Corporate Finance and The Quality of Money
Economics as a broad discipline is sometimes treated as a hard and quantitative physical science and sometimes as a human and social qualitative science.
The ongoing debate revolves around wherever economics follows certain mathematical laws which can be discovered, or whether it revolves more around generalities and tendencies which can be explored but never provided for certain.
Corporate finance, as a subset of economics, tends to be framed very much as a hard, mathematical science.
Whereas accountancy is a mathematical record of what has already occurred in relation to the trade and ownership of a company, corporate finance is the process of matching necessary fund to trade and the allocation of ownership through investment.
Stock and credit need to be funded, through various combinations of equity, debt and trade funding instruments. Companies' ownership can change over time through the allocation of equity and investment aimed purely at ownership acquisition, or specifically for the funding of certain activities.
However, fresh thought is required about what value can be bought beyond the immediate cash value. This is particularly true in relation with regards to investments into growth companies, especially earlier stage ones. The new research theory of The Quality of Money is bringing attention to bear on how investment is significantly more than the exact monetary value alone.
The concept of the Quality of Money includes evaluative capacity, co-creation of a working relationship and a realistic plan, ongoing management support, ongoing sectoral leverage and additional networks, and the ability to construct an appropriate follow-on funding plan.
Some of the existing problem lies in the traditionally adversarial relationship between investor and investee. This has been exacerbated by the spate of TV business investment competitions and their host of regional and local imitators.
Good investment agreements are not built around brief and aggressive encounters, where the entrepreneur tends to rely on hyperbole and the potential investor often streets into overt bullying.
Another key ground on which investment discussions could frequently be much more productively established is that of a realistic plan going forwards. Entrepreneurs often feel a need to talk up potential - often to quite infeasible levels - and investors will quite often understate their perceived potential in order to contain owners' valuation expectations.
Neither of these tactics will enhance the ultimate objective on which investor and interest interests are in fact completely aligned: the creation of fresh value in a business.
Far too few institutional investors have created rich evaluative methodologies. All too often a former banker will have a moderately good general understanding of general marketplaces. Really effective funders have built around themselves not only exceptional personal knowledge but also extensive networks of experts. These are quite frequently a combination of specialist academics who can comment on IP potential and two types of businesspeople: sector experts who can comment on the precise proposal and senior and successful entrepreneurs who assess and support management, marketing and motivation.
This leads to the final element in this overview of The Quality of Money - the ability to plan for funding success. If an investor does not have particularly deep pockets itself, this is particularly important.
If a business does achieve encouraging growth with its first serious injection of capital, the last thing it needs to be faced with when this tranche begins to run low is the distraction of seeking to find a whole new set of investment relationships and to begin again from scratch the huge task of promoting itself and securing investment.
Whilst it is very tempting for young businesses to take whatever investment they can find, it is wiser again to attempt to secure also the best Quality of Money. Also, for investors, it is imperative that they consider if they are risking selling their investment short through excessive aggression, lack of commitment to networks and support, and an inattention to possible future scenarios.