Malaysia

Kuala Lumpur, Malaysia (1996)
Consultant to the Technology Park Malaysia to evaluate potential for creation of seed capital funds by TPM to support growth of start-up technology enterprises admitted to the TPM Incubator Program. Formulated Business Plan for three-phase creation of Ventech Funds with RM100 million. Sponsored by United Nations Development Funds.

Business Plan

The VENTECH Funds
An Early-Stage Equity Capital Financing Program
of the
Technology Park Malaysia and the
Malaysian Ministry of Science, Technology, and The Environment

Project Sponsored by the
United Nations Development Program

Prepared by
Richard T. Meyer, Ph.D.
Orion Technical Associates, Inc.
1513 Plaza Encantada NW
Albuquerque, New Mexico 87107 USA

Acknowledgements

Remarks by Deputy Minister, MOSTE

Executive Summary

I. Mission and Investment Strategy

II. Management

III. Market

IV. Marketing

V. Business Operations

VI. Innovative Services

VII. Financial Plan

VIII.Sources of Capital

IX. Return on Investment

X. Risks

XI. Recommendations of the Consultant

XII. Appendices

Remarks by Deputy Minister, MOSTE

Acknowledgements

The author wishes to express sincere appreciation to all the organizations and persons in Kuala Lumpur for their contributions of time and insight to the planning and development of this Business Plan for the VENTECH Funds, including several representatives of Malaysian banks, venture capital companies, accounting firms, universities, research institutes, government agencies, and especially the professional staff and the entrepreneurs of Technology Park Malaysia (TPM). In particular, the author is indebted to Dr. Mohamad Salleh Ismail, Director of TPM, for conveying his dynamic visions for TPM and the VENTECH Funds and to Ms. Hazibah Mustapha, TPM Venture Capital Manager, for her extensive descriptions of the prospective investments and operations of VENTECH; in addition, she spent considerable time arranging for important appointments, workshops, and the Second Business and Technology Forum. Among the TPM entrepreneurs, special thanks are due to Mr. A.K. Low for his in-depth and frank discussions of the financing requirements of early-stage Malaysian technology enterprises. Finally, the author wishes to express gratitude to Mr. Rustum Lalkaka, who arranged for the author's participation in this project, and to the Malaysian Regional Office of the United Nations Development Program for financing the project.
Abstract

The Mission of VENTECH

The VENTECH Funds are being established by the Government of Malaysia to provide direct equity financing to early-stage* technology enterprises that meet the investment criteria of Technology Park Malaysia for developing and enhancing the technology industry economy of the country of Malaysia. By filling "the entrepreneurial capital gap" faced by most high-risk, high-tech start-up enterprises, the VENTECH goal is to move selected young companies to their market entry stage in a shorter period of time and to prove them as viable candidates for later stage financing by the private sector. In providing early-stage equity funding, VENTECH intends to facilitate the growth of its investees in a helpful and trusting collaborative relationship, leaving ultimate control with the entrepreneur; VENTECH I will always take a minority ownership position (typically 20 to 30%) in the investees, unless unusual and unforeseen circumstances dictate otherwise.

(*Note: Early-stage refers to the concept, prototype, and market-entry stages of a company and encompasses the seed, start-up, and market-entry stages of financing.)

In early 1996, the VENTECH I Fund will be established with an initial government capitalization of RM10,000,000 (alternatively up to RM30,000,000); its goal is to demonstrate and prove the worthiness of early-stage financing in amounts of RM500,000 to RM2,000,000 to TPM Tenant companies. BY 1998, VENTECH II will be established in an amount of RM50,000,000 (public and private); it will be followed by VENTECH III in Year 2000 with a capitalization of RM120,000,000 (public and private). Equity investments from VENTECH II and III will generally parallel the creation, growth, and expansion of TPM Tenants as they progress through the Innovation, Incubator, and Enterprise Centers of TPM. These investment actions and accomplishments by VENTECH and Technology Park Malaysia will begin to produce measurable increases in the technology product component of the Gross National Product within five years of the first investments and continuing for many years thereafter.

VENTECH Objectives

While there already exists a modest community of venture capital companies (VCCs) in Malaysia, including the Malaysian Technology Development Fund (MTDC), there are key reasons for the creation of the VENTECH Funds by TPM, as follows:

1. To establish a fund which invests solely in early-stage technology companies that are Tenants of TPM;

2. To increase the supply of seed and start-up capital to technology enterprises in an existing VCC environment where the VCCs typically make investments in a cross section of business categories and stages of growth;

3. To offset the predominance of investing by MTDC and private VCCs in later stage and mezzanine financings where listings of the venture companies (VCs) and returns on investment can be realized in two to three years;

4. To provide equity financings to technology enterprises as they evolve through the TPM stages of technology innovation (seed level), business incubation (start-up), enterprise development (market entry), and fast growth (market expansion);

5. To bring technology enterprises to the stage when other private VCCs will find the risk level reduced to a point at which they are comfortable in making an investment;

6. To serve as a leader in aligning two or more VCC investors to pool their funds for a participating investment of a larger amount in a fast growth technology company; and

7. To stimulate the growth of the VCC industry in Malaysia through the production of successful technology enterprises from TPM.

VENTECH and MTDC Differentiation

In particular, the VENTECH Funds differentiate from the MTDC in three significant ways:

1. VENTECH invests only in TPM Tenant Companies;

2. VENTECH invests only at the early-stages of company growth; and

3. VENTECH never takes a majority equity or majority board position in a company.

VENTECH's purpose is to prepare its investees for later stage investments by the private sector or for listing through the company's own earnings performance.

Additional points of differentiation, although admittedly of a fine line, between VENTECH and MTDC are demonstrated by the following excerpts from MTDC's mission, objectives, functions, and investment preference:

Mission: "that of ensuring wider application of technology in the industrial sector to ensure continuous growth and competitiveness; putting technology to work for growth"

Objectives: "to facilitate the commercial exploitation of R&D findings apart from research institutions and universities;" "to improve the level of technologies of Malaysian companies through the transfer of technologies;" " MTDC ensures that new research findings are given the best possible chance of success."

Functions: "markets promising research results of universities and research institutions to the private sector;" " provides capital to establish projects in joint venture with other companies to commercialize the research results;" "the provision of seed capital to bring ideas to the stage where they would be attractive to the private sector companies."

Investment Preference" MTDC and MTV One seek to make their investments in private companies when they are at the start-up stage, within 2-3 years of going public or are implementing the research results of universities or research institutions." "MTV One prefers firms with IPO potential; expansion financing: capital for expansion of the operations of a company."

In summary, there appears to be a preference by MTDC to finance technology transfer from existing publicly-funded research organizations to private companies that can commercially exploit that technology and have an IPO within 2 to 3 years. By contrast, TPM and VENTECH are supporting technology innovation originated by private entrepreneurs for private commercialization over an investment period of 5 to 7 years.

So there is a real distinction between MTDC and VENTECH!

Welcoming Speech by Y. B. Dato'Abu Bakar Bin Daud, Deputy Minister, MOSTE, at the Second Business and Technology Forum held on October 12, 1995:

"Today's workshop on The Role of Venture Capital in Developing Technology Businesses is another important action by MOSTE and TPM to facilitate the creation and implementation of new technology enterprises which can make major contributions to the economy of Malaysia. The government's programs in science, technology, and the environment are all important, but our investment in Technology Park Malaysia displays our confidence that technology is critical to our future. And like so many other smaller nations, we have to create our technology business infrastructure from the beginnings. We are determined to provide our aspiring men and women with the opportunity to master the elements of science and engineering in our schools and universities and then to have the opportunity to apply their knowledge and skills to the creation and innovation of new technology products and services for use in all categories of business, industry, education, and government.

"As we all already realize, technology touches the lives of all people everywhere in some form. It touches people in agriculture, chemicals, food and beverage, information, medicine, telecommunications, defense, aerospace, and many other fields--even the arts. We have seen technology enter our Malaysian society for those applications from our neighbors in Southeast Asia, from Japan, from Europe, and from the United States. And the use of those imported technologies have moved our country and our economy ahead--certainly more rapidly than if we had not done so.

"However, we believe that we can accelerate faster the technology component of our national economy by stimulating the technology entrepreneurial environment upon which it has to be based. That is why the government places so much faith in Technology Park Malaysia. We know that we have to provide the basic infrastructure of buildings, facilities, financing, services, and qualified staff both to stimulate the entrepreneurial mind and to provide those minds with the opportunity to be fully innovative. In one setting we are bringing together people with business and technology know-how to foster the creation, growth, expansion, and harvesting of successful technology enterprises.

"We are already beginning to see the results of our efforts. TPM can boast of the contributions to our economy that are being made by several TPM entrepreneurs. For example, Polytron Resources is selling energy efficient electronic ballasts to lighting manufacturers and installers; Orbit Industries has introduced the first "Made in Malaysia" audio amplifier for residential and commercial applications; and Taramedic Marketing has worldwide patent coverage on a low-cost surgical/suturing procedure. We applaud the technology entrepreneurs of these companies and all companies associated with TPM.

"Those of us associated with MOSTE and TPM recognize that there are at least four key resources required for our new technology entrepreneurial system to evolve and succeed:

--People
--Markets
--Innovations
--Money

"The People are our technology entrepreneurs; the Markets are our Malaysian businesses and industries and those of the entire world; the Innovations are new products and services conceived and commercialized by the entrepreneurs, and the Money is the public and private risk capital that is invested in these early-stage enterprises. Today we are here to talk and learn more about the capital requirements of technology entrepreneurs. We are pleased to have with us Dr. Richard T. Meyer from the United States. Dr. Meyer has coined the phrase "the entrepreneurial capital gap." He is going to tell us more about that capital gap today and how to close it.

"We acknowledge that there remains an "entrepreneurial capital gap" in our overall program to promote technology business enterprises. But we have plans to close the gap in Malaysia by providing money in 1996 to create The VENTECH Fund. Dr. Meyer is working with us under a UNDP grant to plan and implement the new fund. He helped the State of Georgia authorize the Georgia Seed Capital Fund over a four-year period from 1986 to 1990; but we have asked him to do the same for us in just four weeks!!!

"On behalf of the Malaysian government I extend a warm and sincere welcome to Dr. Meyer. To make his task easier, I have told him that Malaysians are entrepreneurial, we are technology-oriented, we are profit-motivated, and we are creators of value for ourselves, our country, and the world. I know that he understands and I wish all of you here today to understand that Technology Park Malaysia and the VENTECH Fund are important parts of our system to create, grow, expand, and harvest a wealth of technology-based enterprises to enhance our total economy."

Executive Summary

Mission

This Business Plan provides for the creation of The VENTECH Corporation and three VENTECH Funds under the auspices of the Technology Park Malaysia Corporation (TPMC).
The VENTECH Funds are being established to provide direct equity financing to early-stage technology enterprises that meet the investment criteria of Technology Park Malaysia for developing and enhancing the technology industry economy of the country of Malaysia. By filling "the entrepreneurial capital gap" faced by most high-risk, high-tech start-up enterprises, the VENTECH goal is to move selected young companies to their market entry stage in a shorter period of time and to prove them as viable candidates for later stage financing by the private sector.

The VENTECH Corporation will follow a well-defined investment strategy in order to create a flow of high quality investment opportunities, to enhance potential investment returns for The VENTECH Funds, and to strengthen the growth of early-stage technology enterprises. The VENTECH Funds will be unique in that they will be the only funds in Malaysia focused exclusively on Tenants of Technology Park Malaysia.

