I am freash from reading after the book "Venture Deals". My thoughts on how to parse the funding phases around development / project miles stones and what the ideal method of funding should be and the reasons why. Read the blog...
I was at the ASHRAE show in January and had short but encouraging dialog with the CEO of a small compressor manufacturer. It will be an understatement to say he liked the concept of MicroAC – after a mug shot of me on his iphone and an exchange of cards we split ways. He cautioned against VC and said private partnership is better for the founder. He was speaking from personal experience but I am not aware of the details of his ordeal. But that got me thinking about startup funding. I am very intrigued about how an innovative concept can be taken to fruition by someone who has very little wealth. I am not sure what will come out of this idea but I am going to keep plugging away. It is so much fun and I love all the things I am learning along the way. I just read a book Venture Deals by Brad Feld and Jason Mendelson. Great book. It cleared so many fuzzy things about startup funding. I think microAC is a big dream. It is like two startups at the same time – one an engineering / manufacturing company that manufactures a high tech appliance and the other is a technology company that empowers a home owner to monitor and control the comfort and energy of his house (not to mention home security and personal safety features). Bottom line, this project will need lots and lots of resources and capital. If I pull it off with my meager means, it will be crazy.
Estimating the resources and capital required from concept to launch is very important. My first task is to estimate the resources and capital required in detail for the different stages of product development and the corresponding capital phases leading to launch, actually sometime after launch, could be a year or $5-10M in sales. The innovator or founder should plan to compartmentalize the capital requirement into 2-3 chunks. First is the seed fund required to develop the concept and build prototypes. This can be more than a year in my case because of the complexity of the product. When you have a proven product hardware and software developed that will meet the customer requirements, you enter the second phase of product design and manufacturing palnning. This leads to launch and rampup. The third phase is the growth phase when you have market acceptance and need the oomph to take it to the next level. Ideally, you want the first round of financing to be friend’s and family or angel investors. Essentially, anything that will not require valuation of the company because at this stage there is nothing to base the valuation upon and is likely to be low and will hurt future valuations. Ideally, it will be great if you can put off VC investment till the third round but that may be difficult. The first round can be viewed as a debt and the promise of divident or it could be sweetened by making it convertible to preferred shares at a discount during future rounds of funding. I would want the convertion tied to future investemnt by the investor to encourage contnued funding.
Now, let us see how this relates to microAC. I am still far away from putting details behind the numbers I am going spew but that will be my task in the next few months. But a rough estimate for phase 1 or concept development is about $500K to $1M. The range seems pretty large but this due to the stage I am in now. The lower range is the amount absolutely required. Without this money you do not have a shot at all in developing the concept and testing prototypes. The higher amount is the target amount you want to raise for this phase so that you will be able to do some creative things that you cannot do otherwise. In the case of microAC this might mean that I will not be trying new sensors or reversing valve that add risk and development but could result in overall savings. Or I might evaluate only 2-3 compressors and not 5-6 compressors I would have liked to. Or it might be that home security and personal safety algorithms will be put off until phase 3.
Phase 2 is about getting ready to launch. Incorporate changes from prototype testing and finalize design. Develop manufacturing tools and mfg. plan. The technology backend, website, cloud and apps should move to beta phase at the beginning of phase 2 and become final before the launch towards the end of phase 2. For microAC this phase is probably $2-3M and lots of blood and tears (resources and hard work). Since, this would include some time after launch, it should cover the requirements for marketing, distribution and after market support. It sould be nice to get angel funding for this phase but can be VC.
I am not going to write more on phase 3 is because that will most likely be VC and is post launch. So many things between now and then can shape and define what that phase may be.
Some of the ideas that come to mind for future topics;
- Phase 1 funding options and how to do it.
- Phase 1, concept development and Phase 2, design and manufacturing planning – deep dive on activities / tasks
- Critical tasks or enablers and identify experts for each
Estimating the resources and capital required from concept to launch is very important. My first task is to estimate the resources and capital required in detail for the different stages of product development and the corresponding capital phases leading to launch, actually sometime after launch, could be a year or $5-10M in sales. The innovator or founder should plan to compartmentalize the capital requirement into 2-3 chunks. First is the seed fund required to develop the concept and build prototypes. This can be more than a year in my case because of the complexity of the product. When you have a proven product hardware and software developed that will meet the customer requirements, you enter the second phase of product design and manufacturing palnning. This leads to launch and rampup. The third phase is the growth phase when you have market acceptance and need the oomph to take it to the next level. Ideally, you want the first round of financing to be friend’s and family or angel investors. Essentially, anything that will not require valuation of the company because at this stage there is nothing to base the valuation upon and is likely to be low and will hurt future valuations. Ideally, it will be great if you can put off VC investment till the third round but that may be difficult. The first round can be viewed as a debt and the promise of divident or it could be sweetened by making it convertible to preferred shares at a discount during future rounds of funding. I would want the convertion tied to future investemnt by the investor to encourage contnued funding.
Now, let us see how this relates to microAC. I am still far away from putting details behind the numbers I am going spew but that will be my task in the next few months. But a rough estimate for phase 1 or concept development is about $500K to $1M. The range seems pretty large but this due to the stage I am in now. The lower range is the amount absolutely required. Without this money you do not have a shot at all in developing the concept and testing prototypes. The higher amount is the target amount you want to raise for this phase so that you will be able to do some creative things that you cannot do otherwise. In the case of microAC this might mean that I will not be trying new sensors or reversing valve that add risk and development but could result in overall savings. Or I might evaluate only 2-3 compressors and not 5-6 compressors I would have liked to. Or it might be that home security and personal safety algorithms will be put off until phase 3.
Phase 2 is about getting ready to launch. Incorporate changes from prototype testing and finalize design. Develop manufacturing tools and mfg. plan. The technology backend, website, cloud and apps should move to beta phase at the beginning of phase 2 and become final before the launch towards the end of phase 2. For microAC this phase is probably $2-3M and lots of blood and tears (resources and hard work). Since, this would include some time after launch, it should cover the requirements for marketing, distribution and after market support. It sould be nice to get angel funding for this phase but can be VC.
I am not going to write more on phase 3 is because that will most likely be VC and is post launch. So many things between now and then can shape and define what that phase may be.
Some of the ideas that come to mind for future topics;
- Phase 1 funding options and how to do it.
- Phase 1, concept development and Phase 2, design and manufacturing planning – deep dive on activities / tasks
- Critical tasks or enablers and identify experts for each
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