Investment_Capital_for_ICT

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INVESTMENT CAPITAL
FOR ICT AND E-BUSINESS GROWTH
IN EMERGING AND TRANSITION
ECONOMIES

CONFERENCE PAPER

REGIONAL BUSINESS ROUNDTABLE FOR
ECONOMIES IN TRANSITION

2-4 December 2002
Vilnius, Lithuania
FOREWORD

The most common route for obtaining additional financial „capital‟ for the development of
a business is through banks and other lending institutions – and sometimes through grants
or loans from national, international, sectoral or private schemes to sponsor business
growth.

Outside that is the world of „Equity Investment‟ where investors put „risk‟ money into a
venture in the expectation of a greater financial return.

„Equity Investment‟ or „Venture Capital‟ is widely available but notoriously difficult to
obtain.

This is definitely the case in the more prosperous economies and the difficulties are
multiplied in emerging and transition economies as there is also a commercial confidence
barrier to be overcome before investors will take on what they may see as a
disproportionately higher risk.

This Paper acknowledges that it will be a small minority of companies that will eventually
win venture capital support, but explains the circumstances in which a good idea with an
enterprising and determined person or team behind it, can put a good case for business
funding and be successful.

The illustrations here are mainly from the Western model but similar principles also apply
to the newer economies.

An exception might be newly privatised large ICT enterprises in transition economies
whose previous business had such large market penetration and assurance of revenues that
it would be immediately and obviously be an attractive investment opportunity.

Users of this Paper are therefore encouraged to test their national models against the
Western model (as described in the various sections of this text) in order to understand
how better to attract foreign investors.

Please note, however, that an effective alternative to obtaining venture capital could well
be an involvement with a successful business overseas that stands to gain strategic and
technological benefit from partnering; and this is also a route that should always be
explored.

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CONTENTS

1. INTRODUCTION ........................................................................................................... 4

The purpose and use of this Paper ......................................................................................... 4
Glossary of terms and abbreviations ..................................................................................... 4
What is „capital investment‟? ................................................................................................ 5

2. BACKGROUND TO THE WORLD OF CAPITAL INVESTMENT
IN BUSINESS .................................................................................................................. 6

Why capital investment is such an important factor for business growth in ICT ................. 6
The most common potential sources of funds ....................................................................... 6
What investors will want and expect .................................................................................. 13
How the availability and use of capital can vary in different economies ............................ 15

3. HOW THE INVESTMENT ‘SYSTEM’ WORKS ..................................................... 15

The characteristics of companies most likely to be of interest to investors ........................ 16
Different ways in which investment can be used to help growth and development ........... 16
How, specifically, may the investment help growth? .......................................................... 17
Investors‟ preferences for the use of their funds ................................................................. 18
Using your shares in return for investment ......................................................................... 19
Typical characteristics of people and businesses that invest in companies......................... 19

4. THE INVESTMENT CYCLE AND PROCESSES......................................................... 20

The Business Plan as an essential tool for raising funds .................................................... 20
Stage 1: First round funding ................................................................................................ 21
Stage 2: Creating more momentum in the business ............................................................ 25
Stage 3: Preparing to realise the value in the business (exit strategies) .............................. 26

5. ESSENTIAL CONSIDERATIONS ............................................................................. 27

How investment can change the way you manage your business ....................................... 27
How to cope with the changes ............................................................................................. 28
How to ensure quality and sustainability in the business .................................................... 30
Intellectual Property Rights (IPR) ...................................................................................... 31
Checklists ............................................................................................................................ 33

6. ANNEXES ...................................................................................................................... 35

1. EFQM „Business Excellence Model‟ and its use .......................................................... 35
2. ICT Industry Associations ............................................................................................. 38
3. Case Studies................................................................................................................... 40
4. Business Plan Guidelines .............................................................................................. 43
5. Funding Application Proposal ....................................................................................... 49
6. Perfecting your Pitch (and business plan) ..................................................................... 54
7. Acknowledgements and references ............................................................................... 59

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1. INTRODUCTION

The purpose and use of this Paper

This Conference Paper has been developed to help ICT businesses in emerging and
transition economies gain a better understanding of the circumstances in which capital
investment is acquired and used to accelerate development and growth.

It is intended to help entrepreneurs see investment propositions through investors‟ eyes and
thus enable them to put together business cases that can more readily satisfy investor
requirements.

There are many different sources of capital investment, from early stage support through
friends and family, to the involvement of private investors, public sector funds, banks and
flotation on public markets. Requirements in terms of what investors want in return for
their investments will differ, as does their level of likely involvement in helping businesses
in other practical ways.

This Paper primarily covers the investment alternatives that are already prevalent in well-
established Western economies as well as the most likely routes to investment in emerging
and transition economies. Investors‟ expectations of entrepreneurs and management teams,
in the way they run their businesses for optimal returns, are also explained.

The development of business plans is highlighted as a key skill to be developed both in
making a business case for funding and as an essential tool for good business management
practice. Examples are given as to how business planning can be structured and applied.

Glossary of terms and abbreviations

Business Angel „High net worth‟ or „wealthy‟ investor
Collateral In this case, marketing materials
Corporate venturing Risk investment by a commercial corporation
Debt capital Repayable loans as provided by banks
„Disruptive‟ A radical, change-producing technology
Due diligence Research to verify a company‟s and its directors‟
commercial history and credentials
Earnings The money earned from an investment deal
EFQM European Federation of Quality Management
Entrepreneurs Visionary individuals who start businesses
Equity A percentage share in the value of a business
Equity value What a share in the business is worth
Exit Surrendering ownership in a business for money
Embryo The idea for a business has been formed
FDI Foreign Direct Investment
Financials All the financial reports on a business
Flotation Offering your shares for sale on a public market
Funds Capital sums

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Gearing The ratio of your borrowings to your assets
Going public Selling your company‟s shares on a market
High net worth Wealthy
ICT Information and Communications Technologies
Intellectual assets Valuable know-how and knowledge
IPO Initial Public Offering (sale of shares to a market)
IPR Intellectual Property Rights (protection of ideas)
Investee The recipient of an investor‟s money
Intermediary Sets up and manages investment opportunities
MBO Management Buy-Out (from original owners)
MIGA Multilateral Investment Guarantee Agency
Multiples Investment earnings as a multiple of original investment
Non-executive director Usually part time in an advisory capacity
Pipeline Projection of potential sales or product „events‟
Portfolio Collection of different investments
Positioning Where a company stands relative to the market
Public Offering See IPO
Realise value Take your money that has been earned out of the business
Risk capital Money invested in speculation of a good return
ROI Return on Investment (how much is earned back)
Scaleable (scalable) Ability of a technology to serve far greater needs
Segmentation Technique to divide markets into addressable parts
Shares The value of a business divided into equal parts
Sleeping partner A part-owner who is not active in the business
SME Small/Medium Enterprise
Stake An amount invested into a business
Stakeholder Anyone who stands to benefit from the business in any
way (includes customers, suppliers, staff etc.)
VC Venture Capitalist ( puts risk money into business)
Venture Capital Capital invested speculatively in a business in expectation
of a high rate of return

What is ‘capital investment’?

Capital investment is the injection of funds into a business by external organisations,
individuals or groups so as to help the business develop, grow or expand more effectively
than if it were totally dependent on its own resources. It is based on the premise that there
will be a compensating return to the investor. In the case of a bank, the returns will be
earned mainly through interest on the money that has been loaned to a business. In the case
of venture (or risk) capital, returns come in the form of multiples of their investment that
can be converted to earnings either through dividends or sale of shares. Generally these are
„equity‟ investors who, in return for their investment, take a shareholding in the
expectation that the value of those shares will rise sufficiently through the growth of the
company that their stake will have a far greater value on exit.

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2. BACKGROUND TO THE WORLD OF CAPITAL INVESTMENT IN BUSINESS

Why capital investment is such an important factor for business growth in ICT

The ICT industry is one of the fastest growing and most competitive in the world. New
technologies are developing at a faster pace than they can be adopted economically by
businesses and consumers. This means that those who can market most effectively will
grow at the expense of those who are weaker. This is well illustrated by the story,
attributed to Sony's‟ chief executive Akio Morita, where there were two unarmed men in
forest clearing facing a hungry tiger two hundred metres distant. One of the men was
putting on running shoes. The other one was puzzled. “Why are you putting on running
shoes?” he asked, “You cannot run faster than a tiger.”

“My friend,” said the first man, “I do not need to run faster than the tiger. All I need to do
is run faster than you!”

Investment is the business parallel to running shoes in that it enables businesses to
establish an „unfair advantage‟. This, after all is the function of marketing – to create a
differential advantage that means a business will outperform its competitors. ICT markets
are generally oversupplied. It is easy to start a business, but it is not so easy to grow and
sustain a successful one.

Capital investment is important because it helps speed new technologies to market,
establish companies ahead of their competition, sustain continuous innovation, create
employment and contribute to the economic development of a country or region – in other
words make a positive impact on the society in which it operates.

The most common potential sources of funds

There are principally two types of financing, risk investment and debt finance.

Risk investors will tend to work on portfolios of investments where the balance of success
to failure could typically be in a ratio of 60:40. Their return on investment is based on the
probability rather than certainty of success. Debt finance does not anticipate failure and
takes precautions so that it can recover any debt.

Risk investors can include:

Family and friends
Because they know and trust you and are well-disposed to providing help, family and
friends are often the first source of a new company‟s funding. The advantage in this is that
the process of raising funds is usually much quicker and the terms and conditions of the
investment often less rigorous. There may also be practical support in terms of managing
the business or providing additional resources during times of pressure. Usually the
investment is on a comparatively small scale and there probably won‟t be additional
rounds of funding sufficient to support the growth that may be required at a later stage.

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Private investors (Business Angels)
These are wealthy, or „high net worth‟ individuals with capital to invest and are sometimes
called „Business Angels‟. They may wish to invest individually or as part of an investment
consortium, often of 4 – 6 people, who invest collectively in order to spread the risk.

Where business angels invest on their own, they generally have an affinity with the
business in question and would like to take an active role in its development. They will be
empathetic to the aims and objectives of the business and the people running it, or their
participation in it will not produce the required results.

They are as influenced as much by subjective criteria – can I work with these people, how
far are they from where I live, do I like the business – as objective considerations and finer
financial points. Colin Mason of the United Kingdom‟s Southampton University has
researched business angel behaviour over many years and in a study of thirty such people
confirmed that, for example, they take an average of eight and a half minutes to decide
whether a business plan is of interest to them. The fastest, in the same study, took eight
seconds! This illustrates the importance of developing a business plan that is crystal clear
in its objectives, easy to understand and assimilate, and sufficiently exciting that the
investor is immediately enthusiastic about its potential to interest and involve him as well
as giving a good return on his investment.

The range of angel investment can be up to around USD $750,000, but with an average
investment of no more than about USD $75,000. This is the typical level in the UK as just
one example, but will not be greatly different from the patterns in the United States or
Europe generally.

Because investment in, for example, computer software, does not build up valuable
material assets (that can be sold in the event of failure) the perceived investment risk is
higher than for the production of physical products. For this reason, the Business Angel
most likely to invest in a software company is one who expects to have a significant
management influence and will often want to negotiate the biggest shareholding possible in
the business. Investors in ICT are therefore more likely to come from within the industry
than without.

Venture capitalists
Venture capital firms (or „VCs‟) manage specific investment funds and tend to specialise
in particular types of business or groups of business sectors. They vary in size from those
whose investments start at around USD $750,000, to those who will not consider anything
less than several millions.