Management

The VENTECH Corporation will be a for-profit subsidiary corporation of Technology Park Malaysia Corporation, a government-chartered for-profit corporation. The VENTECH I Fund will be a wholly-owned subsidiary corporation of The VENTECH Corporation. VENTECH I will be independently managed and controlled by The VENTECH Corporation in an "arms length" configuration relative to TPMC. VENTECH II and III will also be set up as separate corporations, but may involve other investors with TPM; accordingly governance of these two funds would reflect the composition of the investor group.

The VENTECH Corporation, as the management entity of VENTECH I, will be under the direction of a seven-person Board of Directors, which also serves as the Investment Committee for VENTECH I, and a Chief Executive Officer, who also serves as Chairman of the Board. The Chief Executive Officer is a well known and respected individual for his/her noteworthy contributions to technology development and commercialization and to the venture financing of early-stage enterprises. The remaining professional staff will include a General Manager, Investment Analyst, Market Research Analyst, and Administrative Assistant/Executive Secretary.

Market Research and Analysis

An Entrepreneurial Capital Gap is known to exist in Malaysia as in other parts of the world. The depth of the gap corresponds to the working capital amount typically required by early-stage technology firms to manage and maintain minimal positive cash flow during their start-up and market entry stages. In Malaysia that amount is approximately RM500,000, according to TPM technology entrepreneurs. The width of the gap is the difference between the amount that entrepreneurs themselves are able to raise from friends, families, savings, and non-related private investors (typically RM25,000-RM100,000) and the amount that venture capital companies prefer and/or practice to invest in their portfolio companies at the time of their initial investments (typically RM500,000-RM1,000,000). As a consequence, the width of the capital gap is often RM500,000-RM1,000,000.

What often happens is that an entrepreneur uses his/her personal resources to "seed" the new technology enterprise, acquires small amounts of additional capital from friends and family for "start-up," obtains an additional sum from private investors to complete a "prototype," and then runs out of money. The entrepreneur finds himself/herself at a "canyon's edge," looking down at the canyon floor which represents the required amount of capital to start manufacturing and marketing and finding that the venture capitalists are on the other side of the canyon, unreachable because the young enterprise does not yet have the tools (criteria) for reaching the level demanded by those venture investors. Many worthy entrepreneurs with solid market opportunities get stopped at this stage and never do get funded because of the shortage of early-stage (seed, start-up, and market entry) capital. The demand for capital almost always exceeds the supply; and not every good deal gets funded, contrary to the claims of many venture capital fund managers.

In most venture capital markets the practice is to invest the most funds (as much as 85% to 90% of the funds under management) in later stage deals and only small amounts in seed, start-up, and market entry deals. In Malaysia, the practice today is to invest predominately at the mezzanine stage where the risks are smallest and the time to listing on an exchange is the shortest (2 to 3 years). This practice applies to MTDC, as acknowledged by its Chief Executive Officer.

For Malaysia, the apparent size of the capital gap for technology enterprises is overwhelming! It is estimated that the existing 100 TPM Tenant Companies may require RM200,000,000 for their early-stage operations. It is noted, however, that at the end of 1994 only RM426,000,000 was under management by 16 Malaysian VCCs and of that amount only 42% or RM179,000,000 remained un-invested for all categories and stages of industry investment. Clearly, the demand exceeds the supply and The Entrepreneurial Capital Gap is reality in Malaysia! It is this gap which the VENTECH Funds intend to fill with fair and trustworthy investments.

Marketing

Marketing of its services by a venture capital company is generally not a major activity, since the demand for capital most often finds the supply. However, VENTECH will convey to the market place what is its investment focus so that VENTECH management is not overwhelmed with inappropriate requests for funding. Therefore, the proactive marketing objective for VENTECH will be:

To identify TPM Tenants that Meet the VENTECH Qualification Criteria.

VENTECH will accomplish this objective and the related objective of increasing its capital resource base through the production of VENTECH literature, conduct of workshops, establishment of relationships with VENTECH investors, creation of a "window of opportunity" program for investors, and the identification of prospective new investors.

Business Operations

Management will conduct the business operations of VENTECH Corporation in a cost effective and productive manner, commensurate with the practices of private business enterprises engaged in for-profit investment ventures. The VENTECH Corporation and the VENTECH Funds will be managed independently of TPM's management in order to maintain complete objectivity and financial responsibility. VENTECH will be Small, Efficient and Effective!

Several stringent criteria will apply to the investment practices of the VENTECH Funds; these criteria are necessary to increase the probability that adequate financial returns on investment will be achieved and that follow-on investors can be secured.

1. Comprehensive Business Plan at Time of Application (a TPM/Applicant responsibility)
2. Experienced and Complete Management Team (fulltime, pledged, and/or identified if financing is received); Employment Agreements (non-compete, confidentiality)
3. Strong Niche Market Opportunity
4. Expected Revenue Growth to RM10 million to RM25 million in five years
5. Evidence of a Harvest Mechanism within Five to Seven Years: IPO, Merger, Acquisition, Buy-Back by Principals
6. Compounded Annual ROI of 50% or Better
7. Proprietary Technology Protected by Patents, Copyrights or Trade Secrets
8. Tenant of TPM

VENTECH will utilize two types of investment instruments (securities) in making investments in early-stage enterprises: convertible preferred stock and convertible debentures. The two forms will be used in approximately a 50/50 ratio to provide a matching of value to VENTECH and the venture company. VENTECH's ownership position will typically fall in the range of 10% to 25% with annual ROI goals of 20% to 50%, depending upon the stage and amount of the investment.

Innovative Services

The VENTECH Corporation will provide numerous services collectively with TPM in order to add-value to its investments on a continuing basis. These added-value services may be free or may carry specific charges. They are provided to enhance the value of the company and hence the value of the investment. The services may include any or all of the following:
1. Management Team Formation, Expansion and/or Replacement
2. Market Research Validation
3. Marketing and Sales Strategy Evaluation and Guidance
4. Financial Reviews and Analyses
5. Technology Referrals
6. Assistance in Identifying and Arranging Additional Stages of Venture Financing
7. Active Role in Achieving Exit from VENTECH Investment via Buy-Back, Merger, Acquisition, or IPO

Financial Plan

The financial plan for the first few years of operation by VENTECH will consist of the prudent investment of sums of money in qualified early-stage technology enterprises. Funds Under Management (FUM) by VENTECH are proposed to start at RM10,000,000 in Year 1, to increase to RM50,000,000 in Year 3, and increase further to RM100,000,000 in Year 5. The Year 3 and Year 5 additions may include both public and private monies. (An amount of RM1,500,000 may be set aside in Year 1 for a revolving loan fund to be called The PR1ME Fund; this fund would be used to meet small (RM150,000) and short-term (3 to 6 months max) working capital requirements of TPM Tenants for inventory acquisition or work in progress orders.) Capital funds and operating funds will be kept in separate accounts by VENTECH.

Several scenarios for VENTECH Funds of various sizes and investment schedules have been projected. Only the "Most Likely" Scenario is summarized here. It includes the Investment Schedule, Cash Flow Projection, and Profit and Loss Statement for RM100,000,000 of capital distributed over three VENTECH Funds of RM10,000,000, RM40,000,000, and RM50,000,000.

After ten years of investment and operation, The VENTECH Corporation will have made 153 investments approximating RM90,000,000 in 44 TPM venture companies; RM10,000,000 will have been lost due to failures of a number of those companies. However, realized capital gains (cash) from those investments will have reached RM49,000,000 by Year 10 from the VENTECH I and II Funds, with VENTECH III gains still to be realized; RM39,000,000 will have been distributed to the investors. In addition, approximately RM21,000,000 will have been earned from interest on the still-uninvested and deposited Funds Under Management.

By the end of Year 10, the VENTECH Corporation will have accrued net investment capital and net operating cash, after taxes, of RM21.7 million, with the bulk of that amount accruing from its 20% of the cash realized from returns on investments from VENTECH I and II. It is anticipated that most of this cash will be used to create an additional investment fund, although some of it will be awarded as bonuses to the Management Team.

Summary data from the Profit and Loss Statement, as follows, show that The Ventech Corporation will be profitably managed over ten years (RM 000):

Item Year 1 Year 3 Year 5 Year 10

INCOME

Interest + ROI Income 525 2429 5864 18556

Less Fees + Losses -100 -875 -2013 -2875

Operating Income 200 885 1725 1640

EXPENSES

Total Operating Expenses 411 660 964 1441

Income Taxes 178 901 1688 517

Total Income After Taxes 345 1374 3707 16787

CAPITAL GAINS DISTRIBUTIONS

To Investors 0 0 1154 14126

To VENTECH Corp. 0 0 2553 2660

Sources of Capital

The VENTECH Corporation seeks to establish three funds in the minimum amounts of RM10,000,000 in 1996, RM40,000,000 in 1998, and RM50,000,000 in 2000 for a total of RM100,000,000 under management. VENTECH I at RM10,000,000 is proposed to be totally funded by the Malaysian government via a pass-through of funds to TPMC. Both government and private funds will be sought for VENTECH II and VENTECH III.

Returns on Investment and Exit Strategies

The overall goal of The VENTECH Corporation will be to achieve harvesting of its individual investments within five to seven years after the initial investment--shorter for later stage investments (3-4 years) but longer for earliest stage investments (8-10 years). Means of harvesting will include buy-backs, mergers, acquisitions, IPOs, and buy-outs. While negotiated ROIs with the venture companies at the times of investment will range from 20% to 50%, the actual compounded annual ROI that will be sought in managing and harvesting the investments will be 15% or better.

Risk Factors

Participants in The VENTECH Corporation and the VENTECH Funds, both investors and investees, are herewith alerted that they will be exposed to considerable financial risks of several origins: Venture Capital Investments, VENTECH Management; VC Management; Technology Market Variability; National and World Economies; and Changes in Law and Regulation. Therefore, they should investigate The VENTECH Corporation and its Management Team thoroughly before making or receiving an investment.

Principal Recommendation of the Consultant

Throughout this Business Plan it has been presumed that The VENTECH Corporation had already been or would automatically be created upon the corporatization of TPM as TPMC. But in fact it must be recognized that the Board of Directors of TPMC and others must be convinced that there is significant purpose and value in establishing The VENTECH Corporation to manage the VENTECH Funds. In order to expedite the prospect and process of creating The VENTECH Corporation and the VENTECH Funds, it is recommended that an Organizing Committee be formed of parties immediately interested in the growth and success of the TPMC and the TPM Tenant Companies, including representatives of TPMC, MOSTE, EPU, MTDC, Treasury, and TPM Entrepreneurs (e.g. Mr. A.K. Low of Polytron Resources). The goal of this Organizing Committee would be to review this Business Plan and to formulate a proposal to the appropriate public and private entities to create The VENTECH Corporation.

I. The Mission and Investment Strategy

A. The Mission of VENTECH

The VENTECH Funds are being established by the Government of Malaysia to provide direct equity financing to early-stage* technology enterprises that meet the investment criteria of Technology Park Malaysia for developing and enhancing the technology industry economy of the country of Malaysia. By filling "the entrepreneurial capital gap" faced by most high-risk, high-tech start-up enterprises, the VENTECH goal is to move selected young companies to their market entry stage in a shorter period of time and to prove them as viable candidates for later stage financing by the private sector. In providing early-stage equity funding, VENTECH intends to facilitate the growth of its investees in a helpful and trusting collaborative relationship, leaving ultimate control with the entrepreneur; VENTECH will always take a minority ownership position (typically 20 to 30% in its first investment stage) in the investees, unless unusual and unforeseen circumstances dictate otherwise.

(*Note: Early-stage refers to the concept, prototype, and market-entry stages of a company and encompasses the seed, start-up, and market-entry stages of financing.)

