Investment+model+general+considerations

Investment models: General considerations
See also: Investment Model Examples  Investment Models Issues and Questions Angel Investing & Venture Capital Risk Capital in Middle-income and Developing Countries

We will use the term, “investing in a technology” to cover what is typically the broader investment not only in an invention or a technology, but also an investment in the management team for example. The critical importance of the management team is indicated in the often quoted comment that it is better to invest in a mediocre technology with an excellent management team than a superior technology with a poor management team.

 Models for technology and innovation investment fall generally into these categories:


 * 1) Grants may be wholly publicly funded or require matching private sector funds in some public-to-private ratio. No repayment is usually required for grants, but optional partial repayment based for example on success of the business which has been supported has been attempted.
 * 2) Loans may range from micro-finance to large scale loans, sometimes with specially adjusted interest rates and with public and/or private sector components.
 * 3) Technology firms may have difficulties in providing loan collateral as most of their assets will be intellectual rather than real property. Another form of a loan is a bond issue by a national or regional government, although this is rare in the technology space.
 * 4) Equity investments are typical of venture and seed capital funds as well as for angel investors. A share of the ownership of the company is taken in expectation of the share increasing in value because of the investment made and assistance provided by the fund management or other advisory service providers. Return on investment is expected when the investment fund cashes out through a sale to a strategic or a financial investor, merger, public offering, or other exit.
 * 5) Guarantees are an under-used facility, but for example a government could guarantee the principle of a loan or the amount of an initial investment thus reducing the risk for private sector investors in high risk situations. Governments could provide guarantees to bonds issued by investment banks.
 * 6) Public-private partnerships involve co-financing by the public and private sector partners. Such partnerships are typically used for infrastructure development and large scale engineering projects, but may have underutilized potential in the technology space.

Investment criteria
Any investment fund or individual investor will seek projects offering potential for attractive growth and earnings. Key criteria may include:
 * 1) A strong and committed core management team with a demonstrated performance track record, commitment, enthusiasm and energy.
 * 2) Sales of products or services locally or in other markets.
 * 3) Potential for scaled-up of the business.
 * 4) Potential for sustainable high growth for the business.
 * 5) Ability to sustainable long-term competitive advantage.
 * 6) A viable business model followed by a viable business plan delivering an attractive return on investment.
 * 7) A strategy for a clear investment exit within a reasonable time period.

Public, private or public-private partnership funds will have different criteria as the basis for investment decisions. This will depend on (as noted on page xx) whether the objective is to earn a financial return on the investment, to create economic development or social good, or other reasons.

Stages of Investment
Before considering criteria and vehicles for different types of investment it will be helpful to review typical equity investment stages. These do not have clearly defined boundaries, and variations will be introduced later in this Note, but may be generally defined as:


 * 1) Angel Investment: An angel investor is someone who provides backing to very early-stage businesses or business concepts. Angel investors may group together to form angel investment pools.
 * 2) Seed Fund Investment: A pool of money used to back companies which are too small to attract venture firms.
 * 3) Venture Capital Fund Investment: Venture capital funds pool and manage money from institutional investors seeking private equity stakes in small and medium-size enterprises with strong growth potential. Venture capital funds usually invest at several stages of a businesses development, including:


 * //Start-up//**: Funding for businesses at the early stage of product or service development.


 * //First-Round//**: Funding for businesses which have initial sales.


 * //Second-Round//**: Working capital for early stage companies that are selling product, but not yet turning a profit.


 * //Third-Round//**: Expansion funds for a profitable company (also called mezzanine financing).


 * //Fourth-Round//**: Financing for exit preparation such as an initial public offering (IPO) or sale, also called bridge financing.