Cleantech investors are commonly approached by very early stage entrepreneurs. And by "very early stage," I mean garage-based-inventor stage. In many cases they're not directly looking for funding from my firm at their stage, but they're looking for advice on how to raise seed capital.
We all need such entrepreneurs to succeed. Their innovation and enthusiasm is the lifeblood of our sector. And so while it's gratifying to encounter such innovators, it's also frustrating to find that so many are having a hard time getting started. And I have come to believe that in many cases these innovators are having an especially hard time because they're not looking for the right thing. They shouldn't be looking for seed capital, they should be looking for how to turn their idea into a business. The funding follows after that.
Below are some suggestions that I hope will help such innovators turn their ideas into a real business. This is a lot easier said than done, especially on limited capital and during limited available hours. I've been in this position myself, and I know there are real constraints on what can be done. So the most important watchword here is "patience." The below process can go relatively quickly if you have a lot of time and no financial constraints, but it can also be effectively tackled over time, on the cheap and with limited bandwidth. Just don't expect it to happen overnight, or you're not being thorough enough. It's highly unlikely that these antiquated, slow cleantech markets will move too quickly and pass you by while you're prepping; but it's much more likely that if you go out there not yet fully prepared, you won't make any headway. Be patient.
So with that in mind:
1. Attack your own idea. Why won't it succeed?
The general sentiment experts and investors like to pass along to early innovators is that they must be unmitigatedly optimistic, that they must simply will themselves to succeed and refuse to take no for an answer.
True enough. But there's a time and place for everything. And you should shoot holes in your own ideas before someone else does. The best way to do that is simply to ask yourself tough questions and then gauge your answers on your own personal bullsh*t meter.
"Is this a solution in search of a problem, or is this idea of mine generated by a very real customer (i.e., not society-level) problem that they'll pay someone to solve?"
"Is this a good idea but aimed at customers or a market that simply aren't accepting of new innovations?"
"Is this a good idea but one where it will take more capital to succeed than I can realistically access?"
"Is this a good idea but one where it will take skills and talents that I don't have and can't access?"
"Do I have time for this? Or am I hoping to just hand it over to someone else to execute for me?"
"Do I have any special advantage that means I would be able to succeed at this even if others also have the same basic idea?"
"Is this something that someone in a national lab or in Silicon Valley or at a university is probably already doing?"
If you end up losing faith in this particular idea, that's still a victory, as long as you then work hard to develop another winning idea. But hopefully what you find is that you have a revised idea you truly believe in, and you're now completely honest with yourself about the obstacles to bringing it successfully to market. I'm a big believer in optimistic entrepreneurs, but there's a difference between optimism and fooling yourself.
2. Decide if you are going to develop a component, or a full solution.
This may seem like a value-laden question, but I really don't mean it that way. These are two equally legitimate pathways.
Is your vision that your innovation is incorporated into other people's products or systems? Are you looking to license it for others to manufacture? These can be financially-successful and commercially-successful paths, requiring much less capital in many cases, than the decision to take on building out a full solution. Are you a battery management innovator who will license an innovation to Tesla, or do you want to take your battery management innovations and use them as the basis for building a new Tesla? The reason to figure this question out for yourself in the early going is that it will dictate a lot of other choices further on. For example, many innovators too quickly assume they need venture capitalists to back their effort, and yet VCs typically want to back full solutions with lots of capital, not capital-light component development and licensing plays...
Generally, I would urge keeping things very simple as a first-time entrepreneur. First-time entrepreneurship is ridiculously hard, and many entrepreneurs find better success their second or third time around after a lot of lessons learned. So to borrow a concept, think of your first entrepreneurial effort as the task of putting out there a "Minimum Viable Entrepreneur" and then failing a lot very quickly so that you can iterate quickly. That's a lot easier to do if the business you're trying to start is as simple as possible. To innovate around a battery pack and license it to an automaker requires several skills. To successfully launch a brand new automaking company requires ten times as many different skills areas.
3. Recognize that at this stage, it's all about the customer proof points and the prototype.
You may have a lot of confidence in your idea, but really that doesn't matter much. What matters a lot more is that customers say they want a solution like this when it's ready for them, and that you have some serious prototype that you can show to people and give them confidence in your idea.