In early 1996, the first VENTECH Fund (I) will be established with an initial government capitalization of RM10,000,000; its goal is to demonstrate and prove the worthiness of early-stage financing in amounts of RM250,000 to RM2,000,000 to TPM Tenant Companies. By 1998, VENTECH II will be established in an amount of RM40,000,000; it will be followed by VENTECH III in Year 2000 with a capitalization of RM50,000,000. Equity investments from VENTECH II and III will generally parallel the creation, growth, and expansion of TPM Tenants as they progress through the Innovation, Incubator, and Enterprise Centers of TPM. These investment actions and accomplishments by VENTECH and Technology Park Malaysia will begin to produce measurable increases in the technology product component of the Gross National Product within five years of the first investments and continuing for many years thereafter.

VENTECH Objectives

1. To establish a fund which invests solely in early-stage technology companies that are Tenants of TPM;

3. To offset the predominance of investing by MTDC and private VCCs in later stage and mezzanine financings where stock exchange listings of the venture companies (VCs) and returns on investment are sought within two to three years;

5. To bring technology enterprises to the stage when other private VCCs will find the risk level reduced to a point at which they are comfortable in making an investment;

6. To serve as a leader in aligning two or more VCC investors to pool their funds for a participating investment of a larger amount in a fast growth technology company; and

7. To stimulate the growth of the VCC industry in Malaysia through the production of successful technology enterprises from TPM.

VENTECH and MTDC Differentiation

In particular, the VENTECH Funds differentiate from the MTDC in three significant ways:

1. VENTECH invests only in TPM Tenant Companies;

2. VENTECH invests only at the early-stages of company growth; and

3. VENTECH never takes a majority equity or majority board position in a company.

VENTECH's purpose is to prepare its investees for later stage investments by the private sector or for listing on a stock exchange through the company's own earnings performance.

Mission: "that of ensuring wider application of technology in the industrial sector to ensure continuous growth and competitiveness; putting technology to work for growth"

Investment Preference: MTDC and MTV One seek to make their investment in private companies when they are at the start-up stage, within 2-3 years of going public or are implementing the research results of universities or research institutions." "MTV One prefers firms with IPO potential; expansion financing: capital for expansion of the operations of a company."

So there is a real distinction between MTDC and VENTECH!

B. VENTECH's Investment Strategy

The VENTECH Corporation will use the following investment strategy in order to create a flow of high quality investment opportunities, to enhance potential investment returns for The VENTECH Funds, and to strengthen the growth of early-stage technology enterprises. The VENTECH Funds will be unique in that they will be the only funds in Malaysia focused exclusively on Tenants of Technology Park Malaysia.

The VENTECH Corporation's principal investment focus will be on small, rapidly-growing technology enterprises that are engaged in the fields of advanced materials, automated manufacturing, biotechnology, microelectronics, information technology, and energy technology and are producing and selling innovative products and services based upon ongoing internal research and development projects. A diversified investment policy will be followed as to size, stage of growth, and technology focus of the portfolio companies. However, VENTECH will confine its activities to companies which are already Tenants or which may qualify to become Tenants of TPM in one of the Innovation, Incubator, or Enterprise Centers. By focusing on the rapidly-growing industries listed above and on TPM Tenants, VENTECH will be able to utilize fully the knowledge and networks of its Management Team and those of TPM in order to reduce the time and effort required to investigate and qualify prospective new investments and to facilitate the completion of negotiations and financings of the portfolio companies. The key elements of VENTECH's investment strategy are as follows:

1. Experienced VENTECH/TPM Management Teams

The CEOs and Professional Staffs of TPM and VENTECH combined represent considerable talent and experience in the management, market research, marketing, sales, manufacturing, R&D, and financing operations of early-stage technology enterprises. They possess hands-on experience in the workings of technology-based businesses as well as formal education and training in science, engineering, information, and business management. As described below, the VENTECH CEO has years of direct experience in the management and financing of technology programs and enterprises.

2. TPM Tenancy Concentration

To accomplish value-added investing, VENTECH will concentrate its activities on companies that are TPM Tenants, or that may qualify to become TPM Tenants, which are early-stage companies generally not yet established with fully developed products/services and markets. Typically these will be enterprises with low market valuations because of their pre-market or early-market status and as such are considered high-risk and long-term investments. In most cases these companies will be unable to qualify for bank debt financing or for financing by other Malaysian venture capital companies because of the lower-risk criteria and shorter-term investments stipulated by those entities. Investments by VENTECH in these early-stage quality enterprises will enable them to grow rapidly and to make valuable contributions to the Malaysian economy while at the same time creating fair and reasonable returns on investment to VENTECH.

Tenancy by an early-stage company in TPM does not provide any guarantee of financing by VENTECH at any time, but it does provide VENTECH with the opportunity to evaluate attractive TPM Tenants and to establish a deal flow for actual investments by VENTECH. Other VCCs and banks are not precluded from direct financings of TPM Tenants and are encouraged to do so to enhance the choices available to the TPM Tenants.

3. Early-Stage Technology Enterprise Focus

Technology is the one principal industry growth area not yet exploited by the country of Malaysia; but the government recognizes the critical importance of it to the nation's economy. That is why MOSTE has created, constructed, and staffed Technology Park Malaysia. TPM is a component of Malaysia's VISION 2020.

TPM exists to facilitate the formation, growth, expansion, and harvesting of new technology enterprises with innovative products and services in six principal technology industry segments, as enumerated above. These enterprises will be early-stage, comprised of companies at concept, start-up, prototype, market entry, market expansion, and pre-listing stages. VENTECH will invest in a distribution of these company stages in order to achieve a portfolio of risk levels, growth rates, and times to harvest that is weighted towards higher risks and longer harvest times, as illustrated in the following chart:

Concept

Total Start-up
Number
and RM Prototype
Invested
Market Entry

Market Expansion

Pre-Listing

____________________________________________________________
Stage of Investment

4. Technology Industry Segments

In order to utilize its Management Team's time most effectively and to make well-informed decisions, VENTECH will concentrate its early-stage investments on the technology segments which have been selected by TPM, primarily advanced materials, automated manufacturing, biotechnology, microelectronics, information technology, and energy technology. The numerous infrastructure components put in place by TPM to support the growth and development of enterprises in these technology segments and the technical management support services of TPM and VENTECH will greatly facilitate the working relationships with the companies through all stages of VENTECH's involvement--from evaluation to negotiation to investment to growth to expansion to harvesting.

The projected distributions of TPM Tenants by technology segment at the time that the new Taman/Park is opened in early 1995 and by the end of year 2000 are shown in the following charts/tables. These distributions will offer to VENTECH a sufficient prospective deal flow over the first five years of its operation.
Existing and Projected Distributions of TPM Tenants by Technology

(to be inserted by TPM)
5. Value-Added Investing

VENTECH's Management believes that investment results can be maximized only if VENTECH and TPM are more than just a source of funds. The ability to add value through ongoing assistance to portfolio companies has the dual effect of enhancing the flow of opportunities (since companies seeking financing and other venture capitalists prefer skilled, active investors) and increasing returns through tangible contributions to the technology businesses of portfolio companies. A Senior Member of the TPM/VENTECH Management Team typically will serve on the board of directors of each portfolio company in which VENTECH has a significant interest. This TPM/VENTECH principal will be an active participant in the portfolio company's strategic planning, operating control, personnel recruitment, and follow-on financing. Where appropriate, the resources of other members of the TPM/VENTECH Management Team or its Investment Committees will be sought out to solve problems of the portfolio company.

6. Investment Size and Ownership Position

Over the five-year period from 1996 to 2000, the total funds under management by VENTECH will grow from RM10,000,000 to RM50,000,000 to RM100,000,000, as it establishes VENTECH I, VENTECH II, and VENTECH III, respectively, with government and/or private funds. However, the thrust of most investments by VENTECH will be in the range of RM250,000 to RM2,000,000 per portfolio company, in aggregate for progression of the company through its growth stages. Typically RM2,000,000 will be reserved for total investment in each portfolio company, although in some cases smaller or larger amounts may be used/required to accomplish the objectives of both VENTECH and the portfolio company.

For a typical RM2,000,000 investment, VENTECH will seek an investment opportunity in which a 20% to 40% ownership position is fair and reasonable to both parties and achieves the return on investment objectives of VENTECH. The ROI objectives are 30% to 50% compounded annually over a typical five-year investment period. VENTECH will utilize a venture capital valuation method similar to that used in the United States, in which the key elements are projected (1) future profits after taxes, (2) price to earnings ratio, (3) required ROI, and (4) calculated present value. In the absence of a significant track record of actual revenues, cash flow, profits, and assets, this venture capital valuation method has proven itself over 25 years to be a useful formula for setting a company's valuation and the venture fund's ownership position.

7. Leveraging Opportunities

While VENTECH may be the initial investor in a TPM Tenant company, it does not seek to remain the sole investor. VENTECH intends to work with its portfolio companies and with other venture capital or corporate investors to secure the total equity funding requirements of the companies. At a minimum, VENTECH will attempt to arrange for a multiple of three times its investment amounts over the growth stages of the portfolio companies from non-VENTECH sources of financing.

8. Goals for Return on Investment to TPM and VENTECH

TPM and VENTECH have two parallel goals in supporting the formation, growth, expansion, and harvesting of early-stage technology enterprises. TPM's primary goal is to add technology enterprises, jobs, and products to the economy of Malaysia. VENTECH's primary goal is to produce reasonable financial returns on investment so that investors will continue to invest in VENTECH and other venture capital companies that service technology enterprises. For VENTECH to achieve its goal, it must ultimately yield ROIs that are competitive with other types of investment, particularly high-risk investments. The specific investment objective of VENTECH is to generate higher returns through the realization of long-term capital gains than are normally available through publicly-traded securities markets. The following chart illustrates the performance of selected asset classes over various years of record:

Asset Class Years of Record ROI (%)*

Hong Kong Stocks

U.S. Venture Capital 1940-1990 18.0

Japanese Stocks 1940-1990 15.7

U.S. Seed Capital 1990-1994 14.5

S&P 500 1940-1990 11.6

Singapore Comp.

Malaysian KLCL

U.S. Govt Bonds 1940-1990 4.5

Malaysian Govt Bonds

*Expressed as internal rate of return.

C. Initial Capitalization Size of VENTECH I

The original planning goal for the establishment of VENTECH I solely with government funds has been an initial capitalization of RM10,000,000; this amount has been generally accepted at government levels as being a relatively "safe" amount for first time investment activities by TPM and small enough that it can be easily accommodated in the 1996 MOSTE budget.

Yet all persons contacted by this project's consultant who are directly engaged in VCC investing in Malaysia and/or are professionals in the field of private sector financial management have stated that RM10,000,000 is too little and that RM30,000,000 is a more practical figure. Major expressed concerns are (1) that too few companies will be served by the lower number, (2) that the amount available to sustain each company through its growth stages will be too small and actually cause rather than solve cash flow shortages, and (3) later stage investments will be favored in order to achieve demonstrable success stories very early in the operation of VENTECH.

The consequences of starting a fund that is itself undercapitalized are almost the same as starting a new technology company that is undercapitalized: (1) that the money runs out before one can reach success in the market place; (2) that the absence of early success in the market place makes acquisition of additional funds very difficult if not impossible; and (3) that success takes much longer than anyone estimates --i.e. "the lemons ripen in two and a half years but the pearls take seven or eight."

