With thousands of high tech companies seeking investment and thousands of venture capital firms and angel investors looking to invest more cautiously in the aftermath of the Internet bubble, the question arises: “What is a good investment these days?"

If you are a company, seeking investment, you need to understand how you might be rated and what you need to do to raise investment.

In uncertain times, conventional wisdom (CW) has a habit of changing quickly in response to the most recent headlines. Current CW suggests the following for venture capital and angel investments:

A good management team with an average idea is better than a great idea backed by an average management team.

About one in ten investments will produce large returns. Three out of ten will survive but not do tremendously well. The rest will die.

Customers are paying for the product and revenues representative of the future business model have been realized.

The market is large and product offering has a significant performance advantage over traditional approaches.

An identifiable and difficult to imitate competitive advantage will give this company a high chance of survival.

The venture capital firm understands and agrees with the leverage model the business is pursuing. For example, many venture capital firms historically have liked software as a business because after the R&D is done, the incremental cash flow resulting from a software sale is very high. In contrast, they have tended not to like consulting firms, because the margin is lower and there appears to be less leverage.

It's hard to argue with this one. A great management team always makes a difference. The problem for most startups is that they tend to have incomplete management teams, generally ones that are too technically focused.

The new product literature on this one is pretty clear. A differentiated, high value product is the single largest predictor of new product success. However, merely being a first entrant into a market seems to us to be no guarantee of success without high value, the processes for rapid product and value improvement, and the access to capital making it possible to grow.

It seems intuitively obvious that having a finished product is lower risk investment. But it is worth bearing in mind, that investing large amount of resources in a finished product has both an upside and a downside.

For the non-marketing oriented company, there is the risk that the product that has been built is not actually based upon functionality that a customer will pay for. So companies that have built products without doing their marketing homework typically are the ones that run out of money. All the investment went into R&D, not learning what the market would pay for.

New product research suggests that doing your marketing homework up front and having a completed product is actually more important than having a finished product based upon limited or no marketing input. In addition, the involvement of a cross-functional team in product development also tends to increase the likelihood of success.

This criterion seems to make a whole lot of sense. If customers are paying for the product, then the business model is established. However, it is worth remembering that many battles take time to win. In the VCR market, there were many launches before dominant players emerged. Windows 1 and 2 were completely unsuccessful, but they laid the path for Windows 3. In other words, a generation one product should always be evaluated in the light of the next planned generations or revenue generation models.

Large markets clearly tend to offer more upside. But it is worth remembering that for most markets, it is extremely difficult to achieve more than around 60% market share. There are rare situations where monopolies appear to exist, e.g. Microsoft Windows, but in reality, even in such cases segmentation reduces actual market share in a broader market sense.

For most startups, achieving a high level of market share success can only be obtained by segmenting a market. Palm is obvious example in the computer business, though the multi-generation strategy is less clear for the firm.

As an investor, we would typically want to see a sequential strategy that allow success to be based upon limited development work, then expansion of development work that would allow penetration of an additional segment, and so on.

Most technologies have many areas of application. Business success typically comes from focusing upon the easiest areas of growth with the greatest payoff. However, in early stage companies, the low-effort, high-return areas are a matter of speculation.

A management team should have an explicit model and test strategy to validate its resource allocation. “Model quickly, test broadly, focus quickly, improve continually.” is our adage at Eclicktick.

Everybody would like to hold a tremendous advantage over the competitors: Polaroid, Xerox, Geron's licensed patent on stem cell research. Pharmaceutical companies typically have high levels of profitability. Having a science-based advantage is clearly advantageous. But it is rare. For most firms, superior execution leads to competitive advantage.

This ability to execute quickly is really rather crucial. Research on international competitiveness suggests very strongly that the location of a firm in a home market with high levels of competition leads to higher rates of value creation and resulting growth. This effect is particularly true if funding, personnel resources and infrastructure make it easy to take the higher level of innovation in the home market and go global quickly.

Many business plans presented to investors are highly conceptual. When not conceptual, they frequently have detailed financial plans with a big hole. The hole is almost always the result of not specifying the drivers of performance that will make the business successful. It's easy to understand why this hole exists. In a new market, it may be difficult, but nonetheless it is necessary to build a model that is driven by activities.

On the one hand, experience does make a difference. As a consulting firm, our own Eclicktick is primarily selling its experience.

On the other hand, past success is no predictor of future success. Skills and aptitude may not have been necessary in a past success, but may well be required in the new business. Many managers who have been successful have been lucky. Many managers who have failed in difficult markets have actually learned far more. So our view is that experience does count, but success is not the only thing we would look at.

