What this inventor wants from investors - Anthill Online

What this inventor wants from investors

September 30, 2009
By Trevor Rose
21
5 Business Lessons from Game of Thrones
khaleesi square
Winter... is it really coming? Nah! And how important are dragons anyway?  CLICK HERE >>
What this inventor wants from investors

Listen to the post

In August, we decided to explore the many facets of capital raising and called the exercise Anthill’s Venture Capital month. The theme tossed up plenty of investment advice and discussion. But it also triggered some strong reactions from Australian inventors. Trevor Rose was among the most ardent, so we invited him to provide a ‘right of reply’.

When I posted a comment to the article ‘5 must-sees before Australian VCs will invest‘, the truth is that I didn’t even need to read the article to know the gist of what it said. (No offense intended to the author, Steve Anderson. I don’t mean the article was predictable… but that business people are.)

When I actually did read it, I was not mistaken in my assumptions.

I consider this article as a literary kick in the privates for those who need it most.

In response to my comment, Anthill editor-in-chief James Tuckerman invited me to write about what I, as an inventor, want from investors.

It’s really quite simple.

  1. I want someone to develop a process for communication with investors that safeguards my intellectual property, so that I can begin talking to them in the first place.
  2. I want someone to risk money on pre-seed stagers like myself who don’t have enough resources of their own.
  3. I want VCs to be open to negotiation, instead of just dictating non-negotiable terms.

IP protection

Regarding my first requirement, surely VCs have had years of experience with IP. And surely by now the investment industry must have come up with a nice neat process that lets inventors/entrepreneurs enter a room and have a conversation knowing that no one would dare try to steal their idea.

I can’t possibly be the first inventor or entrepreneur who has gone to a meeting with a VC and been unable to really provide the detail I wanted to give because the protection to have that candid conversation was absent.

Surely, to be good at being an investor you must have solved the common problems of people who come seeking your experience and advice?

Surely, you wouldn’t want to miss out on brilliant investment opportunities because you never even get to hear them in the first place?

And surely, you haven’t just been sitting on your arses doing absolutely nothing about this requirement for however many decades (over a century) that your industry has been in existence?

Oh, you have been sitting on your arses doing nothing about it?

Are you mental?!

Now, I know you are going to say either:

A. That’s your responsibility, not ours.
B. We can sign a non-disclosure agreement.
C. You have to trust someone sooner or later.

Well, that’s just not good enough for most innovators.

You are the ones who have been doing it so long; you should have an easy-to-follow no/low-cost process for this. And if you haven’t thought of one, here… allow me.

Don’t just stop at a non-disclosure agreement (which I notice that some of you don’t even start with), but back this signed agreement with a video camera recording the meeting and give a copy of it to the person who came to see you seeking financial backing.

The effect of doing this would be that anyone entering your office to discuss an idea with you would know that you are serious about making them feel secure about their IP so they can relax and actually tell you all about it.

I was asked more than once by someone I don’t even know to “trust them”… and I just think this is the laziest possible response.

Please tell me that you are not so ignorant of your own industry that you haven’t heard stories of people being ripped off, or pushed into unfair contractual situations. Why, oh why, would you think that someone smart and creative enough to invent something worthwhile is going to ignore this very obvious fact that the very last thing they should do is to trust you.

I will go one step further than that and tell you that my own personal philosophy about business is that, since so many people have proven themselves to be so dishonest in business, surely it makes no sense to trust anyone. What I trust is that you have done something about it, for this shows me that you are thinking, and that you are thinking about my needs, not just your own.
I would prefer to leave the trust until later, and to have a lot of reasons for actually giving it by that time.

Pre-seed investment

The next thing on the list is that I want someone to risk their money on pre-seed stage projects.

What I need is for someone to decide that the concepts I have in mind are worthy of due diligence on a full business plan, and to provide me with the money I need to live and work on that full time, as if it was my job. There is precedence for this too, you know? Ever heard of a publishing contract? It’s basically the same idea that has been used in both the literature and music professions to support an artist while they produce their works.

I think it would take me at most a few months to complete such a full business plan (or at least enough of it to actually be a viable project or take it to the next stage), given the resources to focus on it and spend a little on research or a consultant’s advice where necessary.

Negotiations

The final thing I want is to have a realistic negotiation… and that means no preconditions without a justifiable reason.

For example, you might say a reasonable precondition is that the cost of recording the initial meeting is going to be charged retrospectively to the business (if it goes ahead) as a loan at a given interest rate. There is nothing unfair about that.