Over recent years, a number of VCs in the ICT sector have come over from the United
States to Europe to extend the reach of their businesses into Europe and beyond, or in some
cases, to escape the effects of the downturn of high-tech stocks in the US economy. In
another example, a country such as Israel that has highly developed high technology
industries, small indigenous markets and generally hostile neighbours has developed, as a
national initiative, its own highly successful venture capital organisation to ensure Israeli
technology is sufficiently well-funded to be immediately relevant to world markets. Many
venture capital firms are international, but many reflect the different characteristics of the
countries in which they operate. Because finance and equity structures in many emerging

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and transitioning Asian, South American and Eastern/Central European economies are
substantially different from Western Europe, entirely different circumstances frequently
prevail and have to be taken into account in any consideration of establishing an
investment infrastructure.

Rigorous commercial criteria

Generally, venture capitalists will be seeking investment opportunities that satisfy rigorous
commercial criteria and in businesses that they can understand. They will be influenced by
the strength and experience of the investee‟s management team, the quality of the business
idea, the market for the products/services being funded and the knowledge of markets,
competitors and technologies that reduce the risk factors in the investment.

What VCs do not like is business plans that focus on products, and technologies instead of
solid business cases and the return they are likely to get from the investment. In the ICT
sector they are likely to be particularly critical of the use of the jargon that tends to
accompany high technology proposals – one recently quoted that the Intel Corporation‟s
original investment business plan was only 4 pages long, which is a refreshing exception to
the norm. A recent straw poll at an investment conference confirmed that a panel of
investors‟ ideal length for a business plan was fewer than ten pages. This may not always
be feasible but indicates that they want information presented to them in a succinct way.

Proven business model

VCs do not much want to fund start ups or product development programmes as there is
usually no market evidence at this early stage that the business idea works.

It is particularly difficult to obtain investment for „discontinuous innovation‟, as compared
to „continuous innovation‟. In the former, the product or service represents an entirely new
or „disruptive‟ concept rather than an improvement to an old one – because whether the
concept will work commercially is still to be proven in the market place. In fact the market
place may not exist and may have to be created which of course is either very slow or very
expensive.

Private equity fund managers
Private equity is funding not quoted on a stock market. Private equity fund managers
manage funds that enable pooled investments by a number of investors in equity and
equity-related securities of companies. The principles, to all intents and purposes are the
same as for venture capital generally, but with collective risk dilution for the investors.

Commercial Banks (debt financiers)
Compared to Business Angels and Venture Capitalists, banks provide „debt capital‟. In
other words they lend money in return for interest on the capital sum, usually for a fixed
period. Banks are very risk averse, preferring to lend money to businesses or people that
have proven track records rather than those that are yet to convert their business ideas into
success. The exception would be a loan secured against business assets.

The criteria for a commercial bank to lend money are not dissimilar to those of private
investors and venture capitalists. There needs to be a very good business plan and a

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credible entrepreneur or management team to give confidence that the business will be
managed in a well-structured, rigorous and determined way.

The diagram below compares the risk profile of different types of investor and the stage of
company growth at which different types of investment are most prevalent.

Level of investment risk assumed by investor

Friends and
family
Business Angels

High Risk Venture Capitalists

Private Equity Fund
Managers

Low Risk
Quoted Equity Markets

Commercial Banks

EMBRYO START-UP EARLY GROWTH ESTABLISHED/MBO*
(*Management Buy Out)

Debt capital from commercial banks

Banks are the least risk takers among those that fund company growth. Their criteria are
based on ensuring they get a relatively modest but reliable return through interest earned.

The dichotomy in the ICT sector is illustrated by the apparent gap between what banks say
they want and what companies in the ICT sector are believed to be like:

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What banks would like What ICT companies offer
 Steady growth forecasts  High growth rates
 Stable cash-flow forecasts  Fluctuating cash needs
 Track record  Business inexperience
 Documented market  New markets/technology
 Good fixed asset ratio  Low fixed asset ratios
 Low gearing ratios  High gearing ratios

Banks express their key requirements as being:

 Management executive quality
clear objectives
commerciality
products not concepts
 Market awareness/ research/ demand/ strategy
 Competitive analysis/technological positioning
 Sales forecasts/revenue streams/funding lines
 Windows of opportunity/product pipeline
 An identifiable advice network

In the short term, they also want achievable sales forecasts based on realistic market
assessment, key customers as references, sales pipeline identified, clear market definition
and segmentation. They are not keen on „flagpoles, fountains and fishtanks‟.

Trade partners

These are organisations which, in return for complementary value, provide funding support
for an otherwise under-funded enterprise. They are exclusively interested in businesses
with similar visions to their own and with whom they can work harmoniously to promote
the best interests of both parties.

Some trade partners will have set up special funds that can be used to incubate potential
partners. This is so that they are in a strong position to capitalise on new technologies as
they emerge. In the early nineteen-nineties, for example, IBM was said to have taken a ten
percent stake in two hundred and forty companies as a deliberate strategy to keep itself in
the frame for new opportunities.

Corporate venturing, as this form of investment is described, is an increasingly popular
route to fund growth. SMEs who might not otherwise be attractive to the more
conventional providers of risk capital, maybe through management experience, or because
they present themselves too technically, can sometimes find that there is an empathy with a
corporation that they cannot achieve elsewhere.

It is important to distinguish here between corporate venturing that injects funds and
strategic partnering where two companies work in a complementary way to provide
incremental trade benefit to both.

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Consortia

Consortia are groups of investors who dilute risk through shared investment. They can be
from investment clubs, for example groups of retired executives. They may be a group of
accountants‟ or lawyers‟ clients, or they can be investment partners of a managed
association of high net worth individuals or companies.

At a parochial level, smaller companies (SMEs) can seek out investment groups through
their local professional contacts, including banks. At a national or international level, they
can locate consortium investors through conventional venture capital routes, via the Web
and other contacts.

In practice, it makes little difference whether funds come from a single source or through
consortia. An SME will have to consider how the investors will manage their investment,
for example through a lead or managing investor, or without a formal structure. If there is
no formal structure or authorised body managing the investment, it will not be managed as
well as it could be.

There is no particular investment scenario that lends itself more to consortia than other
forms of investment. The „rules‟ will be the same as for any investment.

Public offering

The main consideration for a public offering is to achieve the end result of a number of
investors simultaneously responding to a single opportunity. For an offer to be well-
subscribed needs the project to be handled differently than for other forms of investment.
A public offering is time-critical and all the activities leading up to it need to be managed
with a single date in mind. With negotiated venture capital investment, although timing is
important, delays may occur during the process without fundamentally damaging the
nature of the offer.

Because co-ordination is a critical issue in going public, it cannot realistically be left solely
in the hands of the company making the offer. It would normally be handled by a firm of
specialists in the field or by experienced accountants as „sponsor‟. These would co-
ordinate activities with researchers, solicitors and the chosen investment market, be it
local, regional, or internationally-based.

Advice will have been taken about the content of the prospectus. Advance lobbying will
have taken place with analysts and other market influencers.

Public loans/grant funding

There are many different grants and loans available across the Western economies and
increasingly for emerging or transitional countries. They are usually for specifically
defined purposes that need to be fully understood before being applied for.
They follow no particular pattern and it is difficult to obtain an overall picture of what is
available through any single public source. There may be, however, a number of private

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firms that will research and provide details of grants and loans available for any particular
purpose – generally for a small fee.

Typical grant/preferential loan scenarios could include innovation, marketing , export,
employment, regional regeneration, Web development, training, skills, to name just a few.

The information requirement will vary from scheme to scheme but will include the general
due diligence questions asked by anyone from banks or venture capitalists. There will be
upside questions about how the use of funding will meet the objectives of each specific
scheme.

Some loans can have guarantees associated with them, so that in the event of failure, they
will absorb the major part of the risks involved. The Small Firms Loan Guarantee Scheme
is one such example in the UK. The Government in this case will provide guarantees of
70% for start-up companies and 85% for established ones. The Scheme is administered
through the banks.

As with all funding options, it is advisable to start early and not wait until the need
becomes critical before applying.

How the capital investment industry has developed in Western economies

It is worth noting the brief history of entrepreneurial finance in that it illustrates cause and
effect and therefore acts as example of how, from modest beginnings, a whole financing
industry has grown up.

The roots go back to the financing of railways and textile mills nearly two centuries ago
but only began to form, as we know it, just over half a century ago. The American
Research and Development Corporation was formed in 1946 and its biggest success was
Digital Equipment Corporation which was in recent years taken over by Compaq, which in
turn has now been taken over by Hewlett Packard – one of the world‟s biggest companies
and of course based on the ICT sector. A further catalyst in the United States was the fear,
during the Cold War between the Soviet Union and the West that increasing technical
prowess was a precondition to surviving the threat. The Small Business Act, signed by
President Eisenhower in 1958, created the Small Business Investment Company (SBIC)
„program‟ that allowed investors to invest at better returns, and capital to become more
readily available to entrepreneurs. By 1962 there were nearly six hundred SBICs in
operation.

At around the same time, a number of venture capital firms were forming private
partnerships outside the SBIC format. These offered a degree of flexibility that the SBICs
lacked and were not subject to the same limitations on the size of investment portfolios.

Since these early beginnings, there have been wide fluctuations in venture capital
performance as economic factors and regulatory restrictions played a part in their fortunes.
The industry is clearly susceptible to „boom and bust‟.

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In recent years, venture firms are being run more like businesses with all the compliance
and scrutiny that entails. This has been good for the industry and better for the companies
receiving investment as good management of funds benefits all the interested parties.

The industry is dependent on many different influences for its success or failure. These
include entrepreneurs, venture capital fund managers, limited partners or the accountants,
lawyers and other professionals that service this business. This infrastructure is a
prerequisite for economies that want to develop capital investment as a way of fuelling
economic growth.

Investment by and through overseas organisations
Equity has so far only been a comparatively small player in financing entrepreneurs in
economically struggling environments, yet it is recognised as eventually playing an
important part in the creation of innovative, wealth creating private enterprises. Other
sources of funding have been facilitated through such organisations as the following:

Large multinational corporations with interests in a region – for example, oil – will often
fund development projects that help develop a local economy or will do it with others in a
consortium. These are usually well-known in the location where the investment is being
made.

Organisations such as the European Bank for Reconstruction and Development (EBRD)
was set up in 1991 to „nurture a new private sector in a democratic environment‟ and today
uses the tools of investment to help build market economies and democracies in 27
countries from central Europe to central Asia. It is owned by 60 countries and two
intergovernmental institutions, but despite its public sector shareholders, it invests mainly
in private enterprises, usually together with commercial partners. www.ebrd.com

MIGA (Multilateral Investment Guarantee Agency) was founded in 1988 as part of the
World Bank Group to promote direct foreign investment into emerging economies. Its
principal aims are to help improve lives and reduce poverty through providing risk
protection guarantees to potential investors. This opens the door to infrastructure
development of which building export businesses and other private sector growth can be
part. The organisation brings together foreign investors, host governments and project
sponsors for both public and private sector ventures. www.miga.org

What investors/lenders will want and expect

It has been notoriously difficult to find funding for ICT businesses since the „dot com
crash‟. Financiers had poured vast sums of money into thousands of companies in the
expectation that the Internet would create huge wealth on a „Super Highway‟ of trade.
The reality turned out to be different.

