Sources of Tech Venture Funding Where will the money come from?

Epilogue

Here is a snapshot of PRACTO

Typical New Tech Venture Funding Sources

• Who are they• What drives their investment decision?• What do they expect to get?• Where does their money come from?

Typical New Venture Funding Sources

• Self-financed• Research / Educational Institutions• Government Agencies• Corporate Investors• Angel Investors• Venture Capitalists• Banks

Self-financed• From where?

– Family– Friends– The entrepreneur

• What drives their investment decision?– Based on a belief in, or relationship with, the

entrepreneur– Based on a belief that the idea is at least feasible

Self-financed – 3 Fs• What do they expect to get?

– Their original investment returned– Maybe interest– Less often equity

• Where does their money come from?– Usually funded from personal savings or new

borrowings (mortgage on real estate)

Research/ Educational Institutions• Who are they?

– Universities– Private Incubations

• What drives their investment decision?– Ranking/ Contribution to area of research.– The desire to enhance the body of knowledge in a

specific area of interest through research.– Create an entrepreneurial culture

Research/Education Institutions• What do they expect to get?

– The intellectual property that results from the research

• Patents• Rights in property or process, even if not patented

• Where does their money come from?– Endowments (sometimes with spending conditions)– Grants– General funding from government– Student tuition

What Do Government Agencies Offer?

• Technological capability & capacity building• Technology absorption for reduced concept to

commercialization cycle• Financially attractive technology & design

support compared to international sources for world-class products

• Credibility among users• Immediate improvement in bottom line

Few organizations under Government funding schemes• Department of Scientific & Industrial Research (DSIR)• Technology Business Incubator(TBI)• Science and Technology Entrepreneurship Park

(STEP)• National Research Development Corporation (NRDC)• Department of Information Technology (DIT)• National Innovation Foundation (NIF)• Department of Bio-Technology (DBT)• Ministry of New and Renewable Energy

Technology Development Board supported TBIs and STEPs

Corporate Venture Capital ('CVC')

• It is the investment of corporate funds directly into new ventures, usually in the form of equity financing. MNCs such as Intel, Dow, BP, Cisco, Siemens, Motorola, etc. have been active CVCs for a long time.

• What do they offer?Access to distribution channels and industry networks, acquisition potential, and synergies with corporate business units.

Angel Investors• Who are they?

– Wealthy individuals– Often successful entrepreneurs

• What drives their investment decision?– A belief that the entrepreneur has done her

homework– A belief that the idea holds great upside potential

Angel Investors• What do they expect to get?

– Equity– A large return on their investment (> 30% CAR)

• Where does their money come from?– Usually funded from personal savings

Professional Investors• They Include: Venture Capitalists, Private Equity,

Public Equity, Banks• What are they looking for (maturity):

• Significant shareholder value growth for expansion capital or reliable cash earnings

• Consideration of: transparency, honesty, creativity, responsibility, accountability, teamwork, etc.

• Appropriate industry, investment size, stage of company development – can vary depending on risk tolerance and desired ROI.

Venture Capital Investors• Who are they?

– Professionally managed investment vehicles– Usually in the form of a limited partnership

• What drives their investment decision?– A belief that the entrepreneur is very capable

• Management team• Business model

– A belief that the idea and market conditions allow for significant revenue and profit growth

Venture Capital Investors• What do they expect to get?

– Equity– Significant return on investment (~ 30% CAR)– A clearly pre-defined exit for 5 – 7 years later

• Where does their money come from?– Pool from Wealthy individuals– Other external sources

What Do VCs Offer?

• Investment money • Suitable management or technical expertise• Help finding strategic partners or customers• Strategy planning• In return: a large percentage of ownership, plus seats

on the board

Banks• Who are they?

– Lending institutions• What drives their investment decision?

– The creditworthiness of the borrower• Ability of the business to service the loan (make

payments of interest & principal)• Collateral (can be supplied by a third party)

Banks• What do they expect to get?

– Their original loan returned– Interest

• Where does their money come from?– Depositors

SIDBI• It helps - direct finance, bills/receivables finance, letters of

credit, sector-specific loans, etc. • Provision of credit guarantees up to Rs 1 crore - Credit

Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). This is like insurance for lenders.

• Creation of a VC firm that provides early-stage & second round financing for MSMEs with a track record of proven technology or business model and opportunities for growth and earnings - SIDBI Ventures. Moreover, SIDBI has contributed to the corpus of over 33 VC funds across India.

• SIDBI Risk Capital Fund) This is a relatively new effort - a Rs 2000 crore fund that provides long term-risk capital to MSMEs, using structured, convertible, collateral-free debt

Funds often are applied to different purposes

Source PurposeInstitutions Basic research, inventions

Self-Financed Initial start-up funds

Angel Investors Initial start-up funds

Venture Capitalists Just after start-up

Private Equity Longer-term growth of an established company

Public Equity Capital investment requirements of an established company, exit for VCs

Banks Financing for most operating needs