I also don’t think it would be unreasonable to say that, if I do get the pre-seed support to develop the business plan, this money also should be paid back by the business as a retrospectively applied loan.

Another reasonable request would be that all net profits go to repaying investors’ money before I can take anything myself (as a shareholder). I wouldn’t complain about that, and it does make up for the risk being taken with that money if there is a guaranteed rate of interest return.

You wouldn’t have risked the money in the first place if you didn’t think it was a worthy project, right?

Also, don’t expect to just walk in and say, “We want 40 percent,” (or whatever percentage it is that you are after). You keep the percentage share in accordance with the separate components that you have earned!

For example, if you have provided me with support while I complete the full business plan required to properly set out all the specifications of the project, then depending on the estimated size of the business income over the first five to ten years, you might argue for one to five percent of shares in the case of a very large business, or perhaps up to 10 percent if it is a smaller business. In this way, we can separate the allocation of ownership into chunks, and actually see a relevant value proposal for each of these investments.

Then, when it comes to providing the further capital for actually getting the business all rolling and following that plan, firstly you have only gotten to this stage if the previous stages have all been completed (so this is benefiting you, too, because it’s reducing your risk), and secondly it will be easier to see whether your expected percentage share at this stage is reasonable, and easier to seek that funding elsewhere if you are unwilling to be reasonable all of a sudden.

Which brings me to my final point of what I mean by “realistic negotiation”, which is that you cease this expectation that I am going to get out of the business entirely so that you end up with 100 percent of it. And the same thing goes for you taking a majority share just because you are risking the money. That is not reasonable, particularly not as a precondition that does not take into account the amount of money going into it versus the potential gains, and the actual vision behind the concept.

If you want me to hand over a business to you that I believe has the potential to become a multibillion dollar business, well the only way you are going to do that is by paying me multiple billions of dollars. Would you sell it for less?

And I know you will say, “It’s better to have five percent of something that 100 percent of nothing,” but I disagree. No, it isn’t. I would feel like a dipshit the rest of my life for letting you rip me off. Furthermore, I am a creative person and I have many more projects I want to get off the ground, so if you prove to me your trust-worthiness, then you will become my investor of choice for the future.

A couple of final points:

  • I know VCs are not interested in the technical details of the project… but get interested. If you don’t show an interest and make an effort to understand it, then I don’t want you as my business partner, because I am going to think you are an idiot. You expect inventors to understand your world, so you have to make an effort to understand ours.
  • I would also much prefer to be in business with someone who is not so stupid that they will sabotage elements of the project to make it more profitable. I don’t mind efficiency, but it can be taken too far so that it destroys some of the best parts of the project.
  • Understand that if you don’t do this stuff I am asking for, then you aren’t offering me anything at all. If the only difference between one VC and the next is the serial number on the actual currency you give me, then you are just an annoying middle-man making unreasonable requests, and taking profits. By the time I am in the position that you want me to be in before you would invest, believe me the last thing I would do is come to you. I would just go raise the capital myself.

Enough said.

Trevor Rose is a creative and technical problem solver, an inventor, and a sales, strategy and systems consultant.

Photo: Nazir Amin

5 business lessons from Game of Thrones

What can your business learn from the people of Westeros? Read more 'Sponsored by Microsoft'

20 comments
Johnny
Johnny

It would be good for the country and its inventors if there was a base line percentage law for Australian inventors whereas no matter what …..the inventor was entitled to this base line percentage. ........ They would still be able to negotiate for higher than the base line. The introduction of such a law will give Australian inventors some dignity and recognition for their work and prevent them from being totally ripped off or going overseas. We have laws to protect workers, investors, directors & companies but we do not have a single law to protect our inventors WHY? Is it not inventions that create employment, manufacturing and brings wealth from oversea back into Australia making her a richer nation?....isn't that how its suppose to work? Lets get a law that protects our inventors so that they can get on with their jobs of bringing us a better future.

