Three Rounds : Slide 16

In the venture capital business, we generally finance a project for three rounds. Why three rounds? Don't really know! We just know that from our experience and that empirical evidence indicates, no one ever meets his budget on the first go-round. By the time you get to the fourth round, something is significantly wrong with the project. A typical scenario might be, we as Angels will invest $200,000 but initially only finance the company for one-third of the value. By the time we get to three rounds, we will terminate any further funding independent of how well the project is going or how badly it needs money. This is a key element. If the project is going badly, clearly do not fund. If the project is going well, get funds from someone else. The purpose of research and development, particularly the creation of wealth, and front-end R&D is to establish and turn on the lights, not to bring the entire project to fruition.

Conclusion of the projects, i.e., subsequent funding, must be done in separate stages and called new projects. This allows one to go back to the base of the tree and grow new buds and sprouts depending upon what has been learned in the initial sub-project. Since these projects are by definition seven people for optimum size, and typically three years, one can state that a given project will run between one to five million dollars. Normally, we do not tell the researcher, the entrepreneur, or the young company president what we have in mind for the total. As it turns out, independent of what the budget constraints are, almost everyone overruns projects consistently and thoroughly. There is a new trend, however, called "No Slip". In this case, they try to run projects on time and on the money. It has been successfully implemented is some companies such as Hewlett Packard, but for the moment, we will treat overruns as a fact of life and a part of the R&D program to be well managed.

© R. Morley Inc. All Rights Reserved