Funding Column

 

Stay Focused!

Don't get distracted by goals that won't lead to the next round of funding.

 

By Jack Brittain, Ph.D.

 

In the past three years, Technology Venture Development at the University of Utah launched 61 companies. We have a deep interest in seeing these companies succeed. Such startups advance research by providing development funding, jobs for Utahns and economic strength for the state, which improves Utah's funding environment.

Every startup — whether a restaurant or advanced medical device company — faces an immediate financial crisis. Every business has to buy equipment and hire employees before it makes its first sale. One reason new restaurants fail so quickly is that the owners assume sales are going to cover expenses right away. It rarely works this way. The financial crisis for technology-based companies is even more difficult because they are not sure when they can expect sales. As a consequence, they require a higher initial capitalization and need to carefully manage capital resources before having revenue to pay the bills. It is this pre-revenue period that is commonly called the "Valley of Death," a reference to the fact that many companies fail because they lack the funding to make it to market.

Years of experience suggest companies with large rounds of initial funding actually have a higher failure rate than firms with limited funding. There are lessons in this that inform how we handle funding for our companies.

Initial funding is typically personal and may include "friends and family." Individuals making startup investments want to see that you have "skin in the game," and knowing grandma's pension is at risk assures them you are going to work 23 hours a day to make the company successful. You also want to make the most of this limited funding, which is why lesson one is so important.

Lesson 1: Set a critical path goal and stay focused. Do not spend two days designing a logo and letterhead when your company does not have a product. Focus your time, your money and your partners. It is not a company without a product, so put everything into product development and get a working prototype you can show to potential investors.

Lesson 2: Know your market. "I think people will buy it because" is not market research. Show your product to people. Try giving it away if it is a service or something an individual can use like software. If you cannot give it away, you probably cannot sell it. You need to know who your buyers are, what they think of the product and what its value is to them (and this is not your cost of production).

 

Creating a product or service that appeals to customers may seem simplistic, but it's the foundation for any business that hopes to attract investors. A surprising number of companies get it wrong, spending all their initial capital on logos, letterhead, legal and leather chairs. These matter at some point, but they are not the things that secure another round of funding.

 

Jack Brittain, vice president for Technology Venture Development, has served as the dean of University of Utah's David Eccles School of Business since 1999. He can be reached at dean@business.utah.edu.

 

Launch - Spring 2009

 

 

For the full "digital magazine" version of Spring 2009, visit: www.nxtbook.com/nxtbooks/growutah/launch_2009spring/