Topic 11

A set of 50 vocabulary flashcards covering the various sources and mechanisms for financing innovation, including angel investors, venture capital, corporate venturing, crowdfunding, and public funding.

Angel investors (Business angels)

Wealthy individuals who invest their own funds in a small set of companies for an equity stake, providing very early stage seed funding and advice.

Venture Capital

Equity-based financing for more mature start-ups that involves a rigorous selection process, where less than $1\%$ of proposals are accepted.

Corporate Venturing

A process where large, established non-financial companies create units to invest corporate funds into start-up companies in return for an equity interest.

Crowdfunding

The collection of funds to sustain an initiative from a large pool of backers, usually conducted online via a web platform.

Private Equity

A form of private investment intermediary involving illiquid markets, concentrated ownership, and a combination of financing, control, and counseling.

Capital Markets

Markets typically used by public firms where ownership is disperse and liquid, and financing is usually separated from control.

Seed Capital

Venture capital provided to found a firm, often during the concept or research stage.

First stage VC

Funding provided to support the development and initial product launch of a company.

Second stage VC

Funding provided to support the growth of a company once the product is launching or established.

Donation-based Crowdfunding

A patronage model of crowdfunding where backers provide funds with no expected financial or tangible returns.

Reward-based Crowdfunding

A crowdfunding model where backers receive different tangible rewards with monetary value, such as the product itself.

Peer-to-peer lending

A type of crowdfunding where funds are offered as a loan, and investors earn monthly returns based on credit ratings.

Equity-based Crowdfunding

A crowdfunding model where the backer receives a small share or equity stake in the venture.

Initial Public Offering (IPO)

An equity-based external funding source for established firms involving the first sale of stock to the public.

Information Asymmetry

A condition where the inventor has better information about the likelihood of success and nature of an innovation project than potential investors.

Agency Cost

The cost arising from the reluctance of risk-averse managers to invest in uncertain R\&D projects because they increase the probability of financial distress.

Factoring

A method of external debt-related funding for established firms, mentioned alongside bank loans and leasing.

Public R\&D Subsidies

Direct grants from European, national, or regional programs allocated competitively based on proposal quality and firm characteristics.

Tax credit for R\&D

A mechanism where R\&D investments, such as wages or equipment, reduce the total tax load to be paid by a firm.

Modigliani-Miller theorem

A financial theory implying a firm should be indifferent to capital structure, though in practice it often does not apply to risky R\&D.

Staged capital commitments

A Venture Capital practice of provide funding in rounds to incentivize firms to achieve milestones and reduce investor risk.

Horizon 2020

A European project example providing funding for large-scale demonstrations such as advanced smart grid solutions.

Corporate Spin-offs

Independent companies created from the R\&D of a parent firm that established companies may fund through corporate venturing.

Venture Capital Exit

A planned event occurring in $3$ to $8$ years where a VC sells their stake back to the firm, via an acquisition, or an IPO.

Internal funds

A source of financing for established firms derived from cash flow, which is the preferred method for financing innovation.

Mezzanine stage

An investment stage occurring after the expansion phase when a company is getting ready for an IPO.

Debt-to-Equity ratio

A financial measure of leverage; the transcript notes tech companies are less leveraged than the S\&P $500$ average.

SoftBank Vision Fund

A major investment fund whose portfolio includes companies such as Slack, Uber, and Guardant Health.

Peter Thiel

The PayPal founder who was a first external investor in Facebook, providing $\$ 500,000$ for a $10\%$ stake.

Lending Club

The largest peer-to-peer lending platform in the US used as an example of debt-based crowdfunding.

Oculus Virtual Reality

A company that used a Kickstarter campaign to raise $\$ 2.4$ million before receiving venture capital and being acquired by Facebook.

Intel Capital

A specific example of a corporate venture capital (CVC) unit operated by an established technology firm.

Google Ventures

An example of a corporate venture capital unit that invests in start-ups while pursuing both financial and strategic objectives.

Additivity

The concept in academic studies showing that public R\&D support typically leads to increasing total R\&D expenditures rather than crowding out private funds.

Illiquid markets

Markets where assets cannot be easily sold or exchanged for cash without a substantial loss in value, common in private equity.

Business Planning

A stage in the investment timeline occurring after research where the venture's strategy is formalized.

Expansion Stage

The investment phase following product development and commercialization where capital is used for scaling the business.

Series A

An early stage financing round that typically occurs after seed funding and before Series B.

Series B

A stage of venture financing focused on taking a business to the next level, generally following Series A.

Asymmetric information (VC)

The gap between an entrepreneur's knowledge and a venture capital investor's knowledge regarding the start-up operations.

Board Seats

A mechanism of control where venture capitalists participate in firm management, which is usually not present in informal angel interactions.

Lead Investor

A venture capitalist who takes the primary role in an investment, typically performing tasks like interviewing management and touring facilities.

Pro forma financials

Financial reports prepared by a company that venture capitalists review in-depth during the selection process.

Leverage

The use of borrowed money (debt) for investment; the transcript suggests this negatively impacts performance as innovation increases.

Cash ratio

The ratio of aggregate cash and equivalents to aggregate total assets, which is traditionally high in pharmaceuticals and IT industries.

Strategic Objectives

Goals in corporate venturing that involve identifying synergies or gaining access to new technologies and markets.

Angel Investment Size

The typical amount of money provided by business angels, ranging from $\$ 500,000$ to $\$ 2,000,000$.

VC Success Rate

The typical success ratio for high-risk venture capital investments, where approximately $1$ in $10$ firms are successful.

Institutional VC

A venture capital model that differs from corporate venturing by focusing primarily on financial returns and active control rights.

R\&D funding gap

A shortfall in innovation financing caused by risk, information asymmetries, and limited appropriability of knowledge.