CT060-3-3-EMTECH

FINANCING STRATEGIES OF ET

CT060-3-3-EMTECH Chapter 10 - Financing Strategies of Emerging Technologies SLIDE 1

 TOPIC LEARNING OUTCOMES
At the end of this topic, you should be able to:
1. Examine obstacle for establishing new firms.
2. Describe alternatives models for resource allocation.
3. Identify strategies for external financing.

CT060-3-3-EMTECH Chapter 10 - Financing Strategies of Emerging Technologies SLIDE 2

 Key Terminologies

• Intangible
• Tangible
• Asymmetric
• Resource
• Venture
• Alliances
• Symbiotic
• Convertible Preferred Stock

CT060-3-3-EMTECH Chapter 10 - Financing Strategies of Emerging Technologies SLIDE 3

 Introduction

• Established firms at an advantage over start-ups in financing emerging

technologies.
• Internal resource allocation of large companies often put a disadvantages on
companies that rely on external sources.
• Requires a more sophisticated approach to adopt with emerging technologies
and higher risks

CT060-3-3-EMTECH Chapter 10 - Financing Strategies of Emerging Technologies SLIDE 4

 Introduction

• Take example of a telecommunication company;

- shifting in strategies

- traditional telecommunications is not growth business for future.

• To support new IT initiative, managers could provide venture capital to create
its own “external” investment.

CT060-3-3-EMTECH Chapter 10 - Financing Strategies of Emerging Technologies SLIDE 5

 Financing Emerging Technologies

• Objective of a corporation : to create sustained and economic value.

• The expected returns of the investment need to be greater than the cost of capital.

• E.g : the telecommunications division should use a cost of capital reflecting risks in
the telecommunication industry.
• The key to sustained value creation is earning more than cost of capital in both good
years and bad in all divisions.

CT060-3-3-EMTECH Chapter 10 - Financing Strategies of Emerging Technologies SLIDE 6

 Financing Emerging Technologies

• From Physical Assets to Intangible Assets

- greatest challenges : the source of value for emerging technologies tend to be

quite different from the traditional businesses. Eg: US Steel
• Example : Microsoft company continuously create new ideas.

“ We are wealthier than we were 100 years ago!”

so , where did the added value come from?

CT060-3-3-EMTECH Chapter 10 - Financing Strategies of Emerging Technologies SLIDE 7

 Financing Businesses

Possible options to finance emerging technology companies:

• Internal Profits
• Equity
• Alliances
• Bank Loans
• Venture Capital
• Crowdfunding

CT060-3-3-EMTECH Chapter 10 - Financing Strategies of Emerging Technologies SLIDE 8

 External Financing of Emerging Technologies

Asymmetric Information :
• lenders are less informed than borrowers about what is going on
• result : unable to ensure that actions are taken in their interest.

• raising interest rate on loans may lead to a reduction in the quality of

borrowers.

CT060-3-3-EMTECH Chapter 10 - Financing Strategies of Emerging Technologies SLIDE 9

 Challenges of ET

• The challenges of Emerging Technologies firms related to their Financing

strategies includes:
• emerging technologies firms have neither predictable cash flows nor good
collateral.
• more uncertainty about the revenues since the uses of new technology may be
unclear.
• Unsure on what kind of financial structure is best for the company.

CT060-3-3-EMTECH Chapter 10 - Financing Strategies of Emerging Technologies SLIDE 10

 Venture capital

• Accounts for about 2/3 of private sector external equity financing of hi-tech
firms.
• differs from standard forms of financing
• they provide financing in stages to ensure that option value is maximized.
• many hi-tech companies in US initially been funded with venture capital.

CT060-3-3-EMTECH Chapter 10 - Financing Strategies of Emerging Technologies SLIDE 11

 A Symbiotic Relationship

• For biotech businesses, required million of dollars of cash ‘burns’ and many
years before a product has been developed.
• Even for IT companies, they are concerned about competition from emerging
technologies .
• Large firm often choose to invest in or purchase start-up rather than develop
an emerging technology business internally.
• a popular strategy

CT060-3-3-EMTECH Chapter 10 - Financing Strategies of Emerging Technologies SLIDE 12

 Conclusion

• Managers need to understand both internal & external allocation approaches

• Good investment decisions result from considering both approaches.
• By changing and understanding their method of internal resource allocation,
managers can create approaches to financing emerging technologies that
balance their needs; provide sufficient returns to shareholders.

CT060-3-3-EMTECH Chapter 10 - Financing Strategies of Emerging Technologies SLIDE 13

 Question & Answer Session

Q&
A
CT060-3-3-EMTECH Chapter 10 - Financing Strategies of Emerging Technologies SLIDE 14