Venture Capital Investment
Dr. Shahram Yazdani
Shahid Beheshti University of Medical Sciences
School of Medical Education
Strategic Policy Sessions: 08
Pharmaceutical Product Development
Timeline
Phase
R&D
Investment
$ 10-20 M
Success Rate
1: 10,000
Duration
1-5 Years
Dr. Shahram Yazdani
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
Dr. Shahram Yazdani
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
Dr. Shahram Yazdani
Pharmaceutical Product Development
Timeline
Phase
R&D
Preclinical
Clinical I
Clinical II
Clinical III
Investment
$ 10-20 M
$ 10-20 M
$ 20-30 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
$ 30-60 M
Dr. Shahram Yazdani
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. Shahram Yazdani
Need for Money
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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. Shahram Yazdani
Venture Capital

A company requires an average of $16
million in venture capital during the first
five start-up years,
Dr. Shahram Yazdani
A risky investment

Christopher
Columbus seeking
financing from Queen
Isabella and King
Ferdinand in an early
example of venture
capital
Dr. Shahram Yazdani
Venture Capital Industry

History
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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. Shahram Yazdani
Definition of venture capital

Venture capital is a type of financial
intermediary that is specialized in the
financing of entrepreneurial companies.
Dr. Shahram Yazdani
Well-known firms that have received VC
financing
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Dr. Shahram Yazdani
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Apple
Cisco
Microsoft
Netscape
Sun Microsystems
Staples
Starbucks
Google
Amazon
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. Shahram Yazdani
Sources of Finance for Innovation

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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:

Dr. Shahram Yazdani
the stage of development of the project, the
size of the innovating company, the amount
of money required.
Dr. Shahram Yazdani
IPO: Initial Public Offering
Research
Founders
Financial Supporter
Research
Grants
Researcher
Financial Support
Inventor
Entrepreneur
Business Plan
Propositional Prescriptive
Knowledge Knowledge
Dr. Shahram Yazdani
Basic
Research
Applied
Research
Engineering
Prototype
Main Role
New Firm
Pre-production
Prototype
Product Design &
Development
Businessman
Mature SME
Large Company
Product
Manufacturing
Research Stage

Funding will come, usually in the form of
grants, primarily from:

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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. Shahram Yazdani
Public Sector
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Grants
Awards
Investment support schemes
Dr. Shahram Yazdani
Research
Founders
Research
Grants
Researcher
Inventor
Angel
Investors
Financial Supporter
Seed
Finance
Financial Support
Entrepreneur
Business Plan
Propositional Prescriptive
Knowledge Knowledge
Dr. Shahram Yazdani
Basic
Research
Applied
Research
Engineering
Prototype
Main Role
New Firm
Pre-production
Prototype
Product Design &
Development
Businessman
Mature SME
Large Company
Product
Manufacturing
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. Shahram Yazdani
Friends And Family
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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. Shahram Yazdani
Angel Investors or Business Angels
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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. Shahram Yazdani
Angel Investors or Business Angels
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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
Dr. Shahram Yazdani
Angel Investors or Business Angels

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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
Dr. Shahram Yazdani
Research
Founders
Angel
Investors
Research
Grants
Researcher
Venture
Financial Supporter
Capital Firm
Seed
Finance
Inventor
Start-up
Financial Support
Venture Capital
Entrepreneur
Business Plan
Propositional Prescriptive
Knowledge Knowledge
Dr. Shahram Yazdani
Basic
Research
Applied
Research
Engineering
Prototype
Main Role
New Firm
Pre-production
Prototype
Product Design &
Development
Businessman
Mature SME
Large Company
Product
Manufacturing
Start-up Stage
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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. Shahram Yazdani
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. Shahram Yazdani
Venture Capitalists
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Dr. Shahram Yazdani
Seek investments in firms with highgrowth 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
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. Shahram Yazdani
Life Cycle of VC Investment
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Dr. Shahram Yazdani
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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
Issues in Venture Capital “due
diligence”
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Dr. Shahram Yazdani
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Technology or service concept
Market size and dynamics: subtleties of
markets very important
Management team
Business model and financial
requirements
Valuation and Deal Structure
Research
Founders
Angel
Investors
Research
Grants
Researcher
Venture
Seed
Finance
Inventor
Start-up
Dr. Shahram Yazdani
Basic
Research
Applied
Research
Expansion
Financial Support
Venture Capital
Venture Capital
Entrepreneur
Business Plan
Propositional Prescriptive
Knowledge Knowledge
Corporate Investors
Financial Supporter
Capital Firm
Banks
Engineering
Prototype
Main Role
New Firm
Pre-production
Prototype
Product Design &
Development
Businessman
Mature SME
Large Company
Product
Manufacturing
Expansion Stage
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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. Shahram Yazdani
Investment Bank
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Dr. Shahram Yazdani
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.
Research
Founders
Angel
Investors
Research
Grants
Researcher
Venture
Seed
Finance
Inventor
Dr. Shahram Yazdani
Basic
Research
Applied
Research
IPO
Acquisition
Start-up
Expansion
Mezzanine
Finance
Financial Support
Venture Capital
Venture Capital
Entrepreneur
Business Plan
Propositional Prescriptive
Knowledge Knowledge
Corporate Investors
Financial Supporter
Capital Firm
Banks
Engineering
Prototype
Main Role
New Firm
Pre-production
Prototype
Product Design &
Development
Businessman
Mature SME
Large Company
Product
Manufacturing
Mezzanine (Bridge finance)

Finance made available to a company in
the period of transition from being
privately owned to being publicly quoted.
Dr. Shahram Yazdani
Initial Public Offering (IPO)

The first sale of a company's shares to
the public
Dr. Shahram Yazdani
Venture Capital Investment
Dr. Shahram Yazdani
Share of High-tech in Venture Capital
Dr. Shahram Yazdani
The US Venture Industry Has Grown
At Year
End
1970
1980
1990
2001
2003
# Venture Capital Under
Firms
Mgt
28
$1B
89
$4B
399
$31B
943
$257B
919
$257B
Dr. Shahram Yazdani
Source: 2004 NVCA Yearbook,/Venture Economics
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
Dr. Shahram Yazdani
Source: Venture Impact 2004 by Global Insight (Wharton/DRI)
Key Findings
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For every dollar invested in 19701999, 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
Dr. Shahram Yazdani
Source: DRI-WEFA (analysis as of 8/2001
The Increasing Role of Startups in
U.S.-Led Innovation
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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:
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Major source of productivity growth
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1984: 5.9% ($4.4B)
2003: 20.7% ($40.1B)
CAD/CAM, JIT, Auto-ID, payments, POS, e-Tailing,
internet travel
Major source of U.S. Competitiveness:
Dr. Shahram Yazdani
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72% of all venture capital worldwide is in the US
Venture Capital in the EU
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Funds raised in the EU: € 48 bil
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UK 37%, Fr 16%, DE 13%, ...
High Tech early-stage: € 8.6 bil
High Tech expansion/development: € 6.6 bil
Dr. Shahram Yazdani
The German “WFG”
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Dr. Shahram Yazdani
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 !
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