Schrödinger’s Mongrel (and pricing equity in early-stage deep-tech)

I’m one of those annoying people that thinks Schrodinger’s Cat is an apt substrate for pretty much any old mixed metaphor that I can drag in. Apologies in advance.

It’s an age old question – how do you support valuation, at the point of seeking investment in a tech company that has zero, or very little, revenue, but shows exceptional promise. The reason it’s an old question is because it’s hard to answer, but here’s a clunky stab. The exceptional promise/ the pot of gold/ the cat is either alive or dead – which of these states it is in has simply yet to have been observed. It hasn’t been observed yet because we perceive time in a linear manner, but to a super-dimensional observer, the cat is, right here and now in spacetime – either alive or dead.

The mission for the entrepreneur looking for a strong valuation is to ensure that the likelihood is that it is alive. To put it another way, the business leader destined to chaperone the cat into the future, must be able to demonstrate to investors that the path through the fog-shrouded woods towards the goal, is well understood; that all the threats along the way have been considered, strategized and mitigated long before they jump out; and that the cat’s future wellbeing is a natural product of the work that has already been done to plan and manage risk. Risk in this context can be conceived of as existing on a series of spectrums such as technology, scaling, market, economic, investment, counterparty etc. An investor looking to push back on a valuation will generally be doing so by applying risk multipliers. Sound strategic commercialisation seeks to manage future risk through today’s action by pushing these spectrums ever closer to proven.

Good commercialisation therefore drives valuation, because it drives down risk. Bad or non-existent commercialisation is akin to leaving the future to chance. To put it another way, curiosity may actually save the cat…

Regardless of the state of the cat, I fully acknowledge that the metaphor is now as dead as a parrot.

Doing the right deal

Throughout the history of deal-making, folks have conceived of successful negotiations as being the ones where they “won.” Now, of course there is a place for adversarial negotiations, and of course there are times when it’s critical that you look out solely for your own company, but the types of deal that typically constitute the foundations for an early stage tech company, will usually function best when they function as a win-win long into the future.

 

For any early stage technology company, establishing the right structure and commercial basis for collaboration with key partners is critical. Attempting to use an imbalance of leverage, power, or information in closing a deal that favours you and cements a long-term partnership, is akin to building shaky foundations under a high-rise in the pacific ring of fire. It might look beautiful on the warm sunny day when it’s finished, but it’s unlikely to weather the storms. This is as true for a corporate as it is for a start-up, although both parties can be equally guilty of not always seeing this.

 

A long-term win-win is not always easy to structure, and there’s no simple solution for how to achieve it, but openness, honesty, and frank communication are a good place to start (I remember that from my wedding). If both parties genuinely understand the other’s hierarchy of intended outcomes, structuring is made considerably more simple, as is running a conceptual stress-test to see how it will handle any future tectonic shifts.

Pick your champion

As an early stage technology company, the early deals done with big companies can set the course for the business for some time into the future. Getting them done is rarely simple, but the first step is to make sure you have the right champion.

It is a common misconception that because you are engaged in discussion with someone at a company, that you’re engaged with the company as a whole. It is rare that a large multinational invests all of its expertise, budgets and problems in a single individual or team, and frequently teams are empowered to solve their own problems in an economic way and encouraged to share their solutions with the group. This means that generally speaking there are multiple potential entry points into a company, and it’s wise to take advantage of this.

A second common misconception is that because an individual at a big company fully understands a specific problem or opportunity, that they truly care about solving it or grasping it. In actual fact, the vast majority of big companies have a real mix of cultures and sub-cultures meaning that even in the most board-mandated innovation-orientated environments, individuals can on occasion still get decapitated for taking undue risk or diverting themselves excessively from their day jobs to chase the prospect of a new technological Nirvana. Added to this, some people just don’t care as much as they ought to.

Large multinationals are generally constituted of complex and flowing networks of interests, perceptions and political capital. A good champion will help you to understand and navigate these very human elements, as well as support forward mapping the process to close. If they’re serious about wanting to get the deal done, then it’s in their interests to be open.