We have now returned to a new realism where many hard questions will be asked before
money changes hands.

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Investors see ICT companies as having the following characteristics:

 High growth rates
 Fluctuating cash needs
 Relative business inexperience
 Attacking new technologies and markets
 Low fixed asset ratios
 High gearing (borrowing in relation to assets) ratios

What commercial banks want from their borrowers:

 Steady growth forecasts
 Stable cash flow forecasts
 Track record
 Documented market
 Good fixed asset ratio
 Low gearing ratio

What risk capitalists want from their investees:

 Clear, driving vision and mission
 High growth market to attack
 Good customer references – two would be a preferred minimum
 Knowing how to win against competitors – needs excellent competitor knowledge
 Good, strong financials – especially balance sheet
 Good, strong management team
 Right product/service, right technology
 Ability to „ride a wave‟ – anticipate and capitalise on a trend
 A strong, value proposition – the compelling reasons for customers to buy from you
 Proof of delivery capability
 Sustainable competitive advantage
 Business focus – not diluting effort on too many different market offerings
 Revenue quality – recurrance and predictability are important
 Track record, ambition, hunger
 Good positioning, packaging and pricing – that makes purchasing an easy task
 Good planning, controls and reporting
 Opportunity to establish relative dominance
 Evidence of common purpose in the management team
 A good „business‟ as compared to technical proposition
 Acceptance of investors‟ interest and involvement
 Ability to maximise company value

Business growth is not a random event and must be planned for just as much as a trek
across the Antarctic. All parties‟ interests are best served if the investee understands the
process, the milestones, the deliverables to him/herself and to the investor, timing of
market entry and exit strategies that realise maximum value for all stakeholders.

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The process must be unencumbered by previous equity arrangements, non-contributing
executives or sleeping partners. The investor will not want to put money into a business
where the capital is diluted by non-contributory elements.

Exit strategies should allow for equity partners to realise their wealth from the enterprise
after a reasonable period of time, but also give the option to continue with the enterprise
and potentially realise more wealth later, if preferred.

How the availability and use of capital can vary in different economies

Foreign Direct Investment in countries correlates closely with their progress towards
change and democratisation.

Investment prospects are constrained or enhanced by the policies, stability, privatisation
strategies, currency strength, skills, political environment and perceived freedom from
corruption.

Factors that can affect investor perceptions include:

 Susceptibility to unpredictable change in the legal and regulatory environment
 The burden of tax that affects business progress, the potential for corrupt
transaction processes and deficiencies in infrastructure
 Monetary policies and, in particular, inflation
 Trade and exchange rate policies, bureaucracy, red tape and adverse
import/export procedures
 The extent of private equity in property and other assets, and the way this
influences the control and flow of money

Both risk and debt capital require a mitigation of risks for there to be a willingness to work
in partnership with a country, region or with specific businesses, so the investment
environment is as critical in these cases as the business risk itself.

Each country, region or business must demonstrate co-operation between business and
state to create the environment in which foreign investment will work. This is not only to
attract capital but to ensure that the processes put in place will lead to sustainability of
progress.

3. HOW THE INVESTMENT ‘SYSTEM’ WORKS

Assuming that the right political, economic, social and technological environment is
sufficiently suitable to encourage business investment, the system will work in the
following ways:

The business growth cycle

This shows the process through which a business will pass, from concept through to
realisation of value and can be considered as follows:

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Concept Planning/research

Business Plan/
Model
Realisation of value/
Repayment of debt

Resourcing:
Implement Finance
Personnel
Infrastructure

The characteristics of companies most likely to be of interest to risk investors

This is primarily to do with the believability of people and the confidence the investor has
that he can trust his capital in the management team‟s hands.

If it takes a long explanation of the business to build up a case, then it will not be a good
case. If market knowledge is under-researched then that can make the risk too great. If the
product does not have the capacity to dominate its intended market, then it is up against
competitors who can eventually beat it. Marketing and Management skills are more
important than product attributes in most cases.

Different ways in which investment can be used to help growth and development

 Stage 1 Converting ideas into business

Many companies want capital to get business ideas off the ground. At this stage they
most often have to rely on friends and family who could be prepared to take a risk on
the good name and reputation of the investee, or are prepared to be emotionally, if not
intellectually committed.

 Stage 2 Creating more momentum in the business

Based on the belief that a company is not achieving its full potential and with more
financial support could expand more rapidly, their argument depends on the proven
effectiveness of their current business model, intense knowledge of their competitors

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and of the markets they serve. This may be tied into strengthening the management
team to cope with a scaled-up business, and this may be a condition of investment.

 Stage 3 Preparing to realise the value in the business

This anticipates the exit route for the business and wants investment in order to build
value in the business quickly. It may be an exit route for founders and principals or the
means of venture capitalists and others receiving their expected return on investment.
Realising the value could be through a trade sale, management buy-out/buy-in or Initial
Public Offering (IPO)

How, specifically, may the investment help growth?

Market share

If a company‟s aim is to grow market share, then the finance that is needed will be to
increase the aggressiveness and intensity of marketing. There is a substantial body of
evidence which confirms that marketing aggressiveness works substantially more
effectively than „tiptoe‟ strategies in accelerating market share growth.

Building value through profit

If market share growth is not the determinant, then profit will be more relevant than
revenue in building value into a business. There is still a marketing imperative in
positioning a company to maximise profit, but investment in infrastructure may also be the
means of improving productivity thus enabling greater competitiveness.

New channels to market

Finance may also be needed to build or extend channels to market. This does not produce
short-term rewards but can build greater solidity into a business over time. Some
companies want to develop distribution strategies that they believe to be an easier
alternative to direct selling, but those who have not developed a strong presence in their
own right are less likely to succeed in establishing effective channels to market.

Opportunism

Investment may be needed to capitalise on a market „wave‟, in which case timing is critical
as is the need to inspire immediate confidence in the investor. Investors in this situation
need therefore to be more familiar with market circumstances and probably already have a
portfolio that includes other high-tech investments. Alternatively, this scenario can be
immediately attractive to a trade partner for whom the investment could be a strategic
move.

R&D

If a company‟s cash resources are solely focused on running the existing business,
„Version 2‟ product development may be unaffordable without third party investment. So
too will be the ability to introduce new ideas that keep a company ahead of its market.

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Where a company has had previous rounds of funding, existing investors are often the best
source of further funding as they are already familiar with the business track-record of the
investee and the quality of the management team running the operation. If new investment
is sought from new sources, this is arguably more difficult to achieve as it will be
perceived that the incumbent management team were not able to manage the business for
sustainable growth.

Explosive growth

Geoffrey Moore‟s definitive book “Crossing the Chasm”, on how high technology
companies become really successful, says that there is a point in a company‟s lifecycle
when it must either convert to become a spectacularly successful business or accept that it
will remain one of the majority who, although fully competent, will never achieve
equivalent status to the best in the business. To „cross the chasm‟ requires substantially
more investment than a company may ever have received before and may well include
public flotation and fundamentally changing the structure of the business.

Investors’ preferences for the use of their funds

The principal aim for an equity investor is that his capital will accelerate the growth and
development of a business so that he may realise his return on investment at a higher rate
and at the earliest point that an optimum return is feasible.
It is frequently the case that the people seeking funding have gone without proper salaries,
in inadequate accommodation and have worked excessive hours to get their idea off the
ground. They see the injection of capital into the business as enabling themselves to be
„paid a proper salary‟ or to „replace my car‟ or „have my first holiday for three years‟. This
is not in tune with the investor‟s priorities. He sees his money as contributing to the
specific development of the business rather than to give relief to the entrepreneur. Whereas
he will not necessarily object to a modest improvement to lifestyle factors, he will see
excessive expectations as detracting from the company‟s ability to grow. The investment
is not a relief to the investee, it is the opportunity for business development.

It is also easier to obtain funding for selling and marketing than it is for product
development. Putting additional money into product development, particularly in ICT,
means that it has no direct effect in earning income and, because there is not yet any
proven market acceptability, this is more of a risk to an investor than applying more
impetus, through investment, to a proven business model.

Having said that, an investor may perceive that a business has been too conservative in
projecting itself to its markets and there might be a good case for spending money on more
impressive premises or assets in order to give confidence to prospective clients.

With the introduction of new technology to a market, the first buyers are likely to be
motivated by enthusiasm for the technology. These are „early adopters‟ and do not
necessarily represent what will follow. For a product or service to be really effective it
must eventually appeal to the „majority‟ who will buy it because it is proven and they can
be among the large number of users who legitimise its market success. The „energy‟
released by capital is likely to pay more dividends at this stage than it would have done at

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the early adopter stage, which is why it is easier to make the business case for funding once
market acceptability is proven.

Investors mostly invest in people, which is why the strength of a management team is a
critical success factor. A good business idea with not such good people implementing it is
a less favourable prospect than an average business idea with brilliant people behind it.
Good teams will make even second class ideas work because they have the experience,
energy, drive and vision to ensure that markets will buy.

Using your shares in return for investment

It is not always easy for entrepreneurs to be persuaded that giving away some of the
ownership of their business in return for capital investment is a good thing. This, however,
is the meaning behind the expression „equity investor‟. „Equity‟, or a share in the business
is a repayment mechanism for the investor. It is through selling his shares in the business
that he will recoup his capital plus additional sums based on the improved „equity value‟
(market valuation) of the business that his investment helped to build.

Because the business could not have grown that fast or to that size without the investment
capital, the expectation is that the owners‟ shares will have grown in value to such a level
that compensates him for what he has given away. The principle is that it is twice as good
to have 20% of $10,000,000 than 100% of $1,000,000.

The difficulty in parting with equity is to know what percentage of shares to give for what
amount of capital invested. The investor will obviously want to have as big a shareholding
as possible in order to maximise his returns. The entrepreneur will want to give away as
little as possible in order not only to maximise his own returns but to have sufficient shares
left to buy further investment in the company. Typically, in any investment scenario there
is likely to be more than one round of funding needed during the development of the
business over what is likely to be a period of several years. For every round – and there
may well be three or four, the owner(s) will want a sufficient pool of retained shares to
raise the increasing amounts of capital that will be necessary. Undue dilution of the
owners‟ shares will constrain growth.

It is best to seek advice from independent advisers or intermediaries to determine the right
ratios.

The top 20 most successful UK software companies (and the UK has over twenty of
Europe‟s top 50 software companies) have all used equity investment and sold their shares
to fund their growth.

Typical characteristics of people and businesses that make capital investments in
companies

It is often assumed that because there is a very structured and objective process for
preparing a business case for investment, the same will apply to the way in which investors
select the businesses they would most like to support. In a similar way to choosing a car,
where your checklist of the things you want – five speed gearbox, large luggage space, 0-
100 kph in less than 10 seconds, double overhead camshaft, alloy wheels, room for five

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people, etc. - you will already have decided the one that you like the look of best is the one
that you will probably purchase. Similar subjective considerations can also apply to private
investors. There will be intangible factors that affect choice. Because there is more money
available to invest than good business cases for investment, investors always have a choice
and are not driven by the same „survive or die‟ imperative that is often the case for the
companies that need the funding.

Factors such as location, accessibility (near an airport?), attitude, professionalism,
responsiveness, passivity, listening skills, enthusiasm can all have a bearing on choice So
too can the particular technology or market at which it is aimed. Investors will back things
that interest them as well as things that make money. So as well as wooing investors with
science, they must also be seduced by other powerful attractions.

