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Dr. Shahram Yazdani
Venture Capital Investment
Shahid Beheshti University of Medical SciencesSchool of Medical Education
Strategic Policy Sessions: 08
Dr. S
hahra
m
Yazd
ani
Pharmaceutical Product Development Timeline
1-5 Years1-5 Years
R&DR&D
1: 10,0001: 10,000
$ 10-20 M$ 10-20 M
DurationDuration
PhasePhase
Success RateSuccess Rate
InvestmentInvestment
Dr. S
hahra
m
Yazd
ani
Pharmaceutical Product Development Timeline
1-5 Years1-5 Years 1-2 Years1-2 Years
R&DR&D PreclinicalPreclinical
1: 10,0001: 10,000 1: 1001: 100
$ 10-20 M$ 10-20 M $ 10-20 M$ 10-20 M
DurationDuration
PhasePhase
Success RateSuccess Rate
InvestmentInvestment
Dr. S
hahra
m
Yazd
ani
Pharmaceutical Product Development Timeline
1-5 Years1-5 Years 1-2 Years1-2 Years 1 Year1 Year
R&DR&D PreclinicalPreclinical Clinical IClinical I
1: 10,0001: 10,000 1: 1001: 100 1: 101: 10
$ 10-20 M$ 10-20 M $ 10-20 M$ 10-20 M $ 20-30 M$ 20-30 M
DurationDuration
PhasePhase
Success RateSuccess Rate
InvestmentInvestment
Dr. S
hahra
m
Yazd
ani
Pharmaceutical Product Development Timeline
1-5 Years1-5 Years 1-2 Years1-2 Years 1 Year1 Year 1-2 Years1-2 Years 1-3 Years1-3 Years
R&DR&D PreclinicalPreclinical Clinical IClinical I Clinical IIClinical II Clinical IIIClinical III
1: 10,0001: 10,000 1: 1001: 100 1: 101: 10 1: 101: 10 1: 51: 5
$ 10-20 M$ 10-20 M $ 10-20 M$ 10-20 M $ 20-30 M$ 20-30 M $ 30-60 M$ 30-60 M
DurationDuration
PhasePhase
Success RateSuccess Rate
InvestmentInvestment
Dr. S
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Yazd
ani
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. S
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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. S
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Yazd
ani
Venture Capital
A company requires an average of $16 million in venture capital during the first five start-up years,
Dr. S
hahra
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A risky investment
Christopher Columbus seeking financing from Queen Isabella and King Ferdinand in an early example of venture capital
Dr. S
hahra
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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. S
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Definition of venture capital
Venture capital is a type of financial intermediary that is specialized in the financing of entrepreneurial companies.
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Well-known firms that have received VC financing
Apple Cisco Microsoft Netscape Sun Microsystems Staples Starbucks Google Amazon
Dr. S
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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. S
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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. S
hahra
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Yazd
ani
IPO: Initial Public Offering
Dr. S
hahra
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ani
Financial SupportResearchGrants
ResearchGrants
Main Role
New FirmNew Firm Mature SMEMature SME Large CompanyLarge Company
ProductProduct
ResearcherResearcher InventorInventor EntrepreneurEntrepreneur BusinessmanBusinessman
Business PlanBusiness Plan
PropositionalKnowledge
PropositionalKnowledge
PrescriptiveKnowledgePrescriptiveKnowledge
BasicResearch
BasicResearch
AppliedResearchApplied
ResearchProduct Design &
DevelopmentProduct Design &
Development ManufacturingManufacturing
Pre-productionPrototype
Pre-productionPrototype
EngineeringPrototype
EngineeringPrototype
Financial SupporterResearchFoundersResearchFounders
Dr. S
hahra
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Yazd
ani
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. S
hahra
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Yazd
ani
Public Sector
Grants Awards Investment support schemes
Dr. S
hahra
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Yazd
ani
Financial SupportSeedFinanceSeed
FinanceResearch
GrantsResearch
Grants
Main Role
New FirmNew Firm Mature SMEMature SME Large CompanyLarge Company
ProductProduct
ResearcherResearcher InventorInventor EntrepreneurEntrepreneur BusinessmanBusinessman
Business PlanBusiness Plan
PropositionalKnowledge
PropositionalKnowledge
PrescriptiveKnowledgePrescriptiveKnowledge
BasicResearch
BasicResearch
AppliedResearchApplied
ResearchProduct Design &
DevelopmentProduct Design &
Development ManufacturingManufacturing
Pre-productionPrototype
Pre-productionPrototype
EngineeringPrototype
EngineeringPrototype
Financial SupporterResearchFoundersResearchFounders
AngelInvestors
AngelInvestors
Dr. S
hahra
m
Yazd
ani
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. S
hahra
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Yazd
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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. S
hahra
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ani
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. S
hahra
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ani
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. S
hahra
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Yazd
ani
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. S
hahra
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Yazd
