In the World of Startups, it's Darwin all the Way

In February 2004, KnoWatt, Inc. a three-year-old Arizona company, underwent a reorganization through which the Company received an angel investment of $200,000-the first outside funding the company had ever received. The good news: KnoWatt is alive and well, with customers and the promise of more customers. The bad news: it still needs another round.

In the years preceding, the company had gone from a promising startup through the roller coaster ride of the Internet bubble. The founders, experienced in the energy information business and the statement generation business, laid down over half a million of their own money to develop the website and backend for its proprietary algorithms for energy management.

They then began to pilot test the product and to sell it - only to find that the sales cycle was long for technology from an unknown (everyone wanted to see if they'd still be around) and the funding climate chilly. Moreover, the first iteration of the software didn't work the way it was supposed to. A Chandler, Arizona technology company with good product development experience, DSSI, was persuaded to come aboard to fix the product in exchange for equity.

But although initial beta tests showed much higher energy cost savings than the founders predicted, it was difficult to get the word out without a sales force. The CTO was in Texas at a full-time job, the other two founders manning the phones, the accounting, and all the other functions of a company. To augment the founders, Dan O'Neill (now of Arizona Technopolis) and Stealthmode Partners hung out with the company for �deferred compensation.�

In late 2002, KnoWatt, lean and mean, was admitted into an �incubator,� and received advice and office space, along with the promise of securing funding. It soldiered on while all the fancy Silicon Valley companies got shut down by their VCs.

Time slipped by, and one of the founders had to take a job as a forklift operator on the night shift to keep the company alive. After two bouts of pneumonia, his family drew the line, and he borrowed money personally to save his home.

The product got better, and the sales got closer. And then, in December 2003, the unthinkable happened: the incubator shut down. Although DSSI quickly stepped off with an offer of office space, the company was within an inch of its life. The CEO had two little daughters to think about.

And then two miracles happened almost at once: a large retailer signed on for a pilot project, and an angel appeared with a check for the money to fund the pilot. By now, KnoWatt had been around long enough to acquire a reputation as a great product and as a company that had survived.

Fast forward. The cap table was restructured to reflect the conversion of almost all the company's debt to equity, and a short-term plan was developed, which laid out a product development and marketing strategy. This strategy called for completion of certain new aspects of the product so that KnoWatt could conduct several pending pilot projects as a way of beginning to generate revenue. Those projects were to be completed within a six-month period, culminating in a search for additional funding to get the company to revenue.

Six months will be up in July, and KnoWatt is precisely on target, meeting all of its milestones.

The retailer's pilot is under way and the Arizona results alone identified $20,000 in annual savings for the client due to a malfunctioning control system. KnoWatt has a letter of intent for a national pilot of up to forty-eight stores, and has begun receiving data from them. Preliminary results have identified 18% savings annually on eleven stores to date. The criteria for a successful test in the eyes of this customer were a savings of 2%.

A second pilot study is being conducted for an energy services company. Upon successful conclusion of this pilot, KnoWatt has a letter of intent to develop a licensing arrangement, through which the energy company would license KnoWatt's submetering functionality.

KnoWatt is also negotiating with one of Arizona's utility companies to develop an energy information solution for Arizona's public schools, which are about to lose their immunity from utility rate hikes. KnoWatt spent over a year working with the State on solutions for the education market, and is well-known for its expertise.
The Company is on budget from the re-organization. It will have spent $200,000 thru July and accomplished the pilot studies as planned.

Here's the kicker. KnoWatt still needs another round of funding to let it roll out the first customers. It is anticipated that $350,000 will bring KnoWatt to substantial recurring revenue from more than one Grade A customer. If not, the company probably won't survive.

In my world, this happens every day. Welcome to the world of the entrepreneur. Reach into your pockets.