Lessons learned as an entrepreneur
You have a terrific new product concept. Now you’re waiting for venture
capitalists to hop onto your bandwagon. But, can you afford a bandwagon,
complete with band? If the venture capital community doesn’t take the ride,
must your vision end in nothing ventured, nothing gained?
It’s typical for a company to go through one or more rounds of financing
before receiving venture capital. Don’t be disappointed if you don’t obtain
venture funding on your first try. There are other financing alternatives to
keep your dream alive, and keep your company moving forward. Venture
capitalists may be partners later on.
It may be easier to get funding for sales and marketing from private
investors and later-stage venture capital firms than it is for developing a
product. There is a limited number of venture capital firms willing to fund
R&D. and many companies rely on government or other sources of funding for
R&D. The more you can reduce investor risk by funding your own product
development, the greater your chance of attracting venture capital.
In fact, the venture capital community isn’t necessarily the first stop you
should make on your way to market.
Consider instead three financing alternatives to venture capital funding:
Bootstrapping,or taking a product to market without tapping traditional
investors, can be accomplished in a variety of ways, depending on your
product. For example:
Let’s say you have experience creating software products for the medical
industry, and you’ve found there is a market for a hospital scheduling
software package, particularly in their emergency room. It would make sense
to seek a consulting arrangement with a hospital to develop the hospital
software.
For example, you night arrange to develop the package over a period of 6
months for $50,000 with the clear understanding that you will own the
software as you have provided them with a large discount. When you’re
finished, you have created your first customer, and also a product you know
others will need. Then you can approach investors for the $100,000 or so you
need to go out and market the software.
A downsizing corporate giant in your industry or a small company with
limited resources may have existing technology with applications in a market
it doesn’t plan to pursue, or lab facilities it may consider sharing in
exchange for technical skills.
Often public relations firms, advertising agencies and consultants,
including part time CFOs, are open to trading 2%-3%: equity for their
services as opposed to asking cash. An added benefit of having a public
relations or ad agency own part of a company is its vested interest in
having the company do well.
Universities, such as The University of Chicago, The Illinois Institute of
Technology, The University of Illinois have strong, industry-focused
licensing offices to help commercialize the technology developed in their
labs. Before seeking investors to enable you to develop your own technology,
try contacting the licensing offices at top research-oriented universities
to see if they’ve got any thing that matches the description. Often
licensing is done on a royalty basis.
Seek private placements with “angel Investors,” family and friends and, if
appropriate, traditional funding sources including banks.
Raising private financing can give an entrepreneur time to develop a company
with staying power, which would appeal to venture capitalists later.
Some companies, initially choose to turn down venture capital funding in
favor of funding from commercial banks. As such, when they ultimately
approach the venture capital market, the investment is more attractive.
If your product idea is a key component of a larger product, a cooperative
arrangement with a corporation could bring you all the benefits of venture
capital investment for half the equity. In addition to bootstrapping a
product by having a corporate client cover development costs, a full-fledged
strategic alliance can also bring with it access to corporate resources,
such as distribution networks and experienced management.
It is rare that a company “fails” in its first attempt to raise venture
capital and then succeeds in a follow-up attempt. Rather, it continually
refines its focus, presentation, business plan, management team and other
factors.
I recall the irony of one company’s unsuccessful attempt to raise venture
capital on the first try. The value-added reseller of hardware and software
for integrated computer systems had nothing but engineers on its management
team. Unfortunately, the team presented venture capitalists with inadequate
market research and no concrete plans for approaching and penetrating the
market.
The company’s management team did no market segmentation. They failed to
demonstrate whether it was reasonable to expect that their sales were going
to come from the U.S. or internationally, or if the company would target
specific industries. Next time the company needs to find an appropriate
leader for its management team, someone with a clear understanding of the
full picture. They must convey to venture capitalists a creditable marketing
and sales strategy based on thorough market research.
With appropriate preparation, you can get what you need from a number of
sources, to build your own bandwagon.
