StartupStartup Guide 2020: Why Start a Company?

Startup Guide 2020: Why Start a Company?

When launching a new company, there are a number of factors to take into consideration. The reality is that only some inventions may be suitable for the creation of a startup company. Innovations may progress more quickly in a focused startup than in an academic lab or a large company. Along with the invention team, OTD helps in analyzing several factors to determine whether a startup is the most appropriate path to

  • Demand: Potential of the core technology to provide a solid platform for multiple
    markets or product opportunities.
  • Competition: Identification of other companies that offer similar solutions.
  • Licensing: Likelihood of interest from existing companies in licensing the
  • Funding: Availability of capital to build and grow the business, together with
    the interest, capabilities, and track record of likely investors.
  • Commitment: Level of commitment and involvement of the inventors.
  • Support: Presence of a true business champion for both the technology and
    the new venture.
  • Management: Experience, passion, and drive of the startup’s executive team.

Key Considerations:

Below are items to consider when deciding whether or not to start a NewCo:

  1. Is the invention a disruptive technology? If not, how would it be categorized?
  2. How soon can a commercial product come to the market?
  3. What is the level of risk associated with this startup?
  4. Does technology have clear applications and a definable market?
  5. Who owns the intellectual property (IP)?
  6. What will be my role in the new company: full–time employee, advisory board
    member, executive, or consultant?
  7. What are the goals for the company?
  8. Is it to grow the company and position it for an acquisition or a possible initial
    public offering (IPO)? Or, is it to build a small, yet sustainable business?
  9. Will capital from private investment companies be needed? If so, will the
    company eventually be sold or go public? Private investors rely on these
    exit strategies to get a return on their investments.
  10. What is the current value of the company? Pre-money valuations (valuation
    of a company prior to investment) of early-stage companies are generally
    in the $1–3 million range.

The valuations are based on several factors, including:

  • In what stage of development is the technology?
  • Is there proof-of-concept lab data?
  • Is there a working prototype?
  • Are there paying customers?

Funding Sources

When starting a company, generating funding to support the business is perhaps the single most important task at hand. Before embarking, it is necessary to determine how much funding is required and from where it will come. Here are some factors to consider in determining how much funding is necessary:

  • Time to market (that is, how long before initial sales)
  • Employee salaries and benefits
  • Space
  • Equipment
  • Travel
  • Legal fees

Funding for the company may come from one or more sources, including sales, grants,
and investors. For example: Organic Growth: Grow the business slowly based on sales, without the need to raise external funds. Organic growth can be a reasonable strategy for certain NewCo ventures. Typically, however, university innovations are at such an early stage of development that additional funds are necessary to move them from the lab to market.

Friends and Family: It may be possible to secure a small amount of funding from
friends and family to launch the business while additional funding is sought.
Small Business Innovation Research (SBIR): Apply for research grants. The U.S.
the government provides innovation research grants to small companies, which can be
great sources of initial capital. SBIR grants can only be provided to a company, not
directly to an academic lab.

Angel Investors: Individuals or groups that invest their own money in early-stage
companies. New England has a number of angel investor groups, including Launchpad,
CommonAngels, Hub Angels, and Boston Harbor Angels.

Venture Capitalists: Venture capital firms manage and invest the funds of other
investors. OTD is familiar with venture capitalists in New England and beyond, and
can help to establish connections within these firms

Matthew Leising
I cover market structure for News Alarms, specifically how the bond, derivatives, and cryptocurrency markets work or don't.

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