When economic bubbles burst, a lot of people get hurt by the
fallout. Startup and early-stage companies are among the most
vulnerable. It's no secret that many venture capital firms,
burned by the dotcom implosion, have shifted their focus to
later-stage companies--because they are considered safer, and
because VCs don't have to wait as long to get their money
back.
What if you are a VC that specializes in early-stage companies?
How can you keep true to your mission--funding tomorrow's
technologies--while avoiding the wildly speculative investments
that fueled the 1990s tech bubble? One such firm has come up with a
novel solution--if you can't find investable companies, build
them yourself.
"We call it partnering," says Richard Sloan,
co-founder with his brother Jeffrey of Sloan Ventures
LLC, a Detroit-based early-stage investment firm. "The
founders of many early-stage companies are inventors or engineers.
They understand the technology, but they don't know how to
build a successful business. While other VC firms tell them to
'come back when they grow up,' we take the founders under
our wing and put the business together for them."
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For the Sloan brothers, building a company is a four-step
process. First comes a reality check. Says Richard, "We have a
huge database of people in just about every industry, so we
schedule meetings with potential suppliers and customers and bring
the company founder along. We ask lots of tough questions. If our
contact says 'I wouldn't buy that because it would disrupt
my distribution system' or 'I like the idea, but the
margins aren't attractive enough for us,' then we're
aware of a problem. Maybe we can solve it, or maybe this is just a
bad idea."
Step two is brainstorming the business plan. "We have a
room in our office that's covered with wallboard from floor to
ceiling. We call it The Oven," says Richard. "Everything
you write on the walls can be downloaded to a personal computer. We
bring the company founders into The Oven, and we don't come out
until we've got the right strategy for building the company. We
spend the next couple of months gathering supporting data,
confirming assumptions and building relationships."
Step three is building the management team. "It's a
particular challenge here in the Midwest," says Richard,
"because most of the people you want come from large
corporations, not small companies. We sometimes have to be
aggressive and bring people in from other parts of the
country."
Step four is financing for the new company and making sure every
penny is spent in the right way. "These last few months
we've been reminded that bootstrap psychology and frugality
really make a lot of sense," says Richard. "It
doesn't mean we want a company to pinch pennies to the point
that they can't be aggressive. But there will be no fancy
parties, no expensive paintings, no pinball machines, no fluff, no
fat. In many cases, we do the bookkeeping ourselves for the first
year or two."
So what kind of startup company is a candidate for the Sloan
treatment? First, a company must have technology that can be
legally protected from competition. "If your stuff can't
be patented or trademarked, don't bother," says
Richard.
Second, the Sloans look for "platform technology,"
which they define as an "innovation that has applications
across a lot of niches and markets." For example, Richard
cites one of the brothers' biggest successes, a software
product that enables microphones to pick up just one person's
voice in a high-noise environment. "While the inventor was
focusing on the recording industry, you can easily see applications
in the surgery, automotive and wireless cellular markets as
well," says Richard.
Third, the innovator must be a "luminary"--someone who
is well-known in his or her field. "This is important because
they're an ongoing fountain of creativity and innovation, and
because they have credibility with the employees and executives we
will need to bring on board," says Jeffrey. "No one will
travel halfway across the country to work for a startup with a
bunch of no-names running the show."
Finally, the Sloan brothers look for projects that have large
and growing markets. "If we are going to expend all this
energy, there has to be a huge upside," says Jeffrey.
One last thing. "People starting tech businesses must have
a sense of urgency," says Richard. "If entrepreneurs
don't have the right spirit, the right culture, we pass, even
if the idea's a good one. We have to have total alignment of
energy and objectives in order to successfully make a business
happen."
is host of the PBS television series MoneyHunt and
a leading expert on managing growing companies. His advice for
small businesses regularly appears on the "Protecting Your
Business" channel on the Small Business Television Network at
www.sbtv.com.