David Kellam
David Kellam

I think Trevor's metapoint is spot on - there's a serious problem at the early stage of commercialisation in this country and I think assumptions (on both sides) have a lot to do with it. This seems to be a cultural thing - very few people are openly questioning the assumptions on a whole range of public and private policy questions - health, education, security, public investment, private investment etc. I think we'd all benefit from some creative problem-solving rather than all working from a common set of non-scientific, non-statistically-significant assumptions and ignoring everything that doesn't fit with that world view. Maybe that's what you need to do to survive as an angel/VC firm - but we need the debate to happen at a higher level. Investors are the first to point to results with a Machiavellian bent - maybe their analyses are internally consistent at a micro level, but at a macro level there's a distinct lack of results compared to our potential (If I'm wrong here well that's just depressing and we should stop kidding ourselves we're an "innovation nation"). Whether it's deep tech/eng/bio talent heading overseas, companies migrating to easier capital flows or simply not getting started at all, there's a massive disconnect between the potential for innovation and the actual results thereof. I think the problem is manifested structurally, but caused culturally. We don't seem willing to challenge the assumptions upon which are collective decisions are made, and those who attempt to do so are cut down with arguments at a different level of abstraction - it's this disconnect that's causing friction between investors and inventors and is largely unresolvable unless both sides come to the party and are willing to open up to the possibility of both sides being right simultaneously and seeking a new structure that supports that. At present inventors are too busy moonlighting and investors are too busy reading and listening to crappy business plans that nobody actually has the time, brainspace or commercial capacity to actually execute on this. But it needs to be done.

Paul M.
Paul M.

This piece and the follow-up comments read as an embittered rant. It seems the author has been burnt by one or more experiences with investors (potential or actual) and is using this forum to vent. I've got nothing against the occasional rant, but this one seems so specific and personal that it adds almost nothing of value to the VC/entrepreneur debate and does no justice to Anthill. Thanks Alex, and particularly Big Spoon, for attempting some rational contributions. Trevor, do yourself and everyone else a favour and at least sleep on it before you post anything else here.

John Power
John Power

"...be the water, flow around the rocks"

Alex
Alex

Some good points about expected support. I think its fair to expect that. But for the most part - Wow. Good luck raising capital. Really. I especially like the idea of seed capital being applied as a retrospective loan. Business plan funding is also another great idea. Unfortunately - not. going. to. happen. If things were that easy, starting a business wouldn't be very entrepreneurial - paid to write business plans. Never give up equity. Sounds comfortable. Like a job.

The Big Spoon
The Big Spoon

Written as someone who has only ever sat on one side of the early-stage investment table could write it. Good ideas are worth the paper they're printed on plus the value of the guy carrying that paper into the room. On average, no-one is going to steal your paper. But even if they did, if all you've got is "we have to do this first" for it to work, your business == FTL. Money knows better than to try and 'take your whole business'. Money doesn't want that. Money wants as much as it can get, while keeping you totally committed to getting there. Rules of thumb tend to apply. And a good rule of thumb is that your business is going to fail. I know you think you're going to last 5-10 years, but even if you're in the top decile of entrepreneurs, the odds are against you. Liquidation preferences help, but in early-stage deals, Money doesn't come back. Money is additive in deal value. Post-val = Money + (you+paper). The hard truth is that the (you+paper) part of the equation is just not worth as much as your emotions tell you it is.

Trevor
Trevor

thank you for publishing my response James... it is like therapy to finally be heard in public after so many years of frustration... i was just on the phone with a mate from Ballarat who got into developing grey water solutions, he did it all off his own bat while supporting a family, but SO very hard & had to give it up. think how many perfectly good things never even make it that far.

Thor
Thor

Hehehehe its like the whole bank being able to lend money to people that can prove they don't need it thing eh?

Trevor
Trevor

trying John :-) thanks

Trevor
Trevor

hi Alex, my other reply to you got misplaced above under "the big spoon"

Trevor
Trevor

i didnt say "never give up equity"... where does it say that?

Trevor
Trevor

who said that all i had was just a good idea? i have worked on some of these concepts for as long as 15 years... i have developed a significant proportion of a business plan on one of the major ones, and begun the process with another... i think you have made a great deal of assumptions in your response, and its not the first & not the last time i am going to hear this very predictable response i am sure

Trevor
Trevor

in a nutshell yes... but i hope they got my finer points in there that its actually not difficult to create a different regime where this doesnt happen, and its hard to come to any other conclusion than that its caused by laziness... there is zero evidence that anyone has put any evidence at all to solving what is actually a relatively simple problem in the eternal scheme of things

