8 minute read
As due diligence lead at BCI Technology Investments, my primary responsibility is to assess different opportunities along with the potential successes and challenges each are likely to encounter as they seek to scale. After evaluating the business models and operations of well over a hundred young cleantech companies, and interacting with hundreds more over the years, I have found that there are common threads you should be aware of when seeking additional funding from the investor community that can help you avoid the pitfalls I’ve seen others fall into.
Certainly, there is no ‘one size fits all’ approach when it comes to growing a business or a surefire path to success, particularly in the rapidly growing cleantech industry. I would never claim to have a fail-safe ‘paint by numbers’ approach to help you improve your company’s positioning to secure funding. However, below are some of the key areas to consider.
Here are 7 critical areas to keep in mind before talking to an investor:
#1: Your Team: Prove that you are the ones that will succeed.
Your team is, hands down, the most important asset you are bringing to the table. Also, notice how I said ‘ones’ rather than ‘one’ in the title. Nobody can successfully grow a company singlehandedly – you will need support at various different stages of development along the way. That is not to say that you necessarily need to have multiple cofounders in a company, but it is imperative that you pull together a strong management team and advisors that will give you every opportunity to be successful. Investors typically look at the previous exit experience a management team might have as a proxy for a founder’s motivation and understanding of the business growth process. The cleantech industry is still relatively young, so individuals with significant experience in this area are valuable. Investors will also look closely at the number of connections you have in your back pocket to help you get out in front of new customers, strategic partners, and future investors. Crucially, you will also be under the microscope regarding the relevant sector expertise you are leveraging.
Make sure you have a diverse skill set, or be willing to bring on others that will help round you out. This may involve big changes to garner big results – like you moving from the CEO role to a CTO or COO role if it means bringing on the specialized talent that can help you get in front of customers and sell.
#2: Your Technology: Show that this is a solution that does not already exist.
It will be difficult to convince someone to put money into your company if there are dozens of similar products already on the market. Even if there are, then how is your approach better than the competition? Show a clear difference and identified weaknesses in your competitors’ approach that you will overcome.
It is also important to take intellectual property protections extremely seriously.
Was this technology developed in a university where they will be taking royalties moving forward? Is there a known ‘patent troll’ in your space that might bog you down with relentless litigation to burn through your cash reserves? Is your solution purely dependent on software that might be difficult, if not impossible, to successfully patent and force you to rely exclusively on trade secrets as your primary defense? Does your product depend on regulation, such as a carbon tax, to be economically viable?
These are just a few examples, but any one of them could be a major impediment down the road for a future acquisition by a major company, and give investors reason for pause. You need to think through all of these scenarios and convince a potential investor that you are secure in your position as you seek to grow, regardless of what might come down the road.
#3: Your Market Potential: Prove that you have plenty of room to grow.
Investors will have a very different opinion of the opportunity you are bringing to them depending on whether the annual market value that you are trying to take a piece of is $10M, $100M, or $1B+. Showing that you are playing in an industry that isn’t solely dealing with small value niche applications will further incentivize an investor to provide you with capital to grow and capture value.
A growing industry is attractive, so you will want to show the underlying trends as to why this market will continue to expand, and grow the available pie. This is particularly important for the cleantech sector, as you will need to show why there is a clear market need for your innovation. This can also show that you aren’t going to purely need to capture market share from an incumbent market player, and that there might be some room for everyone to grow (at least in the short term) so that you can establish your market presence without having to dive head-first into a price war with your competitors.
#4: Customer Validation: Show that this is a solution people care about and will use.
I have seen more than my fair share of ‘solutions without a problem’ from brilliant technical minds that haven’t adequately made the connection between how this product will ultimately get adopted by a customer and in turn generate enough cash flow for the business to cover all of its expenses. Cleantech companies fall into this trap all the time, where the product you have clearly demonstrates a solution that benefits society, but there just simply isn’t a customer out there that is willing to pay for it.
This is where ‘Voice of the Customer’ is so important, and where a demonstration or pilot project speaks volumes. A word of caution: make sure that you are adequately diverse in the customers you engage with. Landing a single large project or order can be a great win, but if you put all your eggs in one basket and that customer ends up walking away at the last minute, will you be able to engage with others to ensure you can continue to bring in revenue and stay afloat?
