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Finance under pressure – physicsworld.com

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This article first appeared in the 2019 Physics World Focus on Nanotechnology & Nanomaterials

The concept of “pressure” in materials processing makes a useful analogy for the many ways that start-ups can seek funding, writes Matthew Cohen



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(Courtesy: iStock/pisittar)

Pressure plays an important role in materials science and engineering. It can influence how a material behaves. It can alter the material’s state or phase. Changes in pressure can be important for depositing materials atop substrates or taking accurate measurements of their surface properties. Extremely low pressures are often required to obtain high-resolution, nanometre-scale electron micrographs.

As it turns out, “pressure” is also a great way of thinking about the various funding streams available to support innovations based on advanced materials. For scientists who are used to working with the tools of materials science, the following pressure-based analogy may make the funding landscape seem a little bit more relatable – although note that none of this information should be taken in a vacuum (I know, I know, you’re groaning already).

Slow and steady

Grants are a great resource for very early-stage companies. I equate them to molecular beam epitaxy (MBE): a precise deposition method used to grow a range of materials, typically in ultrahigh vacuum at very low pressures. MBE is great at producing high-purity films and sharp interfaces, but deposition rates are typically quite slow, as it takes time for individual atoms to sublimate from a solid source and be deposited on a substrate.

Correspondingly, grants allow companies to make commercial progress – but not very quickly. Granting organizations often restrict how their funds can be used, and the financial-reporting process can be onerous for a small start-up. However, just as MBE may be exactly the right technique for building an expensive, over-engineered, one-off lab sample to test a novel device idea, so grants give new start-ups the funds they need to develop an interesting idea, lab result or initial technology into a working prototype.

The pressure to make progress from grant funding is certainly there. If you don’t, your chances of getting a second grant or additional funding from other sources will drop. However, the magnitude of this pressure is much lower than the pressure you will come under if you take money from friends and family, or from professional investors who want to see a return on their cash.

Strategic partnerships, in the form of funded joint development agreements (JDAs) or non-recurring engineering (NRE) funding, represent another good source of funding for a materials start-up. Well-crafted win–win partnerships can accelerate product development and bring forward the date of market launch.

Furthermore, collaborating with large, established players in the same field can help validate a start-up’s exciting but as yet unproven claims about how their technology will disrupt a market.

Photo of solar-cell research

I like to compare strategic partnerships to plasma-enhanced chemical vapour deposition (PECVD). Similar to MBE, CVD methods produce high-quality thin-film materials under vacuum. They are used extensively in the modern semiconductor industry. While CVD comes in various flavours, on average it is performed at higher pressures than MBE, albeit usually still well below atmospheric pressure in order to reduce unwanted reactions and improve film quality. In particular, PECVD uses plasma to increase the reaction rates of chemical precursors. This enables deposition to take place at lower temperatures – similar to how strategic partnerships can make it easier for a start-up to bring a saleable product to market. The downside is that these partnerships frequently result in a tailored solution that’s really only relevant to the larger entity that provided the funding. However, lessons learned from this funded work can often be applied to the technology platform more broadly.

Upping the ante

If you make your home on Earth – and if you’re reading this article, I presume you do – you’re accustomed to atmospheric pressure, even if you don’t consciously think about it or know offhand that the atmosphere at sea level exerts a mean pressure of 101,325 Pa (~14.7 psi).

I’m going to equate ambient pressure to funding by business “angels”. An angel investor is an individual who invests their own money in a start-up. Compared with venture capitalists (we’ll get to them in a moment), and especially to venture capital (VC) firms that actively invest in advanced materials and advanced material processes, angel investors are much more numerous. According to the US-based Angel Capital Association, around 300,000 people made an angel investment in the US in the last two years. To put this in context, there are at least two orders of magnitude fewer VC firms in the US today.

Angels typically invest less money and at earlier stages compared with VCs. Usually, the cheque is in the $25,000 to $100,000 range, although there are certainly exceptions where they invest less (or a lot more). Angels can be a great source of both funding and mentorship to guide a start-up in its commercial journey and nailing initial product-market fit. Whereas VCs typically want to see some concrete data points demonstrating that a company’s novel technology or service works today and is scalable, angels will often be willing to bet on a driven founder. They will also help the start-up iterate upon and further optimize its product offerings before trying to push it onto that hyper-growth curve.

Of course, if you visit the Dead Sea or the Himalayas, the ambient atmospheric pressure will change a bit. And just as our planet has different regions with different average pressures, angel investors have different preferences for how early they’re comfortable with getting involved in a start-up. Some want to see some market traction and early revenue. Others may just want to see an A+ team and a groundbreaking idea. These differences influence how angel investors weigh risk, evaluate investment decisions and craft milestones for a start-up after they fund it.

