Financing

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==Venture capital financing and other investment alternatives for technology companies: Risk Capital in Developing and Middle-income Countries==

Questions - please add comments

 * 1) What are the financing alternatives for countries with limited S&T capacity and a small number of potential deals (low deal-flow)?
 * 2) How can foreign donors or country governments provide incentives for the private sector to invest where the deal-flow is insufficient to attract traditional investment?
 * 3) Some countries are proposing setting up public-private partnerships for early-stage investment in technology companies (where the public sector funds reduce the risk for the private sector component). Are there any successful, or unsuccessful, examples?
 * 4) We would like to hear opinions from the private sector - investors, funds, and banks.

A challenge for early-stage technology-based companies is raising investment to support their growth. Venture capital is frequently regarded as the only investment to seek, but there may be more appropriate alternatives. Furthermore, a typical technology company developing in a middle-income country is not attractive to venture capital funds. Also, there may be insufficient deal flow to provide the venture fund with a sufficiently large number of business plans from which to select the potentially most profitable investments. In several countries where the World Bank is active, country governments have proposed investing public funds to attract private sector investors in to the early-stage investing space. While government programs may be effective, there are often constraints which discourage private co-investment.

Typical financing stages for company growth


The figure shows typical, or ideal, equity investment levels – which do not have clearly defined boundaries - may be generally defined as (1) Angel Investment: an angel investor is someone who provides backing to very early-stage businesses or business concepts. For example, a business may have little more than idea business concept and perhaps a plan for growing the business. Angel investors may group together to form angel investment pools. Angel investor may also be from the category referred to as FFF (friends, family, and fools). (2) Seed Fund Investment: A pool of money used to back companies which are too small to attract venture firms but requiring too much money for angel investors. For example, if a business perhaps has a prototype product or service but few or no sales.

<span style="font-family: Arial,Helvetica,sans-serif;"> There are alternatives to venture capital which should be considered. Technology based companies in these countries may be better off initially seeking seed level investment. Seed capital investors, including "angel investors," work with much smaller deal flows and typically fund a much higher percentage of potential deals they evaluate (as high as 30% in contrast to venture capital’s less than 2%). Models for the provision of capital such as an investment corporation rather than the traditional limited partnership model may be more appropriate for some countries.

<span style="font-family: Arial,Helvetica,sans-serif;"> There is also a need for education. For example, an investor may agree to invest some money in return for a percentage equity position in a company. Frequently the company does not have sufficient experience to know if this deal is fair or not. Typically the company does not know how to value itself. It has no knowledge or case examples from other companies.

<span style="font-family: Arial,Helvetica,sans-serif;">Modules

 * 1) <span style="font-family: Arial,Helvetica,sans-serif;">Issues and questions
 * 2) <span style="color: windowtext; font-family: Arial,Helvetica,sans-serif; font-size: 10pt;">Investment model general considerations
 * 3) <span style="font-family: Arial,Helvetica,sans-serif; font-size: 10pt;">Investment model examples
 * 4) <span style="font-family: Arial,Helvetica,sans-serif; font-size: 10pt;"><span class="wiki_link">Government (public sector) venture funds and competitive grant programs.
 * 5) <span style="color: black; font-family: Arial,Helvetica,sans-serif; font-size: 10pt;">Public-private partnerships.

<span style="font-family: Arial,Helvetica,sans-serif;">** Additional External Links **

<span style="font-family: Arial,Helvetica,sans-serif;">**The Glossary of Private Equity and Venture Capital** <span style="font-family: Arial,Helvetica,sans-serif;">[]

<span style="font-family: Arial,Helvetica,sans-serif;">The Glossary of Private Equity and Venture Capital is an alphabetical list of all terms used in the venture capital business. The Glossary can be accessed by this link and may also be downloaded to use offline, printout, or share with a colleague. Download by selecting the format you prefer:
 * <span style="font-family: Arial,Helvetica,sans-serif;">[|HTML Format (.html)]
 * <span style="font-family: Arial,Helvetica,sans-serif;">[|Microsoft Word Format (.doc)] (Works with Word 2000+, Word Perfect, OpenOffice, etc)

<span style="font-family: Arial,Helvetica,sans-serif;">VCExperts - Copyright © 2011 VC Experts, Inc. All Rights Reserved.