When dealing with investment companies of larger size, there will be clearer rules of
engagement as investment policies will be in place for the management of a number of
funds. This would be the same as for any reasonably sized business where there needs to
be a clear focus, with policies and strategies for managing a portfolio of interests. In this
instance, there is less likelihood of too much subjectivity.

It is likely that emerging and transition economies will be dealing initially with
organisations that are sufficiently large to manage the particular issues associated with
investing in what for them will be new business environments.

Because of support from government and other agencies, the process, although more
formal, will be thorough and involve more stakeholders in the process. Provided it is
handled well by all parties, this optimises the chances of success as there is more in the
way of collateral support than would be the case in more developed economies.

4. THE INVESTMENT CYCLE AND PROCESSES

The Business Plan as an essential tool for raising funds

The development of a business plan is a major exercise that will clearly demonstrate the
management competence of an entrepreneur and/or management team.

It starts by giving a vision of where a company wants to get to and the road map (strategy)
for getting there, includes detailed analysis of markets, competition, product/service
characteristics and differentiators and clearly shows how a company will succeed in its
objectives.

As well as providing confidence to an investor that it is worth proceeding, it includes an
action plan and set of financial projections that are the basis by which an investor can track
the progress of his investment. It would be easy to see this as a chance to interfere if things
start going wrong, but is, in reality, the means by which the investor can add value as part
of a complementary relationship. Too often, investor relations are seen as adversarial, but
what is certain is that the investor is committed to the business idea and will do anything
positive to ensure its success.

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There is a good illustration of this with the Chicken and Pig story, (or it could be Chicken
and Lamb?)

„The farmer‟s birthday was approaching and all the farm animals held a meeting to agree
what they might do for the farmer for the occasion. After some discussion of initial ideas,
the chicken had an inspiration. “I know what we can do”, she said. “We can give him
bacon and eggs for breakfast.” There was silence as the animals considered this and then
one of the pigs spoke. “That is all very good for you dear chicken, this means you are just
involved. For us it means that we are committed”.

Whichever way you look at it, investors are committed in the same way!

Stage 1: First round funding

Companies who have never done it before often find that seeking funding is a daunting
prospect. This is because they are unfamiliar with the different types of funding that can be
sought for different purposes and where to find the type of investor who would be most
appropriate for their specific needs. There are many funding networks across the world,
from incubators, (groups of start-up businesses that share an infrastructure, and business
support services, including capital sometimes) business angels and venture capitalists to
corporate investors and commercial banks. Some of these will be relevant to developing
economies.

Until such time as a structured investment „industry‟ has developed, people will tend to
rely on their banks, accountants, lawyers, industry peers, and other business support or
trade bodies. These can be very helpful but can lack the breadth and perspective that a
centralised „clearing‟ body in a country or region.

Traditional sources of information will tend to be generalist and will not necessarily
understand the particular business circumstances of an ICT company and will almost
certainly not understand what a company must do to make itself ready for investment from
the point of view of an investor. Banks may be an exception in that they will know the risk
factors that prevent a business being an attractive financing prospect, and this is a good
guideline for approaching a venture capitalist also.

Confidentiality issues

Because funding is most frequently sought for new business ideas or ventures,
confidentiality is a key issue. This often makes it difficult for companies to seek advice on
the basis of full disclosure of their business plans. And protection of Intellectual Property
Rights (IPR) is a fundamental demand of anyone intending to invest in a business. Non-
disclosure agreements are no guarantee of security in most cases and are frequently not
signed by venture capitalists who see so many business plans they could not possibly
exploit the situation to their own advantage. The best security is in the good name and
reputation of the investors and advisers who are involved – as they want to stay in business
too.

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Best advice

Good quality advice can only come from those who understand business management and
strategy as well as the needs of investors. Generally, most investors receive more
investment proposals than they can either read or digest. A good adviser will understand
this and be able to give guidance on how to prepare an investment pitch that succeeds in
getting its message across in the fewest possible words and the greatest possible impact.

Seeking investment too late

Many companies seek investment too late and expect funding within weeks instead of
months. This is because they do not properly understand the process. Anyone seeking to
invest a substantial sum will want time to carry out due diligence. This needs extensive
evaluation of a company‟s financials as well as proper checks on the business principals,
market conditions and business proposition.

Orientation of the business proposal

The case for investment is sometimes believed by those seeking investment as being in the
quality and attractiveness of the „product‟. The case for investment should always be seen
through the eyes of the investor whose principal interests lie in how much he is going to
get back for his investment and when, the extent of the risk he will have to take and the
quality of the people looking after his money. A good adviser will help create this
perspective.

Value of the business

Equity investment requires both parties in an investment deal to make a judgement on the
current value of the business and likely future yield. This will more often than not be a
matter for negotiation and can often be the place that investments go wrong. The main
principle of negotiation is that each party is satisfied it is getting a reasonable deal. Where
one is trying to gain a bigger advantage than the other, then the trust on which a good deal
is founded will dissipate. Valuing a business, particularly in the ICT sector no longer
depends on the traditional ratios that existed before the emergence of such a high growth
and volatile industry. The belief of most companies seeking investment is that they are
worth far more than is realistically the case. Press reports tend to highlight the exceptional
rather than the average; which leads entrepreneurs to believe that the exception is the norm
and that an investor‟s statement to the contrary is an aggressive negotiating stance when it
is not.

The real need for an intermediary

The big issue facing investors and investees alike is the huge gap between their perceptions
that neither has the time nor inclination to address. Because investors have no interest in
the labour-intensive process of educating potential investees, this task is invariably left to
others. Because companies seeking investment have, by definition, very little money to
afford consultants‟ fees, they have generally to learn by word of mouth what the
investment business is about. Neither situation is satisfactory, which is why governments

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and other global support organisations such as the International Trade Centre (ITC), have
an important role to play in providing guidance.

Importance of the business plan

As has been explained above, the essential tool for securing funds is the business plan as
this encapsulates the whole of a business idea and the measures of success that are relevant
to all stakeholders. But it is just a tool. Only tools that are in good hands produce the
effects that are needed, so it is important to understand the sequence of events and how to
handle, improve and amend the use of that tool so that the whole process is conducted well
to conclusion. It may be that although a particular sum is being asked for, that it can be
phased over time and according to specific milestones – there‟s no point in having capital
idle in the bank.

Misconceived expectations

Entrepreneurs who have made financial sacrifices to achieve their success to date can
sometimes expect, once funded, to give themselves greatly increased salaries, new cars,
new office furniture and other trappings of success before, in the investors‟ eyes they have
earned it. Just as an investor works on „deferred gratification‟, so too must the investee. A
reasonable understanding of both parties‟ needs is essential to get the balance right.

Executing the plan

Invariably, an investor will want to strengthen the management board and to do so with
someone who can objectively represent his interests. Because SMEs, particularly in such
high growth businesses as ICT, may not have much in the way of in-depth business
experience outside their own sphere, it could also be useful to have non-executive directors
who can bring additional skills and experience into the business in a non-confrontational
way. There is the added benefit that they can act as mentors to individuals on the board and
a sounding board for new ideas and decision making.

Effective business leadership

Smaller businesses often owe their success to the vision and drive of an entrepreneurial
leader. When others become involved in the business, this can sometimes create tensions.
Entrepreneurs, by their nature are „envisioners‟ and tend to need „enactors‟ to convert their
visions into executable tasks. However, due to the differences in personality between them,
this is often an imperfect axis. Management teams in this circumstance will invariably
benefit from an „enabler‟. This is someone who communicates well with both envisioner
and enactor and is able to translate needs and requirements, non-controversially, into action
that is most productive for the company. Although these roles may not consciously be
articulated, they are implicit for the smooth running of the operation and ensuring the
business plan is executed to build maximum value.

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Increasing the headcount

“If you don‟t make and you don‟t sell, tell me . . . very slowly indeed . . . what do you do
for us?” These words, attributed to Larry Ellison of Oracle Corporation, highlight the need
to increase headcount only on the basis of measurable contribution to the business.
Funding for growth implies headcount growth, but based on strict performance criteria that
should be apparent from the business plan.

Upside financial control

Financial controls can be upside or downside, but where growth through investment is
required, should favour upside expenditure whose principal aim is the generation of more
business. Tied to financial controls are sales forecasting, debt and credit control where cash
„is king‟, representing, as it does, the lifeblood of the business. It is a truism that companies
should have a strategy they can afford, but always stretch the „burn rate‟ for growth.

Marketing as an essential part of strategy

Many SMEs fail to invest sufficiently in marketing. This is because there is a shortage of
good marketing practitioners, cause and effect are not widely understood, nor the results
that focused marketing activity can produce. Yet this is one of the most important criteria
for an investor. If marketing is about generating interest in a company‟s products and
services, then sales is about converting that interest into business. Sales management
among SMEs is not usually as effective as it could be. Only the minority of businesses
manage a properly forecast sales pipeline. Very few are able to articulate effectively the
true business value of their product or service to the prospect. The nature of high growth,
rapid-change business is that measurable business benefits are neither recorded nor
understood.

Business quality

Running a business operation effectively, to produce satisfied customers and profitable
growth, can be greatly helped by understanding the dynamics of the European Model for
Quality Excellence. This shows, in simple terms, the cause and effect of a well-run
organisation and informs the funding process.

Recyclable timeline
People Satisfied people

Strategies/
Leadership Policies Processes Satisfied customers

Societal impact
Resources

Satisfied investors
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Seeking investment is good for you!

The advantage in being involved with an investor is that it forces companies to consider
the whole of their operations in a way that they would not otherwise be inclined to, or have
the time to do.

Until undertaking this process, many do not understand that business is a „closed-loop‟
process where planning and control and activities are always geared to measurable
outcomes, where people contribute in a specified way and random occurrences are dealt
with as expected phenomena. Good business practice will reduce the „time-to-market‟ for
companies seeking funds.

Stage 2: Creating more momentum in the business

Second and further rounds of funding are a natural evolution from the first round,
assuming the original investment has been successful. Typically these are larger tranches
of investment and may be from a different and larger fund (if, for example, the first round
investor was a business angel) or from a number of sources at the same time.

The process of raising second round funding is usually easier than for the first round in that
the company seeking investment is aware of an investor‟s needs, how funds are raised, the
types of funding available and how better to value the business. However, the demands on
the company may increase due to more rigorous conditions imposed by the investment
contract.

Ambitious development aims needed

Whereas first round funding may support a parochial company, there would be an
expectation, particularly in the ICT sector, to develop business, for example in overseas
markets. Information-based businesses are generally more scaleable than those that depend
on substantial fixed assets. The hardware platforms that support information-based
businesses are already globally available, so the issue is deployment, not development.

At the second round stage, companies are also in a stronger position to enter into strategic
alliances as their intellectual assets have a proven trade value and may provide significant
strategic advantages to others when previously they were unproven.

Demands on management

Executing the plan at this stage of development demands more management „bandwidth‟,
more structure in the organisation, more formal processes and procedures and a very strong
focus on marketing. There may be turbulence in the business caused by the need to change
management structure and composition. The strengths that supported the business so well
in the early stages can turn into weaknesses if the axes of power remain unaltered.

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Stage 3: Preparing to realise the value in the business

To reach this stage assumes that the company and its investors have been working to a pre-
defined exit strategy. This will have needed to be clear to the current investors at the time
they made the investment. The exit may be through a trade sale or merger, or an IPO. In
the former case, this is a question of negotiating the best deal. In the latter, consideration
must be given to how much of the company will be on offer, to which of the shareholders
it gives an appropriate exit option and what will be the residual strength of the remaining
management team.