Alex
Alex

No Job. In no job do you work without pay for 10-15 years. That's why people who start businesses are called entrepreneurs. They take risks, kick ass, and get things done. And that's my point. Entrepreneurship is waaaay harder than working a job. What I was calling you out on was this - "I also don’t think it would be unreasonable to say that, if I do get the pre-seed support to develop the business plan, this money also should be paid back by the business as a retrospectively applied loan." I think that is completely unreasonable. It would be sweet if it happened. But think about it. What sort of interest rate should this retrospectively applied loan pay? How many of these seed investments would then have to pay the loan back for Angel/seed investors to make money? Do that maths. Lots right? That's why they don't do it. Getting seed funding that converts to equity at the same rate as the first round does happen, but not often. Why take the extra risk if you just get first round equity rates? And I'm glad the comments didn't upset you, its nothing personal. Things are tough for entrepreneurs. Its economics, not lazyness. I just thought I would point you to this very good series of posts on raising capital - http://www.bothsidesofthetable.com/category/pitching-vcs/ I hope it helps.

The Big Spoon
The Big Spoon

Hi Trevor, I write in response only because I want you to win. It is disingenuous to rebut a response with "how predictable" or "I knew you were going to say that", as though the frequency or consistency of the message somehow devalues its content. I would suggest the contrary: the more consistent the response, the more likely that there is something critical to be heard. If everyone is saying something, listen. You said: "have worked on some of these concepts.." "developed a significant proportion of a business plan.." "begun the process with another..." Great! But until you have traction in a market that can be commercialised, you have what I said, (you+paper). You and a plan, no matter how well researched, or how well developed, is still just you and a plan. To further polarise the issue (and invite scorn): Writing plans (however hard) is easy. Even building things (however hard, costly and life consuming) is easy. Commercialising them on the other hand, is hard. Getting market traction is hard. One of those handy rules of thumb is that startups don't die because of technology failure, or product failure; they die because of market failure. Or put another way, I'd bet 9/10 times that you'll deliver the product. And bet again 7/10 times that the product will fail or flatline in commercial markets. It will run out of Money before "making it". Your position is articulated as an emotional outburst to the (seemingly) disproportionate balance of power enjoyed by a spiteful, greedy and slightly malevolent Money. My comments are in reference to this contention. I make no assumptions about your personal capacities or the merits or progress of your business interests. Your central arguments as I can distill them and summarise a response are: 1) Money should have simple mechanisms to secure your IP in any discussions between you. a) No-one is going to steal your idea (if it's common practice, I'm sure you'll find hundreds of examples to rebut me) b) Someone has already thought of something similar, or will soon. No-one who talks to entrepreneurs as Money is likely to sign an NDA because of (b). And your business plan should already have an answer for how to deal with (b). 2) Pre-seed Money needs to step up and support more good ideas. I agree. But lets clarify a point: Writers and artists are contracted to produce _saleable_ works. Not to produce plans-to-produce-potentially-saleable-works. They're paid to produce _product_ that another business has a finely tuned process for turning into profits. In this picutre, artists and writers are more like a farm that produces a crop than a clever man who produces great ideas, so your precedent doesn't really apply. Business plans, no matter how incredible, do not produce profits. 3) Investors need to be more open to negotiations on the terms of investment and stop fronting unreasonable 'demands'. In regards to Investors you said, "You keep the percentage share in accordance with the separate components that you have earned!" But that's exactly what a funding arc does, as a company's valuation increases over time. And at the risk of repeating myself, Money doesn't want your whole company. It wants as much as it can get while keeping the drivers (in this case you) wholly committed. And there are some pretty steady rules of thumb that apply (for equity stakes at various stages of a company's commercial/market trajectory). That said, back your own play. If you feel that your idea is truly worth more than a 40% stake for money would value you at, man back yourself and walk away. I will point out though that unless you have an exceptional, previously successful team, "pre-product" (let alone "pre-plan") pre-money valuations are likely to be pretty low. Money and Inventors are on the same team. If you're genuinely concerned about Money "ripping you off", you may be in the wrong frame of mind to raise capital.

Trevor
Trevor

actually just one other comment about your comment... i dont see why you think that doing any of this is suddenly as easy & comfortable as just doing a job for someone else... that's a pretty ridiculous assertion alex... even after getting funding, there is still a ridiculous amount of work to do... and in what job does anyone have to work on a concept for 10-15 years with no pay (and plenty of expenses) before they even get paid? dont get me wrong, i am not upset by your comments, i understand that people have different opinions on the subject... but its a fair amount of assumptions required to make those comments... in much the same way as "the big spoon" made comments based on assumptions, and neither one of you asked a single question to confirm the validity of your assumptions before commenting.

