Breaking conventions Featured

7:00am EDT November 4, 2003
Bruce Hartman landed the first funding for a new product he developed in an unusual way: He won a contest.

He landed a $37,000 prize from the Enterprize competition for the business plan he developed for a product used in storm water drainage systems. It's far from the nearly $1 million he will need to get the product marketed and into mass production, but for Hartman, it's a way to show potential investors that someone with some smarts thinks he has a good idea.

For Karl Forssman, president and CEO of Parent Plus LLC, a start-up that offers a solution for male infertility, the journey started in a more conventional way but took a less expected turn. Forssman got an angel investor to pony up the initial funding for his company, but the next round of support appears likely to come not in the form of cash but through a strategic alliance with a major medical center with expertise in infertility treatment, Forssman says.

Financing their ventures hasn't been a neat and tidy process for Hartman and Forssman, demonstrating that while there are general models to follow for funding a company, there are often detours that lead down unconventional paths. Or is the unconventional approach actually the more conventional?

"Everybody tends to think of venture capital as the conventional money source," says Vic Petri, a consultant with PricewaterhouseCoopers.

But the experience of some entrepreneurs could lead one to believe that experiences like Hartman's and Forssman's are closer to reality.

Pamela Lipson, president and CEO of Imagen Inc., a Boston company that was spun out of MIT's artificial intelligence research center, shared her experience at a recent MIT Enterprise Forum. Imagen, like Hartman Products, got an early infusion of capital by winning a cash prize of $30,000 in an entrepreneurship competition in 1997.

Imagen scored some early successes in the electronics and telecommunications sectors, but by 2000, the capital markets had dried up and tech companies had lost their luster for most investors. Finding venture capital was a faint hope for the fledgling technology company.

The technology that Imagen had developed, Lipson and her partner concluded, could have several broad applications. It could be used in instances where human faces needed to be identified, such as in security systems. Another use could be in identifying similar images from a group of photographs or other images, like trademarks.

Imagen also saw potential for the technology to be used for inspecting circuit boards for quality control purposes, the application it settled on as the most promising.

"The technology was very general, and it needed to be targeted," says Lipson.

But with little cash in Imagen's coffers, Lipson says, it was necessary to find a partner that had an interest in the technology, valued having a share of the intellectual property and had the resources to shoulder the risk of development. The potential partner would also have to meet the demands of the marketplace once the product was commercialized.

Imagen approached Teradyne, a $1.2 billion company that manufactures automatic test equipment for electronics inspection. Teradyne saw real potential in using the software to increase the speed of its products, which are used to inspect printed circuit boards.

The two struck a partnership agreement that gives Teradyne a share of the intellectual property, and early this year, it introduced a product that utilizes the Imagen software. It is now in use in Asia and North America.

While the end-around approach may seem unconventional and less direct, moving a business by using a strategic partner -- if the process is well-executed -- can take a company a step or two forward without necessarily raising a lot of additional cash.

In Forssman's case, the halo effect of partnering with a major player could make raising capital easier in the future. He says that the partnership with a prestigious medical research center will raise his company's prestige within the technology and medical communities, a factor he believes will increase his visibility, bring new contacts and potential investors, and make it easier to raise additional capital for his venture.

"They will look at who I'm partnering with and say, 'Hey, this guy is serious.'" How to reach: Hartman Products Inc., www.hartmanew.com; ParentPlus, www.parentplus.net; Imagen Inc., www.imagen-inc.com; Teradyne, www.teradyne.com