Trade sale

Selling the business is probably the most straightforward option but not necessarily the
most financially attractive. The contract may also include performance-related buy-out
conditions which, although they can work, frequently produce tensions for those involved.

Merger

Merging with another company is similar, but with the added complication of cultural
harmonisation.

Public offering

For many companies and investors, the most attractive option is an IPO as it releases
immediate cash into the business without necessarily sacrificing any management control.
It does, however, alter the nature of the business in that public shareholders expect their
money to grow from day one and to receive a reasonable annual dividend into the bargain.
Satisfying shareholder expectations is therefore a function of managing perceptions rather
than delivering the management information demanded by a private investor.

Need to create „mindshare‟

There are strong branding implications here, as shareholders will expect the company to be
well known in the marketplace, to maintain Press awareness, to influence analysts and
other third parties.

For a public offering to work well, there needs to be stability in the business and evidence
of sustainable income from a clearly established market. Although change will always be a
factor, maintaining a stable core business is fundamental.

Timing is key

In any public offering, timing is critical. As it takes time and effort for a company to
prepare itself for IPO, planning needs to be meticulous and forecasting the best entry time
undertaken with great care. Of course nothing is ever exactly as forecast, so contingency
planning is also an important part of the exercise.

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Professional advisers

In executing the exit plan, it is necessary to take professional advice from lawyers and
accountants. Both of these will often employ investment specialists who will offer valuable
advice as well as undertaking the necessary statutory processes. They will not, of course,
have expertise in marketing, so it is usually desirable to seek outside help on this front too.

Professional fees can represent a significant expense which needs to be allowed for as part
of the exit process.

Corporate health

Preparing for exit through public offering needs the company to be in the best shape it can
be, which means detailed attention must be given to all performance criteria, evidence
must be gathered to support the compay‟s clean bill of health and all personnel geared to
commonly understood performance goals. The exit process requires concentrated attention
and leaves little time for running the operation by the directors involved. This means that
responsibility for day-to-day running must be delegated in such a way that does not put the
business at risk.

5. ESSENTIAL CONSIDERATIONS

How investment can change the way you manage your business

As soon as someone else owns a proportion of your business, they will have an interest and
an influence in the way it is run. The original owner or owners will previously have had
only themselves to answer to for the decisions they make for the business and will
probably have enjoyed that autonomy. There are two ways of looking at this new, shared
ownership. The first is negative as it resents interference from what it sees as a necessary
but not particularly welcome third party. The second is positive in that it sees a stronger
management capability, a new and different perspective on the business and the increase in
resources that makes the entrepreneur‟s original vision achievable. Needless to say, it is
companies that adopt this second attitude that achieve the greater success.

In practical terms, there will need to be a formal means of providing information on the
progress of the business. Previously, because the owner was so close to it, there may not
have been such a need. Also, the business will now need to be working to a written and
commonly agreed business plan, where previously this did not need to be written down.

The use of funds will come under greater scrutiny and every action and expenditure will
need to be fully justifiable to a management board for the benefit it will bring the business.

Many companies operate in relatively informal ways before they receive investment. This,
a new stage in its life inevitably means greater formality and structure – and this is a
natural step in its development.

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How to cope with the changes

Change is said to be the only constant you can be sure of. The issue for management is
how to regard change as an essential and beneficial process whose purpose is the benefit of
all stakeholders. Of course there will be casualties, but there will be many more people
who stand to benefit. The energy created by new money in the business needs to be
managed carefully as not everyone sees things through the eyes of a leader.

Factors involved in successful organisational changes
(Based on research into the experiences of those who have done it)

Board level ambiguity

If colleagues, old or new, compete for their views to prevail then those below them will be
confused. If they converge and present a united front to the world then those who work
with them will be motivated by clear messages rather than confused by those that are
imprecise or ambiguous.

Leadership

Whether it comes from the nominated leader(s) or not, there has to be a „champion‟ who
lives and embodies the company‟s „vision‟. If everyone is supposed to be responsible, but
no one in particular is responsible, there will be a dissipation of focus, effort and
achievement.

Single goal

There has to be a clear and sustained purpose to which people can commit that is
understandable and motivational at all levels in the organisation. This is illustrated by the
example of USA President, Lyndon Johnson visiting what was to become Cape Kennedy
(in the days before a man had landed on the moon). The president stopped, on his way into
Cape Kennedy, to speak to a man who was sweeping dirt from the road leading to the
launch pad. “What is your job?” he asked. “I am helping put a man on the moon”, was the
reply – which shows just how an organisation can show commonality of purpose by
everyone that works within it.

Clarity of purpose

There has to be a clear reason why the changes in roles and structure may have to take
place or else inertia can set in.

The illusion of unity

Don‟t expect everyone to agree with the changes that you introduce as a consequence of
the investment, but don‟t droop to the lowest common denominator of agreement either.
You always need the stimulation of sceptics who will either be right or force a repeated re-
evaluation of the adopted changes. This is in the interest of all stakeholders.

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How open should you be?

Tell people as much as practicable about the implications of having a new shareholder or
new directors put in as a condition of the investment. Take some risks with candour – this
is likely to work better in an organisation whose change delivers growth than one facing
adverse circumstances.

Communication

Effective communication is vital and almost impossible to overdo. Yet communications
links can break down in uncertain situations due to being given inadequate priority.
Uncertainty and major change create anxieties that must be dealt with to maintain high
levels of motivation and effort.

Structure and culture

Use structure to change culture. It is normally easier and faster to change the structure,
reward and measurement systems and the performance criteria than to try directly to
modify limiting beliefs or resistance.

Creating winners

Personal success in a newly invigorated organisation is a great motivator but mistakes will
always be made. It is better to recognise meritorious failure as well as success to show that
those in the enterprise are valued and make the best contribution they can to the aims of the
business.

Fast change and initial acts

Early successes create productive momentum. There should also be intermediate
milestones of achievement that raise people‟s confidence in their ability to succeed further.
Speedy successes (or quick hits), even in relatively minor matters, demonstrate purpose
and commitment that will be both motivating to staff and investors.

Caring for casualties

Caring for people, as well as being morally commendable, is organisationally effective.
The worse you treat those who are no longer valued enough, the more resistance to change
will grow. Survivors will adopt defensive attitudes and strategies in case they are similarly
disadvantaged.

Minimising unintended consequences

You cannot avoid all errors, but you can organise yourself to anticipate some and recover
from others. Mainly this will be to do with contingency resources which a well-laid plan
can allow for.

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Boost the rate of selling

The purpose of a company is to make money from customers in return for a product or
service. Employees and investors will be uplifted by an increase in new customers that
justifies the additional resources being applied.

How to ensure quality and sustainability in the business

The quality in the business depends on how well its functions work together, how well the
purpose of the business is understood by all those in it or supporting it, and the
development and use of relevant documentation that clarifies all policies, processes and
procedures. The adequacy of skills and the application of training to ensure continuous
improvement, is an important function of effective leadership and will help ensure
conformance to the quality standard.

There are different proprietary and accredited standards that can be applied, or a company
can, with guidance, develop its own systems. The process of taking a company through a
recognised standard, whether or not accreditation is achieved is, in itself, a valuable means
of educating management into what is required. Standards can, of course, evolve through
experience, but, because of the proven correlation between quality and return on
investment (ROI), an investor will want to know that there is a system in place to
consistently ensure customer satisfaction.

Sustainability in the business is achieved by full attention to the effective functioning of
every part of it, and from continuously improving those aspects that have the greatest
impact on competitiveness, productivity, innovation and growth. There are well
documented benchmarks and ratios that test company health, but a simple model of
effectiveness could include the following:

Generating income. The suitability of product, market segmentation, targeting and timing
as well as pricing, discounting policy and incentives, marketing programmes and sales
negotiation skills all have a bearing on profitable revenues. Stopping money going out can
be achieved through buying effectiveness, operating decisions, efficient utilisation of
materials, wastage reduction, removing non-essential overheads and lowering fixed costs.
Best use of people depends on clear business goals, organisation structure, clarity of roles
and responsibilities, resource planning, optimum use of time and effort, communication,
pay and other rewards, management skill. Optimum use of assets means managing capacity
and utilisation, purchasing policies, depreciation, level of borrowing, interest levels, stock
and whether machinery is fit for purpose and maintainable. Good money management
means effective credit control, reduction of borrowings (investment policy), product and
service performance, warranties, efficient use of time periods, speed of cash to bank and
invoicing efficiency. Strong intangibles are to do with the reputation you earn and the
goodwill you generate so customer relations and public perception have to be managed
effectively.

30
Intellectual Property Rights (IPR)

It is frequently the case, particularly in the ICT sector, that the companies likely to grow
most rapidly and make most profit will have something that is unique to them. This can be
a technique, process, product or capability that can be described as „intellectual property‟.

Any investor in a company will want to ensure that this „IPR‟ is protected from replication.
This need is acknowledged world-wide and most countries will accept the validity of the
legal protection available.

The types of protection include:
 Copyright
 Trademarks
 Patents
 Secrets (industrial and commercial)

This includes computer software, photographs, texts, CDs, videos, film, broadcasts and
transmissions as well as other created or designed materials. Copyright does not usually
have to be registered and comes into existence as soon as a work has been created. Because
there is no regulatory process to the protection of copyright it can sometimes be difficult to
prove ownership. Copyright laws do vary from country to country. Generally speaking in
the ICT sphere it will afford protection for 50 years.

Trademarks

Trademarks are emblems or badges that show origin and sometimes quality. They do not
necessarily have to be registered provided that there is some proof of established goodwill
that could be damaged by someone else using it improperly. If registration facilities do
exist then it is advisable, if goodwill could be threatened, to register promptly. There is a
(usually) small fee to do this. There is community protection from a European Community
Registry based in Alicante, Spain.

Patents

A patent is a right to a monopoly protected in law. It relates to inventions and gives the
patent owner protection, usually for 20 years. There are strict rules governing patents,
mainly stipulating that an invention should genuinely break new ground – no one else in
the world, as far as can be ascertained, has done it before.

Checking this out can be an expensive and time-consuming procedure, so anyone
embarking on trademark registration needs to feel confident that the invention will
effectively create a world standard. Most countries grant their own patents, so any world-
wide arrangement is a question of applying country by country.

It can be done Europe-wide and the European Patent Office is in Munich, Germany.

31
Software is notoriously difficult to patent and so the risk/reward ratio, together with the
likelihood of succeeding, have to be carefully investigated.

Secrets

Trade secrets are highly sensitive, as in the case of the formula for Coca Cola, for example.
They can be a valuable asset to the business and have calculable worth in terms of share of
market, use as security against loans etc. They can often be a means of generating royalties
through those third parties licensed to use them.

Because dealing with investors often needs them to know your secrets, it is important to
have written acknowledgement that secrets and privileged knowledge will not be revealed.

When in doubt, seek legal advice.

32
Checklists (1)

The schema below can be used to check the many different areas where IPR protection
could be needed:

Content Technologies Media Consumption

Software & Services
Industry domain

PC
Content
 Text Software, systems TV Business
 Pictures and
Commun users
 Sound communications Mobile -ications
development phone
links
Consumers
Handheld
device
Content
design/ CD
packaging Systems analysis
System design and Tape
packaging
Programming Film
System building
Video
Implementation
Support
Facilities
Management
Bodyshopping
Systems
Integration

33
Checklists (2)

Although ICT is sometimes described as a sector, it is divided into many dissimilar types
of business. Different types of business can often have completely different types of
markets and business models to explain to a potential investor.