MTDC already exists with a strong preference to invest at the mezzanine stage for shorter term, lower risk investments, including investments in TPM Tenants. VENTECH requires sufficient initial capitalization such that it can invest meaningfully in a number profile of TPM Tenants that truly tests the viability of investing in companies at all early stages of growth. At an average total investment per company over two to four growth stages of RM2,000,000, ten to twenty companies are required to evaluate whether early-stage investing works in Malaysia as it does in the developed countries; that translates to an initial capitalization for VENTECH of RM20,000,000 to RM40,000,000. This range is still far below the total demand for capital that will be created by 90 to 100 early-stage companies entering the new TPM facilities in 1996.

Prospective solutions to this initial shortage of capitalization for VENTECH I are:

i. TPM and MOSTE could reschedule the total prospective allocation of RM100 million for early-stage capital financing so that a larger fraction is made available in year one or two;

ii. TPM could shift some of its operational funds into the VENTECH capital fund;

iii. VENTECH could seek bank or private capital to augment its total funds under management; and/or

iv. VENTECH could create co-investing relationships with other VCCs/private investors.

II. The Management Team and Organization

The VENTECH I Fund is a wholly-owned subsidiary corporation of The VENTECH Corporation. The VENTECH Corporation is a for-profit subsidiary corporation of Technology Park Malaysia, a government-chartered for-profit corporation. VENTECH I will be independently managed and controlled by The VENTECH Corporation in an "arms length" configuration relative to TPM. VENTECH II and III will also be set up as separate corporations, but may involve other investors with TPM; accordingly governance of these two funds would reflect the composition of the investor group.

The VENTECH Corporation, as the management entity of VENTECH I, is under the direction of a seven-person Board of Directors, which also serves as the Investment Committee for VENTECH I, and a Chief Executive Officer, who also serves as Chairman of the Board. The Board is composed of seven persons, as follows:

1. CEO of VENTECH Corporation;
2. CEO/Managing Director of TPM or Senior Member of TPM Management Staff;
3. Three persons, one each representing a private sector business, industry, and professional service firm that have knowledge of technology but at least two of which do not sit on the TPM Board of Directors.
4. Two successful entrepreneurs that started and still manage their original business enterprises, at least one being a technology entrepreneur, and neither having a direct vested interest in TPM or any of its Tenants.

The Board Members of VENTECH Corporation, including the CEO of VENTECH, are selected by the Board of Directors of Technology Park Malaysia (which presumably also selects the CEO of TPM). With the exception of the two CEOs, who serve at the will of or under contract to the TPM Board, the five other VENTECH Board Members are initially selected by the TPM Board of Directors; they serve renewable five-year terms, which are initially staggered for terms of one, two, three, four, and five years, and they subsequently are selected by the VENTECH Corporation Board Members at the expiration of each Board Member's term.

The Board of Directors of The VENTECH Corporation also serves as the Investment Committee for VENTECH I, which makes all investment decisions for VENTECH I. VENTECH II and III will have their own separate Investment Committees with final authority on all investment decisions.

The Chief Executive Officer is a well known and respected individual for his/her noteworthy contributions to technology development and commercialization and to the venture financing of early-stage enterprises.
Management Team Qualifications

1. Chief Executive Officer and Chairman
Doctorate Degree in a Technology Field
15-20 years in Science and Engineering
Technology Development and Commercialization
Private Enterprise Management Experience (7-15 years)
Non-Government Person/Non-Bureaucrat
"Entrepreneurial" in Nature and in Practice
Experience in Raising Private Capital
Excellent Communication Skills

2. Chief Operating Officer
MBA or MS/MA Degree in Business Discipline
Investment/Finance Background (3-7 years)
Experience in Business Financial Analysis
Technology Familiarity and Exposure
TPM Management Experience

3. Investment Analyst
MBA or MS in Business Finance or Accounting
Specific Experience with Equity, Credit, and Risk Investment Analysis
Background from a Bank, Finance House, Corporation, VCC, Institutional Investor, or Government
Working Knowledge of Financial Statements and Proformas/Forecasts
Comprehensive Computer Capability (Spreadsheets)

4. Market Research Analyst
MBA or MS in Business Marketing and Analysis
Experience in Market Research of Technology Products and Services
Corporate/Private Sector Background
Broadly Knowledgeable of Library and Government Resource Documents/ Census Data
Practical Exposure to Supply/Demand Analysis Procedures

5. Administrative Assistant/Secretary to CEO & COO
BS/BA Degree in Business or Technology or Accounting
Accounting and Bookkeeping Experience
Computer Skills in Word Processing. Spreadsheets, and Databases
Library Research Experience
Good Communication Skills

6. Telephone/Office Receptionist--To Be Provided by TPM

III. Market Analysis and Research Services

A. Analysis of Venture Capital Supply and Demand in Malaysia

1. The Venture Capital Industry

a. Historical Background to Venture Capital

Traditionally over time the financing of new business enterprises, large and small, have been financed by the wealth of private individuals and by established governments. With the advent of the industrial revolution and more recently with the technology revolution, other formal and informal sources of financing have evolved. In the United States, the birth of the venture capital industry dates to 1946 when Ralph Flanders and others formed the American Research and Development Corporation in Boston; Mr. Flanders had been President of the Federal Reserve Bank of Boston and recognized the opportunity for a non-banking source of high-risk, high-return capital to support both manufacturing and technology enterprises.

The venture industry in the United States and the world remained small with only modest growth for the next thirty years. In the mid-1970's, two events occurred which caused the industry to begin rapid growth. First, the innovations of new computer technologies in California and in Massachusetts gave rise to new technology enterprises which demanded major sums of money (hundreds of thousands and millions of U.S. dollars) but produced superior returns on investment (30 to 70% compounded ROIs) in three to four years. Second, the U.S. Congress modified investment practices of privately-managed pension funds to allow "prudent" (meaning small and calculated) investments in high-risk, high-return ventures; this action opened up billions of U.S. dollars to the venture capital industry. The subsequent growth of venture capital under management is shown in the following chart, which in the peak year 1990 and US$36 billion represents the sum of approximately 650 venture firms.

Chart of Growth of U.S. Venture Funds Under Management

(extract from contents of Second Business and Technology Forum)
b. World Supply of Venture Capital

The following two charts show the status of the venture capital industry, as of 1991, for the major developed countries and for South East Asia in U.S. dollars. Europe led the developed countries with US$41.4 billion under management, followed by the United States with US$37 billion and the entirety of Asia with US$22.3 billion.

In South East Asia, Singapore and Taiwan had the most venture capital with US$930 million and US$412 million, respectively. In 1991, Malaysia had US$75 million (RM376,000,000) under management; that has since grown to RM426,000,000 (see Lampiran B-1 below) in 1994.
Lampiran A-2

Lampiran A-1

(to be inserted by TPM)
c. Venture Capital in Malaysia

As the Malaysian government has formulated and begun implementation of its VISION 2020, the availability of venture capital has shown a dramatic increase. The following chart shows the growth of capital designated as venture capital since 1984 (Lampiran B-1). Only RM11,000,000 was available for the years 1984 through 1987, with the entirety of that amount under the management of Malaysian Ventures Sdn Bhd (AMMBB). With the enactment of new legislation governing venture capital companies and venture companies beginning in 19xx, significant sums of money from banks were reallocated to venture capital investments. The biggest increase occurred between 1990 and 1991 when the industry grew from RM141,000,000 to RM 376,000,000. By the end of 1994, sixteen VCCs were operational in Malaysia with RM426,000,000 under management. The composition of these VCCs is listed in the following table.

Venture Capital Company Year Estab. Funds Under Management

1. Malaysian Ventures Sdn Bhd 1984 RM 11,000,000

2. Dynamic Technologies Sdn Bhd 1985 RM none

3. S.B. Ventures Capital Corp. Sdn Bhd 1989 RM 5,000,000

4. Mezzanine Capital (M) Sdn Bhd 1990 RM 30,000,000

5. BI Walden Ventures Sdn Bhd 1990 RM 10,000,000

6. Citicorp Capital Sdn Bhd 1990 RM 35,000,000

7. PNB NJI Holding Sdn Bhd 1991 RM 50,000,000

1994 RM 50,000,000

8. Malaysian Ventures 2 Sdn Bhd 1992 RM 15,000,000

9. BI Walden Ventures Kedua Sdn Bhd 1992 RM 30,000,000

10. PUNB 1992 RM100,000,000

11. MBF Equity Partners Sdn Bhd 1992 RM 10,000,000

12. MTDC Sdn Bhd 1992 RM 45,000,000

Malaysian Tech. Venture One (MTDC) 1993 RM 35,000,000

13. Maybank Ventures 1994 RM none*

14. BPMB - NIF 1994 RM none*

15. Bank Islam 1994 RM none*

16. Bank Bumiputra 1994 RM none*

Total Funds Under Management End of Year 1994 RM426,000,000

*These funds were formed in 1994, but no funds had been placed under management as of the end of 1994.

The distribution of investments by the Malaysian VCCs at the end of 1994 is shown in the following chart. Fifty-eight percent (58%) of the total funds available had been invested, with 42% remaining for additional investments by the VCCs. Of the total available funds 17.1% (29.5% of the invested funds) had been invested at the seed or start-up level, whereas 40.8% had been invested at mezzanine and later stages. Of the invested funds, 51.2% had been invested as mezzanine investments, which tends to illustrate the leanings of the existing VCCs in Malaysia.
Lampiran B-1

Lampiran B-2

(to be inserted by TPM)
2. The Entrepreneurial Capital Gap

The graphic depiction of The Entrepreneurial Capital Gap was created in 1992 by Dr. Richard T. Meyer, while researching the status of seed and start-up capital in the United States. It is illustrated in the following chart.

The Entrepreneurial Capital Gap is shown having two dimensions--depth and width. The depth of the gap corresponds to the working capital amount typically required by early-stage technology firms to manage and maintain minimal positive cash flow during their start-up and market entry stages. In the U.S. that amount is about US$500,000 and in Malaysia it is approximately RM500,000, according to technology entrepreneurs. The width of the gap is the difference between the amount that entrepreneurs themselves are able to raise from friends, families, savings, and non-related private investors (typically US$25,000-US$100,000 or RM25,000-RM100,000) and the amount that venture capital companies prefer and/or practice to invest in their portfolio companies at the time of their initial investments (typically US$500,000-US$1,000,000 or RM500,000-RM1,000,000). As a consequence, the width of the capital gap is often US$500,000-US$1,000,000 or RM500,000-RM1,000,000.

What often happens is that an entrepreneur uses his/her personal resources to "seed" the new technology enterprise, acquires small amounts of additional capital from friends and family for "start-up," obtains an additional sum from private investors to complete a "prototype," and then runs out of money. The entrepreneur finds himself/herself at the "canyon's edge," looking down at the canyon floor which represents the required amount of capital to start manufacturing and marketing and finding that the venture capitalists are on the other side of the canyon, unreachable because the young enterprise does not yet have the tools (criteria) for reaching the level demanded by those venture investors. Many worthy entrepreneurs with solid market opportunities get stopped at this stage and never do get funded because of the shortage of early-stage (seed, start-up, and market entry) capital. The demand for capital almost always exceeds the supply; and not every good deal gets funded, contrary to the claims of many venture capital fund managers.
The Entrepreneurial Capital Gap

(extract from Hazibah's Plan for VENTECH or from content of Second Business and Technology Forum)
In most venture capital markets the practice is to invest the most funds (as much as 85% to 90% of the funds under management) in later stage deals and only small amounts in seed, start-up, and market entry deals, as illustrated in the chart below. In Malaysia, the practice today is to invest predominately at the mezzanine stage where the risks are smallest and the time to listing on an exchange is the shortest (2 to 3 years); the investment profile in Malaysia appears as a "spike" on the chart of amount invested versus stage.