In addition, we would distinguish between pioneers and homesteaders. Pioneering managers take uncharted markets and figure them out. Homesteaders tend to be at a loss in such markets. They tend to be more important later in the life cycle of a company.

Although technology is clearly important, our belief is that venture capitalists and angel investors are often too narrow in their leverage model biases.

For the big win, practically every venture capitalist toes the party line that there needs to be a huge cost advantage due to technology. However, many competitive positions come from excellent management and continual incremental improvement with occasional quantum jumps due to platform changes.

In the exceptionally complex and competitive car market, it is the gradual and constant increase in quality that is to be feared not the massive leap in quality or cost advantage. In other words, management is the key.

And in a world of technology indigestion, having the trust of customers may be the single most important asset you can build. The source of technology can change but the brand remains the same as Dell has demonstrated.

We think that Tracey and Wiersema (Tracey, Michael and Wiersema, Fred: The Discipline of Market Leaders, Perseus, 1997) have this one right: there are three kinds of market leadership that can produce leverage:

All three can be attractive sources of leverage. Clearly, quality of management and ability to execute, plus availability of high quality employees are key factors for achieving a non-technology based strategy.

Great companies value great employees, and treat them both well and ethically. But by ruthlessness, we mean that great companies listen ruthlessly and hard heartedly to the market. If their vision is not being accepted, they listen more closely to the market requirements.

Having a long term vision still means you have to get there. Getting there means making money and listening to what the market is prepared to pay for quickly and now.

All companies need to be great at communication. What is predictable in most high tech companies is that the more technical they are, the more difficulty they have communicating why you should do business with them. We find in our work that successful companies have had to bring in non-founders who can make this communication process work.

Most companies are working too hard at doing unimportant things. Most are not spending enough time on the easy things that would have high pay off. Our rule is that if you are working 80 hours a week, something is wrong. You need to rethink your value chain. Laziness is actually about thinking smart and focusing upon outcomes relative to efforts.

Now clearly, some unattractive markets are just plain unattractive. But if you can figure out how to serve an unattractive market well and profitably, then you have gained skills that others will find exceptionally difficult to match.

Surprisingly, entering a market with a large dominant competitor is associated with a higher success rate. One of the reasons for this surprising outcome is that a large dominant competitor will find it costly to drop its prices and will generally hold a price umbrella over the smaller and apparently insignificant competitor.

Strategies that make it difficult for an entrenched competitor to respond are always very desirable.

Visions are often critical to the founding of companies. We like to think that there is a difference between persistence and stubbornness. The stubborn visionary goes out of business because he will not adjust to learnings from the market. The persistent visionary will incorporate market feedback into his vision and is not frightened of or resistant to learning. In fact, change is embraced by the successful company.

Most things in life will go wrong at the slightest notice. Murphy's Law is the engineer's experience that everything will eventually go wrong at the worst possible moment. The same is true in business. In fact, the cynic could argue that the job of management is to fix the things that go wrong.

The net result of all this is that the fewer things you have to depend on going right, the more chance of success you will have. And probably the most difficult thing to depend is the ability to change people's behavior.

Clearly some companies succeed by offering adequate value and low price. But the more complex the technology, the more likely it is that suppliers who take responsibility for the success of their products, e.g. by delivering them as services, solutions or out-tasked services will have lower sales costs and faster growth.

Most high tech firms are extremely deficient in their understanding of how to price, sell and package their product or product service combination. This area is probably the single most important area of failure for most software and high tech firms.

The symptom is always the complaint by the entrepreneur that they are getting great meetings, but no checks being written. Of course, they are not getting any meetings, the problem is even more severe.

In contrast to the informal approaches taken by most investors, there are actually a number of tools that can help formalize the evaluation of your business and implementation plan.

In our own work, we use software for new product success forecasting to diagnose the management team. As a side benefit a prediction of the likelihood of success, and reports on strong and weak factors is produced.

We also work with a clever model from Primary Matters (www.primarymatters.com) to model the entire customer acquisition, closing, installation and service cycle - an increasingly important issue in high tech firms as their value chains are increasingly become built around service and delivery issues.

Selling your business idea is no different that selling a product or service. You need to understand the biases, beliefs, mental models, conventional wisdom and backgrounds of your audience. They will often reject excellent companies because the presentation of the attractiveness of the investment has not anticipated objections. These objections may not be voiced at the meeting.

An anecdote that illustrates why your business make sense. This anecdote must like a good joke, be able to be recalled and presented by your audience to their colleagues. A good test to ask yourself is: “What is the story line, a spouse will tell when he/she goes home at night.