Why am I unable to get venture capital (VC) funding even though the projected sales of our instrument system can reach $25 million in four years selling into a number of fields?
Venture capitalists look for high return on their investments, or ROI. Given that it is very difficult for small companies to become public companies in today’s environment, VCs are looking at how emerging companies are bought and valued. You have to help them understand the value you are creating. For example, if there is a high barrier of entry for an established instrument company to compete with you, they may be willing to pay more in the event of an acquisition.
The other side of the ROI equation is the amount of investment needed to build this $25 million business to ensure the investment justifies the return. The multiple markets you mentioned represent an opportunity, but also a problem because each application is likely to require an investment and a focused effort that requires its own technical features and expertise in selling and marketing. So you have to refine your business plan by segmenting the market to develop a realistic estimate of the investment required.
I am good at polishing difficult laser optical materials to high precision. How can I better promote myself to grow my business?
Let me assume your business is set up to produce customized parts in modest quantity. That means you have a service business. Like most service businesses in our industry, it could provide a comfortable living if you work at it, but it will take time to grow to a production business.
An optical-fabrication shop usually gets started by convincing a few customers to give it a try. As you build a reputation that you can deliver difficult parts on time and reliably meet specifications, these customers will give you more business and recommend you to their colleagues. And if you are lucky, you may have a head start to get volume orders when some of these applications become successful products.
When you are growing a business this way, it is crucial to get a few opinion leaders in the industry as your customers. To accomplish this, I recommend that you get active in the technical community, especially in local chapters of technical societies such as OSA, LEOS, and SPIE, and in trade associations such as OIDA. Within these organizations you’ll find highly capable people with whom you can network as colleagues. Recommendation by word of mouth-sometimes referred to as viral marketing-is an effective way to generate sales because we are a close-knit community.
Having a promotional program can also help. This is possible even with a limited budget if you have a coherent program using print media and the Internet, especially in combination. In short, customer satisfaction is the key to growing the business, and it takes time to build a reputation.
I have developed an instrument that can improve the performance of existing lasers. How do I determine royalties and get the most from scientific laser companies with my invention?
Royalties vary all over the map. Like most pricing strategies, you start with an understanding of costs. You estimate how much it costs you and how much it would cost the licensee to develop the product. One can’t predict when an invention will occur, so you can only guesstimate what it takes to come up with the idea.
The next level is the economic benefit to the licensee; that is, the impact on sales and profits your instruments can have on their product line, including pull-through selling of their other products and sales they may lose if your product is licensed by their competitors. The bottom line is that you are likely to get more, sometimes much more, if you can get a bidding war going. In parallel, get more laser companies interested and get companies that sell accessories into the laser industry to join the bidding.
MILTON CHANG is managing director of Incubic, a venture fund dedicated to helping entrepreneurs build great companies. He was president/CEO of Newport and New Focus, and is currently on the boards of Arcturus Bioscience, OEpic, OpVista, Rockwell Scientific, and YesVideo. Send your questions on career matters, starting and running your own high-tech business, or manufacturing and operations to firstname.lastname@example.org. Visit www.incubic.com for other articles he’s written.