By contrast, funds that are focused on early-stage financings show their greatest amounts invested at the seed and start-up stages and decreasing amounts going to the later stage companies. The chart below demonstrates this investment practice by 36 U.S. early-stage from a survey conducted at the end of 1994. These same 36 funds reported ROIs for their early-stage investments averaging 14.5% compared to 11.6% for all their investments, which confirms the performance viability of early-stage investments.

It is the establishment of funds that concentrate on early-stage investments that are actually helping to close-up the width of The Entrepreneurial Capital Gap. These funds are stepping in where the private investors leave off and before the traditional venture capitalists take interest in a technology enterprise. But the total number of early-stage funds is so small (50 to 75 in the U.S. out of 650 venture firms and perhaps 2 or 3 VCCs in Malaysia out of 16) and the total funds under their management and/or allocated to early-stage deals (typically 5 to 10%) is so little that there still remains an enormous Entrepreneurial Capital Gap, both in the U.S. and in Malaysia.

For Malaysia, the apparent size of the capital gap for technology enterprises is overwhelming! As estimated below in subsection 4, the 100 TPM Tenant Companies alone in 1995 may require RM200,000,000 for their early-stage operations. We note, however, that at the end of 1994 only RM426,000,000 was under management by Malaysian VCCs and of that amount only 42% or RM179,000,000 remained un-invested for all categories and stages of industry investment. Clearly, the demand exceeds the supply and The Entrepreneurial Capital Gap is reality in Malaysia!
Patterns of Investment
Investment Pattern of 36 U.S. funds

(use Chart from page 12 of "The 1995 National Census...")
3. Alternative Sources of Venture Financing

Alternative sources of venture financings for technology entrepreneurs include family and friends, personal savings and credit cards, wealthy private individuals (business angels), banks, and strategic alliances with larger companies.

a. Family, Friends, Savings and Credit Cards

These sources are generally limited between RM10,000 and RM100,000 for most entrepreneurs, although amounts as high as RM500,000 may be available if the entrepreneur has been successful in some other business activity. Such sources must be used by every entrepreneur, however, because all other investors expect the entrepreneur to have some of his/her own money at risk. The risk level must be great enough that the entrepreneur will not readily walk away from the enterprise when the going gets rough!

b. Wealthy Private Individuals

These are high net worth persons who typically have become wealthy through inheritance, the success of their businesses, or as corporate executives of major companies. They will often have a portfolio of their own private investments from low-risk government securities to high-risk early-stage enterprises. They are extremely difficult to identify because of the privacy that they maintain, but they can be an important and critical source of seed and start-up financings in amounts of RM25,000 to RM100,000. In order to reach the typical cash flow minimum of RM500,000, the entrepreneur has to identify and attract several of these individuals into his/her one enterprise, which is a highly difficult and challenging task. In most cases, these individuals only invest in businesses which they are strongly familiar so that they can assess the viability of the enterprise from their own working experience. In the regime of technology investments, there are probably very few such qualified private investors in Malaysia.

c. Banks as Lenders (not as VCCs)

Banks all over the world are conservative in their lending practices. They typically do not invest in start-up companies because of the absence of a track record--meaning assets, profits, and positive cash flow. In some cases of government allocations to banks for designated loans to small companies, the lending criteria may be relaxed somewhat. The difficulties with bank debt financing are (1) that the bank will rarely provide all the financing that an enterprise requires for cash flow and (2) that an installment pay-back schedule for principal and interest is immediately put in place; this requirement generally places hard burdens on an early-stage company that needs all the cash it can get for 5 to 7 years. Bank debt financing is not "patient" money! On the other hand, bank debt financing is less costly with interest rates of 7 to 10%. So clearly there is a position for bank financing with technology entrepreneurs.
d. Corporate Investors/Strategic Alliances

Many large corporations, both domestic and foreign, often are in search for new technologies to use in their operations or to add to their product lines. They have found that early-stage enterprises are often more innovative, more adaptive, faster to respond, and lower cost than their own internal R&D and product development organizations. These corporations will frequently enter into strategic alliances with small companies to achieve mutually desirable goals. Components of such alliances may include management support, manufacturing services, marketing and sales assistance, and financing for R&D or product development. A recent study in the United states revealed that the average financing element was US$2 million.

4. Demand by TPM Tenant Companies

When TPM takes occupancy of its new facilities early in 1996, it expects to have approximately 100 Tenant Companies in its Innovation, Incubator, and Enterprise Centers. By the end of year 2000 when additional buildings have been constructed, TPM anticipates 300 Tenant Companies. While not all of these companies will likely need or qualify for VENTECH funding, we can use these numbers as a basis for estimating total demand within the TPM program for capital financing.

Over a nominal five-year period from entry into TPM,a typical early-stage technology enterprise will likely require RM2,000,000 of venture capital financing for R&D completion, prototype development, manufacturing, marketing, and general operations. Therefore, in the year 1996, the 100 TPM Tenants collectively will exert a demand for RM200,000,000; and by the year 2000, the demand may be RM600,000,000, more or less depending upon prior financings and stages of growth achieved. If we assume that only 50% of those TPM Tenants will meet the investment criteria of VENTECH, then the demand directly to the VENTECH Funds is between RM100,000,000 and RM300,000,000.

C. Market Research Services to Support VENTECH Investments

Market research is an essential activity in entrepreneurial endeavors, both for the early-stage company and for the venture capital firm. The early-stage company must prove in its business plan that a sizable market exists for its products or services; and the venture capital fund must confirm by due diligence that the market exists and that it can be penetrated by the company in which it is investing. As a provider of early-stage financing, VENTECH needs to serve both itself and its prospective investees with market research capability. Following is a list of market research components which VENTECH will acquire over the course of its first two to three years.

1. Technology Supply/Demand Characteristics and Statistics
a. Malaysia and Southeast Asia; Worldwide
b. Database on Technology Competitors
c. Market Opportunities--Qualitative and Quantitative
d. Liaison with Other VCCs
e. Liaison with Banks, MTDC, Business Research Analysts

2. Analysis and Validation of Markets of VENTECH Applicants
a. Review of Applicant's Data and Analyses
b. Independent In-House Assessments
c. Contracted Assessments
d. Patent and Copyright Searches
e. Validation of Intellectual Property
f. Written Assessment on Each Applicant's Market Research with
Confirmation, Modification, or Rejection

3. Analysis of Marketing and Sales Strategies
a. Database on Strategies Appropriate to Each Technology Segment
b. Cost Effectiveness of Various Strategies
c. Liaison with Marketing, Advertising, and Product Promotional Firms
d. Validation of Costs and Time Durations of Marketing Tools
e. Validation of Selling Commissions, Fees, Discounts, Salaries, etc.

IV. Marketing of VENTECH
Marketing of its services by a venture capital company is generally not a major activity, since the demand for capital most often finds the supply. However, VENTECH needs to convey to the market place what is its investment focus so that VENTECH management is not overwhelmed with inappropriate requests for funding. Therefore, the proactive marketing objective for VENTECH will be:

To identify TPM Tenants that Meet the VENTECH Qualification Criteria.

In order to achieve its objective and to make the general technology community of Malaysia aware of its mission and objective, VENTECH will carry out the following activities:

1. Production of VENTECH Literature
a. General Information on Mission and Objectives of VENTECH (as distinguished from TPM)
b. Equity Capital Investment Application Forms
c. Business Plan Outlines and Premier Examples
d. Sources of Technology Financing
e. Primer Document on Equity Financing
f. Quarterly and Annual Reports

2. Conduct of Workshops (in collaboration with TPM)
a. How to Assemble a Qualified Management Team
b. How to Perform Comprehensive Market Research
c. How to Prepare Financial Plans and Descriptions of Capital Requirements
d. The Process and Practice of Equity Venture Financing

3. Relationships with VENTECH Investors
a. Handling Applicant Referrals from Investors
b. Using Investors as Resources and Advisors
c. Monthly Progress Reports

4. "Window of Opportunity" Program for Investors
a. VENTECH Investors
b. Independent Private or Corporate Investors
c. Strategic Alliances
d. Friends of TPM

5. Identification of Prospective New Investors into VENTECH I or Later VENTECH Funds
a. Telling the VENTECH Story
b. VENTECH and TPM Success Stories
c. ROI Opportunities
d. Domestic and Foreign Investor Prospects

V. Business Operations

A. Organizational Structure

1. Legal Structure and Board of Directors

The VENTECH Corporation is a for-profit subsidiary corporation of Technology Park Malaysia. It is directed by a seven-person Board of Directors of the composition described above in Section II. The majority of its Board Members have no direct association with TPM. The Chairman of the Board is the CEO of The VENTECH Corporation. An Organizational Chart is provided herein.

The VENTECH Corporation will establish separate corporations and/or joint ventures for each of the VENTECH Funds. VENTECH I is the first fund of The VENTECH Corporation and is funded totally by funds passed through from the Malaysian government to MOSTE to TPM to VENTECH. The Board of Directors of The VENTECH Corporation serves as the Board of Directors and Investment Committee of VENTECH I.

Subsequent VENTECH Funds (e.g. VENTECH II and III) may include both public (government) and private monies, so separate corporations and/or joint ventures will be required. Each fund will have its own independent Board of Directors and Investment Committee.

3. Functional Elements

The functional elements of The Ventech Corporation are contained within the composition of its Management Team, as indicated in Section II above and as described below:

a. Chief Executive Officer: Serves as Chairman of the Board of The VENTECH Corporation and as CEO of the Management Team; has overall authority and responsibility for the conduct of the business affairs and investment practices of The VENTECH Corporation and the VENTECH Funds; responsible for taking investment opportunities to the Boards of the VENTECH Funds for action, for making the investments approved by the Boards, for managing those investments, and for securing positive returns on investments within reasonable investment periods.
Organizational Chart

(to be created and inserted by TPM commensurate with local preference or use chart from Hazibah's plan for VENTECH)
b. Chief Operating Officer: Reports directly to the CEO and carries out duties and responsibilities as directed and/or delegated by the CEO; responsible for managing the investment screening and due diligence processes for the VENTECH Funds; coordinates the work of the remaining staff of The VENTECH Corporation in market research, investment analysis, and business administration; participates as a staff person in all investment reviews by the Boards and Investment Committees.

c. Investment Analyst: Reports to the COO; performs investment analyses on all investment prospects beyond the screening stage to determine the viability of a probable investment by VENTECH; recommends financial terms for probable investment contracts that will yield the desired returns on investment; maintains and monitors financial records on all venture companies in which VENTECH has made investments and prepares regular reports for the Boards; recommends timely actions on terminating, maintaining, enhancing, or harvesting investments.

d. Market Research Analyst: Reports to the COO; establishes and maintains the databases and networks of information on technology industries, markets, and competition within the six technology areas upon which TPM and VENTECH are focused; evaluates the market analyses provided by the prospective venture companies once initial screening has been completed and then independently conducts or contracts for the due diligence level of market analysis; recommends the investment opportunity as viewed as a market opportunity; maintains awareness of the markets for the venture companies in which VENTECH has invested and alerts both the venture company and VENTECH to significant changes in the markets.

e. Administrative Assistant/ Secretary to CEO & COO: Reports to CEO; manages general administration of the VENTECH offices; maintains investment files for venture companies in which VENTECH has invested; assists CEO and COO in the conduct of their business with TPM, the Boards, the investors, and the venture companies; maintains the accounting system for The VENTECH Corporation.

