Q: I have a lab prototype of a laser that operates at a new wavelength that enables new medical procedures. Thus far I am unable to raise capital to start the company. Any thoughts?
A: This is a not an easy time to raise venture capital, although my impression is that the economic environment is improving and so is the mood of investors. I encourage you to keep trying. You can also in the meantime find ways to improve on targeting, and possibly construct a better story about your business plan and/or to formulate a more attractive proposition.
One reason you are having a hard time raising money may very well be that your plan is too ambitious. Like many business plans I see, you have a sound technical idea but it would take a tremendous amount of time and investment capital to get to commercial realization. Just imagine how much effort it would take to carry the project from a prototype in a lab to a product in doctor's hands with FDA approval. Raising money is always difficult for companies specializing in medical products—very few ideas make business sense from a investor's point of view, even though the invention may be a technical breakthrough. It might make sense for you to scale back your goal to do just enough to get acquired or to partner with an established company as soon as you can prove the business potential. It is more economically viable for established companies to pursue an embryonic idea because they are experienced in business development and only have to make an incremental investment to their existing infrastructure to incubate a new product. I am not saying this is an easy goal; nonetheless, it makes more business sense from an ROI standpoint. Given that the approach makes sense and the investment required is lower, raising money also gets easier.
Most entrepreneurs want to build out their company instead of working toward an early acquisition because they are focused on getting a higher valuation "after the business is established," but they overlook the additional investment required and the risks associated with the time element. If you dial in the dilution of ownership that would accompany several rounds of additional investments, it wouldn't take long for you to realize that you are better off getting acquired earlier than later.
Q: How do I select a banker or a business broker when I want to sell my business, given that they all seemed perfectly qualified?
A: This is difficult because they can be convincing. Checking references is about the only way to get meaningful input. Start with people you trust in your network to find out about the firm's reputation and the standing of the individual banker who would represent your firm. Then get down to specifics by talking to individuals who have interacted with the banker, especially to executives of the companies on the sell side they have represented. To get more meaningful input, always try to get a face-to-face meeting. People are more likely to open up in a relaxed setting such as a get-acquainted luncheon in a nice restaurant. There is very little reason for the individual to open up to you in a casual conversation over the phone, and they certainly won't put their input in an email.
Personal chemistry between you and the individual banker is also important because you will be working closely with that individual throughout the transaction. I like a banker who is smart and intellectually inclined—someone who knows enough about my business to explain the potential, and also knows what he doesn't know so he can bring me into the conversation to provide specific details. I also want someone who can add to what I know about each potential acquirer's business strategy to formulate a coherent and appealing pitch.