Proving successful product adoption is a necessary step in proving your viability and transitions you from ‘science project’ territory into a successful commercialization path. This shows that you can form a viable business and prove to your investors that there is a light at the end of the tunnel for them to expect a return on their deployed capital.
#5: Product Roadmap: Continue developing as a company beyond your minimal viable product.
How are you going to continue to innovate as a company while driving costs down? Developing a breakthrough product is an incredible achievement, but investors will be keen to observe if this is a one-shot opportunity or rather a platform you to iterate off of and expand into other product offerings, drastically increasing the value you are building within the business. Investors are looking for the latter because as mentioned earlier, it improves the likelihood that your value will continue to grow and increases your chances for a successful exit event.
One the other side, while it is important to map out future innovations so that you can diversify your product line, make sure you don’t do it at the expense of bringing your minimal viable product to market and establishing firm business fundamentals first. I have seen companies pivot to a new business line or model too early, which eats into their cash flow and gets them in trouble.
#6: Your Goals for the Business: Have a clear vision on where you are going.
Success to you may not mean the same thing as it does to an investor. You could very well aim to have your company grow to be an operating company and then run for decades (which is an entirely valid approach for a business, I might add). However, make sure you are aligned with the interests of an investor you bring on. Be honest with your plans – it could save you a major headache later on.
Always keep in mind your target investor’s timeline and motivation for providing you with funding, whether that’s increased job growth potential, CO2 emission reduction goals, or overall financial return. Investors will perform due diligence on a variety of areas to weigh the probability of their primary objective being met. An angel or impact investor may be happy with a long–time horizon for a company they invest in, but a venture capital firm with limited partners expecting a return on their capital within a set time frame will have very different expectations. They will expect to see some form of exit event, either an acquisition or IPO, before their current fund’s life expires.
As a cleantech company operating in this space do you feel you will be able to meet this constraint? This becomes increasingly difficult if you are working with hardware, so you should proactively seek out investors that have a suite of strategic partners to help you commercialize quickly.
A typical VC fund is usually set up with a clear endpoint of 8-10 years, after which all investments will need to be successfully exited or written off. This of course can vary by class of investor and industry. Make sure you speak with an investor on how far into their fund they are so you can have an idea of when they might expect you to pursue an exit event. Remember: they very much want you to succeed and will help you along the way, but the primary goal at the end of the day for most investors is to maximize the return on their initial investment.
#7: Working Capital and Runway: Show a path to profitability with the investment you are planning on securing.
Everything else may align, but your cash flow will make or break you. Of course, if you are speaking with investors, you, of course, are in need of additional capital and support to help you grow. But, you will need to show that with your current sales projections (investors will be sure to discount this) you have enough capital with the new influx of cash to become profitable, or that realistically you will need an additional round of funding at some point and have planned for that in your projection and communicated that need to the investor. It is in no way a deal-breaker to plan for an additional round of financing at a later date, and investors will usually expect to have to provide additional support if needed, but in your financial models you should be very clear about when you will be expecting this to happen and how those funds will be used. Plan to get out in front of any future funding needs at least 6 months in advance before you need the capital in-hand. Make sure you are raising enough capital to keep you going: often you will find you need 2-3x of the cash you think you need in order to meet the milestones you have established.
The current pandemic certainly paints this in a more urgent light. Companies are now being asked how they are seeking to conserve cash in this time and how you are best using your time to come out of this more effective and competitive than ever. Investors will expect to hear a compelling ‘phoenix’ story on how you will rise from this that much stronger, which further builds their confidence in you and your team (see point #1).
Of course, and to reiterate, there are endless different topics to go over regarding company health, particularly in this uncertain time. Just keep in mind: different types of investors will have different approaches and certain criteria they look for, however, these points above are some of the major ones you will undoubtedly be scrutinized on, so make sure you have a good strategy for each.
Lastly: remember that the people and organizations around you want to help you succeed – make sure you get their input! You’ll never know what sort of insight you might walk away with that could help you avoid common pitfalls or help you chart a different course to profitability that you might not have previously considered.
Andrew Chabot is Senior Associate at BCI Technology Investments, where he serves as deal flow and due diligence lead. He previously worked in business and product development at a cleantech startup and subsequently managed a portfolio of early-stage company assistance grant programs for the cleantech industry at a state agency. He currently also serves as a mentor for young companies through Cleantech Open.