Kristin: VCs are in chaos. They are not making new investments, they are downsizing personnel, and when it comes to making a deal, they don’t want to go it alone. Additionally, limited partner investors are upset with the poor performance of VCs, they have concerns about high fee structures and want liquidity.
So how might you fund a start-up in an economic crisis? Robert Mehalso provided some advice in a plenary session at COMS2009.
Bob’s advice on dealing with VCs? Well, VCs consume an incredible amount of time in due diligence – they ask thousands of question to find reasons not to invest. Working with VCs is expensive – they require IP reviews, legal/contractual documents, due diligence payments, and annual fees for attending board meetings. And your company pays. VCs want control even for a minority position. And the due diligence process can create apprehension with customers and suppliers. They tend to stick to your original forecasts and often bring little in terms of relationships, customers or future round funding. Additionally, the VC business model is broken – more than half the VC funds will disappear over the next two years. Use VC as a last resort!
So how to prepare for funding?
- Obtain advice from a commercialisation expert on the maturity of the technology
- Focus research to address commercialisation challenges
- Obtain government funding
- Develop industrial interest and funding
- Engage a corporate partner
- Use personal, family and friends’ funds
- Focus on specific markets
- Minimise funds usage by conducting research at university as long as possible, using the research institutions’ facilities and equipment, and engage subject-matter experts to get things done faster.
To maximum opportunities for funding, it’s important to remove technical and market risk and be able to demonstrate manufacturing (eg through pilot). Companies should try to engage government funds for prototyping and pilot plans and engage corporate partners. Wherever possible show he company has revenue. Bob suggests that external funding is possible, but it’s difficult, time consuming and the conditions are onerous.
Is there any upside?