Entrepreneurship: Successfully Launching New Ventures, 2/e Bruce R. Barringer R. Duane Ireland Chapter 10

Case Study: S-Core IT Solutions A software solution provider to more than 140 clinics. Aiming for > 1000 clinics by the end of 2015 Awarded with the Cradle Fund’s (an agency under Ministry of Finance, Malaysia), the CIP500 Grant in September 2010 Awarded MSC Status – August 2011

Founded by Zaidi and Shahrulnizam – home-based since 2004 Specialises in Clinic and Hospital Management System

1. The Importance of Getting Funding Few people know - deal with the process of raising investment capital for their start-up. Many go about task of raising capital haphazardly (unsystematically): Lack experience and don’t know much about their choices.

2. Why Most New Ventures Need Funding Three Reasons

3. Alternatives for Raising Money - PEDO Personal Funds Equity Capital Debt Financing Other Creative Sources

a. Personal Financing Vast majority of founders contribute personal funds - along with sweat equity Sweat equity - value of time and effort

Friends and Family 2nd source of funds: ‘friendly’ loans or investments outright gifts delayed compensation reduced or free rent E.g. Founder of Gateway computer got his start with a USD10,000 loan from his grandmother.

Bootstrapping Finding ways to avoid the need for external financing or funding through creativity, innovation, economical, cost-cutting, or any means necessary. Difficult for new companies to get financing or funding early on - bootstrap out of necessity.

Examples of Bootstrapping Methods Buying used instead of new equipment Leasing equipment instead of buying *Applying for and obtaining grants *Obtaining payments in advance from customers Minimizing personal expenses Coordinating purchases with other businesses Sharing office space with other businesses Avoiding unnecessary expenses

Matching a New Venture’s Characteristics with the Appropriate Form of Financing or Funding

‘Preparing an Elevator Speech’ A brief, carefully constructed statement - outlines merits of a business opportunity Why is it called an elevator speech? If an entrepreneur stepped into an elevator on 25th floor of a building - found that by a stroke of luck a potential investor was in the same elevator - would have the time it takes to get from the 25th floor to the ground floor to try to get the investor interested in his or her opportunity.

This quick pitch has taken on the name “elevator speech.” Most elevator speeches - 45 seconds to two minutes long.

Guidelines for Preparing an Elevator Speech

Initial Public Offerings (IPO) b. Equity Funding Business Angels Venture Capital Initial Public Offerings (IPO)

Business Angels Individuals - invest their personal capital directly in start-ups. Typical business angel about 50 years old has high income and wealth well educated has succeeded as an entrepreneur interested in the start-up process. Number of angel investors - has increased dramatically over the past decade.

Valuable - willingness to make relatively small investments. Needs just RM 50,000 rather than the RM 1 million minimum investment - most venture capitalists require. Difficult to find Most angels remain fairly anonymous - matched up with entrepreneurs through referrals.

Venture Capital VC companies interested in investing in start ups and small businesses with exceptional growth potential.

limited partnerships of money managers who raise money in “funds” to invest in start-ups and growing companies. Funds or pool of money - raised from successful companies, wealthy individuals, pension plans, university endowments, foreign investors, and similar sources.

Still, for the companies that qualify - a viable alternative. Venture-capital companies fund very few entrepreneurial companies in comparison to business angels. Many entrepreneurs get discouraged - repeatedly rejected for funding, even though they have an excellent business plan. Still, for the companies that qualify - a viable alternative.

An important part of obtaining venture-capital funding - due diligence process. VCs invest money in start-ups in “stages,” meaning - not all the money invested - disbursed at the same time. Some venture capitalists also specialize in certain “stages” of funding.

Cradle Investment Programme Pre-seed funding programme for viable ideas Enables innovators and innovative entrepreneurs to make the jump from - having an innovative technology idea to become a successful start-up. Grant – up to RM150,000 for innovative technology ideas with commercialisation potential.

Track Record As of May 2008, about 270 technopreneurs have benefited from the Cradle Investment Programme (CIP). Received RM 50,000 per idea, a total of RM15.7 million for commercialising their ideas. 42% of the ideas completed have reached commercialisation stage - the highest rate of commercialization amongst grants in the nation.

Looking for ideas that fall under the areas of ICT and high growth, including: Software and information services Internet: e-services, e-commerce and e-content Communication and networking mobile data High tech consumer and business products Electronic and semi-conductors Medical devices and advance materials Biotechnology and life sciences Environmental resources management and renewable energy Technology innovation for any industry

Malaysia Venture Capital Berhad (MAVCAP) Incorporated in 2001 by the Malaysian Government The nation’s largest venture capital (VC) company which focuses on investments in the local ICT sectors Its mission: serve as an ideal training ground to groom venture capitalists, empower entrepreneurs to create wealth generate attractive returns for its investments Focuses on the ICT sector and high-growth industries

In evaluating an investment opportunity, VCs factor prospective rate of return of business within a set time period. Having studied in detail - key factors related to the potential of the investee company such as: composition and competency of the founders and management team market opportunity and scalability product strength potential exit strategy within the funding cycle Evaluate business proposition rigorously prior to any investment commitment made.

Initial Public Offering Sale of stock to the public - traded on one of the major stock exchanges. Most entrepreneurial companies go public trade on the KLSE - weighted heavily toward technology, biotech, and small-company stocks. An important milestone for a company. Not able to go public until it has demonstrated - viable and has a bright future.

Four reasons that motivate companies go public raises a company’s public profile, making it easier to attract high-quality customers, partners, and employees. a liquidity event to cash out their investments. a way to raise equity capital to fund current and future operations. By going public, a company creates another form of ‘currency’ to grow the company.

Many advantages to go public - complicated and expensive process. The first step in initiating a public offering is to hire an institution - acts as an advocate and adviser and walks a company through the process of going public.

c. Debt Financing Commercial Banks

BANCRUPT!!! Commercial Banks Have not been viewed as practical sources of financing for start-up companies. This sentiment is not a knock against banks - they are risk adverse and financing start-ups is a risky business. BETTER NOT for a new venture – BANCRUPT!!!

Interested in companies - strong cash flow, low leverage, audited financials, good management and a healthy balance sheet. Although many new ventures have good management, only few have these strong characteristics (financial track record).

SME Bank Designed to function - one-stop financing and business development centre, SME Bank is dedicated to accelerate growth of SMEs. Principal activities - to provide financing as well as business advisory services to Malaysian SMEs

d. Creative Sources of Financing or Funding Strategic Partners Leasing Government Grants

Leasing A written agreement in which the owner of a piece of property allows an individual or business to use the property for a specified period of time in exchange for payments.

Most - a modest down payment and monthly payments during the duration of the lease. At the end, new venture has the option to stop, purchase it for fair market value, or renew. Leasing – more expensive than paying cash for an item. An alternative to equity or debt financing.

Government Grants Early-stage funding for technology companies. (MTDC, MOSTI, MARDI) These programs provide cash grants to entrepreneurs who are working on projects in specific areas.

Strategic Partners MyCreative Ventures Sdn Bhd, a government investment arm, was launched by Prime Minister Datuk Seri Najib Razak today to spur Malaysia's creative industry via strategic and innovative funding. The initiative was initally announced by Najib during 2012 budget proceedings, where RM200 million was allocated for this purpose.

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