Venture Capital Investment

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

2. Pharmaceutical Product Development Timeline Phase R&D Investment $ 10-20 M Success Rate 1: 10,000 Duration 1-5 Years

3. Pharmaceutical Product Development Timeline Phase R&D Preclinical Investment $ 10-20 M $ 10-20 M Success Rate 1: 10,000 1: 100 Duration 1-5 Years 1-2 Years

4. Pharmaceutical Product Development Timeline Phase R&D Preclinical Clinical I Investment $ 10-20 M $ 10-20 M $ 20-30 M Success Rate 1: 10,000 1: 100 1: 10 Duration 1-5 Years 1-2 Years 1 Year

5. Pharmaceutical Product Development Timeline Phase R&D Preclinical Clinical I Clinical II Clinical III Investment $ 10-20 M $ 10-20 M $ 20-30 M $ 30-60 M Success Rate 1: 10,000 1: 100 1: 10 1: 10 1: 5 Duration 1-5 Years 1-2 Years 1 Year 1-2 Years 1-3 Years

6. 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.

7. 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.

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

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

10. 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.

11. Definition of venture capital • Venture capital is a type of financial intermediary that is specialized in the financing of entrepreneurial companies.

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

13. 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.

14. 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.

15. IPO: Initial Public Offering

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

17. 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.

18. Public Sector • Grants • Awards • Investment support schemes

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

20. 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.

21. 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

22. 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)

23. 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

24. 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

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

26. 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.

27. 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.

28. 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

29. 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.

30. 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

31. 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

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

33. 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.

34. 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.

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

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

37. Initial Public Offering (IPO) • The first sale of a company's shares to the public

38. Venture Capital Investment

39. Share of High-tech in Venture Capital

40. The US Venture Industry Has Grown Source: 2004 NVCA Yearbook,/Venture Economics

41. 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 America’s Job-Creating Engine Source: Venture Impact 2004 by Global Insight (Wharton/DRI)

42. For every dollar invested in 1970-1999, there was $9 in revenue during 2000 For every $21,627 of venture capital investment in 1970-1999, there was one job in the year 2000 Key Findings Source: DRI-WEFA (analysis as of 8/2001

43. 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

44. 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

45. 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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