Investment+models+issues+and+questions

Investment models: Issues and questions
Frequent issues raised when discussing investment capital in developing countries and emerging markets include:


 * 1) Developing countries need to set the right balance between investing in (i) technology commercialization and investing in (ii) technology absorption, together with investment in building the capacity to support technology translation and development.
 * 2) Developing countries should understand that capital for investment does not exist in isolation. It is critically important to have an “ecosystem” including, but not limited to, such features as: provision of advisory services, a supportive IP regime, access to markets, an effective governance structure, exits for investments and the rule of law.
 * 3) Many developing countries use the term “venture capital” for the concept of an investment vehicle, frequently wholly or partly publicly funded, designed to support technology-based or “innovative” businesses. In most cases the intended model is not a traditional venture capital fund as found in developed nations, and use of the term “venture capital” may cause confusion.
 * 4) Furthermore, traditional venture capital is not appropriate for most developing countries which lack, or have an underdeveloped, infrastructure necessary for venture funding such as a strong flow of investable opportunities, stock markets and a large business sector for public listing or trade sales, and an entrepreneurial culture where risk and failure is acceptable.
 * 5) Several factors have caused a recent interest in alternative financing mechanisms for developing countries, including difficulties in scaling-down the traditional venture capital limited partnership structure, and increasing developing country government interest in using public funds to invest in new businesses and new product generation.

In this discussion technology commercialization refers to the development and commercialization of indigenous technologies for local use and transfer to other developing and developed countries – for example from universities and public research institutes or small and medium sized businesses - and/or development and commercialization of new products or services from imported and adapted technologies. Technology absorption refers to the absorption and adaptation of new to the country and/or new to the firm technology and know-how developed outside the country and imported and adapted for local use – for example for upgrading a firm’s capabilities.

Investment in both technology commercialization and technology absorption can be effective methods for creating new firms or growing existing ones leading to economic development and job creation. In this report we shall use the generic term “investment capital” (also known as “risk capital”) to describe these kinds of investments.

We will not discuss why technology companies need investment but, we will assume there is a demonstrable need for government intervention in the investment marketplace. We will attempt to provide some practical ideas for ways in which developing/middle-income countries can establish investment vehicles suitable for their own ecosystems.

Not all companies will need investment. Some will be able to “bootstrap” – that is manage to generate early sales of products so that paying customers can provide the development funds needed.

It is important to emphasize that the whole question of investment capital can only be considered in the context of an individual country’s total support ecosystem (policies, culture, business climate, availability of skills, or even religion - e.g. investments may have to be Sharia compliant in some Islamic countries). A country should
 * Assess the legal framework and national innovation capacity for technology absorption and adaptation and commercialization and recommend policy changes to facilitate this spin-in/spin out process.
 * Build the institutions to facilitate this spin-in/spin-out process.
 * Train local staff to handle these highly technical, specialized tasks.

Thus, the main challenges for a developing country or region is to:
 * Create a sufficient deal flow of quality opportunities for investment.
 * Develop an ecosystem to support deal flow and investments.
 * Invest limited amounts of capital in a “smart” fashion, especially to attract private sector participation.
 * Access resources needed to scale up successful investments.

Key financing needs in the inclusive innovation technology transfer and commercialization, and entrepreneurial development value chain should be identified and addressed. Early stage financing remain difficult issues even in developed markets. Investment capital is moving to later stages, that is avoiding technology risk, in developed markets and even in some developing markets such as India. The basics of the classic investment capital model, that twins financing with technology and management advice, need to be replicated in emerging markets. However, alternate finance systems are emerging – often taking advantage of web 2.0 technologies - as today’s venture capital model is being questioned as inadequate, restricted, or even broken. New, especially early-stage, financing vehicles are appearing. Crowdsourcing of early stage investment and monetizing patent portfolios are among a growing number of open innovation based methodologies. Not all of these new initiatives will be proven viable and some may be simply fads, but they should be evaluated.

For example: **Grow Venture Community**, a crowdfunding platform for web and mobile start ups. [], and Crowdfund (South Africa) []


 * Israel Yozma fund** []

===Questions to ask===

We should begin by asking where do we want to end up? What problems are to be solved or needs to be met? Only then can we turn to the issues or whether or not the provision and use of investment capital could help accomplish the expected outcomes. Businesses and country governments often believe that what they need most is investment capital when in fact this may not be the immediate critical need. Also, before investment capital can be deployed effectively and efficiently it may be necessary to make improvements in a country’s IP regime and improve the support ecosystem. But, it is also necessary to be realistic about what improvements can be made in the short-term. Waiting until there is ideal legislation is in place, or a fully functioning support system, will mean delaying action indefinitely. The state of such systems is built into the risk assessment of investment in a country.

In more detail:


 * What is the reason for investing in technology projects or technology companies? Is it to earn a financial return on the investment, to create economic development or social good, or other reasons? The purpose of an investment or investment strategy should be decided and made clear to all involved at the start of the process.
 * If an investment fund or other investment vehicle is to be developed then the question is: how much money will be dedicated to the fund or other vehicle and under what conditions or constraints? The question of the amount of funds available is critically connected to the question of what is the purpose and investment strategy of the fund? Some public investment funds have sizable amounts of money but have not succeeded due to a poorly conceived or implemented investment strategy. Others with limited amounts have no been able to support businesses to become self sustaining.