You can't learn what you need to learn about prospective customers via web searches. Find people from your prospective customer group, or who work with your prospective customer group, and buy them a cup of coffee and informally tell them about your idea to get their reactions. Don't go straight to the top, go to people who have the time to give you thoughtful answers. Ask them about whether this type of innovation would be welcomed or not (you'd be surprised how many innovators want to sell things to utilities and yet really don't understand why utilities actually buy things, for example). And especially try to learn about what pains and frustrations they experience, that might be relevant to your idea. Building in such solutions can be invaluable. Most of all, leave the door open to follow-up conversations once you have something to show them.
And build that something to show them. To the extent you can with the limited resources you have, build the sucker. Too many innovators go out and seek funding armed only with drawings and computer modeling.
- Perhaps you have to do it at a much smaller scale because of costs and physical constraints;
- Perhaps you have to build something that demonstrates only a portion of your idea;
- Perhaps you need to use mostly off-the-shelf components to show what your envisioned proprietary solution would eventually do a better job of;
- Perhaps you simply are launching a service business and can actually do the service yourself for someone; or
- Perhaps you are launching a web-based business and your first test site is built using free hosting and web design tools, doesn't look very snazzy, and is built on a very incomplete database
Whatever you have to do, build a version of it that you can show to people. A version that actually demonstrates the potential effectiveness of something, not just an illustrative model or mock-up.
4. Write a business plan.
I know, I know, conventional wisdom now says that writing a business plan is a waste of time and effort. I disagree. Writing a very pretty business plan with lots of jargon designed to impress an external audience is a waste of time and effort. But the actual thought processes behind writing a business plan are invaluable, at least for first-time entrepreneurs.
What this really does for you is it forces you to get down to brass tacks on all of the various parts of your potentially-good idea that you have previously glossed over or just assumed away. Successful entrepreneurship requires many things, but one of those is definitely the ability to execute on an overwhelming number of specific tasks at a detailed level. Especially if you're not a "details person", the forcing function of having to think through the plan of action in a comprehensive and deep way is very useful.
But do it for you, not for an external audience. Save the high-falutin' jargon for your eventual investor deck or customer pitch (and maybe skip it there, too). Don't worry about the format, about getting the structure just right, or even good grammar. Pick any old suggested template; it really doesn't matter. But take the time to think through your full business in as detailed a way as you can think of, and take the time to write it down, and take the time to keep it roughly updated as you think of areas you forgot or you change your plans. Because when you do go out to external audiences, while you won't show them this document, writing it will be what makes you sound very thoughtful and pragmatic when you pitch your otherwise crazy idea at someone in hopes of them giving you money.
Network with a lot of other entrepreneurs to the extent you can, and try to find a good experienced entrepreneur who's willing to give you regular advice. Consider an accelerator program like the Cleantech Open. Learn good business planning as much as possible from others who've done it in the past, rather than from your own blank slate.
This is not a budgeting exercise. This is a war plan. Numbers are part of that, but it's more about discrete tasks and objectives in a comprehensive fashion. If you're doing it right, you'll likely discover you've been ignoring pretty significant areas of activity that any real business must have... And if you're doing it right, you'll figure out how much money you actually need to raise to make your idea a reality, rather than the typical guessed-at large round number.
Even if your business idea is to get something to a prototype stage and then hand it off to someone else to commercialize, write up the details of that plan, however simple. Because you'll discover it's not so simple after all.
5. Find your team.
I've found that many innovators are pretty self-aware and know of several key skills areas they don't have and will need to bring on board. But they really don't know what to do about that. It's difficult to impossible to build a team by recruiting people you don't know, before you raise money. And yet most innovators, especially first-time entrepreneurs, don't have an a priori team around them. So many innovators punt on this and simply tell themselves (and prospective investors) that they'll hire senior people into various roles after getting capital.
The problem is, unless you have identified full- or part-time managers for crucial areas, it's hard for any investor to write a check. They want to know the team they're backing. So punting is ineffective.
