When venture capitalists, angel investors, and other types of financiers are approached for funding they need to be aware that many corporate managers and engineers (not necessarily with intention) have a tendency to confuse the following three terms, which have definite demarcation lines: 1) technical exploration, 2) technology development, and 3) product development. The levels of capitalization necessary and the associated risk are not only affected by the actual stage of the process, but a lack of sufficient appreciation for avoiding the temptation of prematurely bypassing the second leg in the progression can have disastrous results.
Certainly, it can often be clear when a company engages in just a research exercise. The problem is that many start-ups set up shop right away because they are in a hurry to bring out a solution for a given need at the time. While they may get lucky and sell a few of their widgets, many of them will get stopped dead in their tracks because they embarked on product development too soon.
Given the critical importance of adequate tech development, it is important to have enough information to understand the limitations as well as the corner cases of the solution, which can take a lengthy amount of time, and usually happens after the hype period in the marketplace is over.
We make the following seven observations and recommendations to investors as it relates to the technology development stage:
- Just about all of the guesswork should be eliminated regarding any question as to whether a certain spec can be achieved.
- Prototypes of say, a new material system, need to be made readily available to potential customers.
- The constraints on yield and cost should be accurately predicted before even starting product development.
- When it comes to cornercases, do not accept hand-waving arguments.
- Ask futuristic questions, such as whether the performance can be doubled, and if the cost and the size can be cut in half.
- Even go further in pushing for the possibility of four-fold or ten-fold improvements.
- Be prepared to spend up to five times as much for both capital and time as being suggested by the management team as long as the company is in the tech development phase.
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[written by Alka Swanson and Mark Lutkowitz]