How an idea becomes a company...

The Silicon Valley buzzes with an entrepreneurial energy unlike anything I’ve ever felt. I’ve been back in the valley for 6 weeks now and its still shocking.

I left an executive level position with a Fortune 50 sized service provider to join a 4-person start up and want to document some of the thing I learn and share some of the experiences. Few people witness the birth of a company so I wanted to share some of my experiences during this exciting time.

How we got our start.

In our case, one of my co-founders was actually hired by a Venture Capital (VC) company specifically to identify a new business opportunity and create a business to address it. This role is commonly called an Entrepreneur in Residence (EIR).

The VC provides the EIR with office space, a modest salary and access to industry contact to conduct their research. VCs also designates a General Partner (one of the senior leaders at the VC) to mentor the EIR during the development of their plans. This process can take months and some EIR’s finish their time without ever finding the right opportunity.

When an EIR does identify a business opportunity, they must develop a plan to address it; what is the exact problem, how can it be solved and how much money can be made solving it. When the EIR is satisfied that they understand the problem, can create a viable solution and understand the micro- and macro-economic impacts they present their plan to their mentor. It can take a number of attempts to convince them that the idea is sound.

Once your partner is satisfied, they typically have to recruit another General Partner to co-sponsor the investment. Once the sponsor designates the Second the EIR pitches the detailed idea to the entire partnership of the VC. This is a key make-or-break event for all start-ups. By this point the pitch has been vetted pretty thoroughly, and stand a good chance, but all it takes is a one partner to kill it.

In our case, we initially asked for “seed capital” to conduct the additional research necessary to confirm that the solution we propose to use can deliver the performance we need to work. To do this we need to develop a prototype and measure it’s performance. A Seed typically takes the form of a loan that will be rolled into the first formal round of funding. Seed rounds range from a few thousand dollars to over a million depending on the amount of technical research needed.

The seed round is expected to lead to a Series A investment by the VC, as long as the solution proves viable, but not all of them do. Many times the idea simply doesn’t works or doesn’t deliver the expected performance and value. Sometimes the cost of the solution is more then expected or requires new methods that are unlikely to develop.

Seed rounds are expected to provide enough funding to complete the planning. Running out of seed capitol before answering the questions doesn’t bode well for someone trying to borrow money to build and bring it to market within an agreed upon time and an agreed upon cost basis.

We need to achieve a couple of key goals before we can approach our VC for a Series-A investment. First we need to complete the prototype of our device and confirm it can achieve the required performance and second we need to get confirmation from a few key prospective customers that our solution is something they would deploy assuming it delivers the features we are promising. The next few months should be interesting as we build and test the prototype and meet with industry leaders to validate our plan.