Stay Focused, Be Disciplined (Avoid the Sirens Song)

In The Odyssey, Circe the witch tells Odysseus that in his travels he must at all costs avoid the Sirens, a host of beautiful voices singing enchanting songs from a lonely island. They were irresistible. But, if heeded for only a moment, they caused sailors to abandon all good sense and caution — until they crashed their ships on the rocks and were destroyed.

So it is with the entrepreneur with a solution looking at a new problem/opportunity—not in the business plan. A curse of talented, creative technology entrepreneurs can be the pursuit of interesting but not economic applications of their technology. The failure to remain focused and disciplined to core business opportunities can be deadly. What typically happens is the technologist (whatever hat that might be—engineer, scientist) finds or is presented with an “interesting” problem that can be solved with the company’s intellectual property--- with a little work and thinking, etc. The problems that cascade from this innocent intellectual diversion can be catastrophic if not nipped in the bud—with finesse and diplomacy. Solving minute or interesting problems robs the company of a scarce resource—human talent time. Technologists can tend to enjoy solving problems and think less about the commercial value of solving the problem. This problem can creep up in a variety of ways, but all result in a distraction from the primary mission/goal of the company. Unfortunately, any wanderings from a fully vetted, agreed upon game plan (business plan) that doesn't allocate and link resources to results can cause the company to go in the dumper. Intellectually interesting problems/solutions should remain with academics and R&D labs, not with a start-up or early stage company. If you are the operating executive—CEO, President, whatever the title—or an advisor/board member, your role is to keep the company focused and on track. Although you do not want to stifle creativity, new initiatives must always be measured against the risk/reward of the commercial opportunity and resource constraints of the enterprise. Nothing scares off potential investors like an unfocused, undisciplined entrepreneur that doesn’t seem to be bound by the business plan.

Maximize Value, Perform Seller’s Due Diligence

Typically, buyers are better prepared to buy than sellers are to sell. Implication: sellers do not maximize sale value. Unfortunately, most sellers—small enterprises through large corporate sellers—do not perform a deliberate and thorough due diligence of the business they are selling. The tendency for sellers is to offer the company for sale, but not prepare the company and its key employees for sale. Sellers need to think through, strategize, and scrutinize all aspects of a sale before it is offered to the marketplace. There is nothing worse then buyers discovering problems (legal, human resource, operational, etc.) with your business and using them against you in sale negotiations. Just as buyers use extensive due diligence checklists to review and assess a potential acquisition, sellers need to perform a similar review before placing the company on the market. While the particulars of a seller’s due diligence warrants a longer discussion, heed the lesson of proper-prior-planning; it does yield a higher value.

The “Doctor Problem”, Proceed With Caution

From the vantage point of an angel investor we offer the following cautionary note with regard to investing in early-stage companies whose founders are academics.

As an angel investor you are always on the alert to intercept promising technologies early-on. Early identification of intellectual property with commercial value is difficult and risky but can be immensely rewarding. The further along the development cycle toward commercialization, the lower the risk and the higher the cost of investment. Colleges, universities and national laboratories are great sources of intellectual property with potential commercial value. That said, proceed with caution when considering investing in a start-up company led by or controlled by an academic. Often academics look for funds to support “commercialization.” The academic’s intent to commercialize is often confused with wanting more money to fund research-- not a focused effort to commercialize. Commercialization is a discipline focused on making money from intellectual property. Investors want a monetary return for their money; ROI is the metric. Angel /early-stage investors have no success metric for number of papers published or lectures given. Academics like to “create” intellectual property (write papers, give presentations, receive research grants), the metrics of academia. Academics generally do not like the mundane work of commercializing a product or service--- work for lesser minds. In our experience, many academics lack the discipline or have the patience to focus on commercializing a technology. They are too easily drawn toward purely intellectual pursuits--- see “Avoid Sirens Song.”

Solution: As a potential investor, make your investment contingent on having a strong Board with regular operational oversight (an executive committee meeting monthly) and a full-time, experienced operating officer. Make the academic the Chief Technology Officer with direct responsibility for the product or service under the commercial guidance of the operating officer. If the academic is not willing to accept the need for professional management and close Board-level supervision--- walk away. Also, invest your money in increments. Use specific milestones to trigger each incremental investment.

Build It and They Will Come---Not!

This cautionary note is based on angel investing experience; deals done and a multitude of business plans vetted. Perhaps it is a stereotype or a gross generalization, but we pass along this observation anyway. Beware or certainly be mindful of entrepreneurs and start-ups that hugely underestimate the time and cost of sales and marketing. More often than not, start-ups are led by engineers (pick your flavor of the day—chemical, electrical, computer science) with little appreciation or knowledge of what it actually takes to get a product or service to market. When you look at the core management team-- this being an embellished characterization of three enthusiastic 20 or 30-something guys that may have developed a potently good product or service—you will generally find no one in the crew with any sales experience; zero. They have never sold anything, closed on a contract, or dealt with a real customer. This doesn’t make these start-up investment opportunities bad, it is just an alert for you as the investor.

When reviewing the business plan focus on the timetable and assumptions for bringing the product or service to market. Be wary of revenue optimism; not that it may not be a good business, but ensure the plan allows enough time to sell and close. Most entrepreneurs significantly underestimate the selling cycle time: find the customer, find the right person to pitch, schedule the sales pitch, provide sales support for the internal approval process, make additional sales presentations up the ladder, negotiate a sales contract, wait and wait for corporate approvals, and alas, close. Selling, particularly a new product or service, takes time and persistence. Most start-ups do not appreciate this; they in fact must believe clients wake-up every day thinking only of them.

Be on the alert for unrealistically low sales and marketing budget estimates. This under-estimation comes in three forms: allowance for sufficient time to make the market aware, expense of marketing, and margins required by distribution channel partners. The time for marketing issue is essentially the same as the previously discussed sales cycle issue; it takes time to raise awareness. As a follow-on, many engineering/science oriented entrepreneurs have little or no context for what it takes to market or the cost of developing a unified marketing program. As such, they often short-change the marketing budget. Lastly, many start-ups are clueless on gross margin requirements for marketing channel partners. This directly affects pricing and profit realization. Keep a weather eye open to this issue.