Romancing the Money...February 2003

The methods of science and engineering are based on careful observation of cause and effect, deductive thinking, analysis of data, and thorough and repeated testing of all conclusions. Any desire or expectation for a particular outcome must be suppressed until the data can unambiguously support the proposed hypothesis. This is all well and good when doing scientific research.

Now suppose that by following the above steps you have come up with a new and potentially revolutionary display technology. To try to protect your idea, you have filed the appropriate patent disclosures. Then, after consultation with your significant other, you have decided that this idea is so good it is worth quitting your existing job (which was getting a little shaky anyway), putting together a business plan, and going out to raise money to start your own company.

Having found several colleagues who are willing to join you in this new adventure, and using one of the many reference books on how to write really great business plans, you have arrived at that next and most important step -- to go out and find investors for your start-up business.

Everything up to now has followed a logical and rational process -- the technology development, the development of a patent portfolio, the writing of the business plan, and the assembling of a management team. So the next step of raising money should be just as logical, right? Oh my, we engineers surely are a gullible lot!

The search for funding may appear to have the trappings of rationality, and the investors will make all the appropriate pretenses of using a logical and scientific approach, but don't let that fool you. I suggest that you consider this process from an entirely different and highly unscientific viewpoint. What I am going to describe may even seem terribly irrational and perhaps even improper, but trust me: It will get you further in raising your start-up funding than the logical approach. The analogy that I will make is to that most unscientific of human emotions -- falling in love. Madly and passionately in love! Have you been there? If so, you will be better prepared to follow along with me as we consider the typical stages of this process.

The First Date -- For our money raising efforts, the "first date" will be the initial meeting with the investors and the presentation of your business plan. Naturally, you will describe the new display technology you have developed, your IP position, your target markets and customers, your product development strategy, the risk analysis you have so carefully prepared, and conclude with the financial spread sheets which will show the typical losses for the first three years followed by years four and five showing insanely high sales and profits. But since the people you are talking to are knowledgeable investors, don't you think they haven’t seen all this before? The technology may be what sounds the most interesting to them. But so what? They have passed up many other worthwhile opportunities. Missing another one doesn't worry them. So why should they continue to talk to you? It will have to be that intangible "chemistry" that makes you and your team stand out. They may like your technology, but do they think that you are someone really special? Can they envision you creating a really great new start-up? Do you appeal to them as a person? Yes, yes! OK then, let's move on to the next step.

The Romance of Due Diligence -- This step sounds so logical. However, in reality it is anything but that. Due diligence is the term used for the detailed analysis and testing period. The logical part is that the investors need to evaluate the various aspects of the business plan. As a starting point, they will ask many questions about the technology that are typically not that difficult for us technologists to answer. Then they will want to explore the markets and potential customer interest. Here the process gets less logical. They may ask for "letters of endorsement" from typical customers. Swell! How do you get a letter from a "customer" for a new technology for which a product has not yet been developed? After much head scratching you may come up with a few personal contacts in representative companies who may be willing to write letters expressing their interest in your yet-to-be-developed product. Better yet, you may be able to create more genuine interest if you can come up with a compelling story of how you will solve some critical display needs. You may even be able to get an end user sufficiently excited to write a glowing testimonial. Ah ha, the romance is beginning to take on a more serious tone. Not only are you getting caught up in the process, so are your investors. These latest contacts with end users are beginning to get them seriously excited. And of course, your confident presentation style continues to be a big plus. Who ever thought that "due diligence" could be this exciting.

On the other hand, if the due-diligence "dating" period begins to drag on with more and more questions being asked, with days or weeks passing between answers and the next round of questions, you can safely assume that you have been put into the category of "let's keep dating until we find someone even more exciting." If you sense that happening, it is time to face reality and move on. The love affair is over. You will never consummate the deal, i.e. get the money. But let's be positive and assume that all has gone well so far. In which case, we can move on to the next step.

The Engagement Ring is Offered -- The romance now begins to take on a very serious tone. Both you and the investors seem to be hitting it off. The due-diligence process has progressed better than you or the investors expected. This then leads to the preparation and presentation of "The Term Sheet" by the investors. This is the document that presents the offer of financing in return for an equity position in your company. The investors have placed a value on your technology and on your management team and are offering to acquire a portion of your company as compensation for the money that they will be transferring to your bank account. But why is this engagement ring so small? You expected something much more substantial. What about all the great business potential that you had told them about? And didn't they agree with you? Now the seriousness of the romance and the depth of commitment gets a major test. Are you willing to accept the meager terms being offered? What are your minimum acceptable conditions? Will the investors negotiate? Do you have any other choices?

As in romantic relationships, if multiple suitors are involved, the bidding can escalate to illogical and unreasonably high levels. Did you commit to an exclusive relationship too soon? If you have been clever at managing the process, you will now have multiple parties vying for your company and that tiny diamond in the first engagement ring will be replaced with one much more to your liking.

The Wedding Day -- Congratulations! The money has just been wire-transferred into your bank account. But as with all real-life marriages, it's not quite time yet to live happily ever after. The hard work is just beginning. As many others who have preceded you in starting companies, and entering into marriages, will tell you -- "the first year was the easiest". There will be many challenges ahead. But for now, enjoy the honeymoon period. You’ve earned it. You deserve the next few months of relative calm as you begin building your new company.

Are you ready for the romance of starting a company? There have been so many changes in the display industry over the last decade, especially here in the U.S., that it may be difficult to get a new display technology funded. However, displays have many interesting new applications -- many yet to be discovered and/or exploited -- and some of these applications will be a better match to a start-up business than for development by a major display producer. It is my strong conviction that new technologies and new products need modest entry points. Just as LCDs started with wristwatches and calculators and only later progressed to monochrome computer displays of modest resolution, so must all new technologies and product ideas begin life in relatively non-demanding applications. This is the ideal environment for a start-up company.

Should you wish to discuss these ideas, or the specifics of how start-up companies evolve, please contact me by e-mail at Email, by phone at 425-557-8850, by FAX at 425-557-8983, or by mail at 22513 SE 47th Place, Sammamish, WA 98075.