Where do you fit among the companies that make up the ICT sector?

Pre-packaged software
Companies that develop „package‟ software for multiple sale – includes
applications, systems, information and games products purchased direct, via
distributor or retail.
Custom software
Analysis, design, programming and implementation of customer-specific
software/systems
Systems integrators
Co-ordinators of the supply and integration of some or all the components
necessary to implement a complete systems project – with own or others‟ value-
added products and services (includes Value Added Resellers but not dealers)
Computing services
Consultancy, human resources (bodyshop), programming services, timeshare,
disaster recovery, information retrieval, outsourcing, education/training, support,
maintenance and repair.
Communications
New interactive media, e-business, internet/intranet developments, telephony ISPs,
ASPs and the supply/ implementation of other radio, network-dependent systems
and information services.

Checklists (3)

A team of venture capitalists from a variety of investment firms decided that there were ten
common „lies‟ contained in business plans that, in their terms would disqualify them from
being taken seriously. These were:

Top 10 „lies‟

1. Our financial projections are conservative (they are usually not)
2. Our market is worth x$million (this is always exaggerated)
3. Our contract with xyz „big client‟ is due to be signed next week ( it won‟t be)
4. If we only sell 40% of the company we will still have control (unrealistic)
5. There is no competition in our market space (they have not done their research)
6. No one else can do what we are doing (how could they possibly know?)
7. Xyz „big company is too slow to be a threat (an unwise assumption, not a fact)
8. All we have to do is get 2% of the market (is not as easy as they think)
9. We have/will become the de facto standard (but how can they predict that?)
10. We have „first mover advantage‟ (but someone else could be better and faster)

34
ANNEXE 1

EFQM ‘BUSINESS EXCELLENCE MODEL’ and its use

The European Foundation for Quality Management (EFQM) introduced the Excellence
Model to help organisations understand and practise the principle of Total Quality
Management across an organisation, thus enabling it to increase efficiency, effectiveness
and sustainability through the way it does business and in its relationships with its different
stakeholders. These would include customers, employees, shareholders, suppliers and
others in the different communities in which they operate.

Its relevance to businesses in emerging and transition economies is that it gives a template
against which they can manage their growth and development. Companies can be
accredited against it as for other quality standards, but it also provides an excellent guide
simply to the principles by which they should be managing their operations to the
satisfaction of investors as well as all the other stakeholders.

The diagram below shows the nine elements of the model as they apply in this
circumstance.

Satisfied
People (staff)
people

Leadership Strategies/
Policies Processes Satisfied customers

Resources
Societal impact

Satisfied investors

35
Starting with leadership, one has to consider what the role of leadership is. The model
shows this as leadership that defines strategies and policies and manages people and
resources to optimum effect.

But it cannot do this without business processes. So these are the delivery mechanism of
what the business does. They must be clearly defined and implemented to produce the right
results.

What are the immediate benefits of this? First, customers are satisfied with what you do.
Second, your employees and other stakeholders are satisfied with what you do. Third, it
has a positive impact on the society that surrounds you.

The outcome of all this is first class business results.

Business Excellence – definition of terms

Leadership - this covers the role senior managers play in shaping the organisation through
its values, mission and vision, and behaviour. The actual behaviour and involvement of the
senior managers are fundamental to success. The extent to which managers demonstrate
their commitment to the customers and to the quality standards of the company is also
paramount.

Policy and Strategy This is about planning activity and how it takes into account any
policies and strategies of the organisation. It also enables the connection to be made
between strategy and objectives and actual performance.

People Management – this is how the organisation views the development of its
employees. It also includes the way that peoples performance and training needs are
assessed, and the way that these are related to the needs and requirements of the business.
The degree of employee empowerment (the extent to which they can make and enact their
own decisions) and the scope of internal communications are also important factors.

Resource Management - this is the way that key business information is organised and
communicated throughout the company. The alignment of resources such as material
assets, IT, finance and new technologies, with the goals and targets of the organisation, are
also a measurable contributors to the business.

Processes - the means by which processes are managed, developed and controlled are an
essential measure of business effectiveness. The changing the processes and other
improvement activities, and how these are communicated and acted upon, are also
important considerations.

Customer Satisfaction - this is about the type of relationships the organisation builds with
its customers. It depends on customer perceptions and the measurement of them, and then
looks at understanding what the customer measures can be used for in improving the
business.

People Satisfaction - this refers to the measurement and communication of employee
satisfaction as well as the steps taken to ensure continuous improvement.

36
Impact on Society - this is the involvement of the organisation in the community (and
includes the impact of employment) in which it operates, beyond any legislative
responsibility. It is also concerned with issues of ethical standards and how they are
identified and communicated.

Business Results – ultimately this covers the management of financial and non-financial
performance measures.

The EFQM Excellence Model can be specifically used as a benchmarking tool and
accreditation can be achieved against it.

For further information from a wide variety of sources, look up „EFQM‟ on any English
language global search engine.

37
ANNEXE 2

ICT Industry Associations

Industry associations can provide an extremely useful source of business intelligence,
influence and support. Many countries have highly active bodies helping their members to
grow business. Those who do not yet have such associations would benefit economically,
politically and socially from setting up similar organisations of their own.

In the meantime, the existing associations can often be approached for information and
guidance that would help others.

The World Information Technology and Services Alliance (WITSA – www.witsa.org) is a
consortium of 46 information technology industry associations from different economies
around the world.

There are also many more ICT associations outside WITSA whose purpose is similar. (lists
of WITSA and non WITSA organisations are provided below and include a number from
within emerging and transition economies)

WITSA activities include:
 Promoting policies for industry growth and development
 Facilitating international trade and investment
 Sharing beneficial knowledge and experience
 Creating a vast, world-wide contact network
 Hosting specific world ICT events

Some of the issues addressed by WITSA include influencing regulatory and market reform
to enable better open market competition, protection of Intellectual Property, enhancing
information security arrangements and reducing trade barriers.

WITSA members are:

Argentina (CESSI) Colombia (FEDESOFT)
Australia (AIIA) Czech Republic (APP)
Bangladesh (BCS) Ecuador (AETIS)
Brazil (Sucesu-SP) Egypt (CSCE)
Bulgaria (BAIT) Finland (TIETOALAT)
Canada (ITAC) France (Syntec Informatique)
China (CISA) Greece (SEPE)
Hong Kong (HKITF) Malaysia (PIKOM)
India (NASSCOM) Mexico (AMITI)
Israel (IASH) Mongolia (MONITA)
Italy (ANASIN) Morocco (APEBI)
Japan (JISA) Nepal (CAN)
Jordan (int@j) Netherlands (FENIT)
Lithuania (INFOBALT) New Zealand (ITANZ)

38
Northern Ireland (Momentum) Spain (SEDISI)
Norway (ICT Norway) Sweden (IT Företagen)
Panama (APS) Thailand (ATCI)
Poland (PIIiT) United Kingdom (Intellect)
Portugal (APESI) United States (ITAA)
Republic of Korea (FKII) Uruguay (CUTI)
Romania (ATIC) Venezuela (CAVEDATOS)
Singapore (SITF) West Bank and Gaza (PITA)
South Africa (IISA) Zimbabwe (COMSA)

Other countries with non-WITSA ICT associations include: Austria, Belgium, Burkino
Faso, Chile, Costa Rica, Denmark, Estonia, Hungary, Indonesia, Ireland, Latvia, Pakistan,
Peru, Philippines, Russia, Scotland, Slovenia, Slovakia, Sri Lanka, Switzerland, Trinidad
and Tobago, Turkey, Ukraine and Vietnam.

39
ANNEXE 3

Case Study 1: Prosignia Technology

As a result of two individuals with musical training, music industry experience and ICT
skills believing that digital technologies could transform the use of sound and music on the
Web, the idea behind Prosignia Technology was formed. Its premise was that although the
„streaming‟ techniques that are now commonplace allowed music to be downloaded, it
could not match the speed of digitally deconstructing and reassembling units of sound
instantaneously. There was a lot of work that had to be done to prove this principle,
however, and they needed a backer.

The first investor in the company was a „Business Angel‟, an individual who understood
what the two founders were trying to achieve, appreciated the potential application of what
was effectively a new technology and had confidence that they would succeed. He took a
shareholding in the company and made himself available to support it on the financial
management side.

The result of this initial investment was that it enabled Prosignia to develop the „proof of
concept‟ that confirmed the belief that it could be valuable across a range of applications. It
was initially packaged as a software product and sold to an early market of interested
buyers.

The company also recruited high-powered marketing expertise in part-time roles and put
together a strategy to hit the market hard. But to do this, they needed more money.

A number of venture capitalists were approached and eventually, one of the major firms
agreed to invest $1.5million in return for a 20% stake. The condition was that they would
appoint two new directors to the Board to safeguard their interests. They nominated two
from their panel, but in the event, two alternatives were found and agreed to by all parties.

The original investor was appointed as managing director.

The company continued to expand at pace and established for itself a very high profile and
strong presence. The ICT market downturn for a short time affected growth which was
subsequently put back on track by some tactical adjustments and renewed marketing effort.
(Source: Software Business Network. Company name has been changed)

40
Case Study 2: Aethos

Two colleagues from a major UK telecommunications firm had a vision of capitalising on
the rapid growth in the mobile phone market and set up on their own company, Aethos, in
1994. Five years later they sold the business for GPB47 million.

What made the company a success? In the first place it was a very good market sector to be
in. Second, it had developed some excellent software products, such as mobile phone
prepaid software.

The two partners believe they had their strategy just about right but there was just one
warning they would have for other entrepreneurs – do not go into the venture capital
market too early.

“In the first year we generated revenues from providing consultancy services and this
funded our product development. At this time we talked to a lot of venture capitalists and
they were not interested in what we were doing because they perceived the products as
simply design concepts.

Twelve months later, however, it was a different story. We had managed to sell both our
products and at this time we revisited the VC market. We then found ourselves in the
enviable position that every VC we presented to wanting to invest – we then made sure that
we got the right investor on terms that were attractive to us. Thereafter, the partnership
with our investors worked very well.

The first crucial step in our success, however, was having that „crazy streak‟ and self-
confidence to take that first entrepreneurial action to leave the comfort of a large
organisation. That was the most critical decision the two of us had to make.”

(The above was taken from Icon 66, published by Icon Corporate Finance
www.iconcorpfin.co.uk)

41
Case study 3: Maxima Group

This is a different kind of example, a business that was started through de-merging from a
larger group.

From small company that was turning over £500 thousand per annum at the time of the de-
merger, it grew to a £40 million group of five companies in nine years.

In return for funds transferred from the old to this new company, chairman John Caines
gave up his shareholding and had sufficient capital from the transaction to fund the new
operation for its initial period of operation. So as not to remove too much cash from the old
business and to ensure that it could continue to operate effectively, he left a proportion of
the capital sum as a long term loan, recoverable after a specified period.

The new company, Minerva Industrial Systems, thus started its independent life
unencumbered.

From 1990 to 1997 all funds were self-generated and further self-funded acquisitions were
made to increase the size of the Group.

During this period, starting in 1995, the company started appointing non-executive
directors in an advisory/mentoring role. This in turn developed into more ambitious growth
plans for which external funding was then sought.
The initial sum was provided by a venture capitalist specifically to accelerate growth. It
was initially in the form of a loan and then, subject to performance, based on 30% IRR
(Internal Rate of Return) converted into an equity arrangement. The investor was also then
represented on the Company‟s Board as a non-executive director.

