Starting up and Financing Your Venture

AuthorAdam Levy
Pages119-141
7
Starting up and Financing Your Venture
Adam Levy
As has been repeated throughout this book, patents are technical legal documents,
the purpose of which is economic gain. The patent application and licensing strat-
egies discussed therefore occur within a commercial framework. This chapter
addresses the independent inventor who wishes to realise financial gain from his
or her creation through developing, licensing or selling the invention. It considers
commercialisation strategy, company formation and funding, and eventual exit of
the business.
7.1
Risk, Return and Control
Throughout this chapter several key words are repeated; risk, return, control. This
trinity defines much of the vision and strategy of the start-up company, and the
inventor must continually trade these values against each other. Yet, the circum-
stances, preferences and attitudes of each inventor will differ and indeed, evolve
over time, so there is no simple way to optimise this trade.
The inventor must question his or her attitude to this risk. What personal
investment of time and money is to be made in the invention, and what is
expected in return? People differ greatly in their attitude to money and what con-
stitutes “enough” money, and to what extent risks are justified to have more
money. Whilst every inventor wants to earn a fair and maximal amount from their
creation, it is important to understand the risks that underlie this process, and to
define a personal strategy of involvement that fits with this risk. Some inventors
will be driven by money; some by a desire to create and control an invention;
some will be intensely risk-averse, whilst others will be risk-loving. What is pre-
sented here is therefore, at best, a framework to help the entrepreneurial inventor
to understand his or her own attitudes, and start to plan the future.
119
7.1.1
What is the Return?
Put simply, the return is the money that the inventor manages to realise from the
invention, adjusted for time and taxation. Taxation is covered in more depth in
Chapter 8 and the relationship between time and money is discussed in depth lat-
er in this chapter. Beyond these elements, two key concepts are useful in defining
ones own attitude to return:
The Marginal Utility of Money
When one compares the price of a pair of shoes in two stores a 10 Lprice differ-
ence seems more important than it does when comparing the cost of two cars.
The 10 Lis the same, so why the difference in attitude? The answer lies in the
concept of marginal utility – that is to say that the more one has of something, the
less meaningful the next additional unit seems. Marginal utility applies also to
money. Although the concept of too much money’ is an alien one to the strug-
gling and penniless entrepreneur, it is important to explore attitudes to money
and risk and to identify the point at which additional risk cannot be justified.
Take the example of the young entrepreneur whose company is at the point of
making an exclusive agreement from which he can walk away with 1 million L.It
is suggested that the inventor tries to make the deal non-exclusive, so that the
invention can also be sold elsewhere. If he tries this, it is possible that the deal
will fall through, and equally possible that the tactic will work and that the inven-
tion will net 3 million L. Logically taking the gamble is rational after all there is a
50% chance of more than doubling the return (in economic terms the Expected
Value, or EV is therefore higher at 1.5m Euros). On the other hand, why should
the inventor gamble the financial security of 1 million L. Presented with the same
odds in a card game would the inventor gamble the same amount of money? The
young entrepreneur wisely decides to sign the exclusive agreement.
The young entrepreneur banks his cool 1 million Euros and again has made a
great invention. Faced with the same dilemma, but this time with a 5% chance of
making 10 million Euros, the inventor chooses to take the considerable gamble
(lowering his EV to 0.5m Euros) – after all, an additional 1 million Euros will not
radically change his life, whereas an additional 10 million Euros would indeed.
This relationship between risk and return is a phenomenon that inventors,
managers and investors must try to understand, to avoid distortions in decision
making. The inventor must understand that investors, particularly professional
investors with extensive portfolios, may prefer higher return investments despite
the additional risk. Inventors must structure shareholder agreements that act to
align the risk profiles of investors with their own interests.
7 Starting up and Financing Your Venture120

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT