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

Dr. Shahram Yazdani

Venture Capital Investment

Shahid Beheshti University of Medical SciencesSchool of Medical Education

Strategic Policy Sessions: 08

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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

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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



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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



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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



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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.

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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.

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Venture Capital

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

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A risky investment

Christopher Columbus seeking financing from Queen Isabella and King Ferdinand in an early example of venture capital

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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.

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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

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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.

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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.

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IPO: Initial Public Offering

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Financial SupportResearchGrants

ResearchGrants

Main Role

New FirmNew Firm Mature SMEMature SME Large CompanyLarge Company

ProductProduct

ResearcherResearcher InventorInventor EntrepreneurEntrepreneur BusinessmanBusinessman

Business PlanBusiness Plan

PropositionalKnowledge


PrescriptiveKnowledgePrescriptiveKnowledge

BasicResearch

BasicResearch

AppliedResearchApplied

ResearchProduct Design &

DevelopmentProduct Design &

Development ManufacturingManufacturing

Pre-productionPrototype


EngineeringPrototype


Financial SupporterResearchFoundersResearchFounders

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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.

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Public Sector

Grants Awards Investment support schemes

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Financial SupportSeedFinanceSeed

FinanceResearch

GrantsResearch

Grants

Main Role


ProductProduct






BasicResearch

BasicResearch










AngelInvestors

AngelInvestors

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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.

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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

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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)

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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

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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

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FinanceStart-up

Venture CapitalStart-up

Venture CapitalResearch

GrantsResearch

Grants

Main Role


ProductProduct






BasicResearch

BasicResearch










AngelInvestors

AngelInvestors

VentureCapital Firm

VentureCapital Firm

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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.

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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.

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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

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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.

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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

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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

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FinanceStart-up


Venture CapitalExpansion


Venture CapitalResearch

GrantsResearch

Grants

Main Role


ProductProduct






BasicResearch

BasicResearch










AngelInvestors

AngelInvestors

VentureCapital Firm

VentureCapital Firm

Corporate InvestorsBanks


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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.

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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.

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FinanceStart-up




Venture CapitalMezzanine

FinanceMezzanine

FinanceResearch

GrantsResearch

Grants

Main Role


ProductProduct






BasicResearch

BasicResearch










AngelInvestors

AngelInvestors

VentureCapital Firm

VentureCapital Firm



IPOAcquisition

IPOAcquisition

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Mezzanine (Bridge finance)

Finance made available to a company in the period of transition from being privately owned to being publicly quoted.

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Initial Public Offering (IPO)

The first sale of a company's shares to the public

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Venture Capital Investment

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Share of High-tech in Venture Capital

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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

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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

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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

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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

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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 ?

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

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