I spent some time yesterday talking to an independently wealthy individual who has recently made a late stage investment into a technology company and discussing the factors that had lead to his decision to go ahead.
It was enlightening to actually talk to someone who operates on the investment side and see the things he was looking for and how they matched up to the advice given to companies seeking investment. I asked his permission to share the observations I got from the conversation as I thought they would also be interesting to you.
I obviously can't disclose details of the specific product or market, however the product is designed to take an existing high-margin business that has shrinking relevance and volumes and renovate it to make it appropriate to the modern world. Rather than being disruptive, the technology promises to increase revenue for all the existing players in the related fields.
After a skim of the documents my own professional opinion is that the technology is not terrifically complex and well within the kind of scope that I'd expect a small team to be able to deliver. It combines a well known solution to another similar problem with existing off-the-shelf technology to bring it to a new market. The solution is covered by a US patent.
The investment process:
The individual was introduced to the opportunity by a credible veteran of a related market, whilst playing golf, and a prospectus was later supplied.
General observations on deciding factors:
The investor clearly took note of the credentials of the team he was investing in, in fact I would say that their pedigree was the deciding factor. I don't believe a team with shorter resumes but more recent hands on experience would have had the same response.
A credible route to buy in from the various gatekeepers who could block the technology was important, but this was assumed as a follow on from the team's credentials.
The story told by the prospectus was critical, and the way it laid down a logical narrative from now to exit provided the main structure for thinking about the investment and potential returns.
The financial statements in the prospectus were viewed as optimistic, with major decisions about viability being based on one tenth of the stated returns. A 'hit' was hoped for but not relied upon. However the numbers in the prospectus were used as the basis for factoring down the returns.
Early validation (in the form of an overseas deal) was viewed as a highly promising indicator.
There was one highly troublesome statement in the prospectus; this had been updated verbally to take account of recent developments by the investors contact. The verbal reassurance was sufficient to provide confidence.
Despite the issues of enforcing patents (cost of legal action, possibility of nullification, inability to enforce them in Europe) they were viewed as a key barrier to competition and a major deciding factor.
The reason that I find this interesting is because of the dissimilarities with the early stage investment market that we are so heavily involved in. We tend to optimise for:
- Disruption over co-operation.
- More complex technologies.
- Technology over story and a focus on the product rather than the way it will be bought to market and protected.
- A focus on execution ability in the team, rather than connections and pedigree.
- Speed of execution and iteration over patents to raise barriers to entry.
This is only one data point, so there may be late stage investors who also value those things.
However presumably as you go through the process you will start to pick up pressure from advisors to shift focus and may need to rethink the way you look at your own business so you can be ready for the kind of questions later stage investors will ask.
The major thing that I do take away from this is that everyone loves early validation, and the sooner you can test your ideas out on paying customers the better.