November 10, 2010 –
Winston Ho: Explain technology and be honest about risk.
Raising capital to fund a new business is not something most researchers relish. But it’s a necessary evil, and last week researchers and entrepreneurial hopefuls got some useful tips from seasoned experts when they attended the second event in the CALIT2/TechPortal Entrepreneur Series.
Winston Ho, founder and president of two companies, Maxwell Sensors and Applied BioCode, was joined by Fan-Gang Zeng, a UCI professor who has helped launch three startup companies. Each shared his fundraising success stories with an eager audience.
Ho draws from a wide range of funding experience. Maxwell Sensors is supported in large part by federal Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) grants administered by the U.S. Small Business Administration, while Applied BioCode is primarily funded by angel financing and venture capital. In addition, both companies recently obtained a $2.8 million, three-year grant from the National Institutes of Health (NIH).
Ho told the would-be entrepreneurs many new companies need $5-7 million to see them through the first few years and urged them to plan ahead. “We are scientists and engineers who have ideas and want to make successful companies. But the reality is that you need funding,” he said.
He believes angel funding is the easiest to obtain but it comes with inherent risk. “While you can make a friend rich, you can also lose that friend,” he said. “That’s tremendous pressure.” Explain the technology carefully and be honest about the risk, he advised.
SBIR and/or government loans are much more difficult to obtain, with only a 10-35 percent chance that a given proposal will result in funding. “Ten percent means you need to write 10 proposals in order to win one, and if you want to win three in a year, you have to write 30 proposals. That is the reality,” he said candidly. “It’s not easy.”
Those who hope to receive some of the $2.5 billion a year available in the SBIR program should make their proposals attractive, highlight the project’s significance and focus on its innovativeness. Even the title is important, Ho said. “The first couple of pages are the most important; if they don’t like it they will reject you. It’s the reviewer’s responsibility to find a reason not to like you.”
When seeking VC funding, Ho told the audience, entrepreneurs need connections and champions. He shared his own story about a high school friend, a biologist, who asked his brother, a VC, to finance Ho’s company. “Have that champion who can really push for you,” he recommended. “Lots of VC companies are afraid to make mistakes, and if they don’t understand your technology, they will not invest in your company.”
Using your company to fund itself is another option, he said. Technology licenses or distributorships can serve as funding sources, with licensing fees ranging from $100,000 to $500,000. “You can slice your pie into several portions and license [pieces] to several companies, and keep developing the product,” he informed the group.
Lastly, he urged prospective entrepreneurs to communicate with potential customers. “You need to talk to at least 10 potential buyers,” he advised. “We tend to be working on the technology instead of the marketing, but that’s very important.”
Fan-Gang Zeng: Find partners who share your vision.
Fan-Gang Zeng’s perspective is different. Despite having a hand in three companies that sprang from his research, he said, “I’m a professor here. I don’t run a business.” His recurring advice to the audience evolved from his failed first attempt at entrepreneurship. Maintain self-determination but find partners who share your vision, he repeatedly urged.
“I learned a very valuable lesson,” Zeng shared. “When you go into something you need some independence. If you don’t have that control, it’s very likely you won’t be successful. And whomever you partner with, you better make sure you share the same vision.”
His first successful endeavor, Nurotron, manufactures sophisticated cochlear implants that allow users to understand the nuances of music and tonal language. He talked with 40 or 50 potential investors before finding a team that met his criteria. “Even though they didn’t have medical device experience they were willing to learn and they really wanted to make it happen,” he said.
Three years after it opened, the company, headquartered in Irvine, produced a prototype. Zeng’s investors then funded a manufacturing facility in China, and the company recently finished its human clinical trials. “This is the first time a Class III implantable device is being manufactured in a developing country and I’m very hopeful this will be the first [one] that the FDA will approve,” Zeng said.
Now, he added, investors seek out the company even though it has yet to produce any revenue. “[Institutional investors] come to find us,” Zeng marveled. “Medical devices are an interesting business. It’s a very high profit margin.”
Nurotron recently finished a $10 million, second funding round, a welcome occurrence in a long-term effort. “So I had an idea, and it took me almost 20 years to get to where we are,” Zeng laughed. “I’m very happy to see this will benefit a lot of people.”
Zeng has started two more companies: ImThera, which is developing a neurostimulation medical device for the treatment of obstructive sleep apnea; and SoundCure, which is commercializing a novel acoustic therapy for the treatment and suppression of tinnitus, or ringing in the ears.
“So far, we haven’t made a penny of revenue but now there are a lot of people willing to put more money into these three companies,” he said. “I think that’s a positive sign and someday, hopefully they’ll be successful and everyone will benefit.”
— Anna Lynn Spitzer
