How can I get a VC to invest in my company?

May 1, 2004
My optics business is thriving but I cannot convince venture capitalists (VCs) to invest. Any suggestions?
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Q: My optics business is thriving but I cannot convince venture capitalists (VCs) to invest. Any suggestions?

A: The problem you face is likely to plague most of the companies in our industry. Raising money is more than fast talking investors into investing. You have to provide a vision of your plan and a clear view of how the VCs can realistically get a good return for their risk. A good return implies the company will grow and gain value, and also provide the possibility of an "exit" or a liquidity event at some point in time so the gains can be realized as "money in the bank."

For most investors, that means becoming a public company. For that, the entrepreneur must be genuinely committed to having an exit, be able to get to at least

$50 million in revenue, and have a track record of growth and profitability. It is impractical for a smaller size company to go public because it is difficult to find a top banker to take you public, and enough analysts to provide coverage. In today's environment, you'll also have high legal costs to comply with SEC reporting requirements, which put a relatively large dent in the earnings of a small company. And to make matters worse, few institutional investors are interested in low-cap stocks. All of this points to a lot of work and high costs to become a public company with a low market cap.

The only other option for exit is "to get acquired" which, as most VCs know, is easier said than done. So you are really looking at creative financing outside traditional VC investors. If you are highly confident in the growth of your business, you may consider debt financing to the extent that can be serviced comfortably by cash generated from the business. You may also consider a combination of debt and warrant coverage to give your investors an additional upside in the event you could qualify to become public.

Q. How do VCs view nanotech?

A. One VC heavily invested in nanotech admitted that "nanotech" is a marketing term for several existing technologies as well as for technologies with commercial payoffs that are very far away. Technically "nano" is defined as anything "nanometer" in dimension, and is also extrapolated to mean anything "small." Some investors view developmental biology as nanotechnology because it is about creating new chemicals or materials at a molecular level. Others view quantum-dots and photonic crystals as nanotech for more or less the same reason. Then the list gets long and untidy. The VC also admitted near-term business opportunities are possible with the development and sale of specialized instrumentation for nanotech research and said this is the time to accumulate IP (intellectual property) in preparation for the "arrival" of the nanotech age. Several start-up companies began with these premises and were able to get significant VC funding to do just that. How well they will do financially remains to be seen.

Q: You encourage people to broaden themselves in your articles and in your speeches. How does one do that?

A: Since we all learn differently, I think the most important ingredient is to be broadly interested. If you have to learn something you are not interested in, it is drudgery, whereas learning something that you are "turned on" to is fun and easy. None of us were born interested in lasers and photonics; we acquire those interests or we rationalize to be interested. So there is no reason why we cannot develop similar interest in other areas even after we are trained in photonics. Life can be boring or exciting by our own doing. On the "soft" side, I think it is extremely important to be interested in people. At the end of the day, we have to live and work with people, and learn from each other.

I have found that there is something to be learned from everyone to broaden myself!

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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