A game-changing idea is only one of the ingredients you will need to launch a successful new business. Without the right team and a commitment to ongoing fundraising, your brilliant new venture will founder. This article is the first of five in a series by a venture capital expert who has both launched and funded new companies.
YOU have an idea. It’s incredible. It will change the world. Generations will laud you as one of the greatest of your chosen industry, an industry you will revolutionize and disrupt. Your idea is so awesome that it’s hard to put your excitement into words. And your idea will fail.
At least that’s statistically the most likely outcome. According to the Association of University Technology Managers (AUTM), over 90% of university inventions go nowhere. And since AUTM is effectively the lobby of the people charged with the commercialization of inventions, those are probably optimistic numbers for university inventors. Inventions from private individuals almost certainly do worse.
Before we can talk about fundraising and venture capital, the last stages of the initial venture formation process, we need to look at the technology-transfer chain as a whole.
Invention vs. Innovation
Technology transfer, the process of taking concepts from idea to product, requires two very distinct steps: invention and innovation.
Let’s start with invention. Invention is an intellectual exercise in connecting the dots. It’s the eureka moment when you connect multiple problem statements with existing solutions from other spaces, parallel or unrelated, and come up with a new combination of thought that solves a problem you have discovered. It is a mental event.
Invention can be an ongoing process or a clearly defined moment. An example of the latter was the genesis moment for my past start-up, BrightSide Technologies. We had been working on combining two LCD screens to achieve high contrast. Unfortunately, each screen absorbed over 90% of incoming light, so the dual layer was extremely inefficient. We had thought about using an array of tiny light sources instead of the first LCD but couldn’t think of any practical device that could deliver millions of such tiny light sources (this was a decade ago, when large-scale OLED was still a vague dream). We brought in a photography researcher who showed us a camera concept that would overlay a blurry and an adjusted sharp image to get much higher dynamic range in image rendering. Eureka! We could use the same blurry + sharp idea on the display side by employing an array of big LEDs (1000× larger than the tiny light sources that we thought we would need). In that distinct moment, local-dimming LED TV was born (and a start-up formed around it).
For simplicity, let’s call the invention-rich period “research” and the people doing it “inventors.” An inventor then is a person who synthesizes the problem statement and solutions into a novel concept. One of the best macro-scale models that we currently have for fostering this process is the university, though the same definition applies to independent inventors. Universities provide the most open and free environments for research to occur, with, by a wide margin, the most financial resources (Fig. 1). These definitions of invention, research, and inventors are completely indifferent to what you do with the invention afterwards; you can be an inventor and not have done anything at all other than the mental exercise.
Universities dominate the invention space in the United States, as shown above. Source: TandemLaunch Technologies.
The Entrepreneur
Generally, however, someone wants to do something with the idea. That’s where the innovator comes onto the scene. Innovation is the ongoing process of getting an invention to a point where it has an application value of some kind. That doesn’t happen automatically because technology is only useful if somebody uses it. Unlike knowledge, technology doesn’t have any intrinsic value. If you discover that a distant object in the sky is a planet, that knowledge has some abstract value for humanity. If you find a cure for cancer and it doesn’t teach you anything new about biology, or the human body, and is just a particular mix of stuff that works, then it has no value until it actually cures somebody’s cancer.
Innovators pursue what we often call development — the act of rapidly risk-reducing an idea emerging from research, as well as reducing the idea to some practical implementation. Outlier or extreme cases are considered, many of the scientific elements must be validated, and the fundamentals of how a new technology works will be tested and mapped out. In other words, at this stage, the technical risk of an invention not working are eliminated or largely brought under control.
Innovators work all over our industry — many of them in the development departments of large display companies where they consistently turn ideas into great devices for us to admire at shows like Display Week. But sometimes that isn’t enough. Sometimes, those ideas fall outside the scope of traditional development departments or live beyond the near-term roadmap of big public companies. That’s when start-ups find their role in the economy and we encounter our third actor in the tech transfer process: the entrepreneur.