The answer is to rely upon all the networking you've been doing from the above steps. As you've been talking with prospective customers and partners, and with other entrepreneurs, see who can get to be passionate about your idea. If you need other skills you haven't encountered yet, figure out where those people network and go there, looking for good listeners. With those people, meet with them several times if they're willing, and if you see a good mutual fit, try to soft-recruit them. By which I mean get them fired up about joining your effort when you get funding, so that you can bring them into your pre-funding planning process, and also tell prospective investors about them.
You'll need full- or part-time managers for all the really critical tasks. But there are a lot of other necessary but not as critical areas of entrepreneurship, so also recruit advisors/mentors who can help you know what to expect but aren't anticipated to put in more than an hour or so every other week. And don't forget -- you'll also need someone to do all the actual work. If you're going to CEO this effort, you'll end up spending a lot less time in the lab yourself.
Remember, you're potentially trapped with these people for 10 years or so. So don't fool yourself about your skills gaps, their skills gaps, or that you might quickly discover you can't stand each other. Again, be patient and let relationships develop over time in an iterative way.
You don't need a full team before launching your business, but knowing more of the pieces than just you alone is part of the necessary planning and credibility-building you need to do before approaching funders.
6. Approach funders.
Aha, finally we're to the point of this column, right? I hope that's not what you're thinking, and if so prepare for disappointment. Getting funding is a result of building a great (albeit fledgling) business, not the other way around, and I hope that the above steps are helpful in that regard.
But at some point you'll likely need some capital. So in this period where early stage venture capital is hard to find, where should you look? In all likelihood, the underwhelming answer is grants and local angels.
At this point you hopefully know how much capital you need to take your idea to the next step, and hopefully it's not a huge amount. So note that for anything under $1M, venture capital is likely not a good fit. Even early stage VCs typically don't want to write a bunch of smallish checks out of >$100M funds, because it's a lot of management overhead for them. And there really aren't that many early stage venture capital deals done in any case, versus the number of good ideas out there, so just the numbers game alone says that VCs are likely not your best source of startup capital as a first-time entrepreneur who doesn't already have a relationship with any VCs. Never say never, but grants and angels are most likely the way to go.
And for both of these capital sources, focus mostly on local targets, because they tend to really focus in on their regions. There are actually a lot more grant opportunities at the local level than you might think, but many innovators focus just on the higher-profile national opportunities (like ARPA-E, etc) that get a lot of attention. But I've worked with grant-making bodies from Massachusetts to North Dakota and I can tell you that many states have some kind of entity with a small (<$1M check) capacity to support early stage entrepreneurs and/or technology innovators -- it may not be a cleantech-focused entity, mind you. Furthermore, there are often resources attached to universities, as well as non-profits like MassChallenge and the Cleantech Open, who have some limited financial resources for program participants/winners.
If you need millions of dollars to make your prototype, you're probably not thinking creatively enough. And if you don't need millions of dollars for this first step, do a lot of research to find what local grant-making resources there are that are available to you.
And angels are all around you as well. There are angel groups all over, and online. Without doing the above process it may be difficult to break through the noise to get the attention of angels even when you find them; but with a credible plan your task is to network to an angel investor (or three) who share your passion and your vision for the business. Don't just fire off an executive summary to an angel group email address, use LinkedIn and other resources to figure out individual angels and go talk to them. Even when they're not a fit (which is likely), ask them about other angel investors you should track down. Don't ask them for an endorsement or even a referral unless they want to do so, because investors of all stripes are wary about burning relationship capital in this way when they don't really know someone that well. But just good solid leads for you to track down are quite valuable.
Think globally, but fundraise locally.
The above steps won't be applicable to many innovators, and many more will already know and be actively doing most parts of it. But in my experience, I run across lots of innovators who really don't know how to get started at turning their good ideas into real businesses, and go out to find funding to support doing so. My point is, that's the wrong order of things. Patiently and thoroughly build your business, even if it has gaps at this early stage, and then you'll be in a much better situation when you write a grant application or pitch an angel investor. Which then allows you to focus on local funders with confidence, rather than casting your net too widely.
Network, network, network. Have strong opinions, loosely held. And be prepared to iterate and have countless conversations before you piece it all together. It's hard, but it can be done, and you can do it, even if you've never done it before.