Early-stage investment

Early-stage investment
The people with the money need to believe in your idea, but not necessarily the way you do.
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Get cape. Wear cape. Fly

In his book Rules of Thumb, Alan M Webber, founder of Fast Company magazine, puts it this way: “Nothing is real until somebody hands you a cheque. Until then you could have a great idea or a mediocre one, an idea that will reshape an entire industry or disappear without a trace. You’ll never know until money changes hands. Then you get to find out.”

Stating the bleeding obvious? It’s amazing how often it can be overlooked. If you are lucky enough to come up with innovative ideas there will be moments when money is the last thing on your mind. You can get caught up in the buzz of the new and the thrill of providing something people love. This can be a particular risk if you are a salaried part of a big organisation.

But the rest of the time you will be lucky if you can think about anything else.

When I was young I thought money was the most important thing in life; now I am old I know that it is
—Oscar Wilde

The first customers for your idea are going to be the people holding the money that can make it happen for everybody else, whether they are external investors or your bosses. You may be a salaried part of a big organisation. But unless you are in one of the flabbiest big corporates in New Zealand (in which case you are going to have other problems trying to be innovative) the same principles for getting money into your idea apply as they would for a first-time entrepreneurial startup.

Grenville Main, owner and managing director of web, research and branding agency DNA , sums it up like this: “Access to capital comes down to how smart you and your idea are, and how well connected you are.”

To get this right, there are two important things to remember: the people with the money need to believe in your idea, but not necessarily the way you do. Keep It Simple Stupid, at least to begin with. If you haven’t nutshelled your idea (and you should have), now is the time to do it. You may not have the classic ‘lift pitch’ moment, but if you are lucky enough to land a proper meeting with the right people, their time is worth a lot more money than yours and they are not going to waste it listening to your elaborate vision for a brighter future.

All they want or need to know is what the new idea is, exactly how much money you need to make it work, a pretty accurate estimate how much money it will make and when they can take their share of it and run.

“One of the big questions investors have is who is the team that is running the business?” says Stephen Drain, director of the AUT Centre for Innovative Leadership. “Who are they, do they have the goods? If not, who are you going to get in on the board of advisors, who can take on a leadership role?”

Your one-line answers to these questions are what they are going to be saying to themselves over and over as they try to decide whether to trust you with their money.

Then once they do sign, they or their people will follow up on the detail and all the paperwork in painstaking detail, often including patents and insurances you don’t think you need. But you want to have this nice comfortable bed of paper ready to nestle their money into. It is vital to get professional help in looking at budgets and contracts to avoid nightmares later on.

But remember, initially you are selling a dream by convincing people it can be a reality.

No such thing as a free launch

In case you hadn’t noticed, New Zealand does not have as much money in it as, say, the US. For example, as well as sheer scale and population density, US innovation benefits from a vast military industrial research and development complex. The Defence Advanced Research Projects Agency alone has a staff hovering at about 250 and a budget of US$3.2 billion to spend on emerging technologies with a military application. Of course, companies benefitting from DARPA largesse are free to commercialise the products produced in other ways too.

Similarly, there is money washing around all over the world for the right idea. Unfortunately, it is really hard enticing that money over here to New Zealand where we can play with it. “People talk about capital not travelling,” says Jonathan Kirkpatrick, CEO of AUT’s Business Innovation Centre. “It can travel, but it usually doesn’t travel very far or in great quantities.”

Kevin Pryor, director of commercialisation/CEO AUT Enterprises, agrees. "I went to a conference in America and they were talking about the difficulties in getting investment funding out of the Silicon Valley for technologies developed on the east coast, let alone out of the country.”

And even the investment money that is here can be a bit risk-averse says Dave Wrightson, incubation coordinator at AUT’s Business Innovation Centre. “It is a bit of a catch-22: investors are required to help fund startup development and generate early revenue, but investors want to see clients and customers on board before they invest.”

The money also often comes with significant strings attached. “You almost never get all the money you need,” says Wayne Hudson, partner at specialist intellectual property lawyers Hudson Gavin Martin. “It’s more often that they will give you half, so you have to go to them for some more. And then they’ll put all sorts of extra clauses in their agreements so you end up with an underfunded project where, at best, its success has to be deferred while funding from other sources is found.”

Mo money, mo problems

Believe it or not, it is also possible to have too much money: just look at Charlie Sheen.

If you strike on something that really gets people excited everybody is going to want a piece. This is good, but it calls for careful management. Otherwise a number of things can go very badly wrong—even worse than taking porn stars home to meet the wife. This is another particular risk of attempting to innovate in large organisations with decent-sized research and development budgets.

Stay hungry

Too much cash too soon can take the edge off your original idea. If you already feel like you have the gold, human nature says you won’t do the extra yards to get things spot on. Pick your least favourite movie sequel as an example of this one. “Entrepreneurs need to be kept hungry,” says Jonathan Kirkpatrick, CEO of AUT ’s Business Innovation Centre. “Sometimes quite literally!”

Uncomfortably numb

Not getting any cash is the surest sign there is something wrong with your idea. Running out of cash is the surest sign there is something wrong with the business model you have attached to it. Wallowing in investment dough can be like putting masking tape over the warning lights on your dashboard—it won’t stop you from crashing or blowing up if you are careless.

Too many cooks

The more stakeholders you end up with, the more people you have to answer to. You can end up spending so much time talking to them and lose sight of all the other work you need to do.

You want buy-in, not a sellout

Nobody hands over investment cash for nothing. Each time you land a new investment you should expect to lose a slice of ownership and control of your company. If you get carried away you can end up selling the goose that lays the golden eggs.

It is also not unheard of for people to get booted out of the business they founded. Steve Jobs was out of a job for a while there, and Jeffrey Hollender founded innovative cleaning product company Seventh Generation, but was ousted from his role as CEO in 2009.

“Being fired from the company you founded is hard for any entrepreneur/founder to deal with,” says Hollender. “If I had a piece of advice for entrepreneurs, I’d say, ‘Don’t give up control. And if you do, do it in a thoughtful, methodical fashion.’”

And the rest …

You want people to invest more than money. In getting the right people on your board, you are also looking for:

• Connections: who do they know?

• Access to distribution networks: can you piggyback on other firms they invest in?

• Know-how: these people didn’t get and keep this sort of money without knowing a thing or two about business. Learn all you can.

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