Responding to an Electrifying Business Opportunity
You’ve known Eric since third grade. You remained friends through high school and were roommates your freshman and sophomore years in college. But he majored in physics and you majored in finance, so later in your college careers you were usually heading to different classes and had different interests.
Eric is one smartest, most creative people you’ve ever met. After graduating—he did so with highest honors—he went to grad school to work on his Ph.D. in physics at a top-notch university. The two of you lost touch for a few years, though you did hear from a mutual acquaintance that Eric had created quite a name for himself en route to his Ph.D., which he earned a couple of years ago. Meanwhile, you took a job at a major corporation after graduation and have steadily moved up the corporate ladder.
It was a nice surprise last week when you answered your phone and heard his voice. After a few minutes of pleasant chitchat Eric got down to his real reason for calling. He explained that while doing research for his doctoral dissertation he stumbled on an idea for a new type of battery technology. After graduating he continued working on the new technology and recently applied for a patent for a new type of battery based on this technology. You heard the excitement in his voice when he told you that his new battery could easily double the range of electric cars and (even better) be completely recharged in about 5 minutes using an ordinary electrical outlet. Eric also told you that once the kinks are worked out of the production process, his batteries were likely to be easier and less expensive to produce than current batteries. In short, his battery could revolutionize the electric automobile industry, and make Eric a multimillionaire in the process.
Eric then told you that he wants to start his own company to exploit his new technology. He called you because he needs some advice. He doesn’t have a business background and knows very little about the process of starting and financing a startup company. He asked if you would help him decide the best way to structure his new company. He also hinted that he would like to have you invest in the company. You told him you’d do a little research (and a little thinking) and get back to him in a few days.
After the phone call you did some Internet research on battery technology and electric cars. You weren’t able to follow all the technical details, but discovered several articles in reputable journals that mentioned Eric’s breakthrough. Based on what you gathered from these articles, Eric was being honest when he told you his technology had real promise. However, you also found several other articles about competing technologies, and noted that some of them also appeared quite promising. A couple of articles pointed out that the battery technology that gets to the market first has the best chance to dominate the market—if it can live up to its hype.
After you completed your research you took some time to reflect on Eric’s request. You know Eric is extremely smart, hard working and honest. He’s a long-time friend and it would be exciting to work with him on a project that could revolutionize the automobile industry—and also help the environment. But it is clear that the company will face a lot of competition from other startups. The new company will need to be set up quickly and raise a significant amount of money to get the battery to market ahead of the competition. The potential payoff is huge, but so are the risks.
You Decide:
What are the key challenges Eric faces?
Given the challenges, prepare a short report for Eric listing at least 3 forms of ownership that might be worth considering. Provide a brief summary of the advantages and disadvantages of each option.
Assume that Eric is impressed by your recommendations and formally offers you an opportunity to join his new company as part of the ownership and management team. You’ve been earning a nice salary for the past few years and have managed to accumulate an impressive portfolio of financial investments. You could invest a significant amount of money in Eric’s company, but only if you sold off many of these assets. Would you be willing to do this? Would you be willing to quit your job and accept Eric’s offer to become an owner/manager of the new company? Explain, citing the key factors that guided your decision.