May 2009 Archives

By Dennis Posadas This week let us discuss the basics of funding for technology startups. The first thing one has to realize is that unlike a lot of businesses that have physical collateral (e.g. a building, manufacturing equipment, etc.), technology based businesses often have an additional type of collateral--namely intellectual property. Now the problem oftentimes is that bankers in most parts of the world, including the Philippines, do not know how to value intellectual property. You can’t blame them; specialized consulting firms have sprouted up that can do these valuations, unfortunately not many of them are based in the country. In addition, there is also the matter of how much sophistication there is in the product. If at first glance, the observer can figure out how the product or service works, then there isn’t too much of an intellectual barrier to start with. But let’s assume for argument’s sake that the invention or technology is novel, is useful, and is not immediately obvious to someone who is an expert. For example, if someone shows a design for a more efficient engine, and the mechanical engineering community thinks it is innovative, then perhaps the idea or the technology is patentable. Once that has been established, and people agree that it has value, then we can talk about funding. The first type of funding that engineers and scientists should consider is a grant. Grants are available from the Department of Science and Technology (DoST), from various government agencies, multilateral agencies, private foundations, etc. There are different types of requirements and conditions that one must meet in order to get a grant. But if you are able to get a grant, that is good because oftentimes there is no pressure to pay it back. However, you must of course make sure to deliver on what you promised, whether it is an altruistic benefit or whatever the grant stipulates. The second type of funding is of course a loan. This can be a personal loan from friends and family, or it can be a bank loan. For small amounts, often the best persons to try to get a loan from are people you already know for the simple reason that they are often the only ones who will give you a loan. For a bank loan, the situation is often difficult for technology startups because their value is not often premised on physical collateral, but more on intellectual collateral, which bankers often cannot value accurately. Try showing your Philippine or U.S. patent plaque to a banker, and let’s see how far you will go with your loan application. The third type of funding is equity. Equity is not a loan, rather it is an agreement to give partial or full ownership of the business to the person/company who gave the equity. Angel equity often comes from the three F’s: friends, families or fools. Often these people ask questions, but it is often, like the personal loan, your relationship with these people as well as a business plan that makes sense, that matters. Venture capital is a more sophisticated form of equity for those small to midsized companies who expect to grow really big. Venture capitalists make decisions based on how you present your idea in a business plan, oftentimes questioning your assumptions about market size, how you plan to penetrate it, your marketing and manufacturing strategy, your technology, and all that. VC’s, as they like to call themselves, often reject as much as 95 to 98 percent of the proposals they receive, and they often fund only when your company reaches a certain size. So if your business is still only an idea in your head, don’t talk to a VC, but talk to one of the three F’s I mentioned earlier. Finally, when all else fails, and no one wants to loan you money or give you equity, you can always do what Michael Dell, Bill Gates, and a lot of technopreneurs did. Bootstrap. To bootstrap is a verb that comes from the story of the German character Baron Munchausen, where it is said that he could pull himself and his horse out of the mud by pulling his bootstraps, which is of course physically impossible. Nevertheless, bootstrapping simply means to fund your startup by the sales you generate. So instead of borrowing or asking for money, you basically pay salaries only when your customer has made a downpayment, or given the full amount. Now making the sale, especially the first sale, of an unproven product, now that is another story altogether. Getting funding, and making a sale may seem extremely difficult for many engineers and scientists, but like many things in life, is simply a matter of determination, even in this poor economy. Dennis Posadas is the author of Jump Start: A Technopreneurship Fable (Singapore: Pearson Prentice Hall, 2009).