Events
Fools and Roads Are Not Barriers for Startups
The article is written by Vladimir Elin (PhD, Investor, Inventor, PJSC Intersoft Eurasia CEO, DO-RA Project Manager),
who in first person talks about the stages of startup development, as well as possible difficulties and mistakes on the way to success. The inventor's view on the difficult path of innovation from a startup to an international independent project.
It seems that for each stage of the startup evolution a certain standard algorithm of interaction with the investor is prescribed. Business incubators or business angels are acceptable form of “startup – investor” communication at the first stage of the startup development, which starts from the creation of idea and prototype. At the second stage, when there is a concept of the project development and engineering documentation for the batch of product’s pilot, software or technology, there is a good time to think about venture investors or profile corporations.
When you get into the hands of venture capital fund, corporation or any similar organization, better be patient and follow your road map. Just take it as the destiny or karma of the innovator and this way should be passed at least out of interest: will project get money or not. It is really impossible to speed up bureaucratic procedures for issuing investment: the system is adjusted so as you will need to comply with a series of rituals and procedures. Without them, no one will sign an investment memorandum for issuing coveted liquidity - real money for your project. Alas, today all employees are connected with so popular KPI and a number of other obligations. They inherently are not capable (and honestly, are not interested) to accelerate investment decisions on any stage.
Today, when the world becomes more and more cross-border, it is quite logical for a startup to look for investments around the world. At the same time, the vast majority of investors are usually interested in only two things: guarantees of preserving and multiplying money invested into the project. All other moments are only details and nuances which can vary depending on capital market.
At the stage of “dating” foreign investor is highly interested in everything: what team will work on the project, how the idea of the startup is stated in the presentation in English (less often in the investor’s language - Chinese, Japanese). Which method of calculating the probability of achieving an announced result is embedded in the business model of the project (the Monte Carlo method or Program Evaluation and Review Technique model, which is an estimating technique that uses a weighted average of optimistic and pessimistic project’s development). What is the philosophy of the project team - eco, impact investing or something else. Finally, how the key players of the team are motivated and what incentive exists in the project when they are on the way of reaching the planned result.
It often happens that startup and investor work in different jurisdictions, under various tax and financial regimes. At the same time, there are many informal plexuses between developers inside of the startup team, and this part of the relationships is also important for investors. After all, everyone understands perfectly well: appetite comes with eating. So, with the appearance of investment tranches and in anticipation of the forthcoming success of the project, any employee can choose the strategy of "topping after sludge": for example, in order to prove his indispensability to ask for unscheduled bonuses, shares in the project or other benefits previously not listed in his hiring contract. It is clear that this leads to a certain risk for the project – both financial part and human resources.
Currently (just like a while ago), there is a simple rule worked abroad: transfer your company with the team and intellectual property in the foreign country, and get grant financing and state support, favourable attitude of investors, sales markets and other business benefits. At the same time, some offers are quite controversial and absurd. Thus, one American corporation, acting through investment fund in the core sphere, offered me to sell exclusive rights for the technology and selling of my project on the key markets of the world: the USA, Japan, China, India, the European Union, Australia, etc. just for $10,000. Well, at least the corporation promised me to invest some money in marketing and production, but without clear guarantees. When I naively asked my "future partners" how about a lump-sum payment, which is at least $100,000-200,000 for any kind of such transactions and industry royalties within 3-5% (the standard numbers for this type of transactions), I got an answer, that original offer from this corporation is pretty much enough for my project. However, later, this American corporation was swallowed up by another, European company.
Many corporations, commenting on their relationships with startups, often state that inventors who come to them for getting money, offer solutions that do not meet market requirements and tendencies. In reality, it is not quite like that. Corporations are a huge conglomerate of various departments and units which consist of people with different backgrounds, horizons and philosophies. And not always and not all of them are at the forefront of science and perspective thought. There are many real examples from history when, it would seem, high-tech companies miscalculated: IBM "slept through" personal computers era, Nokia did not believe in touchpad “buttons-free” phones, Kodak - in digital photography.
Often, innovative solutions offered by startups are directed to the future, they overtake the market and sometimes do not allow adequately assess the usability of the technologies being created to the standards of the current marketing and financial patterns. Although, modern economic science has achieved good relevance to the market of modern developments. There are new tools for valuing intangible assets (IA) in the form of patents for utility models and inventions, technologies, design solutions. Due to this it became possible to introduce intellectual assets, developed by innovators and startups into the financial circulation. In this case, startup usually monitors the market for the future implementation of its own product and sometimes knows even more about it (the market) than any experienced marketing agency. Therefore, it is possible to get answers for so popular questions – “what so sell, when and to whom?” even at the initial stage of the startup development.
In the case of my project - a compact gadget with a dosimeter-radiometer function - I have tested different types of financial support. I tried to work with venture funds in the USA, Europe, Russia, as well as with American, Japanese and Russian corporations. But in the end, at a certain stage, I decided to implement my own project by myself. This was due to a number of circumstances. Five-year patent war, during which we defended the right to own the product, although it was ended in our victory, but significantly slowed down the production activity of the project during this period. Of course, the specificity of the project also affected the development process: it is directly connected with nuclear industry, which is very sensitive to dual-use products, but at the same time is very inert to such innovations.
We, Russian people, build our state, despite the contradictions, obstacles and absurdities inside the country. In general, at the moment we have to overcome local barriers, waiting, when the program of “import substitution” in our country start working on practice instead of just words and governmental papers.
Even classics mentioned: there are two troubles in Russia - fools and roads. And I became convinced of the veracity of this statement in practice. I managed to go through many of the procedures and difficulties in the process of my activity as an inventor and businessman, while was dealing with it on my native language, under well-known laws and clear mentality, as I acted on the territory of my country. I tried to discuss the project with the investor at the earliest stages and on the initial level, tried immediately discussing what is to be done, in what terms, how realistic are my requests within the one or another investor. And that is interesting: there are real money from the investor, and the topic is my profile, moreover, the technologies seem to be perspective, and there is a market for my product. But there are always long-standing stable connections and suppliers of more "antique", expensive, but reliable equipment. In this case, the attitude for the startup is traditional: "Who are you? A small enterprise, unknown to our system and not certified in our respected department. In general, we are unsuitable in so many ways, please get lost... ".
At the same time, Russian system for supporting startups and innovators is gaining strength and technology. Many industrial parks - especially Skolkovo Technopark- have learned to select, filter and approve projects that are interesting for the market and are in a high demand for the society. There is only one misfortune - these systems gradually get bogged down in the bureaucracy, become more and more complicated and inflexible.
Especially, I would like to note that over the few past years, Russian venture funds, such as Runa Capital, Ru-Net Holdings, Bridge Capital Energy and others have significantly increased their activity. There is a new program for accelerating startups called GenerationS, under the RBK Group, divided into several profile clusters: agriculture and medicine, energy, IT solutions for the banking sector, extraction and processing of the resources, adaptive production - and there is a hope that the best startups will be noticed. Projects can participate at this program at any stage of their development: from the idea, creation of a prototype, pilot production to full-fledged industrial manufacturing.
Formalization through automatization can be achieved through the ICO procedure using the block-chain technology with the help of crypto-currency. This, in my opinion, is the most progressive, yet unregulated investment and accounting environment for innovators and startups, although it has not been completely investigated by risks and other components of classical investment. However, the owners of such digital currency, like Bitcoin, Ethereum and others, are more dynamic in their investments in various startups to generate income and hedge financial risks that exist in crypto-currencies.
