Financial Strategies – Some Basic Rules

Aug 122008

Here is an example of what I mean. One of the services that I routinely render to managers of investment funds is to do a quick and dirty assessment of a company and its management team. Most often I am asked to assess the team, its business plan and to develop an estimate of the team’s ability to implement that plan. On one such journey I found myself sitting in front of a CEO whose company was developing software for the intelligence community. It was clear both that the CEO was completely focused on arranging venture capital funding for the company (to the exclusion of knowing much about the company’s products) and that the company’s products were nowhere near market ready. Early in the interview, I asked how much SBIR funding the company had. “We don’t have any”, came the reply. “We have decided to go directly for venture funding.”

At that point, the interview was over. Based apparently on the perception that ‘real men’ go for venture capital and the alternatives are for ‘sissies’, the CEO was prepared to ignore very efficient sources of potential financial support.

For those of you not familiar with the program, SBIR stands for Small Business Innovative Research and is one of the government’s principal vehicles for stimulating off-balance-sheet R&D. An important aspect of that program is that a company gets to keep almost all the rights to the intellectual property it develops. It is effectively a grant in support of research and development.

Well, to finish that story, the company didn’t get its financing and the CEO became an insider’s joke within the venture capital community.

Here is a very good rule: Make sure that you are turning over every stone in the pasture. Don’t let your ego or limited understanding of the options limit your company. Get in touch with experts in the field and really pick their brains. Make sure that you are looking down every alley and then pick the most efficient of the options.

So What Are Some Of These Options? There are a whole range of financing options that a company can access. A CEO, who is doing his job, will make sure that all of them are being investigated. Here are five to start with:

Friends, Family and Fools: This is the traditional starting place for most companies. It can be the only source of borrowing (yes, that’s what I said … borrowing) available. But many companies stop going to this well too early in the game and give away equity in exchange for the relatively small investment.
SBIR, STTR & Other Grants: There are a whole range of government and non-government sources of grant-based funding that a company should be investigating. Many of them are very easy to access. SBIR & STTR solicitations are available through every major federal department.
Universities and Research Centers are also sources of research support. The University of Maryland Technology Advancement Program (TAP) is a fine example. By locating the company in that business incubator, a CEO will have arranged access to world class R&D support at low costs. This is a form of financing.
Your Customers: Remember, it is the customer, not the investor, that is the true test of your company’s value proposition. If your product or service is as good as you think it is, and they want it badly enough, they will pay for it … and, many times, they will pay for its development. The willingness of the very companies which should be most interested in your product or service to invest in the development of your company’s intellectual property should be seen as an indicator of how well you have actually understood your space and how well your proposed solution meets strongly felt needs.
Strategic Partners: Every once in awhile I encounter a startup company that seems absolutely dedicated to reinventing the wheel … or, to put it another way, re-inventing the whole mouse trap rather than just a better spring. If you have part of a solution, it is sometimes a very good idea to add that insight to a broader mix … and that can often lead to a source of financing.

So what’s a CEO to do? The mantra needs to be a through and balanced approach. Initially cast a very wide net and insist that your team investigate all potential sources. Talk to other CEOs, your banker, your insurance agent … anybody and everybody that might have an idea to contribute. And keep asking, probing and pushing … it is a process that should never end.

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