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Non-traditional product
financingFinancial Jiu Jitsu for entrepreneurs
Thomas J McCabeOctober 2015
What we’re going to do• This invitation-only roundtable seminar will focus on funding product
development without going into debt or seeding valuable stock. Each of the participants will share valuable contributions and learn from each other's experience.
•The discussion will be facilitated by Thomas McCabe who used non traditional methods to raise several rounds of product funding for McCabe Software (McCabe.com), the company he founded.
Outline• When this can work• Deals I did --- examples• Qualifications --- you’re the man• You’re the clients R&D• Why it’s a good deal for the CEO• The arrangement
• Concept• Contract
• Traps to avoid• Types of companies where this can work• Follow up
When this can work
• works when the CEO’s biggest problem overlaps commercial marketplace
• Why would it not?• The CEO’s biggest problems are your companies research
treasure trove
The deals I did• A large telecommunications company• A consulting company trying to establish self in reengineering• One of the big six accounting firms(at the time) trying to get into Year 2000 remediation• Hardware manufacturers – – HP, Dell, IBM, Sun• A branch of the United States Army – – to apply the automation to all its contractors• A distributor in Italy trying to establish its own technology credibility• A second large telecommunication company with and extinct language.
The Deals I did(con’t)
• With each of these I had a core killer technology and a vision of how it could play out in a much larger scale with their marketplace presence
•With each of these there was a new twist I will put into the product. I would give the sponsoring company credit for the idea. They could use this as a discriminate to give them a competitive advantage in the marketplace.
You’re the man -- qualifications
• You are clearly the captain of this niche• There is a huge overlap with the clients pressing needs• There is a huge marketplace to be served• Your passion and commitment is something the CEO
cannot get anywhere else.• You are hugely successful and could do this deal with
somebody else.
The entrepreneurs company as killer R&D
• the entrepreneur has precisely what the corporate R&D lacs
• deep understanding of the CEO’s biggest problem• commitment to the solution space• vision for product cycles over time• killer development instinct, with on time delivery
From the CEO’s point of view
• The CEO has been waiting for someone who • articulates his biggest problem• has the chutzpah to pull it off• has the credibility in the problem space• has the passion to succeed
This is a very good deal for the client.
• He cannot grow his own killer technology, • The cost of adapting your technology to his company is minuscule for
him • He can't find articulate and passionate spokespersons to convey his and
your message.• He is looking for somebody like you.• He may want you to help penetrate his company
Publish a paper with the CEO
• The CEO is looking to be a hero in cyber security• This is probably his number one priority from its Board of
Directors• You probably can get things published that she probably
can't
Traps• Trials• Pilots• Legal• ‘ Let’s get consensus ‘• Sharing intellectual property• stock ownership• ‘tire kickers’• ‘put in a tool for free and we’ll see how our people like it’
Traps --- continued
• If the above come up, explain to the CEO why it kills the deal• The CEOs company drags out the negotiation – – they can't
make a decision• Do not let the client ‘use the product’ for a while• Remember what seems like a large amount of money to you, is a
drop in the bucket for the CEO
Synergies with types of companies with this could happen
• Consulting companies• Overseas distributors• A company with a related niche, but not quite in cyber
security . Ask attendees --- what type of companies for your niche
The agreement• There is something new the client needs – – new features, new platform, new
marketplace, new language to parse. These new features have to be desirable for your general users.
•Remember that the client's assessment of development cost is typically for five times larger than yours – – don't give away this leverage, price it accordingly. If you reveal your very low development costs you will lose credibility.
•The client shares is in the development cost and he gets a 50% discount on licenses.
The contract• Some money upfront, • some money with a technical demonstration, • the rest of the money upon delivery. • Do not give into a contractual acceptance test – – this will kill the deal. • Make sure you give money upfront, otherwise the client is not committed. • I would call these relationships partnerships.
Incubator companies
• Firstly, what is their niche. • Secondly, have they ever tried something like this. • Thirdly, once they've this, how would they do it do it. • Fourthly, maybe Vic or I accompany them in the
negotiation, or coach them.
This is what you do
• While I was doing this there was a regular sales force, selling the regular product at the regular price.
• It was a mistake to mix in the sales people with this – – they were all custom one-of-a-kind deals.
• I would handle these myself with the help of very good technical support.
The other way
• The alternative – – angel investors or venture capital – – takes you off your game.
• Getting and managing investors is another different game that you're probably not great at.
• The time spent with clients in your field deepens and expands your knowledge – – it's right in your sweet spot.
Try-learn cycle
• Done right, it’s a great deal for the CEO• repeat it• Fail at this 3 times, getting better each time, the 4th will
work