Although the company was then prepared for a market flotation through an IPO (Initial
Public Offering), this was not followed through and in 1999, John Caines started a process
of divestment which has now been completed

42
ANNEXE 4

Business Plan Guidelines

[Company Name]

Business Plan Ver. [Version number]
Date: [dd/mm/yy]

[Contact name]
[Phone number]
[Fax number]
[Email address]
[Web site address]

43
Contents .............................................................................................................................................
Executive summary ...........................................................................................................................
Description of the business:...............................................................................................................
Products and Services.....................................................................................................................
History ............................................................................................................................................
Ownership ......................................................................................................................................
Management Team ............................................................................................................................
The Market ........................................................................................................................................
Market Size ....................................................................................................................................
Segments ........................................................................................................................................
Growth............................................................................................................................................
Competition ....................................................................................................................................
Routes to Market ............................................................................................................................
Marketing .......................................................................................................................................
Sales ...............................................................................................................................................
Operations ......................................................................................................................................
Business location.......................................................................................................................................
Personnel ........................................................................................................................................
Organisational Chart ......................................................................................................................
Recruitment Plans ..........................................................................................................................
Financial Data ....................................................................................................................................
Historic Financial Results ..............................................................................................................
Projected Financial Results ............................................................................................................
Profit and Loss Projections ............................................................................................................
Cash flow Projections.....................................................................................................................
Balance Sheet .................................................................................................................................
SWOT Analysis .................................................................................................................................
Strengths .........................................................................................................................................
Weaknesses ....................................................................................................................................
Opportunities ..................................................................................................................................
Threats ............................................................................................................................................
Company Needs .................................................................................................................................
Appendix 1 Management Team Resumés ........................................................................................
Appendix 2 Detailed Financial Projections ......................................................................................
Appendix 3 Product Brochures ........................................................................................................
Appendix 4 Customer List By Year .................................................................................................
Appendix 5 Other Important Supporting Material ...........................................................................

44
Executive summary

Your business plan should be complete, clear, neat and accurate. It will be an extension of
you and your business. The length of a good plan will vary depending upon the business,
but in general should be less than 30 pages. Regardless of the length, it is important to be
concise – why take a page to say something that can be said in one paragraph.

The executive summary should be able to act as a stand-alone document and provide an
overall picture of your business proposition. You will find it very valuable in attracting the
attention of potential investors. A good executive summary will encourage them to read
on. Try and keep the summary to less than two pages.

 What is the market opportunity?
 What is your competitive position?
 What are your funding requirements?
 For what purpose are the funds being requested? What are the expected benefits to the
company?
 Besides funding, what are the organisation‟s other needs?
 How much are you investing in the venture?
 What is the business of the company?
 Provide a one paragraph summary of each of the major sections contained within the
business plan
 Summarise financial projections (Yearly Sales, Gross Profits, Net Profits, break-even,
Return On Investment and Cash Flows) Indicate major financial milestones (Note
when cash flow turns positive, when break even is achieved, etc.).

Description of the business:
Products and Services

 Clearly explain all products and services.
 What advantages does the product or the service provide to the customer?
 What underlying technology does the product or service use? Who owns this
Intellectual property?
History
 History of the company since its incorporation to its position today.
 What is the status of the venture: start-up, expansion of a going concern, purchase of an
existing business?
 What is the legal structure of your business? Is it a sole proprietorship, partnership, a
limited liability company or some other form?

Ownership

 How is the equity distributed between the organisation‟s owners and others?
 Details of any option schemes if in existence.

45
Management Team

This is often one of the most important sections of a Business Plan and should be
supported by providing detailed chronological resumés in the appendix. This section
should include a one-paragraph summary for each key person (e.g. MD, Sales Director,
Operations Director, Commercial Director, Head of Development and Finance Director)
within the organisation.

Details to include might be:
 Names of those that will have day-to-day responsibility of managing the business?
 Details of their business backgrounds, management experience and contractual details?
 A list of proposed salaries and wages. Are they consistent with industry norms?

You should also provide information on non-executive directors and external advisors who
have an equity or likely future revenue involvement.

The Market
Market Size
 Who and how large is your market?
Segments
 How have you segmented the market?
 Which segments are your targets?
 What are the size and growth rates of the segments of priority interest?

Growth
 What is the trend in the business, segment and industry? (Are revenues growing,
stable, or in decline?) Include copies of supporting documents, ideally independent
market surveys, in the appendix.
Competition
 Who are your competitors? What are their strengths and weaknesses?
 Identify competitive or substitute products/services.
 Can any of your competitors be used as a role model?

Other important information might be:
 Size
 Goals
 Market Share
 Product Quality
 Marketing Strategies

The Internet is often a fertile source of competitor information. We find using search
engines such as www.infoseek.com and key words appropriate to your product usually turn
up a number of competitors. Very often these competitive companies are from the US and
NASDAQ listed which requires them to file yearly annual reports (called 10K) with the
SEC. These 10K reports provide an amazing amount of competitive information. One can

46
find links to SEC filings from www.nasdaq.com. Alternatively one can go directly to the
EDGAR database at http://www.freeedgar.com.

Companies are required to list their main competitors in the SEC annual reports. Hence,
finding one competitor can lead to a number of others.
Routes to Market
How will you move your product or service into your target market?
Marketing
 How will you market your products and services?
Sales
 What pricing and sales terms are you planning on? What licensing terms?
 How will you be competitive?
 What percent of the market do you have now? How much do you think you will have
in the future? How quickly will you reach that percentage? Document the sources of
your estimates.
 Is your business seasonal? Explain.
 Describe significant customer relationships or prospects.
 What revenue model do you use?
 What is the typical sales cycle?
Operations
Detail any important operational issues. This may include:

 Equipment, facilities and people necessary to help generate your products and services.
 How will your products and services be produced and made available to the customer?
Business location

 What is your business address, why did you choose that location and is it still
relevant?

Personnel
Organisational Chart

 Describe your organisational structure and include a brief description of who does
what. Include an organisational chart if necessary.
 What management assistance resources are available to you and what will you need in
the future? (e.g.: accountant, lawyer, outside consultant, financial advisor) What is
your relationship to these people and what is the associated cost?
Recruitment Plans
 What are your anticipated personnel needs for the next three years?
 What skills must your employees have? Will you train the people, or will you hire an
outside trainer? Will you hire only already skilled workers?
 Do your plans include recruitment costs? What assumptions have you made regarding
staff turnover?
Financial Data
 Details of your assumptions and revenue models should be included.Historic Financial
Results

47
 Historic Financial information should also be presented if available, stating year-end
and whether it has been audited.

Projected Financial Results
Profit and Loss Projections
Cash flow Projections
Balance Sheet

SWOT Analysis
Strengths (internal strengths that can be exploited to develop the business)
Weaknesses (internal weaknesses that restrain progress and should be remedied)
Opportunities (external factors of which you could take advantage)
Threats (external factors that could damage you if not counteracted)

By completing a SWOT analysis with candour, you will identify the actions you need to
take to maximise your capability to be successful.

Company Needs

Many people think of Venture Capitalists as only able to provide money. Advisers and
intermediaries are able to provide much more than just money. This may include
assistance with:

 New Management, either permanent or interim.
 Developing and implementing corporate strategy and business processes
 Sales & marketing plans
 Formal training in these areas is also available
 Help with international expansion.
 Introduction to possible marketing partners and early stage customersAppendix 1
Management Team Resumés

Appendix 2. Detailed Financial Projections
Appendix 3. Product Brochures
Appendix 4. Customer List By Year
Appendix 5. Other Important Supporting Material

48
ANNEXE 5 FUNDING APPLICATION PROPOSAL

(This proposal is a modified, simplified and truncated version of a 25 page document that
was successfully submitted for around USD$700k of funding. The name of the business
has been substituted as have any items that could make the company identifiable. The
purpose of providing this document is to show how information can successfully be
presented to a potential investor)

New Product Information Software - “Prodinfo”

Contents:

A. Technology overview
1. Proposed new product
2. Business benefits
3. Intellectual property
4. Technical challenges
5. Resource allocation
6. Project management methodology
B. Business Plan
1. Market size
2. Experience of management team
3. Market trends
4. Competitive environment
5. Business model
6. Marketing and distribution
7. Sales projections
8. Allocation of funds
9. Cash flow, Sensitivity analysis, Internal Rate of Return (IRR)

C. Appendices

A. Technology Overview

Prodinfo is unique in that it is based on two complementary technologies that between
them enable extremely rapid retrieval and manipulation of relevant product and market
data.

It uses a state-of-the-art navigation tool that enables users to pinpoint and retrieve
information about even the most complex queries. Using advanced data maps together with
statistical formula, it includes the ability to create probability forecasts in an extremely
user-friendly, intuitive way.

Part of the technology was developed by the mathematical department of „Regis Wells
University‟, whose research into such topics leads the academic world.

49
1. Proposed new product

Prodinfo will manage internal, third party supplier, market and competitive information in
an integrated and easily retrievable way and will enable any management team to take
tactical and operational decisions based on up-to-the-minute, fully analysed data. It is
expected to be deployed world wide, following its European launch.

Its main functionality will include:
 xxxxxxx
 xxxxxxx
 xxxxxxx
 A flexible yet easy to use research tool will enable users to sift through information
instantaneously and compare and contrast different sets of findings with ease.
 There will also be automatic searches of new information retrieved from the Web and
other on-line sources of corporate knowledge
 All information used will be traceable
 Hypothetical models can be built to help anticipate different commercial scenarios
 All data will be standardised and utilise an unambiguous taxonomy

The product itself will comprise a number of modules that can be used in any permutation
to reflect the needs of individuals and user organisations.

2. Business benefits

 Up-to-date product information enables fast decision response
 Wide user acceptability because system is so easy to use
 Traceable data protects clients‟ interests
 Data aggregation means users are always presented with the „best of the best‟
information sources
 The product can be used by many users simultaneously without detriment to
performance

3. Intellectual Property

Over half the software in use is already protected by copyright and a patent has been
applied for to cover the critical components that the proposed funding will help us develop.

We will be seeking copyright protection in all the new modules to be developed and have
already made arrangements for an escrow agreement that freezes our source code for
verification purposes.

4. Technical challenges

Because we are employing two different technologies that derive from two different
authorship sources, we have to prove that the two will work together seamlessly and at this
point we are not sure of the amount of effort or change to the original code will be
necessary to achieve this. However we are confident, because we have free access to both
development sources that the challenge will be quickly surmountable.

50
Also, because we will be aggregating data from a variety of sources there is the logic
challenge of developing a taxonomy that can be universally applied. This has not been
done before but our initial investigations lead us to believe that it will be achieved, and that
the concept will be ready for testing within just a few weeks.

5. Resource allocation

A number of principal consultants and senior developers will be employed on the project
and their work will be managed and co-ordinated by a specifically appointed project
director, accountable to the Board and driven by specific milestones and commercial
targets.

Estimates for the work involved and allocation of resources are (notionally) in Appendix n

As with any pioneering activity, we can only estimate effort and real time-scale at this
stage, but we are confident that our predictions will be accurate to plus or minus 15%.

6. Project management methodology

We are working to standards that have been developed by the Company and effective in
operation for over six years. These mirror conventional methodologies, such as Prince, but
have been adapted from what was originally a public sector-orientated process to a more
streamlined version that is now more suitable to private sector projects.

