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.