B. The Investment Process

The practice of receiving, evaluating, and determining the investment opportunities for the VENTECH Funds is a multi-step process which involves the entire Management Team and the Investment Committee/Board of Directors. Whereas a typical venture capital firm may only invest in one or two venture companies out of every 100 applications that it receives, it is expected that the percentage of investments by VENTECH will be higher; the reason being that VENTECH only invests in TPM Tenant Companies, which have already undergone a level of screening for their admission to TPM. However, admission to TPM does not guarantee any Tenant Company with an investment by VENTECH. Since VENTECH investment funds are limited, VENTECH must conduct its own independent investment process, consisting of the following steps:

1. Applicant Access Channels
2. Application Criteria
3. Application Documentation
4. Screening of Applications
5. Business Plan Presentation by Screened Applicants
6. Due Diligence on Selected Applicants
7. Meeting with Finalist Applicants
8. Negotiations of Terms and Conditions
9. Investment Committee/Board Actions
10. Preparation and Signing of Investment Contracts
11. Filing or Registration of the Contracts
12. Allocation of Funds to Venture Companies per Contract Terms

C. Application/Investment Criteria

In addition to being a Tenant Company of TPM, other criteria apply to the investment practices of the VENTECH Funds; these criteria are necessary to increase the probability that adequate financial returns on investment will be achieved and that follow-on investors can be secured.

D. Investment Instruments To Be Used by VENTECH

VENTECH will utilize two types of investment instruments (securities) in making investments in early-stage enterprises: convertible preferred stock and convertible debentures. The two forms will be used in approximately a 50/50 ratio to provide a matching of value to VENTECH and the venture company; by doing so, 50% of VENTECH's investment will be in convertible preferred stock which represents long term "patient money" for the venture company, and 50% will be in convertible debt which protects VENTECH from a total loss on its investment.

The convertible preferred stock is a type of stock used frequently by venture capital investors. The stock's preferred status gives VENTECH a preference in the event of a company harvesting and can designate that the venture company pay dividends to VENTECH. This instrument also entitles VENTECH to convert its shares into common stock at a predetermined formula and to vote the preferred stock on shareholder issues. The conversion formula prescribes adjustment mechanisms that protect VENTECH against unfair dilution by sales of cheaper stock to later investors. This instrument also permits VENTECH to require the venture company to redeem the preferred stock after a predetermined time for an amount that provides VENTECH with a modest profit.

As an additional instrument, VENTECH will use equity-linked debt (a convertible debenture), in the form of Convertible Redeemable Unsecured Loan Stocks (CULS), as a second means of investing. This form of investing provides VENTECH with the opportunity to convert its investment to common shares in the company if the company is performing well or very well; alternatively VENTECH can request the portfolio company to redeem the loan stocks at a prescribed rate and schedule if VENTECH chooses to remove itself as an investor. This latter case may apply if VENTECH chooses to make way for another follow-on investor or if the company is not doing well in meeting its revenue and profit goals.

E. Terms and Conditions of Equity Investment Contract

The following items will be components of the Investment Contract between VENTECH and the portfolio company, with most items being requirements prescribed to the portfolio company.

1. Negotiated Boilerplate of Necessary Provisions in Malaysia
2. Minimum of One Position on VC Board of Directors for Boards of 5 or fewer
Directors; two Board Positions if 5 to 7 Directors, with maximum of 7 Directors
(the 1 or 2 VENTECH Directors are exclusive of TPM Directors)
3. Frequency of Board Meetings
a. First year of investment: monthly minimum
b. Second year: minimum of every two months
c. Third and subsequent years: quarterly minimum
4. Management Team Salaries
a. Minimum amount necessary for prudent living, not to exceed guidelines set in Investment Agreement and
b. To be approved by VC Board of Directors.
5. Professional Support Team in Place
a. Accounting Firm
b. Law Firm for General Legal Services
c. Patent Lawyer
d. Banking Institution

6. Financial Statements To Be Provided (Hard Paper Copy and Computer Disc)
a. Monthly by 5th of Following Month
b. Quarterly within 15 days after end of Quarter
c. Annually within 30 days of end of year
d. Income Tax Report Filings by First Filing Date
7. Written Progress Reports on Same Schedule as Financial Statements
8. Agreement with TPM and/or VENTECH for Management Consulting Services

F. Guidelines for ROI and Equity Ownership Percentage

Each investment contract between VENTECH and a portfolio company will be individually negotiated with respect to the specific financing terms of the equity (and debt if applicable) amount. However, the following guidelines will be used to establish reasonable and consistent treatment of returns on investment and equity ownership percentages.

Stage of Investment Annual ROI Equity Amount (max) Incremental Ownership

Innovation Center 50% RM100,000 10%

Incubator Center 40% RM500,000 25%

Enterprise Center 30% RM1,500,000 15%

Technology Lots 20% RM2,500,000 10%

For example, an investment of RM100,000 at the "innovation center" stage assumes a company valuation (not paid-up capital) of RM1,000,000 for a 10% ownership position; or a RM1,500,000 investment at the "enterprise center" stage corresponds to an agreed-upon valuation of RM10,000,000, even if the paid-up capital is only RM1,000,000.

G. Criteria for Follow-On Investments After the First by VENTECH

One way that VENTECH has to ensure that its portfolio companies make every effort to perform as planned and agreed is to place conditions within the investment contract that must be met if any follow-on investment is to be provided; this is one of the advantages of making staged investments with early-stage, high-risk enterprises. The following criteria will be used be used by VENTECH both for sustaining its Convertible Preferred Stock and CULS with a venture company and for determining a subsequent investment.

1. Updated Revisions of the Company's Business Plan
2. Achievement of Revenue Targets of Prior Stage to +/- 25%
3. Adherence to Criteria Set in Prior Stage
a. Board Meetings
b. Financial Statements
c. Progress Reports
d. Other Commitments to TPM/VENTECH Agreements
4. Achievement of Product Development Targets
5. Timely Notification of Significant Changes in:
a. R&D or Product Development or Manufacturing
b. Market Opportunity and Competition
c. Management
d. Vendor or Customer Actions

H. Additional Investments to be Postponed until Targets and/or Conditions are Fulfilled

If VENTECH is not satisfied with the management or financial performance of a company, it can withhold additional investments until certain conditions have been met or it can terminate its investment by activating the redemption provision of the CULS agreement.

VI. Innovative Services

The following services will be provided collectively with TPM in order to add-value to its investments on a continuing basis. These added-value services may be free or may carry specific charges. They are provided to enhance the value of the company and hence the value of the investment.

A. Management Team Formation, Expansion, and/or Replacement

Venture capital investors around the world have found that the management teams for their invested companies are the key to the success of the companies, so they place considerable emphasis on "Management, Management, Management." VENTECH will work with its companies at the beginning of the investment period to ensure that complete and qualified team is in place to conduct the management, manufacturing, marketing, financial, and operational affairs of the company. As the company expands, VENTECH will be available to find and recruit additional key personnel to the team. And if the company needs to consider a change in the management team in order to get it back on track towards its milestones, then VENTECH will exercise its position at the Board level to replace key persons as deemed necessary.

B. Market Research Validation

VENTECH will maintain its own databases on the markets for the six major technologies to be supported by TPM and will establish networks of related market information sources. This information will be used to validate, alter, or contradict the market research presented by a candidate company in its business plan. VENTECH must assure itself that the claims for the existence of specific markets of significant sizes are correct and that the company's technology can penetrate the market, be competitive, and gain market share commensurate will projected revenue growth over 5 to 10 years.

Since VENTECH will be making a number of investments over time in related technological fields, it will gain a more comprehensive knowledge of the market parameters than the portfolio company will likely have in its earliest stages. So VENTECH can be a valuable resource to the company on actual market factors and competitors as the company nears market entry and then later expands its markets with new products..

C. Marketing and Sales Strategy Evaluation and Guidance

The strategies, tactics, and tools of marketing technology products and services vary greatly with the technology, the product, the market, and the pricing. VENTECH and TPM personnel will apply their experience to aid the portfolio company in making the proper allocation of people and money resources to the marketing and sales activity. Marketing budgets and sales projections will be checked and modified as necessary to match the reality of supply and demand.

D. Financial Reviews and Analyses

VENTECH will draw upon local, national, regional, and international tabulations of financial factors by industry category to analyze and modify the on-going five-year financial projections required from the portfolio companies. Specific attention will be addressed to a company's cash flow position at all times and to the growth of revenues, gross margins, operating expenses, and profits. During the entrepreneurial growth period of a technology enterprise, "happiness for both the entrepreneur and VENTECH is positive cash flow."

E. Technology Referrals

The offices of TPM, NCSRD, and MOSTE will be drawn upon by VENTECH to identify technology personnel, developments, and facilities that may augment a portfolio company in its quest for prototype completion and demonstration. Likewise, technical referrals among the TPM Tenant Companies will be conducted whenever a mutually beneficial result holds potential.

F. Assistance in Identifying and Arranging Additional Stages of Venture Financing

Since VENTECH is principally and primarily an early-stage investor and since its total funds under management will be insufficient to finance the portfolio companies through all stages of growth, VENTECH will be very active in working with the companies to identify and arrange additional stages of financing. VENTECH will use its contacts within MTDC, private VCCs, and corporate Malaysia to secure later stage financings that promote the rapid growth of the company and are fair and reasonable to the entrepreneurs.

G. Active Role in Achieving Exit from VENTECH Investment via Buy-Back, Merger, Acquisition, or IPO.

Ultimately and within 5 to 7 years in most cases, VENTECH will need to exit its investments in a given portfolio company and return the capital gains to its investors. Generally a partial or complete financial exit or harvest does not occur until a company is merged, purchased, or goes public with an IPO. VENTECH's role as the original investor will be to work with the later stage investors and the company to promote a harvest of at least its investment at a priority level.
VII. Financial Plan

A. Capital Funds Under Management

Capital Funds Under Management are those funds received from TPM (and other investors in VENTECH) specifically for investment in qualified early-stage Tenant Companies. Until venture company investments are actually made, these funds will be deposited in low-risk, interest-bearing accounts; these deposits will, therefore, generate additions to the FUM. The FUM will be diminished each year by a small percentage as an allocation to the management operating account of The VENTECH Corporation.

Investments into venture companies will be staged-investments, generally beginning with the "innovation center" stage and progressing through the "incubator center," "enterprise center," and "technology lot" stages of the venture company that continues to meet its growth targets. For each first-time investment in a venture company, VENTECH will allocate and reserve a total of approximately RM2,000,000 to cover the multiple stages of investment over the growth period of each company.

As a early-stage investor, VENTECH does expect to incur actual fund losses due to the poor performance and/or failure of some of the venture companies in which it invests. Typically, failure can be ascertained within two years of an investment; so an assumed percentage of funds invested will be programmed to be totally lost in the VENTECH financial plan.

Returns on investment will vary greatly over the investment portfolio, but actual returns will not be realized until five to seven years after the first-time investments in the venture companies. The actual returns will not occur until the VENTECH investments are "harvested" through one of several mechanisms: IPO, acquisition, merger, buy-back, or buy-out by a larger and later stage investor. For purposes of the VENTECH financial plan, a modest and realistic average ROI will be assumed for all investments.

When investments are harvested by VENTECH, 80% of the proceeds will be distributed to the investors in proportion to their investments and 20% will be retained by The VENTECH Corporation for its continued investment program and operations. Some portion of the 20% will be appropriated by the Board of Directors to reward the VENTECH Management Team for their individuals performances in managing the investments of the VENTECH Funds.

B. Operating Income and Expenses

A major portion of the operating expenses of The VENTECH Corporation for its first five to ten years of operation will be funded by TPM from its corporatisation grants from the Malaysian government. In addition, The VENTECH Corporation will derive operating income from an annual "management fee" consisting of a small percentage of the funds under management in the VENTECH Funds. This expense to the Funds will be offset by interest income earned on deposited funds under management that have not yet been invested in companies; income will also be realized from investment processing charges to the venture companies and from management, marketing, and technical assistance service charges to the venture companies.

