Investment fund prioritization: deciding where to invest
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Prioritized portfolio of potential investments
We've been working with a large European venture fund to determine their optimal portfolio of investment opportunities.
The modeling concept is based on the work we have been doing prioritizing strategy, markets, customers, product requirements, and new product project portfolios. It is based on the idea that these decisions are influenced by objectives or decision criteria.
Defining the criteria and the weighted values of the criteria is critical to understanding how the decision model behaves and the factors that influence ranking priority. The basis for this modeling algorithm is AHP (Analytical Hierarchy Process), which has a long history in practice.
The idea is that you have limited resources and you need to get the biggest "bang for the buck" out of your investments; and the question is "where should you spend your money to get the greatest return in the shortest time frame?" Same problem is true if you were a CEO trying to determine your optimal product portfolio.
So it is a natural extension to apply this same thinking to investment portfolios in which you have the same problem of funds allocations. In this case, it was a question of where to put the investors money and which decisions will result in the greatest benefit (based on the business objectives of the venture fund).
We took a two-dimensional spreadsheet and gave it a third-dimension in terms of a variable criteria. The initial client spreadsheet considered the business objectives (or decision criteria) to be equal, while the decision model we constructed enabled the team to dynamically simulate changing decision criteria (i.e. what is more important Risk or Return, and how would this difference effect the portfolio ranking?). This tends to make the problem much more interesting and realistic, especially when things change as they always do.
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