[JUNYU NEEDS YOUR

ADVICE]
Executive Summary
For the commercialisation of the new innovation from Junyu and its market related impacts,

this report analyses the function of the banks and the Venture capitalists to ascertain which of

the two investment opportunities should be sought after for this project. The next part

analyses the two countries Australia and United states among which only one is going to be

selected as the launching market. Therefore, careful analysis of the index values regarding the

various parameters from “The Global Competitiveness Report 2018” has been undertaken.

The index values have been computated to numerical values so as to be able to calculate a

cumulative performance indexes for the two countries. Based on that analysis, United States

was selected to be the best choice of country among the two for this initiative.
Table of Contents

Executive Summary...................................................................................................................2

1. Introduction............................................................................................................................4

2. Analytical Development.........................................................................................................5

3. Conclusion............................................................................................................................11

4. Appendix..............................................................................................................................12
1. Introduction
To assume a binary status for determining whether a new development is a innovation or not

is a rather simplistic method of determination. Generally, a more precise system for

determining the effect of the innovation is used. This entails an incremental analysis of the

development in two axis. Firstly, the impact of the development in the market sense has to be

considered and secondly, the impact of the development in the technological sense. The

below figure would provide a better understanding of the process of determining where to

place an innovation in the scale.

Figure 1

As can be seen in the above figure if the development is strictly an innovation in the market

sector that is not a development in the technology sector then it is termed as an Architechtural

innovation. If however, the developments do not bring any new innovation to either the

market or technology then the development is known as Incremental innovation. Innovation

in the technological space in an already existing market is termed as disruptive innovation.

And finally, developments in technology in a totally new market place are known as a

Radical Innovation.

For the purposes of this case, we need to ascertain in which space the new innovation from

Junyu falls on. The pharmaceutical market is an already established market place and also the

industry of vigour inducing drugs is not a new one. So we can clearly state that the innovation

is not market related. However, the technological development is significant when compared

to the alternatives that are already in the market place. Based on those two factors we can

specifically put the innovation in the category of Disruptive Innovation.

The point that needs to be considered, as with all drugs, is the ethical considerations of the

drug in the market place. From the fact that it is not the first of its kind, and vitality and vigor

inducing drugs already exist in the market place, we can understand that the drug is definitely

not outside the scope of morality. However, pending clinical trials, the implications of this

drug could be huge for a certain sub section of the population. The drug enables reduction in

sleep time. However, reduction in sleep time is not necessarily directly proportional to the

creative output that a person can give. Mental fatigue from work would still be as big of a

factor as before. Therefore it could not be termed as a destructive drug on its own, rather as a

performance enhancer for those who need the excess time.

2. Analytical Development
Task 1

To develop the task, I would use research papers from the Harvard Business review to

explain the reason behind the existence of Venture capital market and Venture capitalists.

Today in the market of abundant start – ups, there often is a shortage of hard assets for most

of them at the beginning. Therefore, the risk involved in investing in those start-ups goes

higher. However, this also negates the ability of the banks to finance the operation as they are
legislatively bound to a certain interest rate. Therefore, in the absence of hard assets if the

risk factor goes sufficiently high, then the banks cannot finance the operation as the interest

rate for the investment cannot be maintained at the corresponding high rates because of Usury

laws that are in place. This is where Venture capitalists come in. The idea behind the venture

capital market is to invest in innovations that can be readily commercialised. The capital

invested in this form is rarely long term investments; rather, investment is done in boosting

the infrastructure of the commercial aspects of the innovation so that they can be sold to

corporations at substantially inflated valuations to gain liquidity for the investments that have

been made.

To understand where exactly venture capital investments are generally made, let us take the

US example. According to studies, venture capital funding corresponds to a very minute

portion in the funding of new innovation. In 1997, in the United States, a total of US $ 10

billion had been invested by venture capitalists, however, from that only 6 % of the funding

(or US $ 600 million) was invested in start ups. This shows the stark difference between the

perception that Venture Capitalists have and the actual investments that they do. Most of the

amount of that US $ 10 billion went into follow – up funding for already established

programmes that already had initial capital investments in the form of government funding or

corporate funding. The investments made venture capitalists is generally not in good ideas or

great innovations, but rather in current excelling markets. Over the years, the vested interests

of the Venture capital firms have shifted along with the growth in various segments of the

market. In the 1980s, the venture capital market invested heavily in the energy industry. That

shifted in the 1990s to genetic engineering, computer hardware, software and

telecommunications segments of the market because of the tremendous growth opportunity in

those markets. In more recent times, the investments have shifted again to the “Internet

space” which accounts for almost 25 % of the total venture capital investments. The venture
capital investments are generally made in sectors that are expected to have significant growth

numbers (over 20 – 25 %). To understand the specificity of this growth parameter, we need to

understand that less than 10 % of market segments are expected to grow even 15% annually.

The next step would be to understand how the venture capital funding takes place and how it

is different from other kinds of investments. As discussed earlier, banks cannot claim as high

interests on their investments as would be necessitated by the risks involved in investing in

new innovation. However, venture capitalists exist by inflating the valuation of the company

that they have invested in my growing its infrastructure, marketing, sales and hard assets and

then selling those to established corporations that might be interested in them. The rate of

return in the long run that venture capital investors look for is relatively higher than normal at

about 35 % to 40 5 annually. Most of the funding for the venture capital funds comes from

large institutions like pension funds, financial firms university endowments and insurance

companies. These institutions invest a small part of their capital in high risk and high return

venture capitalists that offer them a return rate of about 25 % to 30 % in the long run.

