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Why and How to Invest in Entrepreneurial Nanotech vs. Corporate CompaniesBy Pearl Chin - Managing General Partner, Seraphima Ventures |
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There are some that argue that investing in nanotechnology startups and small companies is riskier because of the higher probability for hype and incidences of scams. However, this past couple of years it seems evident that the larger more established publicly traded companies, like Tyco, WorldCom, Enron, Parmalat, etc. should be no less exempt from this scrutiny. It is expected that wherever there is major money to be made, there will be hype and scams. This does not mean investors should not invest or be more risk adverse. It just means investors need to be more careful about how they decide to invest and be smarter about it. The desire to make money must be balanced by responsibility and accountability.
It is still the responsibility of the investor to do their due diligence. Many of those problems they came up against during dot.com was the skipping of such important practices believing they would miss the gravy train pulling out of the station without them before finishing their due diligence. Some of it can certainly be because these investors did not understand these businesses.
Of course, it is also the responsibility of the entrepreneur seeking to raise funding to present their business model and case in a way that will make the investor understand their value proposition. In the end, the onus is on the entrepreneur since they are the ones who are asking for the money and the investor is the one who has it to give. The entrepreneur must persuade and convince the investor why they should be given the money they seek and how they will create an attractive return to their investor. Some investors will be easier to convince than others depending on their expertise. Not all investors will want to invest even if it is a good argument. There will be many reasons why an investor will not invest even if it is a convincing argument and good business plan. Sometimes it is just not a good fit in which case you should move on to the next potential investor.
An interesting argument is that entrepreneurs cannot be trusted because of what happened during dot.com. Giving several million dollars to someone in their mid-20's with little business experience to head an internet startup and then expecting them to be responsible with spending may be construed by some as naïve. Many of those young entrepreneurs, even though they may have had a great business idea, had little experience managing money. Even parents manage their children's allowance spending to some degree and the deal in some households is that chores are often done in exchange for the allowance.
Recently, a good friend of mine sent me this article from a Human Resources trade magazine (Personnel Today, Feb. 24, 2004). In a nutshell, a few years back a consulting group did research on charting the differences between successful entrepreneurs and chief executives. In some key areas, such as drive, determination and working long hours, there was little difference between the two groups. Interestingly enough, where entrepreneurs really outscored executives was in integrity. Some 70 per cent of those who successfully started their own businesses have 'an honest, ethical style of leadership', compared with 28 per cent of chief executives. The details of how the study was conducted and the definitions of what constitutes an 'an honest, ethical style of leadership' were not provided but the numbers are striking and worth commenting on.
It seems that when the article mentions chief executives they are referring to those of large corporations. Are entrepreneurs really different from 'normal' manager-executives? Perhaps they are not different but just used to a certain corporate culture. However, most entrepreneurs have rejected the corporate culture the chief executives have accepted. Does this mean that entrepreneurs are more trustworthy than chief executives? Probably not if they are from the other 30% pool.
According to the article, some believe there are two very distinct types of entrepreneur - 'one-man bands', who become larger-than-life heads of the organization, and those who delegate and create much bigger organizations. One of the characteristics of entrepreneurs is that they are self-centered and often arrogant. They like being in control, and they are often entrepreneurs because they couldn't stand working for other people. This may be true in many cases but this is not necessarily a bad thing if one knows how to manage them.
The same article states that in their desire to get results, entrepreneurs will encourage others to be like them and take the initiative. They are three times more likely to do so than CEOs, who are more likely to be interested in keeping the team on an even keel and creating harmony than in pushing on. The latter approach may not be appropriate for a startup strategy that requires quick thinking and decision making versus consensus and maintaining the status quo. A major difference between companies run by entrepreneurs and others is the shorter decision time, which generates a more active culture. In a large company, what could have taken months going through various committees and accounting reports, can be decided in days.
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Dr. Pearl Chin has an MBA from Cornell, a Ph.D. in Materials Science and Engineering from University of Delaware's Center for Composite Materials and B.E. in Chemical Engineering from The Cooper Union.
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This is another monthly column contributed by Dr. Chin to Nanotechnology Now. The full article appears in our May 2004 Premium Newsletter, along with other outstanding pieces by leaders in the field.
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