United States: What Do Early Investors Really Expect Of An Emerging Technology Company?

Last Updated: September 4 2015
Article by John W. Caldwell

Emerging technology companies – at their core – will usually have a great scientific or engineering breakthrough or improvement coupled with at least one stellar individual talent. The company will usually have credible proof of concept and often a working prototype. It will never have enough money or enough time or enough boots on the ground to either build an iron clad business plan or develop an air tight patent portfolio. There will always be gaps.

This said, what is it that very early investors hold to be essential in such a company? What questions must be answered in order to pry loose a contribution to the exchequer? What must an emerging tech company's business plan show?

Is the company leadership experienced; does it have a clue?

Brand-new CEOs, college professors, freshly minted MBAs, and retreaded, mid-level, big corporation managers are all anathema. While there are some professorial types who end up doing well with new companies; they rarely do well with their first new company. The ardent, fresh faced MBA grad will invariably – but erroneously – think that school provides the tools to run a company. What about that failed mid-level executive? Does it take much imagination to see how that will end?

It follows that at least one leader with actual, current, demonstrable success in scientifically-based business is what is needed. This leadership must be capable of handling business organization, finance, legal, personnel, and inter-business relationships. It is NOT necessary that the leader be an expert in the relevant science; that can be the focus of others. But the leader must truly have capable hands on the tiller. Without such a person, the chances of acquiring funding are small.

Does the science make sense?

Demonstrating an understanding of the science requires more than just telling a story. The company must be seen to have recognition of the scientific underpinnings of its planned product line by at least some respected authorities. This is often achieved by having recognized scientific advisors who stand behind the company and lend credence. University origins are helpful here, especially if some of the technology originates at a tier 1 research institution. Failing that, recruiting known scientific authorities in the relevant field is nearly essential. An exception to this might exist where the science is readily approachable by most people. Not all technology companies will be engaging in Nobel-quality work after all; however, the substance must be present.

Is the intellectual property in order? Can exclusivity be attained?

Piracy is rampant. There are few truly effective ways of securing an exclusive position in the market. For science-based companies, having a well-conceived patent strategy is nearly always necessary. Trade secrets have their place and a trademark and copyright plan is usually important as well. The key, however, can be found among the patent rights.

A science-based emerging company must be seen to have patent applications in place that are likely to issue and that will provide the legal mechanism to stop competitors from copying important inventions upon which the product line will rely. It is not necessary that the patent be issued, only that it is likely to issue. Further, no investor wants to bet on a "one-trick pony." An overarching intellectual property (IP) plan ought to be in place to identify and protect inventions for the ongoing technological pipeline. The business plan ought to include an IP plan as an element. Part of this should focus on freedom to operate.

It follows that an emerging company must have the services of first-rate patent counsel available. This is always expensive. However no IP plan will be respected unless it is under the care of true experts. The company business plan ought to identify an expert IP law firm that has the matter in hand as well as provide a plausible budget for effectuating the IP plan.

Does the company have access to the needed resources apart from money?

The business plan ought to identify general legal counsel that has committed to helping the company in its early years. Newly minted lawyers will not do here; seasoned business counsel is essential. Accounting talent, sometimes a personnel agency and other advisors which the company will use to build itself are important elements of success. They should "show on the pages" of the business plan. Detail is far less important than is the cast of characters. The right advisors will confer confidence that they will carry the enterprise forward correctly.

Do the financials make sense or are they Hoodoo?

The younger the company, the less "real" the numbers. Yet a business plan with purely fictitious financial outlooks will not gain respect or lead to investment. Market planning, margins, and the like are what they are. However, what is often forgotten in the use of funds are expenses for the items discussed above. Urging that an IP plan be in place, but providing no line item to pay for the expense is not encouraging to investors. Understating the costs of needed expertise is easily spotted by potential investors and can render the financial picture unbelievable. Finally, overstating likely margins, market penetration, overall market, time to profitability or the other elements of the financial overview can lead to a feeling of distrust.

This leads to the final item: Can I trust this company?

Comment is hardly needed for this. Can I trust the company leadership to see the field clearly, carefully allocate resources (MY resources!), prioritize focus, secure truly expert professional help, hire the right people and mind the sheets and tacks? An investor's hand may hover over the wallet, but it will not open it unless trust is evident.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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