Our methodology is fully documented and its effectiveness can be verified if necessary.

There is full reporting at every stage in the project lifecycle.

Business Plan

1. Market size

It is difficult to predict market size with accuracy as the product is new and fulfils a
different need in many respects to any similar type of product that has gone before it.
However, what we do know is that the overall world market for knowledge products is
already over $30bn and growing at 5% per annum and we would expect this to convert into
a market of at least 4% of that number but growing even faster. As early players in the
product/competitive/ market knowledge space, we would expect to build a significant share
of what is available – particularly as we see ourselves around twelve months ahead in the
development of this new kind of application.

Our financial projections (see Appendix t) are a conservative interpretation and a
sensitivity analysis is given.

2. Experience of management team

51
A management team of four covers the financial, sales, R&D and general management
functions and has been brought together because of complementary skills, experience and
common belief in the growth of value-added on-line information. Each has specific
experience in this sector ranging from 4 years to 15.

Details of individual team members are contained in Appendix s

3. Market trends

The overall trend in the use of value-added on-line information resources is considerable. It
has been evolutionary (as compared to revolutionary) which means that growth has
reflected the progressive emergence of technologies that refine information and speed it to
market.

Prodinfo is part of that continuum but is sufficiently advanced in concept to give the
company a clear market edge that it will be able to sustain over the longer term through
continuous investment in technology and product improvements.

The relaxation of cross border regulation concerning freedom of information, plus the
increasing globalisation of world trade, means that, businesses increasingly rely on up-to-
the-minute information to remain competitive.

Also, growing convergence, particularly in the high-technology industries means that, for
the foreseeable future, there will continue to be sufficient merger and acquisition activity to
produce constant and dramatic change in the commercial environment.

4. Competitive environment

The relative newness of the Prodinfo application means that direct competition is, for the
time being at least, relatively light. There is still however, relatively greater indirect
competition from companies that sell well-established information products using older
technologies and who are considered the de facto business intelligence sources. Prodinfo
intends to position itself as different to these and progressively establish a reputation for
satisfying a different, more urgent kind of information requirement.

Specific companies perceived to affect this process are
xxxxxx
xxxxx
xxxxx
xxxxx

These are categorised as technology competition, direct competition,
indirect competition and ancillary competition.

52
5. Business Model

This includes a combination of direct and indirect sales channels plus „Super Partners‟ who
already have a branded market presence and the opportunity to act as OEM in those
vertical markets they usually address. The markets for each of these players will be
allocated so as not to cause overlap and therefore customer ownership contention.

Resellers will be geographically based and sell to SMEs. OEMs will sell to a captive base
of named vertical market clients and Prodinfo will sell to corporations that fall outside both
those categories.

Prodinfo will retain control over product evolution and will set up both direct and partner
support, training and accreditation.

6. Marketing and distribution

In order to sell direct as well as through channels, Prodinfo will control the production of
marketing collateral, PR and brand advertising and provide full sales training and refresher
courses to a consistent standard that ensures the quality of the sales and after sales
processes is consistently upheld.

The strategy is to develop initially through direct sales, and then to recruit a „pilot channel‟
of six resellers before extending this number to 100+. OEM Super Partners will be
recruited once the sales model has proved effective and more impetus can confidently be
applied to accelerate the process.

The basis of income will be an annually renewable licence fee plus a percentage for
support and updates. In order to secure good quality revenues, incentives will be given for
longer-term commitment.

Resellers will gain a discount on product licences that improves, subject to commitment, to
different levels of target. OEMs will be royalty-based.

7. Sales Projections

A spreadsheet would be provided here

8. Allocation of funds

A spreadsheet would be provided here

9. Cash-flow, sensitivity analyses and IRR projections would be provided here.

C. Appendices

Market reports, technology assessments, further project details and other supporting
information provided here.

53
ANNEXE 6: PERFECTING YOUR PITCH (and business plan)

This brief paper tells you how to prepare the best possible investment presentation (or
„pitch‟) in the shortest possible time. It takes you through the process of creating a
compelling „elevator pitch‟, executive summary, and company overview presentation. It
contains useful tips concerning the best way to present to investors and highlights some
common mistakes.

1. First consider your ‘elevator pitch’

The principle of the elevator pitch is that, if the potential investor you wanted to talk to
were to ask you, when travelling in an elevator (or lift), what was your business
proposition, you would have to explain it very clearly in a very short period of time –
before the elevator reached its destination.

However, presenting things succinctly in such brief form is far harder than preparing a
detailed presentation. Mark Twain probably said it best: "I didn't have time to write you a
short letter, so I wrote you a long one".

If he had been looking for investment, he may have said: "I didn't have time to write you a
short Elevator Pitch/Executive Summary/Overview Presentation, so I wrote you a long
one".

Less is more … but it is much harder to do.

2. Why the excitement about ‘Elevator Pitches’?

 It's not just the end results, but the mental process
 It is the Purest distilled essence of your dream and vision
 You learn to articulate what really matters
 It forces you to focus
 You might actually use it on an elevator one day so you‟ll be ready!

3. Where does your elevator pitch belong in the presentation process?

If you consider that persuading an investor to invest in you is a little like fishing, there is a
similar process to be gone through in order to land your „catch‟. A hook alone is
insufficient. You need some succulent bait to put on the hook. The elevator pitch „EP‟ is
like the bait.

Look at this process continuum

Bait the hook Land the
*EP* fish
Get them Close
interested them

54
But remember, bait the hook, don't force feed the fish by giving them too much. Get them
wanting more!

The elevator pitch covers what (the idea) and so what (tangible benefits). It doesn't
include how (you are going to do it). Ask yourself the question "So what?" every time you
make a statement.

4. There are not many tall buildings – you are likely to be in a short one!

The elevator pitch consists of:
a. A positioning statement such as "We cut manufacturers‟ overhead
costs”.
b. A burning problem, such as manufacturing capacity is poorly utilised in 35% of
our industry.
c. Quantifying the size of the opportunity. You have to want a big chunk. If the market
is work $23bn and you are looking at 0.0007% of this for your company, that is not
impressive. Take out all irrelevancies, focus only on what will appeal to the investor. If
the market is huge, use a sub-set of the market. For example, say the market is 4% of
overall and we want 5% of this market.
d. A unique opportunity, not the 17th on-line bookseller.
e. So what? benefits.
f. Mission statement, clarifies your positioning statement. But ensure it could fit on the
back of a business card.
g. Call to action.

5. Be exciting
It must change the pulse rate.

6. Kill ‘Business School Speak’
"We provide the leading business-to-business solution for clinical data capture and
management for the pharmaceutical and biotech industry".
"We streamline processes to speed important new drug therapies to market".

7. Kill ‘Techno Speak’
"Utilising the 2048-bit Diffie-Hellman key exchange and 168-bit triple-DES, we
provide intrusion protection for digital voice, fax, and wireless communications".
"We safeguard your communications".

8. Speak in plain language
Use the KIS principle: Keep It Simple.

9. Where does your Executive Summary ‘ES’ belong?

Bait the Land
Hook *ES* the fish
Get them Close
Interested Them

55
10. Executive Summary

Not shorter than 45 pages
No fonts larger than 8 point
No graphics or charts

Aim for a document that is succinct and presents a compelling argument. The Executive
Summary should be able to stand alone as a brief but complete document justifying the
investment being sought. This includes not only the text but the principal figures that
support your case – sales projections, cash projections and costs over at least a three year
period.

11. Executive Summary: An analogy

The market is the racetrack
The business idea is the horse
Smart gamblers/investors bet on the best riders not just the horse

12. Focus on Track Records

Include the team's track record; everybody has one. Explain what expertise you have and
what is lacking. It's OK to say "I'm the temporary Finance Director. We will get a
heavyweight after we receive funding".

13. Where does your Overview Presentation ‘OP’ belong?

Bait the Land
hook *OP* the fish
Get them Close
interested them

14. Pitch Decay

Only 50% remembered after just one hour
Only 20% remembered after just one day
Only 10% remembered after just one week

15. So what's the 10% that matters?

This should be able to be expressed in three major statements:
1. Big Point one
2. Big Point two
3. Big Point three

16. What's the 10% that matters? (make sure to repeat essentials)

Tell them what you are going to tell them
Tell them
Tell them what you told them

56
17. Identify your ‘MUST REMEMBERS’

Plan and allow for pitch decay.

18. Do it in about a DOZEN slides!

1. Title; Speaker introduction; what you are after
2. Company overview and elevator pitch; mission statement
3. Problem buy-in; market and opportunity size (racetrack)
4. Your solution and products, with benefits
5. More solution details (horse)
6. Technologies
7. Competition
8. Marketing and „business multiplier‟ points
9. How you will make money and how much
10. Team (riders)
11. Status, time projections, use of funds
12. Recapitulate, call-to-action (we would like you to . . .)

19. A DOZEN slides maximum in FIFTEEN MINUTES
(OH YES YOU CAN!)

20. The essentials for a business plan

Make it short. If you can say it in 20 pages, why say it in 120. Investors never read with the
same diligence with which you wrote it

Basic contents should include why the need for your product or service, why this is a
growing market, how you will succeed, who is in your team, who are the competition, how
you will beat them, how much money you will make and how much it will cost to get
there.

To develop the above points in more detail:

1. Your product or service should fulfil a real need, not a hoped-for need. Why would you
buy what you are creating?
2. The market should really exist and be projected to grow rapidly and there should be
some verification of this – analysts report, for example.
3. It is very important to say how and why you will succeed, including how you will
market and sell – in a credible way.
4. Say why your team will succeed, what their relevant backgrounds are, what gaps exist
and what you will do to fill them. (It pays to be honest)
5. Be realistic about your competition and demonstrate that you know them in detail. Do
not claim that you have no competition because even if there is no one directly selling
the same product or service, someone will definitely be competing for the budget from
which the purchase of your goods will be paid.

57
6. Say what your technological, sales and other advantages are and how they will help
you outgun others who compete for your potential clients‟ budgets. Say why your
advantages will be sustainable.
Include sales, development, people, travel, licensing and other costs plus income
statements, balance sheet projections and likely cash-flow. Cover quarterly details at
least for the next two years and outline but realistic forecasts for those two or three
more that follow.

58
ANNEXE 7

Acknowledgements and references

The following have been used as sources in this Conference Paper or are potentially useful
references to support it.

www.
bvca.co.uk British Venture Capital Association
Harpercollins.com „Crossing the Chasm‟ – an excellent book by Geoffrey
Moore that describes how high technology companies
achieve exceptional growth. ISBN 0-88730-717-5
ebrd.com European Bank for Reconstruction and Development
provides funding in emerging and transition economies
e-envoy.gov.uk Source of industry information
efqm.org Information about the Business Excellence Model
eurasia.org Private grant making organisation
iconcorpfin.co.uk Useful site of a very successful intermediary with
relevant information on investment issues
intellectuk.org UK ICT industry association with useful information
and links
ipanet.net and Sources of private investment
fdixchange.com
Emails new investment opportunities
pondventures.com Venture capitalist‟s site with useful information and
guidance
strathdon.com Fund manager and investment company with a good
track record in ICT and useful information available on
its site
vcr1978. com/resourcecentre Venture Capital Report – a useful publication
vcinstitute.org Investors in Asia

witsa.org World Information Technology and Services
Association represents the industry associations of 46
countries

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