Commercialising a new technology is an expensive and potentially risky business. Typically, it will need to be financed using equity (sale of shares) rather than debt (such as bank borrowing). 2D Materials, an NUS spin-out, shares its experiences in presenting its IP to investors.
Raising finance for a technology start-up can present the founders with an apparent ‘Catch 22’. Substantial funding has to be raised to have sufficient capital in place necessary to further develop and implement the technology; but without being able to review the technology, investors may find it hard to assess the risks the opportunity presents. The answer, generally, is to focus on how the IP a firm owns, or to which it has exclusive access, can de-risk the proposals to an acceptable degree, by showing that there is a realistic prospect it will have a defensible and sustainable competitive advantage.
This is all the more important in a competitive and increasingly crowded market such as the production of graphene. Hailed as one of the most ground-breaking inventions this century on its discovery in 2004, which earned Nobel Prizes in Physics for Konstantin Novoselov and Andre Geim, graphene is the first two-dimensional (2D) material to be readily available. Its properties, which combine strength with pliability and excellent conductivity, make it suitable for a wide range of industrial applications.
As a result, there are now hundreds of companies worldwide claiming to produce ‘graphene’. However, the graphene produced is of variable quality and properties, which has slowed down the adoption of this technology. The ability to produce high-quality graphene at scale, therefore, represents a potentially unique selling point.
2D Materials (2DM) is a spin-out from the National University of Singapore (NUS) and the Centre for Advanced 2D Materials, the first Graphene Research Centre in Asia. It was co-founded by internationally renowned experts Professor Antonia Castro Neto and Dr Ricardo V.B. de Oliveira and boasts Nobel Prize winner Konstantin Novoselov and other leading figures on its board of directors and advisers.
2DM has exclusive rights to a proprietary process for the production of high-quality graphene, which is being scaled to industrial level via its commercial pilot facility in Singapore Science Park 2. However, like many start-ups, 2DM is faced with the challenge of financing expensive ground-breaking research and development.
Lack of funds may often delay, or even prevent, progress from the laboratory bench, through scale-up to a commercially successful business or product. External investors can provide a company with much-needed investment, expertise and support, and often bring specialist know-how as well as an injection of capital that will support growth. However, there is always the potential for conflict between the time an innovative business needs to develop its offer and become profitable, and the desire of many investors to obtain early returns from the least risky investments.
It is therefore important for the company seeking investment to understand the investor’s needs and expectations. Early-stage investors are engaging at a time in the business that presents the most risk and will, therefore, expect a higher return on their investment to be adequately compensated. Before entering into negotiations with investors, it is therefore very important to know what they are looking for.
Gary Rubin, Business Consultant to 2DM, characterises the overall risk appetite as follows.
“I would say investors in Singapore and Asia are not too dissimilar to European investors. They tend to be rather risk-averse and cautious, preferring to put funding in smaller tranches, subject to hitting specific milestones before committing further funds. While I understand their rationale for doing this it can also be quite frustrating. ‘Drip feeding’ the money in can be a bit restrictive in allowing the company to commit funds and resources necessary to implement your plans. This is quite different from the US investor model where, if they believe in you and your idea, they are willing to commit the necessary larger funds upfront.”
First, of course, you have to find an investor with an interest in your market. In certain sectors, companies attend pitch contests where they have the chance to pitch their idea to a panel of investors. This works in the creative and digital sectors, but in the sort of high technology sectors in which 2DM resides, they may involve a lot of work for little return. As Gary explains,
“We need million-dollar investment (not $10,000 or $50,000 if you’re lucky) to invest in infrastructure and purchase specialist equipment, hire a team of skilled people and scale an operation for the industrial market—therefore, I don’t think we are likely to pick up the type of investor at a pitching event unless it is a very focused industry-type event”. Most of the company’s approaches to/from potential investors, which have included business angels, private equity firms, family offices and venture arms of large corporates, have been quite targeted: “Either we’ve approached them, or they’ve come to us”.
When it comes to intangible assets, investors often seek evidence of strong IP, protected by way of registered rights, such as a patent for a technical innovation. US studies have found companies with a strong patent portfolio tend to raise more funding, more quickly, than those without. This is because patents may alleviate investor concerns on a start-up’s ability to monetise its invention and stop competitors entering the marketplace.
Patent filings can certainly allow companies to disclose details of their invention to investors with less fear of disclosure risk. They also allow technical details to be communicated more credibly and say something about the quality and distinctiveness of their invention (particularly if patents are granted). Many companies, therefore, choose to file patents in support of fundraising, even if they do not prosecute these through to grant.
However, in the case of 2DM, its key invention is a novel process or method. This is something that is not easily reverse engineered, meaning that 2DM might reasonably expect to protect its “recipe” by a trade secret, provided that the company takes the necessary steps to keep it secret. Most of its competitors are located in China and India, and the management team was concerned that large companies might use published patents to address quality problems with their own products, were these to be disclosed. Accordingly, after getting all the assessments for patentability and freedom to operate done, 2DM decided to agree on an exclusive licence from NUS for a trade secret instead.
“While we are small, we decided it was best to keep our IP hidden from our competitors.”
“It’s been a concern to us whether relying on a trade secret is sufficient enough for investors during investment discussions, as investors ask us to disclose more information about our process so they can evaluate its innovativeness and how its differs from other processes, and also about our IP position and its protection. But when you explain the innovation to them, they do understand and accept the rationale to maintain the trade secret and not patent, as long as the company has taken its own internal defensive measures to keep the trade secret limited to certain key people”.
In this regard, as well as securing and limiting access to trade secrets, 2DM has implemented tight employee contracts and makes extensive use of non-disclosure agreements (NDAs) and non-solicitation agreements.
Gary notes that the timing of investment is important on both sides. In discussions with investors, many indicate a preference to tranche in investment:
“They want to give you a little bit and see you put it to work to increase the value before they release a little bit more, which is quite frustrating”.
Gary’s view is that it is important to stand your ground on subsequent negotiations.
“If investors want to invest against milestones, it should become increasingly more expensive for them—they shouldn’t get the same deal for applying the handbrake at certain parts of our plans. If we hit the milestones, investors shouldn’t expect to release the remaining amount of their funds at the same valuation as they first came in.”
He goes on to add
“Some investors also want to see us secure customers before they invest, particularly the VCs. But the longer they leave it, and the more letters of intent or contracts I get in my hand from customers, the more the parameters shift in my favour. So, if you are waiting for me to secure a key contract with a customer and think you can still continue with the investment on the same terms—no way!”
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