Preparing A Technology Business For Investors

by Steve Carman

This problem is exacerbated when resellers or joint marketing partners lose interest in your product or in your market segment. Investors will want you to be able to exit unproductive relationships and pursue alternatives.

You think you have done the hard part when you have developed a unique technology, prepared a business plan that is aggressive but achievable, and even have a few customers willing to provide favorable testimonials for your technology. Investors are starting again to search out investment opportunities in new technology and you believe that with an infusion of cash, your business is a prime candidate for rapid growth. But, before you ask prospective investors for money, make sure you are ready for the questions those investors are likely to ask you. A sampling of some of the questions that entrepreneurs overlook, but seasoned investors never forget, follows.

What makes your technology unique? Have you surveyed the competitive landscape to understand if competitors exist and, if so, do you have reason to believe that your technology is superior? You also should ensure that your technology does not infringe on the intellectual property rights of any competitors or other inventors. Have you put in place the "barriers to entry" that will permit your business to fill an identified market before other competitors can bring their product to market? While entrepreneurs are frequently willing to postpone the investment of time and energy to prepare a patent application, many investors are unwilling to invest in technology that has not yet been protected from, or may even be infringing on the rights of, competitors. If your technology has been developed jointly with others or you anticipate joint development in the future, have you properly documented those relationships and allocated intellectual property rights among the co-developers? Few investors will be eager to invest in a technology you do not clearly own or for which you do not have an exclusive license.

How do you propose to market your new technology? If you are planning on using a reseller network, or entering into a joint marketing arrangement with a third party, the terms of the arrangements should be finalized and documented before going to prospective investors. The costs of marketing, and the time to successfully market, new technology are frequently underestimated. This problem is exacer-bated when resellers or joint marketing partners lose interest in your product or in your market segment. Investors will want you to be able to exit unproductive relationships and pursue alternatives. You should also be prepared to confirm for your prospective investors that you have protected the name under which you are going to market your technology and that the name is available and protected in all markets in which your business plan suggests you will be marketing your technology.

Are you ready to share control of your business and plan for its sale? Almost all professional investors will require some element of control, or will want to articulate the circumstances under which they obtain control, in exchange for their investment in your business. Many entrepreneurs have difficulty sharing control and bridle at the suggestion that someone else may have valuable insight that would be helpful in the growth of "their" business. Entrepreneurs struggle even more with the notion that investors will want their money back and will want to plan for the return of their money before the money is even invested. Who are the likely buyers of your business and what is a reasonable price to expect them to pay? What other "exist strategies" can you identify for your investors?

Yes, preparing to answer these questions can divert your focus from achieving important business milestones. But don't grow a company that achieves those significant milestones, only to be told that your company is still "not ready" for outside investment.

 

Steve Carman is a partner in the law firm Blackwell Sanders Peper Martin LLP. He may be reached at scarman@blackwellsanders.com or 816-983-8153.