<span style="font-family: Arial,Helvetica,sans-serif;">**Is the Venture Capital Business Broken?** PE Hub blog. <span style="font-family: Arial,Helvetica,sans-serif;">[] <span style="font-family: Arial,Helvetica,sans-serif;">A 2010 survey of over 1,000 venture capitalists asked them a simple yes or no question: “Is the Venture Capital Business Broken?” Over 53% of the respondents said “yes.” Partial contents include:

<span style="font-family: Arial,Helvetica,sans-serif;">Building great companies vs. building products that can be sold. <span style="font-family: Arial,Helvetica,sans-serif;">M&A (mergers and acquisitions) over IPO (initial public offering). <span style="font-family: Arial,Helvetica,sans-serif;">Resistance to innovation in the venture capital industry. <span style="font-family: Arial,Helvetica,sans-serif;">Size of funds will decrease. <span style="font-family: Arial,Helvetica,sans-serif;">Industry in need of a major reset. <span style="font-family: Arial,Helvetica,sans-serif;">Increasing fund raising internationally.

<span style="font-family: Arial,Helvetica,sans-serif;">**Venture Capital Guide for Development 2008.** BID Network. <span style="font-family: Arial,Helvetica,sans-serif;">[] <span style="font-family: Arial,Helvetica,sans-serif;">This updated pocket-sized guide contains a list of more than 100 venture capital and private equity funds for starting & growing small enterprises in developing countries. Additionally, a chapter on various methodologies of impact assessment is added.

<span style="font-family: Arial,Helvetica,sans-serif;">**Pre- Seed Fund Due Diligence Check List** <span style="font-family: Arial,Helvetica,sans-serif;">[] <span style="color: #404247; font-family: Arial,Helvetica,sans-serif; font-size: 10pt;">Due diligence is used to investigate and evaluate a business opportunity. The term due diligence describes a general duty to exercise care in any transaction. As such, it spans investigation into all relevant aspects of the past, present, and predictable future of the business of a target company. Due diligence sounds impressive but ultimately it translates into basic commonsense success factors such as "thinking things through" and "doing your homework".

<span style="color: #404247; font-family: Arial,Helvetica,sans-serif; font-size: 10pt;">**Sample Due Diligence Checklist** <span style="color: #404247; font-family: Arial,Helvetica,sans-serif; font-size: 10pt;">[]

<span style="font-family: Arial,Helvetica,sans-serif;">**Public Financial Support for Commercial Innovation, Europe and Central Asia Knowledge Economy Study**, Itzhak Goldberg //et al//, The World Bank 2005. <span style="font-family: Arial,Helvetica,sans-serif;">[]

<span style="font-family: Arial,Helvetica,sans-serif;">Partial contents: <span style="font-family: Arial,Helvetica,sans-serif;">** Economic Rationale of Support for Commercial Innovation ** <span style="color: #231f20; font-family: Arial,Helvetica,sans-serif;">Information Asymmetries and the “Funding Gap” <span style="color: #231f20; font-family: Arial,Helvetica,sans-serif;">The Impact of General Purpose Technologies (GPTs) <span style="color: #231f20; font-family: Arial,Helvetica,sans-serif;">Exports- versus Local Markets–Oriented Innovation <span style="font-family: Arial,Helvetica,sans-serif;">** Instruments to Support Commercial Innovation ** <span style="color: #231f20; font-family: Arial,Helvetica,sans-serif;">Grants versus Loans <span style="color: #231f20; font-family: Arial,Helvetica,sans-serif;">Procurement Preferences and Tax Incentives <span style="color: #231f20; font-family: Arial,Helvetica,sans-serif;">Matching Grants <span style="color: #231f20; font-family: Arial,Helvetica,sans-serif;">Venture Capital Support <span style="color: #231f20; font-family: Arial,Helvetica,sans-serif;">The Role of Business Support Services <span style="color: #231f20; font-family: Arial,Helvetica,sans-serif;">Monitoring and Evaluation <span style="font-family: Arial,Helvetica,sans-serif;">** ECA’s Institutional Framework for Public Support of Commercial Innovation ** <span style="color: #231f20; font-family: Arial,Helvetica,sans-serif;">The National Innovation System (NIS) <span style="color: #231f20; font-family: Arial,Helvetica,sans-serif;">Key Factors in the Knowledge Economy <span style="color: #231f20; font-family: Arial,Helvetica,sans-serif;">Economic Incentives and Institutional Regime <span style="color: #231f20; font-family: Arial,Helvetica,sans-serif;">Knowledge Assessment Methodology (KAM)

