CLOSING THE COMMUNICATIONS GAP WITH INVESTORS

Robert Rea

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 outstanding 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.

 

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:

 Failure factors include:

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.