New Venture Evaluation Factors
Extensive evaluation of numerous factors must be undertaken to determine the viability of a new UI spinout company and concept. These include:
- Market opportunity
- Company value proposition
- Proprietary approach- technology impact, intellectual property position
- Proposed products, competitive landscape & competitive advantage
- Projected financials and proposed sales model
Ultimately, the company concept must be attractive to external management talent, who would then assume the responsibility for developing the company and raising financing, or, the company must be attractive to early stage investors who will bring on the management team. In some cases, Faculty/Staff may have an interest in being the point person for moving the company forward.
Elements in Evaluating New Companies
- Market Opportunity - most early stage venture investors look for companies addressing large markets. The venture capital metric is return on investment, or dollars invested to reach a liquidity event (IPO, Acquisition) versus dollars the investor receives at the liquidity event. As such, the companies must be equity based, and the addressed market must be large enough to justify the millions or tens of millions of investment dollars typical for an early stage technology company.
- Value Proposition - the combined elements of the company contribute to the value proposition- but ultimately, the value proposition is defined by articulating how significant and otherwise untapped value is created through the use of the proposed technology and products, and, clearly defining the revenue stream that flows from this value.
- Industry Trends & Regulatory Matters - everyone knows that new drug targets have huge barriers to entry through the FDA regulatory process. However, most new products address markets in an industry with an existing culture. Aerospace markets track the global situation. Personal computer technology is dominated by incumbents. Knowing the industry is crucial; an early stage technology company will usually need to find established partners that are early adopters to validate a product and endorse it, enabling sales to more risk-averse customers.
- Proprietary approach - is the intellectual property stand alone or platform IP e.g. can one or more products addressing major markets be created from the IP that would form the basis of new company and generate the revenue streams required to sustain the company? Are there sufficient barriers to entry for competitors? If competition exists, does this approach have a substantial advantage, does it leap-frog the competition, and is the technology sufficiently protected?
- Development risk - what is the stage of development for the technology? Can the risks be clearly identified and mitigated? Who – a new company or an established company – is most committed to and most likely to bring the innovation to market? Does it require substantial infrastructure and is anyone willing to pay to create that infrastructure for a new company?
- Technology impact - what is the nature and outgrowth of the technology? Is this an upgrade to an existing product on the market, is it a quantum leap in performance? Does it enable totally new and large market opportunities, or does it address an existing small market? What is the adoption curve- can early adopters be identified to validate break-through technologies?
- Proposed products - do the proposed products have a clear market need? Would someone buy what you want to sell, and has this been validated? Researchers tend to think in terms of features or descriptors of their technology (an instrument that measures glucose and other blood components, the measurements are spectroscopic, a stabilized interferometer is used to reduce noise), whereas a customer would be more interested in benefits (enables real time measurement of human factors that dictate speed of recovery, and hence post operative costs.) Raising financing may be contingent upon having customers signed up and ideally committing dollars or at least in-kind contributions to R&D, product development, testing, or sales.
- Company management expertise - does the stage and attractiveness of the opportunity merit the interest of the management talent required to raise financing and get the company off the ground?
- Financials - is the model articulated for how products will be sold, who will buy them, how much revenue is projected and by when? Are the costs to first product known? Does the team understand its burn rate, e.g. sunk costs required to get to self sustainability? Is the team meeting development milestones and budget? Does the financial return to the company justify the financial investment to develop the technology and products, what is the best method for financing this effort, and which entity is most likely to secure that financing? For a new company, is it attractive to venture capital sources? If not, are there other sources of financing, such as debt financing, grant funding, or cash from operations to move the company forward?
- Team - does the team have the requisite skills to move all aspects of the company forward? Is the research team well respected in their field? Have they attracted R&D grants, published? Does the team have a track record of delivering on their promises? Are they receptive to feedback and willing to redirect as needed to get the company off the ground? Are they open to changes in product specifications, research directions, etc. that may result from market feedback? The team is virtually everything in a new company. The team needs to be highly productive and have a shared vision. Getting a company off the ground is difficult. If there are issues with the team, or crucial team members leave the project and cannot easily be replaced, it is unlikely that the company will be financed.