They Must Buy (Someday)!
“May the force be with you,” said Obi-Wan Kenobi to Luke Skywalker at the beginning of the Star Wars series.
That was the thought that came to mind after meeting with a prominent venture capitalist in Silicon Valley in February of 2012. I was six years invested into a new industrial compressor design. It had high promise. Today, due to the incredible progress of the design and test team, these promises are real.
But I am getting ahead of myself.
The VC told me something that stuck with me to this day. It is a macro investing principle. He listened carefully to what I had to say and asked a few questions to be sure he understood just what we were building.
Then he said, “As a VC, we invest in companies that are building innovative products. Products that promise to change the world. The kind of products that provide the foundation for a billion-dollar company.
“For us to realize our return for our investors, these products must be developed in markets seeking innovation. Innovation must be important to big companies in that industry. They demonstrate this by developing their innovative products and also by seeking innovative products.
“And that’s how I make my money. I invest in new ideas. The ideas become innovative products. The entrepreneur finds the hot market for the products. A fast-growth company is created. A big company comes in and buys it because it is now a proven product in the market.”
Then he burst my bubble.
I was thinking, “There isn’t anything more innovative than this compressor design. It is a whole new compressor platform that will build a new industry, customers, and vendors to support it. It will finally get us as a society to the holy grail of zero global warming potential for HVAC. This will put a huge dent in climate change and make us all a ton of money!”
Then the VC said, “I’m sure your compressor is amazing. But you are creating innovation in a market that is not seeking innovation. In other words, it is too difficult to find a buyer and exit. Therefore, I’m not interested.”
I left his office wanting him to be wrong.
But I knew he was right. He was right because he shared a macro principle. He told me, “If you build it, no one will buy it. Why? Because they are not looking for anything new and different.”
The dilemma: Believe or Give up
This was the struggle:
Believe: I was already in this deal for almost six years. We'd developed an amazing technology. With global warming being front-page news worldwide, the market would surely turn our way.
Give up: Stop funding research and development. Cut expenses. Wait for the market to realize they had a problem to solve, and their current technology would not solve it. In the meantime, maintain awareness of the patented technology we owned. Eventually, cut a deal for what’s left of the patent life.
We chose: Believe
The bet was that the market will materialize. And when it does, we will be standing as the only viable, cost-effective solution. A major manufacturer will adopt this new zero GWP compressor platform and make billions from it. And so will our founder, his team, and the investors.
That’s the dream!
In the meantime, we wait for the market to be forced to seek innovation. Wait for the market to materialize. We believe this will happen. The driver creating the demand for innovation will be government regulation driven by voter interests. But will the regulations be put in place fast enough?
Before I invested in this deal, I said to the entrepreneur, “This is the kind of deal where I might always be a $100k investment away from a one-billion-dollar return.” And here we are. This is what it looks like to swing for the fences as an entrepreneur or angel investor.
Investing in deals expecting the market to appear at just the right time is not for sissies. This is high risk, high return territory.
Maybe this is the one!