How The Investment Cycle Works

Date Wednesday, September 10th, 2008

With the numerous stories of investors losing their hard earned cash in business start up investment, I have decided to explore the possibility of creating a simple investment flow model for which business should follow before they are able to attract funds from the general public. This investment flow is based on the premise that the general public needs to be protected from exploitations due to lack of knowledge and expertise by the more informed institutional investor or from unscrupulous business man. This basic investment model divides the business investment process into two stages namely; the idea generation/refinement stage and the multiplication/ adoption stage.

In the idea generation/refinement stage, the business goes through the processes of idea generation by the entrepreneur and goes through a series of innovations that launch it into the growth stage of the product life cycle. During this stage, the entrepreneur has a business idea that still need to be developed and that will require huge capital outlays, some of which will be used in the experimentation of business concepts and ideas. The entrepreneur therefore at this stage of business will need someone who will be able not only invest his money but also his business expertise which could either be in the form of experience, market knowledge or general management skills.It is therefore important for the entrepreneur to seek investors who are experts in the same field acting as friends and peers who will then assist him to develop the idea and draft a business plan to attract venture capital funds. The entrepreneur with his friends should be able run a pilot project which they will be able to evaluate and make the necessary improvements and make it part of the presentation to the venture capitalist. They will then employ the services of the venture firm which will provide technical expertise to grow and refine the business idea based on its massive experience.

Once the business has begun to grow and enjoy a wide public acceptance, it will enter into the multiplication/adoption stage. It is during this stage that the business has fully defined its operational model and systems and therefore is able to do realistic forecasts on its business growth. The product/service offering will also need no additional external assistance for its development and only cash from investors to expand its operations. The entrepreneurs together with the venture firm can seek capital from pension funds and other fund managers who will bring in additional capital that would finance the expansion of the business and at the same time involve the public indirectly through the funds. The business will continue on with this process until its products are widely accepted by the general public and therefore having a strong brand image. It is at this point that I would advocate for the business to seek a listing in a stock exchange where the public can directly buy into the company as a form of reward to their loyal support of the company.

In this simple model two things are achieved; the business is able to match its investment with its need and at the same time reduce the risk tolerance of the investor involved. It is good to note that the business moves from high risk investors who demand for greater control of the company to low risk investors whose desire for company control is much less. This model also protects investors who have little business expertise and knowledge from investing into companies that can easy swindle them or collapse as in the case of the techno boom in the Silicon Valley. They can be able to go through the history of the company they intend to invest in or ride on the assurance of the company visibility, market share and reputation based on the company’s shareholders to share in the profits. This creates a win-win situation for every class of investor and also for the company as well.

by Magu Nguru

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