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Guest Writer - Gastautor - Gast Schrijver

Why and How to Invest in Entrepreneurial Nanotech vs. Corporate Companies

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.

A couple of reasons pointed out in the article why entrepreneurial ventures may be more ethical is that in a startup, it works because the entrepreneurs choose self-starters who believe in what they are doing and can work on their own. Being honest with your employees is extremely important to maintain the 'band of brothers' mentality taking on the world that is necessary in the very early lean years of a startup. This honesty generates a high-standards culture where people believe they will be treated well and fairly, and just as importantly, their individual contribution will be recognized and rewarded. The downside of this integrity is that poor performance is also recognized and punished. The upside is that in a small organization, you are likely to be given a lot more responsibility and experience, which can be traded elsewhere if need be.

As a company grows, it’s structure will have to change to accommodate growth. As a company grows, it is natural to start seeing the entrepreneurial spirit become diluted with every infusion of new people. From the long time New York Times Bestsellers list, “The Tipping Point”, by Malcolm Gladwell, once an organization starts to reach approximately 150 (the magic number that is some critical threshold) people, something goes.

The idea is investors do need to screen and interview the management teams extensively for any potential management issues. For this reason, many investors prefer to see a management team in a startup with extensive management experience with regard to budgets, planning, operations, and finance. I have noted in the January 2004 article that it is not necessarily a good thing to hire someone with an impressive and extensive corporate experience even though it may give some investors the “warm and fuzzies”. You also do not want to hire failed startup entrepreneurs, unless you can be certain they learned their lessons from the failure.

It is also important to understand what makes up good management teams first. The leader and the manager are not necessarily the same person although they can be. One inspires and looks at the big picture, and the other makes sure the results come in on time and within budget. The answer is not to just hire experienced members to avoid this nor is the answer to stick to teams of purely entrepreneurs to avoid the other 72% of chief executives. There is no magic bullet to substitute for asking the right questions and performing proper due diligence like background checks. That is the only way to avoid throwing out the baby with the bath water.

Of course it is not a good idea to make generalizations about entrepreneurs and chief executives as did the article. The point is that investors need to play a more active role in monitoring and managing those companies in which they invest.

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.

Dr. Chin specializes in advising on nanotechnology investment opportunities. She is also Managing General Partner of Seraphima Ventures and CEO of Red Seraphim Consulting where she advises investment firms and and startup firms on the business strategy of nanotechnology investments. She was Managing Director of the US offices and co-Managing Director of the London offices of Cientifica. Prior to that, she was a Management Consultant with Pittiglio Rabin Todd & McGrath (PRTM)'s Chemicals, Engineered Materials and Packaged Goods group. Dr. Chin will be advising the Cornell University JGSM's student run VC fund, Big Red Venture Fund (BRVF), on investing in nanotechnology.

She is a Senior Associate of The Foresight Institute in the US and was the US Representative of the Institute of Nanotechnology in the UK. She was an alternate finalist for a Congressional Fellowship with the Materials Research Society. She was also a Guest Scientist collaborating with the National Institute of Standards & Technology (NIST) Polymer Division's Electronic Materials Group under the US Department of Commerce. Dr. Chin is a US Citizen born and raised in New York City.

Dr. Pearl Chin