How can I find a VC to keep my business alive?

Q: My ten-person company has been around for a long time, but we need funding to stay alive. Can you recommend a venture capitalist?

A: I am sorry to hear that. I have seen you working hard at trade shows, must be for 20 or more years. Your business is typical of so many companies in the photonics industry. You have a specialized know-how a few people need from time to time, but they can buy pieces from various vendors and put together their own systems. So even though you sell products, you are really a service provider who solves the customer’s problem of having to do it on his own. My guess is that, because of low differentiation, it is hard to charge much more than covering your costs, which makes it hard for you to get off that “poverty treadmill” and reinvent yourself to go after bigger opportunities.

The reality is if you want to raise money from anyone, you must be able to show how you are going to provide your investors the kind of return on investment (ROI) that can meet their investment goals. Another way of saying this is you have to figure out how potential investors can get their money out with satisfactory profits. So if you want to raise money from VCs, you have to come up with a business plan to show how you can get on a path to build the business to an IPO situation, say in five years. Because you have not grown rapidly in the past, you may have to clearly state what will be changed to make things different this time, and that could mean a clear statement about a change in the leadership and in the company culture.

Given that there are a lot of niche businesses in our industry, let me propose an approach that may be of use to other companies as well. Because you are more likely to build a nice little business than a high-flying “IPO company,” my suggestion is to sell investors shares with a scheduled buyback program with a built-in rate of appreciation so that they can get a high rate of return, and you can get your capital without taking the personal risks of borrowing. My assumption is you can generate enough cash with the business you build with that infusion of capital to follow through with the program. In effect, you are not promising an IPO to attract VCs, but borrowing from investors who are looking for high-risk lending opportunities. Being ­up-front and truthful always works!

Q: I have an invention to build a fast optical switch and have customer interest, but cannot get funded. All I need is a bridge loan from angel investors to get going. Any suggestions?

A: Several well-financed switch companies that formed during the bubble are having a hard time getting additional funding to stay solvent, so I am sure it is ­doubly hard for a new startup to get funded. I am also not sure what kind of honest or serious feedback you are getting from your potential customers. No doubt, you provided excellent specifications that you believe you will get, and they no doubt said in essence “we are interested if you can deliver.” I think getting a bridge loan from small investors is enormously risky for everyone involved. My recommendation is for you to incubate your invention in an enterprising way, such as in a university lab, until you have a substantial amount of money lined up to bring your project to a meaningful conclusion. Move on if you cannot get sufficient funding because you cannot afford the opportunity cost of spending time on a project that will go nowhere. Nothing personal-your invention may be sound, but if the project cannot be justified in a business sense, there is nothing you can do about it.