What Disruptors Need to Attract Capital
Attracting financial backing for your company takes more than just ground breaking innovation these days, say experts. It takes time tested thinking as much as a blockbuster idea.
“I tend to bet on the jockey more than the horse,” said Pete Snyder, CEO of disruptor.com, a seed capital investment firm that specifically targets disruptive innovator startups.
“When I look at a company to invest in, I want a smart, savvy entrepreneur who knows his stuff just as much as I want an innovative product," Snyder said. (Read More: Top Disruptive Products)
While it may now seem like a no-brainer to expect business expertise at the helm of a new company, that wasn’t the case a decade ago.
“A lot of money was going to new firms, specifically tech ones, in the late 1990s and early 2000s, and we saw the tech bubble burst,” said Greg Coleman, adjunct business professor at New York University and CEO and co-founder of the marketing data gathering firm Criteo. “A lot of those startups did not have good business models and good people behind the ideas. That’s why they didn’t last.”
While the term "disruptive innovation" originated in the 1990s, the concept goes back much further. Steamboats replaced sailing ships and opened up seagoing routes for commerce. Automobiles created new markets in transportation, pushing railroads to the edge of extinction. More recent examples include companies like Apple (personal computer), Amazon.com (e-commerce), and Eastman Kodak (digital camera) before it ran into other difficulties.
For future innovators seeking cash, there seems to be plenty around even in a recovering economy. Venture capital fundraising for the first nine months of 2012 totaled $16.2 billion, a 31 percent increase compared to the same period in 2011, according to the National Venture Capital Association.
But getting those funds means startups have to show their business acumen as much as prove they have a revolutionary product, said Jason Malak, managing director at CBIZ Valuation Group,a business management firm.
“Venture capital firms want to see a good solid management team in place before they invest,” said Malak. “If the team has done something before and even failed, that’s OK. They’d rather see a track record, including failures, as long as there is some kind of know-how behind the effort.”
Bromium, a startup developing new security software, and its management team are an excellent example. Two of the three founders had already built and sold a successful company. The company’s investors include Andreessen Horowitz, Ignition Partners and Intel Capital.
Even with a top flight management in place, some VC firms might feel hesitant if not adverse to risk with a disruptor venture, said Duncan Moore, vice provost of entrepreneurship at the University of Rochester.
“There’s still a hangover of sorts from the tech bubble. Add that with the recession and slow economy and many VC firms don’t want to take as much risk even if they have the money,” Moore said. “I think there’s more funding going on for disruptors on the smaller angel investor scale and with local community funds.”
While innovators may jump at the chance to get investor money, they have to consider the cost of doing business with one, said Scott Shane, professor of entrepreneurial studies at Case Western University.
“Some startups may end up saying they gave up more than they needed to,” said Shane. “Investors want control over the company, and the more money they give, the more control they want. The company management team has to figure if there’s a better way to get funding. “
And trying to be a disruptor is just plain hard to do, Shane said. “To get really high returns, you have to become a big company and grow fast. It can be done but it’s not easy.” (Read More: Disrupting Disruptors)
Easy or not, Snyder said that even with the ups and downs of investing in disruptors, there may be no better time than now to find one.
“I think we are in the golden age of innovation and technology right now,” said Snyder, who is funding five firms, including Potomac Research Group, a data marketing research firm for hedge funds. “The kind of innovation we have been seeing will only continue in the future.”
—By CNBC.com's Mark Koba