The company has been founded, and you have identified a customer need with an associated sketch for the product. The hypotheses have been tested in the market and the product outline is becoming more and more refined. The founding team is falling into place, and the company may have made its first hires. Consciously or unconsciously, an organizational culture is formed, and you have rigged the company for product development. What happens next?
 

Critical conditions

Product development is in many ways a very challenging phase. Both organization and product develop at the same time, and it is easy to lose track of the big picture. There are three pitfalls in particular that you should pay particular attention to:

Product development becomes too technically focused and market orientation is forgotten. Many forget to check with the target group whether, for example, all functionality is necessary or whether user preferences have changed. We recommend developing hypotheses about the market and product and testing these regularly. This ensures customer-driven development and prevents the product from early on acquiring many complicated features that do not affect the customer's willingness to pay. Verification from the market is also something that reduces market risk and can affect how you perceive the investors in a capital raising process.

A pilot customer can consciously or unconsciously dictate product development. The feedback from pilot customers is in many cases important and necessary for the company's development. However, it is important to have a conscious relationship with the pilot customer's role when involved in product development. We recommend paying attention to the pilot customer's expressed needs and continuously checking that these coincide with the market you seek to serve, and that you have a common goal for the collaboration. Perhaps the pilot customer also contributes with financing. Although the capital is attractive and seems critical to survival, it is important to have a conscious relationship with the advantages and disadvantages that an industrial owner can have, both in the short and long term. An industrial owner can entail bindings upon exit, at the same time the power of an established industrial player can be what ensures that the product is realized at all. Clarification of expectations and agreements are therefore very important. 

Missing system for measurement and accountability. Measuring the product development phase is experienced by many as demanding, as there is little information in financial data. This often means that the company establishes strategies, but not associated functions for measurement and accountability. The consequences of this can be a lack of ownership of the tasks, a changing focus and an inefficient development phase. There should be a clear plan for this phase, which makes the organization responsible and manages it. In this way, one can channel focus, ensure progress and keep stakeholders informed of changes in communicated plans.
 

Increasing demands on the organization

In the product development phase, many people experience a greater need for administrative functions.

The company may have employed several people, capital has been obtained from one or more investors, and the company has received public grants for one or more projects. The company has more and more stakeholders to deal with, but the development of the product gets all the attention. In many cases, this means that reporting to investors is de-prioritized, and the general manager spends a lot of time on manual reporting to public grant providers to ensure payment of funds. Manually updating liquidity forecasts to have an overview of how long the capital will last takes time. At the same time, the CEO focuses most of his time on raising capital to ensure the company's survival.

In other words, increased need for administrative systems and structures is the first consequence of the company growing, and the general manager quickly becomes a bottleneck in several processes.

We recommend that the company carry out an overall survey of the stakeholders and the various stakeholders' requirements for the company. This, as well. simple liquidity planning should be the focus when establishing the structures in the accounting system. With the right set-up in the accounting system, complemented by a cost-effective reporting solution, reports to the stakeholders will come out at the touch of a key, and updating liquidity forecasts will become a left-handed task. This is a simple and cost-effective measure that reduces the administrative pressure on the general manager and enables the key people to focus on the company's core activities.

 

Challenging financing

Much of the reason why product development is perceived as a particularly demanding phase is the access to capital. Many experience lukewarm interest from investors, and the message is often the same: "come back when you have your first customers". The public policy apparatus does not fully finance the company's development costs, and the company's is considered premature in the banks' credit assessment systems. It can be felt that the company is in the "valley of death", and all the capital the company gets must be used in full for product development.

In this phase, it is not unusual for the company to receive different feedback from investors when it comes to the valuation of the company. This is linked to the investor's perception of risk. For the company, it is therefore important to think about risk minimization throughout the entire phase. The team, market, product and financing risk in particular influence the investors' assessment of the company and represent important value drivers in the phase. These should also be in focus when you set up and present the case to investors.

It is also important to think long-term when the company is to raise equity capital - a high valuation obligates and must be defended in later financing rounds. One way to reconcile the valuation is to identify different exit scenarios and work back on the company's value in the various rounds leading up to the exit. Based on the financing plan, the company must defend the milestones that lie in the various financing rounds and that explain the promise in company value. 

Another important source of funding for the phase is public grants, which are increasingly receiving larger amounts. The rich supply of public funds is regarded by some as "free money" and in some cases leads to the company applying for grants without anchoring this in the company's development plan. Be aware that the company's financing plan is adapted to the product development plan, and not the other way around.

The prerequisites for grants vary between different grant providers and grants, but common to all is the premise of risk sharing and innovation. Risk sharing means that public grants do not fully finance a development course, and grants must therefore always be combined with equity. Some companies try to get close to 100% funding by combining various public funds. Even if one were to pass the grant provider's assessment criteria, it is challenging to stay within the terms of the state aid regulations, and the company's projects are underfunded. In all cases, this means that the company does not have sufficient equity capital to complete the projects - neither with own efforts nor with a combination of various grants is it possible to obtain higher support than is specified in the state aid regulations. That’s important to consider in capital and liquidity planning.

However, public subsidies can be a catalyst for equity as it relieves the financing risk. We therefore recommend that the companies look at the overall financing structure, and how different sources of capital can together cover the capital requirement for the phase. This should be the starting point when the company seeks funding from the various sources.

 

Examples of services from BDO's industry team

• Accounting, CFO and legal services, including capital planning, assessment of financing options, assistance in issue processes and application writing for public grants (also applies to EU funds)
• Financing and ownership strategy
• Scalable systems for handling internal and external reporting, including liquidity management and management of capital use, as well as. reporting to the board and owners.
• Seamless reporting on publicly supported projects, including financial reporting on EU funds, for example Horizon Europe.
• Employment agreements, including option agreements and remuneration mechanisms
• Systems and procedures for follow-up of employees
• Industry-specific business development for tech startups based on lean startup
• Cooperation agreements
• Efficient accounting and payroll delivery in cloud-based systems