What can I do with my idea if I can't get start-up funding?

Sept. 1, 2002
What are my options to get the most out of my idea if I cannot get funding to start a company?
1304qa Chang New

Q: What are my options to get the most out of my idea if I cannot get funding to start a company?

A: You want to find out whether you were turned down because the investor would not back your idea or because the investor would not back your team. For the latter case, you may want to share your idea with an experienced entrepreneur who can champion the company. You can also sell or license your idea to an existing company. In any case, an idea is not worth very much until you can get people excited about the business opportunity—so much so that someone will make the commitment to invest energy or money resources to turn that idea into a business. So you need to carry the idea further, to a point where people can visualize and value the opportunity.

Most engineers think of the validation of an idea as getting a patent, proving the concept, or building a prototype. In order to emphasize the importance of taking a holistic approach to building a business case, I would go so far as to say most investors/entrepreneurs are not particularly worried about the technology up front, and will do technical due diligence only after they are convinced that a business case can be made. So you want to make their job easier by approaching it like a businessperson, to first quantify the risk/reward. Getting customer validation from knowledgeable and credible opinion leaders is an important first step. Then you must identify the technical milestones and estimate the investments required to get there. Otherwise, in today's environment, you are not likely to get to first base with investors.

Q: What happens to the assets of a company that's being closed down by investors? Can I take the technology and start over again?

A: This is depressing, but an issue of the times. A company usually has more assets than liabilities, but even if it doesn't, it can continue to operate if it has enough cash to meet its payment obligations. Start-up companies run out of options when they run out of cash and cannot convince investors to invest or creditors to extend more credit. The only option left is bankruptcy. When a company decides to file for bankruptcy, lawyers and accountants ask for retainers for their anticipated fees to administer the bankruptcy proceedings, and creditors come out of the woodwork to collect proportionately what they have coming. Any money remaining goes to holders of preferred stock first, usually on a last-in/first-out basis. If there is anything left, it goes to holders of common stock who are typically founders and employees. The sad truth is usually not much is left after paying the people who administer the bankruptcy.

We tend to think of assets as cash and physical assets that can be auctioned off. In high-tech businesses, intellectual property (IP) is often the most valuable asset. You can no more use the IP than you can take the office computer home without authorization, in this case from the bankruptcy court. Since other people may also be eyeing the IP, you are likely to face a bidding war in an auction. You also should not be too surprised if the IP has already been transferred out of a company. What is happening is some VC firms are making bridge loans to companies secured by their IP. The VCs will then transfer the IP to jump start their other portfolio companies. So the short answer is you cannot take the technology without getting clear title from the courts; we all know how sticky it can get if you violate patent rights.

About the Author

Milton Chang

MILTON CHANG of Incubic Management was president of Newport and New Focus. He is currently director of mBio Diagnostics and Aurrion; a trustee of Caltech; a member of the SEC Advisory Committee on Small and Emerging Companies; and serves on advisory boards and mentors entrepreneurs. Chang is a Fellow of IEEE, OSA, and LIA. Direct your business, management, and career questions to him at [email protected], and check out his book Toward Entrepreneurship at www.miltonchang.com.

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