Finding the Right Investors
December 2004 / January 2005
Volume 2 Number 6
Getting financing is crucial for entrepreneurs in developing technology-based businesses. The entrepreneur must work with a variety of financiers as well as financier types, depending on the stage of technology and business development, while simultaneously satisfying their divergent investment criteria, goals, and values—€”or they won't get the investment required to successfully develop their businesses. For example, early on, the entrepreneurs often seek financing from the public sector for R&D and concept development; but soon after, they must shift their focus to private-sector investment as the technology becomes more mature and a market-focused business is being developed.
In meeting investor needs, it is important that entrepreneurs understand, and integrate into their business-development strategies what drives the decision process and perspectives of each particular investor and investor type. The table compares the different perspectives of public sector investors with that of venture capitalists for a variety of issues such as goals, investment focus, payoffs, and approaches to the funding process.
As shown in the table, the public-sector technology-development investors typically see their role as funding high-risk, long-term research and occasionally as funding cost-shared demonstration projects; they treat commercialization as the responsibility of the private sector. Public-sector managers know they can't be perceived as picking winners and losers in the marketplace. They hope that the private sector will exercise its option to further invest in entrepreneurial ventures based on these technologies.
Private-sector investors, on the other hand, must pursue return on investment and profits for the companies in which they invest tor they won't be successful.
Private-sector profits result from developing effective businesses with market-driven products and robust markets, and not just from technology.
Beyond having a common need for a market focus, differet private-sector investor types will have varied perspectives as well; perspectives based on their expertise and appetite for handling different kinds of risks. For instance, consider project financing, which requires a combination of debt and equity, and which is a crucial enabler on the critical path to large-scale deployment of these technologies as compared to venture capital. While (VC's) will accept technical risk (though often considerably less than that which public-sector technology-development investors will accept), project financiers will accept none. Nevertheless, project financing availability is valued by VC's because it enables follow-on venture investment to occur at less expensive pricing, even though VC's don't normally directly invest in projects; project time frames are typically too long, and the exit strategy, as well as the returns for projects, often do not adequately meet VC needs.
Another key to success for entrepreneurs, as well as for that of public sector and other early-stage investors, is to collaborate in a way that makes investor requirements congruent, rather than mutually exclusive, by building bridges in the early stages among various investment participants. To this end the public- and private-sector investors can fruitfully engage each other and entrepreneurs in two main ways: 1) by reducing information gaps or asymmetries between the two sectors by providing appropriate access to data, knowledge, and insights critical to making sound investments by both sectors; and 2) by accelerating a shift from a technology focus to a market focus.
Lawrence Murphy is manager of enterprise development programs at the National Renewable Energy Laboratory. Peter Edwards is a partner at Altira Group, a venture capital firm in Denver. This article was adapted from Edwards and Murphy's report, Bridging the Valley of Death: Transitioning from Public to Private Sector
Financing. NREL/MP-720-34036, NREL, 2003.
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