By Victoria Scarborough, Materia Prima Ventures

As soon as you hear the pitch, you’re thinking—this is a great idea, a potential gamechanger for my company. You want to get this going as quickly as possible. Startup companies usually have great ideas and potentially disruptive technologies, but they always need various levels of support to fuel their work, explore the scope and capabilities of their technology, and scale-up the most promising prototypes. The innovation ecosystem necessarily demands that we feed it a regular diet of mentorship, direction, milestones, and money. If you care about this technology, you’ll want to see it succeed and, in turn, help grow your own business. But, as a guy once told me, “no matter which way they’re moving their mouths, they’re always talking about money.” Thus, I thought it would be useful to discuss how startups are usually funded along their journey to commercialization.

The Federal Government supplies about $137 billion in funding for research at U.S. universities and Federal Labs annually. This seed funding, as well as some that may be provided by the State, is intended to drive our economy toward innovative technologies and job creation through the formation of new companies. Many of the best technology startup companies begin at the university level where they apply for funding in the form of public research grants, like those offered by the Small Business Innovation Research (SBIR) program(s). This type of funding is designed to provide validation of the technology in the first phase and perhaps a prototype in the second phase of funding. It doesn’t provide funds for scaling up the manufacture of the technology. If you get involved at this point, you may be asked to pay for samples and give feedback on any testing of the technology. After all, you’re in the validation step. In addition, the startup often raises some capital from the “friends and family” fund and perhaps a local angel investor group. At this point, there is generally less than $1MM invested in a startup company from these various sources. Commercialization readiness is 0–4 on a scale of 1–10 at this stage.

For commercialization readiness levels of 5–6, the startup will need more money for scaling up and testing a viable product to prepare for sales and service. This funding can be from another infusion of cash from more angel investors, a commercialization partner like a big company, and/or a venture capital group (VCs) who can provide more than $3–10 MM of capital, depending on the needs outlined in the startup business plan. Manufacture is a typical hurdle now. At this point, the startup should have a very solid management & technical team with enough staff, expertise, and resources to commercialize the technology. In this stage, the startup should begin receiving $1–10 MM in sales revenue from its products to be considered successful.

For commercialization readiness levels of 7–10, the startup must be generating $10–100 MM in revenue, and it should be gaining a lot of attention from VCs and other investment groups. This company may exit to another bigger company or become available as an initial public offering (IPO). Or, if it’s like Uber Technologies Inc., it may decide to stay in the startup mode. In any case, if it has made it this far, it deserves a serious look.

So, as soon as you hear the pitch, you need to ask—where is this company on the Commercialization Readiness scale? From there you can decide just how much you want to commit to this technology. It may require nominal amounts of cash at first, but as the startup grows, its funding requirements grow accordingly. Given this, is your company ready, willing, and able to join these startups and fuel the innovation ecosystem?

CoatingsTech | Vol 15, No. 2 | February 2018