Entrepreneurs are innovators with limits. They drive innovation in a constrained environment where time, money, and resources are significantly lower than the requirements of the process seen at face value. An entrepreneur’s job is to maintain the environment that allows innovation to occur by engaging in an aggressive pursuit of growth under conditions of risk. This is what start-ups do best, due to their focus, speed, and flexibility. Start-ups are thus sometimes the point of invention, but more often than not they are created by entrepreneurs after the invention to act as innovation engines.
To create those engines, our intrepid entrepreneur needs pistons (people) and fuel (funding). A bit later, a healthy dose of lubricants must be added to the engine to keep it from blowing up, but we will ignore those operational aspects for now. Finding good people is hard and so is raising money. Fortunately, the two parts usually come in pairs. Good teams can almost always raise money fairly quickly — money generally follows talent. So the first goal for any entrepreneur isn’t to raise money but rather to build a fundable team.
Completing the Team
A strong team requires a good mix of skills, as well as a strong interpersonal fit between the founding team members. Most professional investors will tell you that team friction is the number one reason for start-up failure. Start-ups usually do not simply run out of money. They either implode due to internal conflicts or lose the ability to raise longer-range financing (usually also due to internal conflicts). Of course, some businesses are just plain unsustainable, but, in general, a good team can pivot to new opportunities, whereas a good business will fail utterly if the team collapses. Score one for the team, zero for the business model or technology.
Teams represent the bulk of value in a technology start-up: know-how about the business model, technology, and market. This know-how is often hard to characterize because it is the knowledge embedded in the heads of your people, but it is of enormous value to any potential acquirer and essentially for the operation of most revenue streams. The first step to forming a strong team is to fill the three principal roles needed for any tech start-up: hustler, builder, and plumber:
1. Hustler (CEO): The hustler identifies revenue opportunities and relentlessly hunts them down — including the early-stage financing, which is after all just revenue with equity debt attached. At a later stage in the growth of the company, it is possible to have an inward-focused CEO who emphasizes staff development and processes. Early on, that’s a very difficult arrangement to pull off. For better or worse, the technology investment community got used to CEOs who are externally focused and full of (visible) energy. If you are a technologist who isn’t fond of traveling and making constant presentations, I would strongly encourage you to find a business partner who is.
2. Builder (CTO): Your CTO is the builder of the central value proposition of the company, be it technology, product, or service. This role needs an innovator, not an inventor. You need access to inventors to get clarity on their thoughts, but that can take the form of a consultancy or advisory role. What you really need is an innovator who has enough understanding of the technology and commercialization process to drive the technology from invention to commercial application. This is the person who can communicate technical strategy (including to non-technical audiences such as investors and customers), motivate your technical team to deliver on this strategy, and formulate technical directions that lead to value creation.
3. Plumber (COO): The plumber keeps the place running, which can mean human resources, finance, operations, or literally ensuring that everybody on the team is fed. If you have the right hustler and builder, they won’t have much time to support these activities. That said, this is definitely the most optional role of the three, at least for the early stages of a new venture. If you don’t want an early stage plumber, or can’t find a good one, then I would recommend outsourcing these activities to somebody other than the hustler or builder (e.g., hiring a junior administrative staff early on, using financial service consultants, etc.).
Titles are of course a matter of choice in a start-up. Still, these three roles cover the fundamental elements of any seed-stage company. Companies that lack a hustler at the helm will rarely scale — often condemning themselves to eternal “in the basement” status with essentially self-employed founders just getting by on subsidies and modest revenue. Similarly, the confusion between inventors with innovators for the CTO role is, in my experience, the dominant cause of failure for university spin-outs — the professor (almost always an inventor) stays in charge and after a few years everybody wonders why no product was ever launched.
Finding people with the above skills is a great start, but not quite sufficient to celebrate the success of your new venture. These people also need to work well with each other and, more importantly, do so in an environment that will be as stressful as any they have ever encountered. Think of your co-foundership as a marriage without a pre-nuptial agreement and few social conventions. Your founding team thus needs a solid platform of common goals and values.
