How do we prove interest in and raise capital for a new system?

We have a technology using laser-assisted interaction to produce a new material system that could have significant implications.

Apr 1st, 2010
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We have a technology using laser-assisted interaction to produce a new material system that could have significant implications. We are encouraged because three big companies in different fields have expressed interest and are willing to provide us specifications for their needs. How do you think we should proceed to raise money from investors?

Wow! It seems like a simple question but this is really a complex issue. I will do my best to be constructive. First of all, you want to ascertain that the interest is genuine. You also want to pick one out of the three areas to focus on, because I suspect each application would have specific needs to make it ever-consuming. As far as raising money is concerned, get the right amount at the right time from the right investor.

I also have a comment about your technology. It is easy to say these companies are interested when there is no skin off their noses; that is to say, they have nothing to lose at this point because they have not invested any money in your technology. My recommendation is for you to get some funding from these firms to establish genuine interest. You may argue that getting money from a "big" company is no minor task, but it is better to ascertain how interested they really are now than it is later when you are spent, in terms of both time and resources. And the side benefit having them go through the trouble is that they will have a vested interest in helping you succeed and may even become your advocate out of self interest. Having money changing hands and the companies' strong support is what would provide you the credibility in front of investors to secure your funding.

Most entrepreneurs want to hedge their bets by taking on several application development projects. An experienced investor may very well view this as an indication that you lack the confidence to make decisions. As a practical matter, a startup company is always short of people and financial resources; trying to carry several projects could very well result in accomplishing nothing before investor patience runs out. My recommendation is to spend quality time up front to really understand the application and match the nuances of your technology to be able to pick one application that would get you to the end point quickly with the best results.

Contrary to conventional wisdom and what anxious entrepreneurs are inclined to do, it is not always wise to "take the money from anyone who is willing to invest." Getting investor funding too early before having clear visibility of real revenue would usually spell trouble because investors expect a return in a reasonable timeframe. You are likely to be on the receiving end of endless grief if you get funding from inexperienced investors, especially if you are overly optimistic in your sales pitch, and professional investors like VCs can lose patience and "pull the plug."

The little I know about materials development is that it could take several years—if not decades—to develop and iron out the infinite details even when there are tremendous technical and financial resources behind the effort. I recommend that you find a materials guru to provide you insights that you might have missed.

An appropriate source of funding at an early stage of developing technology for commercialization may very well be a government research grant. That is what programs like Phase 1 of SBIR are for, and the NIST ATP program, for example, is specifically designed to fund high-risk, high-potential projects. One important benefit is that in the process you'll get an evaluation by unbiased and knowledgeable program managers. Their feedback would prove to be invaluable even if you are not funded.


MILTON CHANG is founder and managing director of Incubic Management LLC. He is also director of Precision Photonics and mBio. Chang is a Fellow of IEEE, OSA, and LIA. He has received Distinguished Alumni awards from the University of Illinois and Caltech, is a trustee of Caltech, and is member of the Committee of 100. Contact Chang at miltonchang@incubic.com with questions, and visit www.incubic.com for other articles he has written regarding entrepreneurship.

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