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Financing of New Technology

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Financing is difficult due to low capital and retained earnings levels in the ... Tax-motivating financing (e.g. Scientific ... Advantage of turf financing: ... – PowerPoint PPT presentation

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Title: Financing of New Technology


1
Financing of New Technology
  • Henry C. Co
  • Technology and Operations Management,
  • California Polytechnic and State University

2
Small Firms
  • Small firms lack ability to raise funds for a
    major new technology acquisition internally.
  • Even when they do, the impact on the balance
    sheet is dramatic.

3
  • When Zeft Technology (a small manufacturer in
    Ontario) purchased its first CNC machine, its
    debt-to-equity ratio jumped to 221.
  • The usual consequence of this would be further
    difficulty in attracting outside financing, thus
    making the automation investment a bet your
    company scenario for many small firms.

4
Mega-growth Technology Companies
  • These firms typically have current (and
    projected) sales growth of 40 to 50 per year and
    compete in a relatively new industry, market,
    and/or product.

5
  • Financing is difficult due to low capital and
    retained earnings levels in the company relative
    to sales.
  • These firms never generate all the cash that they
    require externally, working capital is often a
    problem, and their growth can be stymied by a
    lack of financing.

6
New Technology Financing
  • Tax-motivating financing
  • Limited partnership with guaranteed features
  • Traditional sources of financing
  • Turf Financing
  • Government

7
  • Tax-motivating financing (e.g. Scientific
    Research Tax Credit SRTC)
  • Investors receive an risk-free return and the
    company receives no-strings attached financing,
    provided it can come up with sufficient
    additional financing.
  • Limited partnership with guaranteed features.
  • Traditional sources of financing
  • Bank loans, public share issues, venture capital.

8
Bank and Term Lenders
  • Banks tend to be conservative lenders
    specializing in operating (rather than long-term
    capital) loans.
  • To be successful in securing bank loans,
    megagrowth firms must be ready to continually
    bring in outside equity to help support higher
    bank loans.
  • When banks fund real assets, they want the assets
    to have good resale value in case the company
    defaults. Banks prefers general-purpose
    technology that others can use because
    specialized technologies have low resale value.

9
Venture Capitalists
  • Venture capitalists are dedicated professional
    firms that invest in companies by taking a strong
    equity position.
  • Venture capital firms recognize the long-term
    nature of the potential payback from their
    investments, and they usually remain involved
    with the firms they invest in for relatively long
    periods of time.
  • Over 40 of 1984 venture capital dollars went
    into either computer hardware systems (CAD/CAM,
    CAE) or software services (AI).
  • To be successful in procuring funds, the firm
    must be able to demonstrate both the plausible
    benefits of the new technology and the strong
    potential for profits in its business.

10
Turf Financing
  • Involves the sales of a bundle of rights to the
    technology being developed in lieu of equity or
    joint-venture participation
  • Advantage of turf financing
  • The investors are for the long term because they
    hold an entry philosophy as opposed to an
    ownership one, and therefore may be a bit more
    patient for a return on investment.
  • The young company has its hands full developing
    its own local market segment, and it will be a
    long time before its resources and know-how are
    built up enough to go into other areas.
  • Endorsement of the technology by a large investor
    could be critical to rapid development of the new
    technology. If the new technology is
    strategically validated, local marketing efforts
    will be facilitated and there may be attraction
    of additional funds. The larger company may also
    turn out to be a valuable source of advice.

11
Government
  • There are a variety of government programs
    available that can provide funds for a new
    technology acquisition.
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