July 1, 2023
I work with a lot of startups. It is something I enjoy. I love meeting new inventors and see their ideas mature and go from concept to prototype to product. And I’m such a geek that I love 3D printing and C&C’ing prototypes, etc. But I thought it would be useful to discuss a startup I am working with that…for some reason…just can’t seem to get funding. Suffice to say that I am under NDA so the names have been changed and significant details left out, but….
These guys (there are 3 principles) have a great idea. A revolutionary idea in the area of sneakers. They have been busy for the last couple of years designing and prototyping the necessary changes that their product brings which will produce game-changing results (they predict from their mathematical models). But they have spent all of their money and all of the money they could get from family and friends and are out looking for investment dollars. Ok. Great. So, let me tell you my experience with them.
The patents (yes, they have them and have gone to considerable personal expense to get them and keep them) are owned by one of the principles, rather than the company. When a potential investor asked them to be moved into the company, the head principle (we will call him President) was incensed. I told him “You have no sales and aren’t projecting any for at least 2 years. You have no assets and your reluctance to move the patents into the company doesn’t give the investor anything to invest in”. He informed me of the great expense of moving them and I suggested that they put a statement in the business plan saying that the patents would be moved when a certain level of funding was completed. My pleas went unanswered.
The CAP Table (if you don’t know what that is, you need to. A good non-biased explanation can be found on investopedia.com) that they presented to a potential VC was in Word (it is always in excel). When I inquired why, I was told that none of them knew excel.
The company didn’t understand why the potential VC wanted a table (again, in excel) that showed potential milestones towards development and the associated costs. The answer they gave me was “Well, we don’t know the costs”. I told them that estimates would be fine, but that only seemed to confuse them more. In this case the VC would have given them X towards prototype 1, Y to get to test product, and Z to get to a marketable product for a total investment committed of A=X+Y+Z. Not money handed over to the company immediately, but a phased approach where the promise of full funding was there and upon completion of each milestone more money turned over to the company. When I asked why they didn’t want to comply with the very reasonable, in my humble opinion, requests from the potential VC, I was told that they didn’t need any VC money. They had briefed one the DOD agencies and the “innovation annual awards” (I’m making that name up) and were told what they needed to do get that money. Again. I tried to explain to them that this was the government and they must tell everyone that. Just because the government (or any grant giver) tells you what they want to see doesn’t mean there is a guarantee of money. You are in pretty stiff competition from a whole bunch of other startups that are applying for the same grants. And, grant monies come with pretty serious strings about what you can and cannot do with that money. Not to say that there is anything wrong with grants. My point here is to believe you are certain of something in the future when you are far from it, and you already have an investor at the table making pretty reasonable demands is very short-sighted.
Finally, the VC suggested that the current principles take roles in the Engineering department (with perhaps a Chief Innovation Officer or Chief Inventor, or the like for the inventor), and they got incensed! They said they had no intention of “splitting the pie” that many ways. I asked them whether they wanted the whole bathtub, or a piece of the Pacific Ocean, but my question fell on deaf ears.
This happens time after time after time. Engineers don’t always make good businesspeople. Sometimes they do, but a lot of times they don’t have that skillset. And the same can be said for businesspeople. I could no more invent (and do the math) on such a complicated product as they are designing, than I could fly the shuttle back to earth and land it safely.
Are you getting the picture? It’s not just great engineering that makes a company successful (or in this case, a funded one). It’s bringing people from all skillsets together. It’s about sometimes giving up some portion of ownership to the people that can help you meet your goals. I’ve got more case studies for you, but if you are a startup and you don’t see the problems with 1-5 above, perhaps we should talk!
Until then, thanks for reading. Follow me on twitter at @DCJimS.