Major expenses of The VENTECH Corporation include salaries & emoluments for the professional management team and costs of general administration. The management will be under tremendous responsibility to evaluate, institute, and monitor the early-stage investments. Early-stage investments are known to be the most time-consuming and costly to manage, which is why many venture capital companies make very few if any such investments; so it is both necessary and desirable that the VENTECH Management Team be highly qualified and well paid. Regular and substantial annual salary increases augmented by bonuses from the 20%-portion of the investment proceeds are fully appropriate.

Operating expenses will also include some contract and/or consultant expenditures to others for services in performing market research, due diligence, technical assistance, and management assistance for the venture companies, both before and after the investments are made.

C. Cash Flow Projections and Investment Schedules

This VENTECH Business Plan includes several alternative investment schedules and their associated cash flow projections. The alternatives encompass both different total funds under management for one to three separate VENTECH Funds and different time-profiles of investment among the growth stages of the venture companies. The VENTECH Management Team can choose whichever alternative best matches the TPM and VENTECH circumstances at the time The VENTECH Corporation is put into operation; or a modification or a hybrid of the investment schedules and cash flow projections can be implemented.

The investment schedules are based upon progressive and successive investments in TPM Tenant Companies up to an average maximum of approximately RM2,000,000 per company. Except for the VENTECH I Fund of RM10,000,000, investments in a venture company typically start at the "innovation center" stage; with VENTECH I, the first-time investments are distributed over venture companies at all stages in order to service the demand likely from the TPM Tenants and to secure investments that will likely mature at successive later times.

Standard assumptions used for calculating the cash flow projections are listed on the page designated "Financial Assumptions." Specific assumptions which differentiate the several cash flow projections are either indicated therein and/or are listed on the individual cash flow projections.

D. Profit and Loss Statement

Only one multi-year profit and loss statement is included at this time in this plan; it is the P&L for the "most likely" cash flow projection. It includes the estimated corporate income taxes and assumes, only for purposes of this plan, that the income and expenses of all VENTECH Funds are consolidated under The VENTECH Corporation.

E. Financial Assumptions for Cash Flow Projections

Following is a listing of the item descriptions and major assumptions made for the purpose of generating the Cash Flow Projections for the VENTECH Funds; some specific assumptions are identified on the individual Cash Flow Projections.

CAPITAL FUNDS UNDER MANAGEMENT: the capital funds investment account, including additions and reductions from investments, investment losses, interest earned, management fees charges, returns on investment; the capital gains portion of the cash flow.

1. Gross Funds Under Management: the aggregate sum of funds originally under management, starting at RM10,000,000 and increasing to RM100,000,000; but not reduced by losses or costs.

2. Ventech , II, or III (BOY): the amount of money remaining to be invested from a given VENTECH Fund at the beginning of a Year; Amount Invested: the amount invested in a given Year from a specific VENTECH Fund.

3. Interest Earned on Deposited Capital: uninvested capital is maintained in bank/money accounts which accrue interest; interest rate assumed to be 6 percent.

4. Investment Losses: some percentage of the investments will be lost due to venture company failures or very poor performances; losses are taken once per investment in the second year after the year of investment at the rate of X% on the amount invested; in most cases, a rate of 15% has been assumed, although a rate as high as 20% might be experienced in the early years in which VENTECH is still learning the investment game and a rate as low as 10% might apply in later years..

5. Investment Returns-Ventech: an average compounded annual rate of return of 15% (in most cases) has been assumed for all investments, with cash realizations beginning in the fourth (Ventech I only) or fifth year after the investments.

6. Management Fees for Operation: percentage fee on the Gross Funds Under Management charged to offset operating costs; for most small venture funds, the customary fee rate is 3%; however, only 1% is charged here because of the operating cash being made available by TPM to VENTECH. As Ventech matures and increases its FUMs and if TPM decreases its cash subsidy to Ventech, then this percentage fee will need to be increased from 1% towards 3%.

7. Net Change in Capital for Year: the change in amount of capital available in a given year.

8. Cumulative Capital Available(EOY): the remaining capital available at the End of Year for investments in the next year, prior to any distributions to Investors.

9. Capital Distributions to Investors: Capital gains are distributed to the Investors in the year realized at some percentage, assumed to be 80% here; the total capital gains are the sum of the Investment Returns from the Ventech Funds in a given year. The remaining 20% is reserved to The VENTECH Corporation for management.

10. Net Net Capital Available: the remaining capital at the End of Year after distributions to Investors.

CASH AVAILABLE: the cash available in the cash operating at the beginning of an operating year.

1. Beginning Cash: the operating cash available at the beginning of each year, the amount carried forward from the preceding year.

2. Operating Cash from TPM: the amount of cash provided by TPM to The Ventech Corporation for operating expenses each year.

CASH RECEIPTS: the cash received from operations in a given year.

1. Management Fees (Y % of FUM): the percentage charge against Gross Funds Under Management each year for operating cash.

2. VC Processing Fees (Z %): the percentage charged directly to the Venture Company for the costs of processing its investment application, assumed in most cases to be 2% of the capital investment provided by VENTECH; this fee may be applied against the principal amount of the investment.

3. Fees for Services to VCs: Estimated cash receipts from professional staff of The VENTECH Corporation providing various management, market research, marketing and sales, and general business administrative services to its portfolio Venture Companies; assumed to be 0.5% per year of the FUMs.

4. Other Receipts: provision for other sources of cash receipts.

CASH OPERATING EXPENSES: the cash expenses of operating The VENTECH Corporation.

Appropriations: The assumed set of fixed operating expenses each year of The VENTECH Corporation.

1. Salaries and Emoluments: The salaries, insurance, retirement costs, and other benefits for initially five professional staff persons, as outlined under the Management Team; these costs are increased at rates of 8%, 15%, or 25% per year depending upon the increase of the FUMs; in cases where the FUMs reach maturity and begin to diminish, the salaries are diminished to provide for a decrease in number of staff persons. Total emoluments are calculated at 18% of salaries.

2. Studies and Training: Cash allowances for on-going costs of workshops, seminars, conferences, and short course for the professional staff; assumed to be 4% of Salaries and Emoluments.

3. Foreign Travel: Costs of travel to out of Malaysia conferences and site tours for the professional staff; assumed to 4% of Salaries and Emoluments.

4. General Administration: All other costs of operating The VENTECH Corporation, including support personnel, office supplies, legal and accounting services, local travel, etc.; assumed to 40% or 50% of Salaries and Emoluments.

VC Client Financing Costs: The variable costs of performing certain tasks related to evaluating, making, and monitoring investments in the VCs, each type of task assumed to cost 0.25% of the amount invested in a given year.

1. Market Research Analyses: The tasks of independently evaluating the industry, market, and competition of the VCs.

2. General Due Diligence: The task of checking and validating all elements of the VC business plans to achieve assurance of meeting the investment criteria of The VENTECH Corporation.

3. Technical Assistance: The task of engaging technical experts to assist the VCs with achievement of their product/service development goals.

4. Management Assistance: The task of recruiting and hiring qualified management personnel to assist the growth and expansion of the VCs.

5. Other Expenses: Allowances for other costs of assisting the VCs.

INCOME TAXES: Government income taxes paid on the net taxable capital gains and net taxable operating income of The VENTECH Corporation; current tax law exempts VCCs from paying taxes on capital gains for three years after the invested VCs have been listed on the KLSE (most of VENTECH's VCs will not have qualified for the KLSE during the terms of its investments); only "permitted expenses" are deducted. The amount of income tax is derived from the associated Profit and Loss Statement and is paid in the year following the year of assessment.

CAPITAL EXPENDITURES: the capital outlays for equipment, etc.

1. Office Equipment: Outlays for office equipment required by VENTECH above and beyond that available from TPM.

2. Computer Systems: Outlays for computer systems required by VENTECH above and beyond that available from TPM.

3. Vehicles: Outlays for vehicles required by VENTECH above and beyond that available from TPM.

CASH RECEIPTS LESS CASH EXPENDITURES: the net of actual cash operating receipts over cash operating expenses and capital expenditures for each year of operation.

ENDING OPERATING CASH: The net of CASH AVAILABLE and CASH RECEIPTS LESS CASH EXPENDITURES for each year, carried forward to the Beginning Cash for the next year.

ENDING CAPITAL AND CASH: The sum of Net Net Capital and Ending Operating Cash at the end of each year.

F. The "Most Likely" Scenario

Several scenarios for VENTECH Funds of various sizes and investment schedules have been projected. Only the "Most Likely" Scenario is presented in the main body of this Business Plan. It includes the Investment Schedule, Cash Flow Projection, and Profit and Loss Statement for RM100,000,000 of capital distributed over three VENTECH Funds of RM10,000,000, RM40,000,000, and RM50,000,000. The additional scenarios are presented in Appendix B.

After ten years of investment and operation, The VENTECH Corporation will have made 153 investments approximating RM90,000,000 in 44 TPM venture companies; RM10,000,000 will have been lost due to failures of a number of those companies. However, realized capital gains (cash) from those investments will have reached RM49,000,000 by Year 10 from the VENTECH I and II Funds, with VENTECH III gains still to be realized; RM39,000,000 will have been distributed to the investors. In addition, approximately RM21,000,000 will have been earned from interest on the still-uninvested and deposited Funds Under Management.

Summary data from the Profit and Loss Statement, as follows, show that The Ventech Corporation will be profitably managed over ten years (RM 000):

This VENTECH Business Plan has assumed the establishment of three VENTECH Funds; their sources of capital are itemized below. Both public and private funds are proposed to make up the funds under management for the second and third funds in order to achieve the known benefits of combined public/private investments and involvement in the evolution of new technology enterprises for a country.

A. VENTECH I Fund (1996)

1. Wholly owned subsidiary corp of The VENTECH Corporation
2. Initial capitalization of RM10,000,000 provided by VENTECH/TPM/MOSTE

B. VENTECH II Fund (1998)

1. Subsidiary corporation of The VENTECH Corporation, as majority investor.
2. Initial capitalization maximum of RM40,000,000 provided by VENTECH/TPM/MOSTE at a minimum of RM20,000,000 and/or institutional and corporate investors in minimum amounts of RM5,000,000 per investor.

C. VENTECH III Fund (2000)

1. Joint Venture corporation of The Ventech Corporation with Private or Public Investors
2. Initial capitalization of RM50,000,000 minimum provided by VENTECH/TPM/
MOSTE at a minimum of RM25,000,000.
3. Additional capitalization of RM25,000,000 maximum provided by other investors in minimum amounts of RM5,000,000.

IX. Returns on Investment and Exit Strategies

A. Returns on Investment from VCs

The following ROIs (annual compounded rates) will be established as target rates with the TPM Tenants in which the VENTECH Funds invest, as a function of the stage of the investment:

B. Net Returns on Investments to VENTECH Corporation and Investors

The Net ROI will be net of any net operating expenses of The VENTECH Corporation and the VENTECH Funds, of capital losses sustained by the individual VENTECH Funds from failed investments, and of a twenty percent (20%) "carried interest"/capital gains allocation to The VENTECH Corporation for its management performance, for on-going operating expenses after the TPM subsidy is terminated or exhausted, and for future investment opportunities.