Start-ups typically fail due to a misalignment of interests, so you need to make sure right out of the gate that all founders have equal interest. It doesn’t do you any good to have two superstar entrepreneurs if one of them wants to build the next Facebook and the other wants to build a company to flip it for a million dollars in as short a time as possible. Right around the time you hit that million dollar milestone and get the first offer, that founding group is going to implode.
Co-founders also need to have similar emotional ownership of the venture. In other words, they should feel bad if things are not going well, as that’s the only way that your founding team will really pull out all the stops to make things better. In this context, it is usually also a very bad idea to have co-founders with different time commitments (e.g., one of them still working elsewhere). Investors hate founders who are not “all-in,” for good reason, so you need to make sure that your team is fully committed. Finally, try to avoid “single task” co-founders. Your controller isn’t your co-founder, nor is your first software developer. You are looking for people who are first and foremost leaders. They might be technical leaders but they shouldn’t be just writers of code (or just accountants, etc.). That might work very well early on, but introduce great stress when your venture scales and you have many coders but only one genuine CTO.
Raising Money
The engine is ready. Time to inject some fuel. To do so you need to know where the money is and how to get it. There are many different types of investors, and the second article in this series will go into the details of different investor types, their financial reward models and expectations, and some specific strategies to raise money from each type. For now, let’s deal with the most basic case of a seed investor: private money without a specific emotional connection to the entrepreneur (i.e., not your rich cousin). These people are often called angel investors, though I have never fully understood whether they are guardian or vengeful angels. I have seen both variants during nine rounds of fund raising as an entrepreneur and I am sure that I show both sides now that I am sitting on the other side of the investment table.
We have already established that almost all investors bet on people — teams of people specifically — so that takes care of much of the value proposition of your pitch. Still, raising money is not quite as easy as just showing up with a good team. I have made hundreds of investment pitches. And yet I have only closed about 50 investors over the years (individuals and institutions). While that’s still a lot of money, the conversion rate from pitch to investors is depressingly low, with maybe one in ten pitches going anywhere.
Fundraising Is Fundamental
The key to fundraising is to understand that it is a function like any other. Consider giving somebody the title of Vice President of Equity Sales. Because that’s what fundraising is — sales of a product (equity) with all the traditional aspects of a sales program: lead generation, qualification, cold and hot calling, relationship management, and, ultimately, lots of shoe-leather abuse. In that sense, fundraising is just as much a functional skill as software development or product marketing. If your start-up plans multiple investment rounds, then I would strongly recommend that you staff accordingly (add the matching experience to the requirements for your CEO hire if possible). Fundraising cannot just be something that you do “on the side” — you will either run out of cash or get taken advantage of so badly by savvy financial operators that you will wish you had run out of cash.
Fundraising is also a continuous process, even if you actually do it in trenches. There is a common misconception that fundraising is something you start when you need the money and then stop when you get it (until you need it again). That never really works. Investors need an ongoing relationship and it is your job to maintain it, especially during times when you don’t need their money. If the first email from a CEO after a funding close is a request for more funding, often a year later, there is little chance of success. A monthly or at least quarterly investor letter is really a must in these times. Really savvy companies will go as far as creating online dashboards for their investors, but that’s definitely in the optional camp.
The need to be in constant fundraising mode can also have some positive benefits for your organization. Fundraising is often the only external metric for a pre-revenue technology start-up. It forces you to achieve milestones and make meaningful progress toward your end goal. It will push the team to the limit and certainly added some dog-and-pony-show pressure, but ultimately build the best value for everybody involved.
As a final note on fundraising, I recommend to be prepared to be lucky. You ultimately cannot control all the variables in your venture or fundraising process. Instead, you need to create a foundation where bad luck won’t kill you and good fortune can be leveraged. In the fundraising game, this means to always have a backup plan if the “sure thing” investment doesn’t materialize and at the same time to keep an open eye for opportunities out of left field.
As is probably obvious by now, entrepreneurship is not for the faint of heart. Building a technology business requires a strong team, deep innovation, and usually quite a lot of money. Even if you assemble all of these elements, your venture is still more likely to fail than to succeed. But once in a while it all just works. The product inspires the world, the bankers love you, and the team can’t stop hitting home runs. In these moments there is no better role than that of the entrepreneur!
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