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Financial SupportSeedFinanceSeed
FinanceStart-up
Venture CapitalStart-up
Venture CapitalResearch
GrantsResearch
Grants
Main Role
New FirmNew Firm Mature SMEMature SME Large CompanyLarge Company
ProductProduct
ResearcherResearcher InventorInventor EntrepreneurEntrepreneur BusinessmanBusinessman
Business PlanBusiness Plan
PropositionalKnowledge
PropositionalKnowledge
PrescriptiveKnowledgePrescriptiveKnowledge
BasicResearch
BasicResearch
AppliedResearchApplied
ResearchProduct Design &
DevelopmentProduct Design &
Development ManufacturingManufacturing
Pre-productionPrototype
Pre-productionPrototype
EngineeringPrototype
EngineeringPrototype
Financial SupporterResearchFoundersResearchFounders
AngelInvestors
AngelInvestors
VentureCapital Firm
VentureCapital Firm
Dr. S
hahra
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Yazd
ani
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. S
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Yazd
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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. S
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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. S
hahra
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Yazd
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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. S
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Yazd
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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. S
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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. S
hahra
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ani
Financial SupportSeedFinanceSeed
FinanceStart-up
Venture CapitalStart-up
Venture CapitalExpansion
Venture CapitalExpansion
Venture CapitalResearch
GrantsResearch
Grants
Main Role
New FirmNew Firm Mature SMEMature SME Large CompanyLarge Company
ProductProduct
ResearcherResearcher InventorInventor EntrepreneurEntrepreneur BusinessmanBusinessman
Business PlanBusiness Plan
PropositionalKnowledge
PropositionalKnowledge
PrescriptiveKnowledgePrescriptiveKnowledge
BasicResearch
BasicResearch
AppliedResearchApplied
ResearchProduct Design &
DevelopmentProduct Design &
Development ManufacturingManufacturing
Pre-productionPrototype
Pre-productionPrototype
EngineeringPrototype
EngineeringPrototype
Financial SupporterResearchFoundersResearchFounders
AngelInvestors
AngelInvestors
VentureCapital Firm
VentureCapital Firm
Corporate InvestorsBanks
Corporate InvestorsBanks
Dr. S
hahra
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Yazd
ani
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. S
hahra
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Yazd
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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. S
hahra
m
Yazd
ani
Financial SupportSeedFinanceSeed
FinanceStart-up
Venture CapitalStart-up
Venture CapitalExpansion
Venture CapitalExpansion
Venture CapitalMezzanine
FinanceMezzanine
FinanceResearch
GrantsResearch
Grants
Main Role
New FirmNew Firm Mature SMEMature SME Large CompanyLarge Company
ProductProduct
ResearcherResearcher InventorInventor EntrepreneurEntrepreneur BusinessmanBusinessman
Business PlanBusiness Plan
PropositionalKnowledge
PropositionalKnowledge
PrescriptiveKnowledgePrescriptiveKnowledge
BasicResearch
BasicResearch
AppliedResearchApplied
ResearchProduct Design &
DevelopmentProduct Design &
Development ManufacturingManufacturing
Pre-productionPrototype
Pre-productionPrototype
EngineeringPrototype
EngineeringPrototype
Financial SupporterResearchFoundersResearchFounders
AngelInvestors
AngelInvestors
VentureCapital Firm
VentureCapital Firm
Corporate InvestorsBanks
Corporate InvestorsBanks
IPOAcquisition
IPOAcquisition
Dr. S
hahra
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ani
Mezzanine (Bridge finance)
Finance made available to a company in the period of transition from being privately owned to being publicly quoted.
Dr. S
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Initial Public Offering (IPO)
The first sale of a company's shares to the public
Dr. S
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Venture Capital Investment
Dr. S
hahra
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Share of High-tech in Venture Capital
Dr. S
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The US Venture Industry Has Grown
Source: 2004 NVCA Yearbook,/Venture Economics
At Year End
# Venture Firms
Capital Under Mgt
1970 28 $1B 1980 89 $4B 1990 399 $31B 2001 943 $257B 2003 919 $257B
Dr. S
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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)
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Key Findings 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
Source: DRI-WEFA (analysis as of 8/2001
Dr. S
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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. S
hahra
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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. S
hahra
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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.
Thank You !
Any Question ?