Soft Money and Mad Professors

Working with inventors and entrepreneurs at the cutting edge of their profession is exhilarating. To be given insights into new, possibly world-changing, developments before they’ve barely made it off the drawing board is a rare privilege. And yet so many of these projects fail, their initial promise almost predictably heading for heartache. All too often I have seen astonishing developments scuppered by the twin demons of greed and vanity, their demise hastened further by the inventor’s inability to express the essence of the project in a way that is comprehensible to the layman. These revolutionary inventions die a painful death, unappreciated, under-funded, with patents going to the wall while mad professors bemoan the failure of the world to recognise their great idea.

In my opinion, there are several reasons for this. Firstly, the grant-aided culture of today’s scientific community results in waste that would dismay the general public, if it were generally known. University spin-outs are the worst offenders. I have seen (many times, in the business ‘hub’ of the University science park where I have my office) new companies move in, replete with funding and as excited as children with a new toy. They have finally made the big time! They take up residence, perhaps just three people in an eight-person office space (room for growth), in a flurry of ergonomic chairs and executive desks. They award themselves an impressive new salary – perhaps a little over the odds, but hey, they’ve worked for tuppence for years to get to this point.

But these nascent businesses are not really businesses at all – they are a huddle of scientist with a brilliant idea, a lab somewhere else in the city, data servers in some off-site cyber crypt, and no experience of how to grow a company. Within a week or two, the office becomes a ghost office. Still in business, yes, but the scientists are elsewhere – developing the science of their project, as indeed they should be. In the meantime, tens of thousands of pounds in grant funding has been blown on the vanity face of the venture – an over-sized, empty office full of expensive office furniture, fittings and neglected pot plants.

So what next for our inventive professors? They pop in to their office from time to time, they gather their team and work on the project. Perhaps a tantalising new development distracts them from the business (“The Second Phase”), and the grant money starts to dwindle. The cost of filing their patents starts to hit home, the burn-rate is in danger of becoming a conflagration. It’s time for the Three Fs – family, friends and fools – to come to the rescue with their chequebooks. And here is where the problems really start.

In gratitude for the starry-eyed donations of their loved ones and supporters, share certificates start to flutter around like confetti. One director after another is appointed as the small-time investors seek recognition or status in recompense for their goodwill and cash. And so the fledgling company limps on, until the point where it becomes evident that some outside funding is all that stands between the invention and oblivion.

So let us assume that our embattled scientists and engineers find their way to some relatively benevolent source of investment, perhaps a knowledgeable high net-worth individual with an interest in their technology, or an investment house that doesn’t include rape and pillage amongst its activities. That cap table is now looking like a problem: a couple of dozen investors, a thousand pounds here, 20 grand there, 15% to you and 1% to you (but you can have a directorship as well). People subdividing their shareholdings without due process, amateurs demanding to stir the pot. And the sight of real money on the table. Everyone is excited at the thought of getting their money back tenfold, but not a single one properly understands about dilution or that they are about to become plankton in the food chain of the reconfigured company.

How can our grant-aided start-ups do it better and ensure their brilliant ideas are the ones that change the world? The errors are so frequently repeated and so basic, it is easy to summarise:

  • Don’t sign a long contract on a fancy office. Find a small room or office to share, perhaps a room in a business hub or incubator. All you really need is room for a laptop and a filing cabinet.
  • Buy your office furniture from Ikea or a second-hand shop (or even Freecycle). Many companies in business centres just leave their furniture behind when they move out. Once you move in somewhere you may well find free stuff up for grabs.
  • You’ve just stopped yourself wasting the first £50K of your operating budget. Now nurture every penny of what’s left. Pay yourself just enough to live on; rewards come later. Cash flow is king, so guard what you’ve got vigilantly. The money WILL run out – it’s your job to make that later rather than sooner.
  • Don’t offer random equity stakes to every small-time benefactor. You are just storing up problems for the future. Investors must be rewarded, of course, but do it rationally and proportionally.
  • Don’t throw directorships around like encouragement awards. A directorship of a nascent company is a serious responsibility and should be reserved for people who understand the business, where it’s going and how it’s going to get there.

Follow through on these ideas, and when the investment house with the multi-million pound cheque book does come knocking, you’ll be in great shape to accept the money, work together and grow the business for the future.

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