Technology Commercialization

The Passage Across the Valley of Death: The Gap Between Research and Venture Capital (http://EdAddison.tumblr.com) .

At Johns Hopkins University, I teach students of entrepreneurship.  These students vary across disciplines.  They include biotechnology students who are studying how to manage innovation, engineers and computer scientists who learn to write business plans, and MBA students who are learning about venture capital.  The model used for this process is to begin with an innovation that can be packaged into a product or service, write a business plan, and then go seek venture capital.

This is a common approach, but the facts show that venture capitalists do not fund many ventures before they have completed product development and have proven revenue streams.  Even then, only a small percentage of ventures get venture capital.  How can a venture succeed, then, in transitioning from the initial product innovation to a successful growing company that has penetrated a sustainable market share?  This zone of early development, between science and business, is often called the ‘Valley of Death’ because funding sources are minimal.

The ‘Valley of Death’ is really a testing ground to see what teams and what products survive and which do not.  It is in the Valley of Death where small amounts of funding must be secured to prove products, where initial sales have to be made, and where the tenacity of the founding team is tested.  To many, it may seem there is nowhere to turn.  I believe it is a good test of the worth of a venture, to see if they survive the valley of death.  Otherwise, we may return to the inefficient use of capital that was seen during the dot com era before the bubble burst.

So where does funding come from during the transition across the Valley of Death? The answer is everywhere, and many places.  Failure to secure adequate resources is a sign that the venture doesn’t have what it takes to reach an efficient and powerful launching point.  The following list names just a few of the sources, and the validation proven by each.  A venture that crosses the Valley of Death must be good at bootstrapping using a multitude of these resources.  Not all are needed, but many are.  My top 10:

10.  Founders use their own money and credit sources, showing they believe in what they are doing

9.  Founders and early employees work without pay or for low pay for a while, demonstrating a commitment for the long term

8.  Early money from friends and family, which serves to greater incentivize the founders not fail

7.  Government grants and contracts and economic development support, demonstrating that others believe in the future of the venture is doing

6.  Consulting and services revenue prior to product completion, providing cash flow to keep the team around, done artfully so as not to distract from the mission

5.  Private placement equity from angels, angel groups or accredited investors, acquiring working capital for critical tasks and proving that others will back the venture

4.  Leases for necessary equipment, office space or vehicles, therefore minimizing the amount of upfront capital needed to meet early milestones

3.  A corporate strategic partner who provides development capital and possible a distribution channel, securing the first major piece of business

2.  Custom sales to early adopters and visionaries, providing early customer usage and testing of the product or service

1.  Acquiring some mainstream customers, proving that “the dogs are eating the dog food” (the customers are buying the product, the team can sell the product, and there is revenue that counts).

The truth is, if the venture cannot do these things first, there is a problem.  The problem may be that the product is ill-conceived or there is no market pull for it.  The problem may be a lack of conviction or talent among the team.  The problem is often lack of critical mass — high potential ventures cannot be developed by one or two people as it usually takes a team of a half dozen or more to build up the necessary energy.  The problem may be a team that cannot sell or who will not leave the cave and network — if so, this team is not ready or deserving of funding.  Sometimes the problem is immaturity of the technology — the world is not ready for this yet. 

Whatever the case, the passage across the Valley of Death is a better test than a venture capitalist reading an executive summary.