Q. What is the current VC funding situation? I have developed a technology that can build a laser that costs the same as what is on the market but can provide 10–50 times more output power. What are my options if I cannot raise a substantial amount of capital?
A. I surmise you are at a very early stage in your business development. My recommendation is to apply for government grants and get supplemental “angel investments” to refine the technology and develop applications. That would put you in a much better position to make your investment attractive to professional investors. I will explain why.
It is always possible to get investment capital from VCs, but that is becoming increasingly difficult, especially for hardware startups. A Jan. 7, 2013 headline in the San Jose Mercury News, which is the voice of Silicon Valley, reads, “Startup crisis: A-round cash is evaporating,” and the article went on to state “…Widespread consolidation in the venture capital industry means fewer places than ever to find big cash infusion.” This situation is real, considering there were plenty of VC funds chasing Internet and mobile business a couple of years back, and now getting follow-on investments even for companies started back then has also dried up.
Everyone wishes to raise a substantial amount of seed capital all at once and at an attractive valuation. Unfortunately, investing in photonics has been out of favor since the telecom bubble. Seasoned investors have learned that the gestation period between technology development and commercialization is typically long, which means substantial capital is required to build out the business; there is high market uncertainty; and low ROI is expected because capital is tied up for a long time. Apply for a grant or even several grants as your backup plan even if you have a high degree of self-confidence.
To improve your odds, you have to present a strong case that you have a winning product, a winning business, and can get to a quick exit in order to get professional investors interested. After all, you have to compete with all the investment opportunities in front of them. Frankly, VCs today are looking for sure bets and quick returns. In another words, raising money has become a chicken or egg dilemma.
Out of necessity in this environment, one approach is to raise money in tranches, which also is a way to delay the influx of capital to make the investment more attractive to investors. You may consider doing what many of our photonics colleagues do, which is to use friends’ and family members’ money to get launched, then use government grants to develop the technology and applications to get closer to commercialization…and then raise capital from VCs. You would at least have government grants to point to as validation.
One principle to keep in mind when doing so is always raise enough money to get you comfortably to a milestone that you can leverage to impress your current investors; you would need their support in order to get funding for the next round. The bravado “to get any amount of money to get going” is the wrong instinct because it is not going to be pretty when you are no further along and the money runs out.
One final piece of advice is do not be overly optimistic or cavalier in making your financial projections, thinking you’ll have a ready market given that you have a superior product. I recall it took Uniphase in its early days two years more than projected to break into the marketplace, even though it had a well-engineered argon laser that was superior in performance, priced lower, and plug-compatible with what was on the market at the time. I encourage you to try, but temper your optimism by being realistic.
