usually interested below $500,000 Slow decisions but very thorough Add value, not just financial assistance No outflow of cash in interest on loans or dividends to investors before exit

Dr. Shahram Yazdani Risk Taker or Risk Averse Myth: Venture capitalists are risk takers Reality: Venture capitalists are relatively risk averse, preferring to take the minimum risks required to achieve the high level of returns that they seek.

Dr. Shahram Yazdani Life Cycle of VC Investment Preparation and submission of business plan Preliminary assessment of business plan Meet the people Light due diligence Term sheet Heavy due diligence Investment memorandum Commitment Letter Negotiation of shareholder’s agreement Grow the company Exit

Dr. Shahram Yazdani Issues in Venture Capital “due diligence” Technology or service concept Market size and dynamics: subtleties of markets very important Management team Business model and financial requirements Valuation and Deal Structure

Dr. Shahram Yazdani Financial Support Seed Finance Seed Finance Start-up Venture Capital Start-up Venture Capital Expansion Venture Capital Expansion Venture Capital Research Grants Research Grants Main Role New Firm Mature SME Large Company Product Researcher Inventor Entrepreneur Businessman Business Plan Propositional Knowledge Propositional Knowledge Prescriptive Knowledge Prescriptive Knowledge Basic Research Basic Research Applied Research Applied Research Product Design & Development Product Design & Development Manufacturing Pre-production Prototype Pre-production Prototype Engineering Prototype Engineering Prototype Financial Supporter Research Founders Research Founders Angel Investors Angel Investors Venture Capital Firm Venture Capital Firm Corporate Investors Banks Corporate Investors Banks

Dr. Shahram Yazdani Expansion Stage Financing provided for the growth and expansion of a company which is breaking even or trading profitably. Capital may be used to finance increased production capacity, market or product development and/or to provide additional working capital.

Dr. Shahram Yazdani Investment Bank An Investment Bank is a firm, acting as underwriter or agent that serves as intermediary between an issuer of securities (shares) or bonds and the investing public. The investment banker, makes outright purchases of new securities from the issuer and distributes them to dealers and investors, profiting on the spread between the purchase price and the selling (public offering) price.

Dr. Shahram Yazdani Financial Support Seed Finance Seed Finance Start-up Venture Capital Start-up Venture Capital Expansion Venture Capital Expansion Venture Capital Mezzanine Finance Mezzanine Finance Research Grants Research Grants Main Role New Firm Mature SME Large Company Product Researcher Inventor Entrepreneur Businessman Business Plan Propositional Knowledge Propositional Knowledge Prescriptive Knowledge Prescriptive Knowledge Basic Research Basic Research Applied Research Applied Research Product Design & Development Product Design & Development Manufacturing Pre-production Prototype Pre-production Prototype Engineering Prototype Engineering Prototype Financial Supporter Research Founders Research Founders Angel Investors Angel Investors Venture Capital Firm Venture Capital Firm Corporate Investors Banks Corporate Investors Banks IPO Acquisition IPO Acquisition

Dr. Shahram Yazdani Mezzanine (Bridge finance) Finance made available to a company in the period of transition from being privately owned to being publicly quoted.

Dr. Shahram Yazdani Initial Public Offering (IPO) The first sale of a company's shares to the public

Dr. Shahram Yazdani Venture Capital Investment

Dr. Shahram Yazdani Share of High-tech in Venture Capital

Dr. Shahram Yazdani The US Venture Industry Has Grown Source: 2004 NVCA Yearbook,/Venture Economics

Dr. Shahram Yazdani America’s Job-Creating Engine Companies backed by venture capital since 1970:  Provide 10.1 million US jobs  Had 2003 sales of $1.8 trillion  10% of US GDP on under 2% of capital invested Source: Venture Impact 2004 by Global Insight (Wharton/DRI)

Dr. Shahram Yazdani Key Findings For every dollar invested in , there was $9 in revenue during 2000 For every $21,627 of venture capital investment in , there was one job in the year 2000 Source: DRI-WEFA (analysis as of 8/2001

Dr. Shahram Yazdani The Increasing Role of Startups in U.S.-Led Innovation Venture backed firms spend twice as much on R&D as non-venture backed firms Share of US R&D performed by firms with <500 employees:  1984: 5.9% ($4.4B)  2003: 20.7% ($40.1B) Major source of productivity growth  CAD/CAM, JIT, Auto-ID, payments, POS, e-Tailing, internet travel Major source of U.S. Competitiveness:  72% of all venture capital worldwide is in the US

Dr. Shahram Yazdani Venture Capital in the EU Funds raised in the EU: € 48 bil  UK 37%, Fr 16%, DE 13%,...  High Tech early-stage: € 8.6 bil  High Tech expansion/development: € 6.6 bil

Dr. Shahram Yazdani The German “WFG” First German venture capital fund. Structure:  Founded by 29 German banks who put up 10 billion DM.  Government guaranteed up to 75% of fund losses.  12 person board = 3 bank, 3 government, 2 industry, 2 management consultants, & two scientists.  Mixed board committee made project selection.

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