C. Exit Strategies from VC Investments

Five principal exit or harvest strategies will be exploited by The VENTECH Corporation on behalf of the VCs in order to realize cash liquidity for all the investors:

1. Initial Public Offerings
a. KLSE
b. Singapore Stock Exchange
c. Other Foreign Exchanges

2. Acquisition by a Larger Technology Corporation
a. Cash
b. Exchange of Stock
c. Issuance of New Stock

3. Merger with Complimentary Corporation
a. Cash
b. Exchange of Stock

4. Management Buy-Back
a. Cash from Profits
b. Private Investors

5. Investment Buy-Out by a Later-Stage Venture Fund
a. Cash for Shares

X. Risk Factors

Participants in The VENTECH Corporation and the VENTECH Funds, both investors and investees, are exposed to considerable financial risks of several origins: Venture Capital Investments, VENTECH Management; VC Management; Technology Market Variability; National and World Economies; and Changes in Law and Regulation.

A. Risks of Venture Capital Investments

While venture capital investments offer the opportunity for significant capital gains, such investments involve a high degree of business and financial risk that can result in substantial losses. Among these are the risks associated with investment in companies in an early stage of development or with little or no operating history, companies experiencing discontinuities, companies operating at a loss or with substantial variations in operating results from period to period, and companies with the need for substantial additional capital to support expansion or to achieve or maintain a competitive position. Such companies may face intense competition from companies with greater financial resources, more extensive development, manufacturing, marketing, and service capabilities, and a larger number of qualified managerial and technical personnel. The VENTECH Corporation anticipates that may take significant positions in companies in rapidly changing high technology fields and that such companies may face special risks of product obsolescence.

B. No Assurance of Profit, Cash Distributions or Appreciation

There is no assurance that the investments of VENTECH will be profitable or that any distribution will be made to Investors. Any return on investment to the Investors will depend upon successful investments made by VENTECH. There is no assurance that such investments in start-up and young companies will be successful. The marketability and value of any such investments will depend upon many factors beyond the control of the VENTECH Management Team or its Boards of Directors. The expenses of The VENTECH Corporation may exceed its income.

C. Reliance on Management

All decisions with respect to the management of The VENTECH Corporation and the VENTECH Funds will be made exclusively by the respective Boards of Directors and the Chief Executive Officer. Other Investors will be able to participate in the management and investment policies only through their actions and voting rights at meetings of the stockholders in the corporations. The Investor-Stockholders will not receive detailed financial information issued by the portfolio venture companies which will be available to the Boards of Directors. Accordingly no part should invest in the VENTECH Funds unless such party is willing to entrust all aspects of the management of The VENTECH Corporation and the VENTECH Funds to the Boards of Directors and Chief Executive Officer.

D. Risks Associated with VENTECH Management

The Boards of Directors and the Chief Executive Officer have limited experience in evaluating, making, monitoring, and harvesting venture capital investments in early-stage enterprises. For many of them, the investments of VENTECH will be their first real experience in such investments. As a consequence, there is little or no track record upon which to judge in advance the quality and success potential of the VENTECH investments.

E. Risks Associated With Management of VCs

The management teams of the portfolio Venture Companies will often lack persons with strong or measurable business management experience, since many of these persons will be technology trained and experienced. Therefore, they may be exposing themselves for the first time to the management of entrepreneurial companies which depend upon fast growth for success in competitive markets. They are likely to make improper or incorrect judgements and decisions which could seriously damage the growth potential of their venture companies. Members of the management team may also get into conflicts among themselves which might lead to disruptions in the progress of a company. Poor management is well known to be the most prevalent cause of failure by early-stage companies.

F. Risks Associated with Variability of Markets for Technology Products

The supply and demand of technology products and services varies frequently and greatly in today's marketplace. The average turnover time for significant changes in commercial offerings of technology products and services currently is three years or less, whereas the average time for an early-stage investment to reach a harvest stage is five to seven years. So there is a significant probability that the venture company may have to adjust its technology product or service within its growth stages to accommodate changes in the market. There also is no assurance that a competitor may not surface and gain significant market share ahead of the venture company, leaving the venture company without its presumed window of opportunity.

G. Risks Associated with Changes in the Economies of Malaysia and the World

Changes in national and world economies are generally beyond the control of VENTECH and its Venture Companies, but they certainly can strongly influence the success and failure of early-stage companies. Such influences will be greater for early-stage companies because of their short history in business and the shallowness of their cash flow and profit positions. Currently Malaysia is experiencing annual increases in its gross domestic product that would be considered favorable to new ventures; but major decreases in that rate could seriously impact a new venture. Likewise, unfavorable changes in the economies of Southeast Asia or the World might damage the growth rate of early-stage ventures of the type in which VENTECH expects to make investments.

H. Risks Associated with Changes in Laws and Regulations by the Malaysian Government

Generally speaking, the record of most countries has been to enact legislation favorable to the creation and investment practices of venture capital companies. This has been true in Malaysia as well, starting with the income tax recognition of VCCs in 19xx and followed by enhancements in 1992. Provisions of tax law that typically affect VCCs include capital gains, allowable operating expenses, loss carry-forward, and corporate tax rates. At any given time and state of the national economy, however, legislators may choose to change the tax laws and these changes may impact VCCs either positively or negatively. Likewise, changes in tax laws may impact the investment practices of private, corporate, and institutional investors and the financial performances of portfolio venture companies. So there is no long term certainty on tax treatment by a government.

I. Long-Term Investment

An investment in VENTECH is a long-term commitment and there is no assurance of any distribution to the Investors prior to any liquidation of The Ventech Corporation.

XI. Recommendations of the Consultant to TPM and VENTECH

This section of this VENTECH Business Plan reflects the specific viewpoints and recommendations of the UNDP Consultant, Dr. Richard T. Meyer of Orion Technical Associates, Inc. These recommendations are based upon ten years of experience with early-stage entrepreneurs and venture capitalists and upon information gained from interviews and meetings with a cross-section of people in Malaysia during a three-week project. These viewpoints may not coincide with the content of the business plan or with the current positions of key persons involved with establishing or funding VENTECH. However, they are intended to be constructive in nature and deserving of further consideration by TPM, MOSTE, and the Malaysian government.

A. Initial Legal Structure for VENTECH

The preferred legal structure for a venture capital fund is a "limited liability partnership," but such legal structure does not yet exist in Malaysia. The advantages of a limited liability partnership are that limited partners have their financial liability limited to the amount they have invested, and the general partners have full liability but complete management control over investments and operations; limited liability partnerships also have defined lifetimes of typically ten years, so the general partners are driven to make and harvest the investments within that time period. Finally, the capital gains are taxed only once--to the partners when the gains are realized and/or distributed.

A "corporation" (private limited company) is the next best legal structure for a venture capital company because it provides for management by a separate Board of Directors and for investment by shareholders; the shareholders may or may not have voting rights depending on the type of stock they have acquired. Corporations can also own or have percentage ownerships in subsidiary or other corporations, which allows for TPM to hold ownership positions in a subsidiary, The VENTECH Corporation, and for The VENTECH Corporation and/or TPM to hold ownership positions in one or more VENTECH Funds that are established as separate corporations.

A form of operation for a venture fund that is NOT recommended is a "division" or "department" of a government agency or a private corporation. The major difficulty that has been experienced by many who have tried this structure is that political agendas and/or private personal or corporate goals interfere with the prudent management of investments. The venture capital entity should be shielded from such influences and base its decisions solely on its investment criteria and due diligence practices.

In the case of the initial VENTECH Fund, it is recommended that no investments be considered or made until The VENTECH Corporation has been established as a subsidiary corporation to TPMC, with its own Board of Directors and Chief Executive Officer.

B. Fund Size for the First VENTECH Fund

A RM10,000,000 fund size is an acceptable initial capital amount for an early-stage fund, but only if that fund is assured in advance of receiving an additional RM20 million to RM30 million to provide for the necessary follow-on investments into the same venture companies. A typical early-stage technology enterprise will require RM250,000 to RM500,000 for its first venture investment and will need at least RM2,000,000 total in early-stage investments to secure a positive cash flow and profit position with its products or services in the market place. A RM10,000,000 fund will only be able to provide prudent investments in five companies on average. This number of investments is too small and will take too long to test the value of TPM's providing a venture fund to its Tenant Companies. Furthermore, with 100 Tenant Companies occupying the new TPM facilities in early 1996, five investments will not come close to satisfying the demand, whether the five investments are made over one, two, or three years.

Approximately 12 to 15 persons knowledgeable of venture capital funds and investments were interviewed in Kuala Lumpur. All except one stated unequivocally that a fund size of RM10,000,000 was too small and that the most appropriate initial size was RM30,000,000. This finding agrees with a recent survey by the Consultant of 36 experienced early-stage fund managers in the United States, which revealed that the best initial capitalization for such a fund was USD32,000,000. (It is assumed that there is an approximate numerical equivalency of RM and USD for matters of technology company capital requirements.)

While RM10,000,000 may be the only amount available to initiate a VENTECH Fund, the management of TPM and the proposed VENTECH Corporation should strive from the very beginning to secure commitments for an additional RM20,000,000 from the public or private sectors. And in making the first rounds of investments in venture companies, VENTECH should keep in reserve at least one if not two RM for every first RM it invests in a venture company.

C. Composition of Board of Directors

The Boards of Directors of The VENTECH Corporation and the VENTECH Funds obviously need to include adequate representation of the major investors in the funds, but equally important is to

Item	Year 1	Year 3	Year 5	Year 10
INCOME
Interest + ROI Income	525	2429	5864	18556
Less Fees + Losses	-100	-875	-2013	-2875
Operating Income	200	885	1725	1640
EXPENSES
Total Operating Expenses	411	660	964	1441
Income Taxes	178	901	1688	517
Total Income After Taxes	345	1374	3707	16787
CAPITAL GAINS DISTRIBUTIONS
To Investors	0	0	1154	14126
To VENTECH Corp.	0	0	2553	2660

Asset Class	Years of Record	ROI (%)*

Hong Kong Stocks
U.S. Venture Capital	1940-1990	18.0
Japanese Stocks	1940-1990	15.7
U.S. Seed Capital	1990-1994	14.5
S&P 500	1940-1990	11.6
Singapore Comp.
Malaysian KLCL
U.S. Govt Bonds	1940-1990	4.5
Malaysian Govt Bonds

Venture Capital Company	Year Estab.	Funds Under Management
1. Malaysian Ventures Sdn Bhd	1984	RM 11,000,000
2. Dynamic Technologies Sdn Bhd	1985	RM none
3. S.B. Ventures Capital Corp. Sdn Bhd	1989	RM 5,000,000
4. Mezzanine Capital (M) Sdn Bhd	1990	RM 30,000,000
5. BI Walden Ventures Sdn Bhd	1990	RM 10,000,000
6. Citicorp Capital Sdn Bhd	1990	RM 35,000,000
7. PNB NJI Holding Sdn Bhd	1991	RM 50,000,000
	1994	RM 50,000,000
8. Malaysian Ventures 2 Sdn Bhd	1992	RM 15,000,000
9. BI Walden Ventures Kedua Sdn Bhd	1992	RM 30,000,000
10. PUNB	1992	RM100,000,000
11. MBF Equity Partners Sdn Bhd	1992	RM 10,000,000
12. MTDC Sdn Bhd	1992	RM 45,000,000
Malaysian Tech. Venture One (MTDC)	1993	RM 35,000,000
13. Maybank Ventures	1994	RM none*
14. BPMB - NIF	1994	RM none*
15. Bank Islam	1994	RM none*
16. Bank Bumiputra	1994	RM none*
Total Funds Under Management End of Year 1994		RM426,000,000

Stage of Investment	Annual ROI	Equity Amount (max)	Incremental Ownership
Innovation Center	50%	RM100,000	10%
Incubator Center	40%	RM500,000	25%
Enterprise Center	30%	RM1,500,000	15%
Technology Lots	20%	RM2,500,000	10%