And so, at the risk of sounding like a Sunday supplement, a quick round-number checklist to help you to spot whether you have a good one. They:

 

  1. Understand what it does
  2. Understand the value of what it does
  3. Know to whom internally it has value and the nature of the problem it solves
  4. Can explain it to others
  5. Have real personal credibility
  6. Have a track record of on-boarding external technology
  7. Want to get a deal done
  8. Will empathise with your needs and work with you towards a shared goal
  9. Are frank about timing and will support sticking to an agreed timeframe
  10. Will help you to understand the process to getting a deal done, and all of the gates you need to pass through and the boxes to tick

If your primary engagement is with an individual with all of the above characteristics, great – you stand a chance of getting it done. If not, that doesn’t necessarily mean you want to jump off that horse, but it’s well worth considering getting new blood into the stable. Early technology deals should be done as much as possible from the same side of the table, focussed on benefits and structures for win-wins. A good champion works with you towards common objectives.

Getting the right champion is just the beginning, and from there on out its essential to be building your own political capital, and understanding first-hand the inner machinations of the business, but you’ll never understand it nearly as well as when you have a talented insider with aligned interests.

New Year Reflections

New year is an opportune time to reflect on the year that’s gone by, and to resolve never to repeat the mistakes of the past. For any such resolution to work, one needs to think very candidly about one’s own mistakes. So…lesson learned:

I saw what I believed to be the right course of action, but it wasn’t the course that was taken. This meant that I lost the argument. To lose the argument when you are wrong is the right outcome. Reason, logic and the wisdom of others have prevailed and all is right with the world.

If you lose the argument when you’re right then you need to think very carefully about your failure to persuade. Building a case and arguing it is the core of getting any deal done, and mistakes made in the broad church of persuasion are not to be repeated and so turn into invaluable life lessons.

The specific lesson for me here was this – I knew that different arguments for the same outcome would resonate with different characters, but acquiesced to having the key discussion in the presence of all invested parties. The rest is history.

What of course I should have done was to isolate discussions, to have got each on-side in the manner best suited to them, and to have walked into the final meeting asking for no more than a show of hands. Why didn’t I do this? With the benefit of hindsight, I’m pretty sure it was good old fashioned hubris.

There is nothing new or novel in treating people as individuals – some of the great thinkers have determined this should be a moral imperative never mind a business one – but anything worth doing is worth planning, and anything that is of fundamental importance is worth planning with military precision. When you come to execute the plan and it takes 5 minutes and looks as simple as CO2, that’s a pat on the back even if no-one but you knows it.

Know thyself

The ancient Greeks had it right, no doubt on a number of things, but surely none more fundamentally than as encompassed in the Delphic maxim – ‘know thyself’.

While at a RIG strategy meeting recently, we analysed in some gory detail our myriad individual strengths and weaknesses. I was told  (very generously I thought) by Mr. Shields Russell, RIG’s illustrious leader, that my strengths were strong enough that I should give myself the headspace to ensure I could bring these to bear, and to look to those around me to make up deficiencies. I’ve since come to the realisation that in fact the master social engineer was inviting me to look more closely at the team around me, for there lyeth all of the experience, character traits, and perspectives that if utilised intelligently could more than make up for my own personal inadequacies.

RIG is made up of a diverse bunch that, as well as getting along fairly well with each other some of the time, are all the friends a lonely technology entrepreneur could need or want. Despite being an outfit built by design around commercialising technology, none of us on our own has all the skills. If and when you come to the realisation that you are a jack of a particular trade, for the sake of everyone around you, get the hell out of the way and call for the support of a master – no-one will thank you for doing anything else. In any case complex, multi-faceted industrialisation requires more traits than any one ancient Greek or modern CEO could possibly hope to personify.

The advice of course was as sage as the Greeks themselves, and I firmly believe that had they had the forethought to dream up management speak, the aphorism would surely have read know thy team.

It's a love thing

Having recently joined RIG, I can already proclaim that I love my job.

RIG’s raison d’être (or at least a high-minded version of it) is to discover new technologies that could in some way, big or small, change the world for the better, and to ensure that they find markets and realise their potential.

My contribution to all this is to work with engineering technology in energy and natural resources – an industry where small improvements can lead to enormous benefits. Although I’ve been in oil and gas for the last nine years, experiencing the industry from this perspective brings with it a multi-dimensional learning curve that is unlikely ever to become less steep on account of the diversity of industry technical challenges and the ingenuity of those finding the solutions.

The technology into which I’m currently sinking my teeth is a method of adjusting the surface properties of metals to optimise their performance in specific environments. Its impact is already being felt as the thermal tolerance properties it confers onto titanium are enabling a satellite to orbit the sun without risk of heat induced failure; and on paper at least could allow a jet to travel at Mach 24, meaning that one need never be more than a few hours away from anywhere else on Earth (depending on queues at security). Working out all of its applications in energy is an excitement and a privilege, not unlike the job.