Trevor
Trevor

2nd use of the word evidence should have been "effort"... sorry about that

Trevor
Trevor

to be honest, i have given up on the idea of pitching VCs in the first place... because to me their expectations are just so unreasonable & one sided, there isnt any point in going there in the first place... they dont offer me anything i need in the way i need it

Trevor
Trevor

ok but as i said, you have to ask questions before you make assertions based on assumptions, and you are still not doing this. your current assertion is based on the assumption that investors are in some way powerless in the process & taking huge risks with lots of money on lots of projects, many of which might fail (perhaps the majority in your view)... but this is not what i am proposing at all. if you reread the article, what u will see is that there is a TINY amount of money (less than $100) invested in a stage that precedes this... which is where investors get to hear the details of the project in much greater detail than they usually would & for a greater quantity of projects than they usually would, because the purpose of this stage is to remove the barriers to that conversation taking place & taking place PROPERLY... ...so investors are not even going to GO to the stage u are talking about in the first place, if they didnt think there was a damn good reason to do so SECONDLY... during this 2nd stage where investors are asked to put in a bit more money to do due dilligence on a business plan... well, just because i suggested that the money be repaid as a retrospectively applied loan when the business is up & running, that doesnt mean that i was suggesting that this is the ONLY possible means of returning that money... and i freely admit that as the amount of money increases, that method of return becomes less appropriate... but i was never intending to write an exhausting article on every element of the possibilities. what i was trying to do was to show that if investors want to avail themselves of MORE & BETTER opportunities for investment, then they have to start thinking more about how they can make it work for the inventor or entreprenuer, because right now, their effort level is indistinguishable from zero if an investor had gone to stage 2 with an inventor, the fact is that in this particular model i propose, THEN they have already reduced their risk because of the projects they chose NOT to go to stage 2 with... and the recovery of literally a teenagers pocket money risked on stage 1 cannot be (in any rational argument) considered a difficulty to recover... thats just ridiculous but yes you are right that there is more money being risked in stage two... and that might vary from at the lower end being about a few tens of thousands, to just support the living expenses of someone while they complete some stuff without the need to also do a day time job etc which is what really makes it impossible for a lot of people... through to the higher end where an investor might be risking a few million dollars to get all sorts of prototyping done etc. the whole reason that anthill (i think) has published my article is because during VC month, there was a lot of discussion about the failings of VC & investment & government to support seed stage businesses... and the fact is that australia continues to lose its brains to overseas... the other problem being that if we have local talent who come up with something, but they cant get funding... with every day that passes there is a chance that someone overseas will think of something similar first (and then once again we have to import it)... ...so whether or not my exact proposal is the exact way things should happen is irrelevant... and it wasnt presented as the be all and end all solution, it was presented as me coming up with something on the spot that is at least roughly in the right direction, whereas the vc industry in several decades has done little more than sit on their arse with their dicks in their hands... and thats a fact because there is no evidence that they have EVER put any thought into this at all... or at least no evidence from the perspective of someone who actually has some kind of reasonable standards on the subject... but my expectations of them are not low, i expect WAY more than what they do, because i cant see that they do much other than sit back & take money & make demands

Trevor
Trevor

i give up big spoon... because it seems like this is the only response i am ever going to get... and you started out sounding like you were going to be supportive, but how can that be the case when your belief is "writing business plans is easy" and "building things is easy"... you think building the space shuttle was easy? ...just time consuming & difficult? would you consider building a prototype of a geothermal powerplant that tunnels 6 kms into the earths crust easy? ...i could go on but i wont... there isnt any point... you have demonstrated WHY i will end up leaving australia too... because the VC game is convinced it is always right... and about my "emotional response" well believe me this is very calm... i have just had enough of trying to communicate to people who arent willing to consider the possibility that they might be wrong no matter how much evidence is presented... i wholeheartedly have to disagree with everything you say... from my point of view its the exact opposite... its the commercialisation end that is easy to me (but just hard work & time consuming)... its all the stuff before that which is hard... not because it has to be, but because i am doing it with utterly no support or encouragement whatsoever the FACT remains that we have a problem... good ideas are going to waste or being lost overseas... and you have all convinced me that this is what i need to do too, since there is obviously no support here... only a bunch of assumptions and including the arrogant assumption that your previous assumptions are true without needing to ask a single question first to determine if this is indeed the case... i dont know how you justify this, it doesnt seem rational to me at all

Trackbacks

  1. [...] Trevor Rose has written a nice piece on VC’s, Inventors & the business issues faced when taking an idea or invention into a product. [...]