<span style="display: block; font-family: Arial,Helvetica,sans-serif; font-size: 10pt; line-height: 115%; margin-bottom: 0in;">**What the Public Sector Should Know about Venture Capital** <span style="display: block; font-family: Arial,Helvetica,sans-serif; margin-bottom: 0in;">[]

<span style="font-family: Arial,Helvetica,sans-serif;">**International Finance Corporation (IFC) Innovations in Emerging Markets** <span style="font-family: Arial,Helvetica,sans-serif;">[] <span class="style1" style="font-family: Arial,Helvetica,sans-serif;"> Innovations in Emerging Markets is a blog sponsored by the International Finance Corporation. It compiles knowledge, news, and ideas about sustainable business innovations and trends by firms and entrepreneurs operating in emerging markets. The blog is informal and represents the opinions of the bloggers, not IFC or the World Bank Group. Objectives are:
 * <span style="font-family: Arial,Helvetica,sans-serif;">To share knowledge related to sustainable business innovations and practices by firms and entrepreneurs operating in emerging markets
 * <span style="font-family: Arial,Helvetica,sans-serif;">To highlight topics, trends, debates, articles, and best practice by firms applying sustainable private investment principles
 * <span style="font-family: Arial,Helvetica,sans-serif;">To provide a link between IFC’s resources on sustainable private sector investment and technical assistance in emerging markets and global communities of practice

<span style="font-family: Arial,Helvetica,sans-serif;">**The Globalization of Alternative Investments Working Papers Volume 3: The Global Economic Impact of Private Equity Report 2010** <span style="font-family: Arial,Helvetica,sans-serif;">[]

<span style="font-family: Arial,Helvetica,sans-serif;">The Report is published by the World Economic Forum. It is the result of collaboration with researchers and faculty at various institutions.

<span style="font-family: Arial,Helvetica,sans-serif;">See Part 2 (Page 26)
 * <span style="font-family: Arial,Helvetica,sans-serif;">Governments as Venture Capitalists: Striking the Right Balance **

<span style="font-family: Arial,Helvetica,sans-serif;">The researchers analysed over 28,800 enterprises (based in 126 different countries) that received venture capital funding in the 2000-2008 period. The enterprises cover <span style="font-family: Arial,Helvetica,sans-serif;">a wide range of industries but are dominated by high technology firms. The performance of enterprises financed by some form of government venture capital was compared with those supported by private venture capitalists in order to determine the impact of public involvement on performance. The key findings illustrate that:


 * <span style="font-family: Arial,Helvetica,sans-serif;">Enterprises with moderate government venture capital (GVC) support outperform enterprises with only private venture capital (PVC) support and those with extensive GVC support, both in terms of value creation and patent creation.
 * <span style="font-family: Arial,Helvetica,sans-serif;">GVC performance appears to differ markedly, with GVCs associated with national governments and international organizations having stronger performance
 * <span style="font-family: Arial,Helvetica,sans-serif;">than those associated with sub-national (e.g., state and provincial) government.
 * <span style="font-family: Arial,Helvetica,sans-serif;">Partial GVCs and indirect GVCs exhibit stronger performance than full (i.e. government-owned) GVCs.