THE PLUNGE

So your research has finally reached the point where you can see a path to commercialization of a great new technology. You are enthusiastic about confronting the risks and finding investors to share your enthusiasm. You are typically employed in a well-organized large company where you have learned enough about the market and the competition to convince yourself that the time is right to become an entrepreneur.

You have been successful inside the company in obtaining funding for you projects. Proposal procedures are well established, and you have staff support for obtaining market data, forecasting costs and revenues, calculating net present value based on the corporate cost of capital and submitting your request in the annual capital budgeting process.

However, the world of private equity investors is not so well structured. It is filled with Angels with unstructured personal agendas and hundreds of venture capital companies. These companies have clearly stated investment policies on their web sites, but their partners have diverse backgrounds and interests, and they don’t always follow them. But you remain confident that funding issues can be handled routinely once an investor learns about the outsanding opportunity that you are willing to share.

Investors can be expected to have the opposite view. They learn about many outstanding opportunities every day. They focus on finding well-structured business models that provide so much real value to customers that it can be shared to create substantial wealth for all involved.

STRAINED COMMUNICATIONS

You quickly learn that you have a communications problem. You can’t understand why investors are simply not interested in the details of how your technology works but only in what it does that customers care about. Your communications are also limited by the lack of a common language. You speak in technical terms – entropy, caches, C++, morphing structures, photoresist, functional chemical groups. Investors speak in business terms – value proposition, liquidation preference, valuation, IRR, time to positive cash flow, exit strategy, product differentiation.

Here, investors have the edge. Many of them specialize in focused market segments and have learned the language well enough to understand most technical concepts. But technical entrepreneurs often make the mistake of believing that business issues are just common sense and don’t warrant the time required to dig deeper. In the end, it’s the business issues that dominate the conversation.

ABSENCE OF SOLID INFORMATION

Even if there is some initial success in initiating a conversation, there is often not much to talk about if your business plan does not contain all the information investors need to continue the conversation. Some typical problems that irritate investors:

· Market data not specific. Investors (and you) need to know what potential customers are now paying for the function that you propose to replace, not just the size of the broad market. This level of detail is rarely available to people outside the industry. Remember, if you propose to introduce a new, disruptive technology without precedent, the market size is zero.

· Percentages meaningless. Proposing to obtain a very small share of a very large market has no meaning.

· Specific customers not identified. Market segments don’t buy things; people do. They need to be identified along with compelling reasons to buy.

· Customer value not quantified. How much cost could be saved or how much market share could be increased?

· Incomplete competitor information. Spend time with trade journals and the internet looking for competitors. You need to know more about them than the investor does.

· Distinctive competence not clear. What’s so special about your stuff? Be specific.

· Intellectual property not solid. Are your patents easy to work around? Are they configuration-specific or do they offer broader process protection?

· First to market strategy weak. Investors have learned their lesson in the dot.com crash. If you have no intellectual property and the success of your plan depends on being first to market, the number of potential investors is severely limited.

· Inexperienced CEO. Investors are highly skeptical of the ability of a technical genius to build a fast-growing high tech start-up to a $100 million company in five years if they haven’t done it before…even if they can.

· Thin team. Although not having everyone on board at the beginning is OK, all of the key people must be fully committed to the enterprise when the money is available.

· Thin board. The absence of boards and advisors with lengthy industry experience and broad perspectives makes investors very nervous.

· Too much R&D. Investors are willing to take business and market risks, but they’re not very venturesome when it come to technological uncertainty. Depending on R&D to produce commercializable results is a job for the government.

· No history in financial plan. Investors want to know how you have survived so far. Starting financial projections when you get the money leaves out an important part of the story.

· Time to positive cash flow too long. Most investors are willing to hang in there for 18 months, but their numbers decline quickly after that. They must provide a competitive return to their investors, and time is a very important factor.

· No analysis of comparables. Investors paint pictures in their minds of duplicating the recent financial success of their peers. You can help them along by providing example of companies like yours beging sold to big companies or going public that return at least ten times the initial investment in five years.

· Investment request and use of funds not matched with cash flow requirements. How much money should you ask for? The purpose of equity investment is to cover the cumulative negative cash flow until the company can sustain itself on revenue. Do the analysis and ask for a margin to cover the uncertainties in the assumptions.

· Assumptions not stated. Investors don’t believe that your financial projections will actually happen. However, they can decide whether or not to believe the assumptions you used in making them. The projections are simply the results of the assumptions. If they are not clearly stated with convincing rationales, you have wasted a lot of time.

INTANGIBLES

After you have filled out your business plan, the dance begins in earnest. Research in the business venturing literature has identified additional factors for success and failure in getting the money. Success factors include:

· Founders with prior successful start-ups

· Ethical, frugal and skilled people

· Technology and enthusiasm way above the norm

· Multiple investors

· Corporate alliances

· An innovative solution to a difficult, market-driven need

· Outstanding team

· Focused product development effort

· Excellent group of investors and directors

Failure factors include:

· CEO too abrasive

· CEO too weak

· Missionary market

· People too concerned about their salaries

· Conflict over control

· Proprietary position didn’t hold up

· Couldn’t get together on valuation

· Weak team that didn’t work well together

PUTTING IT ALL TOGETHER

At this point, you finally know what you have to do.

1. Don’t waste time by presenting incomplete and unbalanced information.

2. Make sure your technology offers an innovative and well-protected solution to a market-driven need.

3. Make sure your team is credible for carrying out your plan.

4. Be realistic about your valuation.

5. Exude cautious enthusiasm.

6. Learn the language of investing.