I have been in a series of meetings with early-stage technology companies lately, discussing strategic capital.  These founders and CEOs started developing their technology before the current economic crisis, and have rightly continued their progress.   Some have revenue from a separate side of their business, some don’t. Some have received initial funding from professional sources, others have not.  Some control and own most of their equity, others do not.

What is interesting is that all these CEOs continue to pursue capital from sources that continuously turn them down, mostly from venture capital groups to whom they have access. 

When asked why they continue, rather than seek their capital elsewhere, they look a bit blank.  It is as if there is no other source of capital.  Like, revenue, perhaps?  Or a strategic deal?  I once created initial seed capital of $2.2M from altering an international software distribution deal, with no equity leaving the company, and a win/win for all parties, so I know it can be done.

I understand why, if they have access to venture capital, that they may not want to pursue angel investment, which would offer them less capital in exchange for more equity.  Better to deal with a full venture group.  And in most cases they had tapped out their friends and family, and had no more access to private individual capital.

Still, I was reminded of that old book about the cheese not being at the end of this particular (venture capital) tunnel. 

Alternative forms of capital include revenue (sometimes with a “sweetener” of a small amount of equity in options) from: licensing, reselling, bundling, OEM deals, and joint ventures with partners and near-competitors.

After some conversation, these CEOs are excited to consider licensing their technology to players in foreign territories, once we explore how that licensing can create significant and rapid revenue (with no loss of equity) and still be restricted and controlled.  And this licensing would open a new market for them!

They are even more comfortable with distribution channel strategies that allow them to resell their newly launching product through a partner into a different market sector or an international territory.  The same applies to the idea to OEM part or all of their product for integration into or bundling with a completely different product, to be resold by a channel partner.

They are initially less excited when we consider alternative forms of capital and revenue, such as licensing their technology to (or joint venturing with) near competitors – larger companies that share and dominate their market space, but do not occupy their market sector.  For example, a competitive company in the enterprise sector might want to move to the middle- or small-market space with my client’s similar product that is designed precisely for that market.  This deal would not be an acquisition too early to create wealth for the founders and their early investors, but some synergistic agreement to share the success of opening the new market sector.  Or it may be a development deal to create “hooks” into the competitor’s product to allow access to that market, with the competitor’s sales team dedicated to penetrating the market for revenue sharing by both parties.

Of course, it depends on many pressures:  is the new company nearly out of business if they don’t find capital quickly?  Does the market allow them to delay the release of the product, because there are no competitors on the horizon?  Can they sustain through launch and early revenue, but only need growth capital?

Each case is different, of course.  But the options for building a company through deal-flow are often overlooked amidst the noise of capital raising.  And revenue drives up the company’s valuation when the time may come again to raise equity capital.

Let me know your thoughts on this, and if I can be of any help thinking it through.