Once a start-up raises angel funding, the pressure is on to make tangible progress. Typically, taking outside funding makes it possible to hire more people and expand operations, but it also increases the cash going out the door (the “burn rate”). Cash is king in Start-up Land. Running out of money in the bank before meeting the milestones needed to unlock additional capital can mean the end of the company – or at the very least, a “bridge” financing round where the terms are typically heavily skewed in favour of the investors.

The heat is on

The next materials process in my analogy is hot isostatic pressing (HIP), which is used to reduce porosity and increase density of metal and ceramic components. Basically, HIP subjects a component to simultaneous high temperatures and pressures in a containment vessel using inert pressurizing gas. Pressure typically ranges from 10s to 100s of MPa, which is a few orders of magnitude higher than ambient conditions.

It’s often said that VCs “add fuel to the fire”. Generally, before writing their first cheque, VCs want start-ups to have a pretty good handle on how their product fits into the market and how they’re going to use venture capital money to become large, profitable businesses. To understand why this in and of itself adds a significant amount of pressure to a company and its management team, let’s take it back to thermodynamics fundamentals and the ideal gas law: PV = nRT.

As VCs look to increase temperature T by adding monetary “fuel”, the pressure P and/or volume V must increase to keep things balanced. Volume – in this case the size and magnitude of the initial idea or innovation – rarely changes much with the addition of venture money, so pressure must go up accordingly to keep our equation balanced. If VCs, who typically take seats on a start-up’s board of directors, don’t like the performance of the founder or key management personnel, it is their fiduciary responsibility to augment or even replace them with people who can get the job done. If a venture-backed company isn’t progressing by hitting the milestones the VCs have laid out, it’s likely going to be quite difficult for it to raise additional VC money and the proverbial bubble may burst. Avoiding over-pressurization by delaying a VC approach until the appropriate time can help mitigate this risk.

As intense as it may feel to work at (or manage) a VC-backed start-up, there is another funding option that involves even higher pressures: private equity (PE) and/or debt. This is the diamond manufacturing of the funding world. Synthetic diamonds can be produced in a few different ways, including via CVD at near-atmospheric pressure. However, the most common technique is the high pressure, high temperature (HPHT) method, which often means applying approximately 5 GPa – about 50,000 times atmospheric pressure – to the raw material.

Private equity firms often use their capital (along with debt) to purchase majority ownership positions in more mature companies. Usually, their goal is to improve the operations of the purchased company through restructuring, roll-up acquisitions, divestments and so on and, ultimately, to sell the company at a much higher price. As the “hold” periods (the amount of time PE firms hold on to portfolio companies before divestment) are typically shorter for PE firms than they are for VCs, the pressure ratchets up another notch. While VCs begrudgingly accept that there will be some ups and downs, and that most start-up activities will take longer and cost more than initially anticipated, private equity firms expect their portfolio companies to improve their performance every quarter. If not, aggressive reorganization or recruitment of a new, more proven management team is certainly in the PE playbook. This can leave entrepreneurial founders on the outside looking in. While the pressure to perform financially may not quite be the same as it is for a publicly listed company, where analysts can scrutinize most facets of a company’s operations, private equity money typically means it’s time for a company to rapidly grow and accrue value, aggressively reposition itself to a more favourable position in the value chain, or get ready to be sold off to the highest bidder.

The importance of pressure

The final part of my analogy borrows a key theme as well as some of the words from the classic film The Shawshank Redemption: “Geology is the study of pressure and time. That’s all it takes really. Pressure. And time. That, and a big goddamn [pile of money].” In many ways, advanced materials entrepreneurship is a lot like geology. Geology is all about the processes by which the Earth and its features change over time, and successful start-ups will similarly face significant transformations as they move from a clever idea or promising lab result to a fully-fledged operating company.

Successful commercialization requires an unflinching drive and internal pressure to succeed – similar to how gas molecules impart pressure on the walls of a pressurized vessel. Successful commercialization also requires delivering a solution to a pressing external need – similar to how some materials can efficiently attenuate external impacts. Finally, the commercialization journey requires you to successfully weather the various funding opportunities that pass over your radar like low- or high-pressure systems in the atmosphere – sometimes, alas, with about as much predictability.

As venture capitalists, we certainly hope that the start-ups we invest in will progress on a time scale that has more in common with meteorology than geology. If and when you or someone you know is ready to take on the higher-pressure VC funding route to move their business forward, we are eager to listen. Listening is, after all, reliant on sound: a pressure wave.

  • Enjoy the rest of the 2019 Physics World Focus on Nanotechnology & Nanomaterials in our digital magazine or via the Physics World app for any iOS or Android smartphone or tablet.

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