Task 4

Now in performing the task for the specific case of Junyu, based on the requirements we need

to analyse the venture capital markets in both the United States and also Australia. The

parameters that need to be studied are as follows:

1. Intellectual property rights protection

2. Financing of SMEs

3. Number of days to start a business

4. Venture capital availability

5. Companies embracing disrupting Ideas

6. Soundness of the Banks

For data regarding these parameters we will use the data from “The Global Competitiveness

Report 2018” that was published in the World Economic Forum. The compilation of the data

has been mentioned in the Appendix section. Here we evaluate the data by computing the

numerical value for the index of performance for each country i.e. United States and

Australia. The values in “The Global Competitiveness Report 2018” have been listed below.

Sl. Index of Performance Australia (Index United States

no points) (Index Points)

1 Intellectual property rights protection 5.8 (out of 7) 5.9(out of 7)
2 Financing SMEs 4.7(out of 7) 5.8(out of 7)
3 Number of days to start a business 2.5 (days) 5.6(days)
4 Venture Capital Availability 3.6(out of 7) 5.6(out of 7)
5 Companies embracing disruptive ideas 4.1(out of 7) 5.7(out of 7)
6 Soundness of banks 6.4(out of 7) 5.8(out of 7)
Table 1.

In order to develop the task, we must first understand the concept of numerical scoring. It is

done so as to be able to universally asses various parameters on different grading scale. In

this case we have taken a uniform maximum value of 100 out of which the numerical scores

have been depicted.

Now, the values in the “The Global Competitiveness Report 2018” have been shown out of 7

in all cases except for that of “Number of days to start a business” which has been depicted in

days. For the other parameters, the formula that was used was,

I
S= ∗100
7

Where, I depicts the index value of the parameter. 7 is the highest numerical value in the

indexing scale. Therefore, for Intellectual property rights protection in Australia, the I value
would be 5.8. Putting that into the equation would give us the value 82.86 which is the

numerical score for that parameter.

For the Number of days to start a business the ranks of the countries out of the 140 listed

countries were considered because the highest or lowest scores in days were inconsequential.

The rank for Australia was 5th and that for the US was 30th. Therefore, the numerical score for

Australia would be,

140−5
S= ∗100
140

Which comes to 96.42.

The corresponding numerical values for these parameters have been adjusted and computed

as scores out of 100 for all parameters except the “Number of days to start a business” which

is a quantitative figure. For that parameter, the ranks of the countries on the list of 140

countries have been adjusted for to represent a score out of 100. The adjusted values have

been listed below.

Sl. Index of Performance Australia (S) United States

No. (S)
1 Intellectual property rights protection 82.86 84.28
2 Financing SMEs 67.14 82.85
3 Number of days to start a business 96.42 78.57
4 Venture Capital Availability 51.42 80.00
5 Companies embracing disruptive ideas 58.57 81.42
 6 Soundness of banks 91.42 82.86
Table 2

Based on the weights that have been allotted to each of these six parameters (described in the

table 3 below) the following scores for the two countries have been generated.

Index of Performance Denotations Weight (%)

Intellectual property rights S1 30

protection
Financing SMEs S2 25
Number of days to start a business S3 25
Venture Capital Availability S4 10
Companies embracing disruptive S5 5

ideas
Soundness of banks S6 5
Table 3

Cumulative numerical score for United States based on these weights is 81.853.

Cumulative numerical score for Australia based on these weights is 78.389.

This cumulative analysis helps us in determining which country is more prudent in

supporting a new start up and comparatively, according to these figures, United States is the

clear choice if only one country is chosen to be operated within.

3. Conclusion
Therefore having analysed the innovation that needs to be commercialised and also the start

up environments of the two countries (US and Australia) we can safely understand that if

only one country is chosen for establishment of the enterprise, then it should be done in the

United states, because of its better performance in two key segments of interest namely, the

protection of intellectual rights and the financing of SMEs.

Task 5

In pursuit of task 5 the table depicting the index values from the Global Competitiveness

Report 2018 have been listed below.

Sl. Index of Performance Australia (Index United States

no points) (Index Points)

1 Intellectual property rights protection 5.8 (out of 7) 5.9(out of 7)
2 Financing SMEs 4.7(out of 7) 5.8(out of 7)
3 Number of days to start a business 2.5 (days) 5.6(days)
4 Venture Capital Availability 3.6(out of 7) 5.6(out of 7)
5 Companies embracing disruptive ideas 4.1(out of 7) 5.7(out of 7)
6 Soundness of banks 6.4(out of 7) 5.8(out of 7)
Table 4

4. Appendix
Task 2

In order to develop the task I will discuss the loaning and investing practices of the banks. In

most cases banks are bound by Usury laws which prohibit them from charging interests

higher than a fixed rate. In the case of Junyu the investment required would be for a start up

with no hard assets. This, in terms of the banks, represents a high risk factor and, therefore,

would require higher interest rates for investments. This is legally not possible for the banks

to do, and hence, no, the banks would not be able to provide the capital investments for

Junyu. Junyu will have to rely upon venture capitalists to get her financing, because most

other sources of investments other than corporate are legally restricted from charging higher

interest rates, which would be necessary for the risk value of this project.

Task 3

To calculate the cumulative index of performance, we use the following formula,

 Sn an
P=∑
100

Where P refers to the cumulative performance index of the countries, Sn refers to the

numerical scores of individual parameters and an refers to the weights for that specific

parameter. N refers to serial number for the parameters and its values range from 1 to 6, as

there are six parameters.