Investors Do Not Fund Research And Development

Martin Zwilling , Founder and CEO , Startup Professionals

10 Nov 2013

I still get business plans, looking for an investor, that say all too clearly that the primary “use of funds” will be to do research and development (R&D) on some promising new technology, like superconductivity or cancer cures. Entrepreneurs forget that investors are looking for commercial products to make money, rather than R&D sunk costs, so investment hopes are sunk as well.

In fact, the term ‘research and development’ covers a continuum of activities, so you need to use a more precise term to maximize your funding likelihood. There are opportunities all along the continuum, and they need to be mapped to the right academic environments and public- and private-sector development organizations before a funding source can be determined.

Let’s consider the six stages normally associated with R&D, and the boundaries and project-specific activities interwoven therein:

• Basic technology research. The first stage is basic research on a technology that shows a potential for solving a difficult or expensive problem. Look only for grants, universities, and enterprise sponsors at this stage. Real products are only speculation at this stage, and mentioning a large list of them won’t help get outside investors.
• Technology development. This stage is the transition to pilot-scale research on the technology. It may entail a number of false starts, but no products. A successful result is a one-of-a-kind technology that shows enough promise both technically and economically to warrant demonstration. Funding sources are still the same as stage one.
• Prototype development. Now we are ready for demonstration tests conducted on first-time or early-stage products. The demonstration stage usually implies substantial redesign and debugging until final robustness can be established. Angel investors are definitely interested at this stage, but VCs usually wait until stage five or six.
• Verification. Verification is testing and publicly reporting the performance of a commercial-ready technology using specific standards (EPA, FDA, etc.). Results, if positive, are used for marketing a product directly to customers. If these required tests are common and low risk, VCs may jump in at this stage.
• Commercialization. The fifth stage includes preparing for, financing, and implementing full-scale manufacturing and marketing activities. The technology can be reliably replicated and produced. This includes entering into partnerships, arranging for manufacturing facilities, and developing channels for distribution. All is definitely fundable now.
• Diversification. At this point the technology is ready for implementation with a full-scale marketing plan for an array of products, including interfacing with appropriate partners, and commercialization. The term research and development should never be mentioned, even though ongoing efforts for the next product are always required.

While I certainly applaud basic research, I try to remember that people buy solutions and products, rather than buying technology or a new platform. There is even a small group of customers, called ‘early adopters’ who seek out new technology solutions. However, we all need to remember that the mass market tends to wait for the product image to supersede the technology.

So investors, looking for a near-term large and growing market, see technology development as a big red flag. They defer to others, like government agencies, universities, and large corporations to take that risk. You can participate, of course, with private funds and grants, but don’t expect venture money to be thrown your way just yet. Get used to the message, “We love your proposal, so come back when you have a real product and a real customer!”

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