Editor’s Note: Dr. Frank Gozzo is a local angel investor whose portfolio includes FlightGest, Noverant and Gozzo Consulting Group. He’s actively involved in supporting start-ups and non-profits in the region and can be reached at fgozzo@gozzoconsulting.com. This column is the latest in the Entrepreneurial Spirit series done in partnership between the Council for Entrepreneurial Development and WRAL Local Tech Wire.

By FRANK GOZZO, Gozzo Consulting Group

RESEARCH TRIANGLE PARK, N.C. – Of all the issues which should be seriously pondered by any start-up firm, deciding between creating a “Technology” or a “Company” is perhaps the single greatest strategic question. Those who choose wisely from the onset are generally blessed with lower burn rates and multiple exit options. Choose poorly, and you can easily burn your bridge to financial sustainability and kiss your exit strategy goodbye.

What’s the difference between these two start-up approaches? Let’s look at two common scenarios:

Assume you founded a start-up with a handful of employees in order to leverage some unique intellectual property which you own. Whether the IP is hardware, software, service or a combination thereof is irrelevant. The fact remains that it’s your mission to grow the business to ultimately reach a very healthy exit.

Scenario 1: Build a “Company”

At the first all-hands meeting (in your garage), the team exudes great energy and has grand visions of Google-like growth. You define your strategy; create a robust corporate structure including sales, service, marketing and functions; then carefully staff those roles. You launch your plan and quickly find your burn rate growing, yet sales have not materialized at the same rate. The technology is still “maturing” (i.e., not working), but you’re still making news headlines.

After 14 months, you’ve depleted first-round funding from your Aunt Rose. Investors find the technology intriguing, but question your ability to get it to market. Congratulations …you’ve given birth to an unproven Technology which is burdened by a Company burn-rate.

Scenario 2: Build a “Technology”

The team still has strong energy at the kick-off, but decides that while refining the technology is low risk, bringing it to market will be the toughest nut to crack. So you launch development full-steam, bring in some Nobel laureates to fill a few board slots, and retain the local university for additional perspective. Your burn rate still makes your heart stutter every payroll, but cash flow is somewhat predictable and you’ve also spun-off three new products.

You’ve survived for 17 months, but you have yet to make a real sales call to any genuine customer (besides Aunt Rose). Then, you discover two other players in the market with competing products. Congratulations … you’ve given birth to a healthy Technology which lacks a Company infrastructure.

There are variations on the above scenarios, but they are far less common. For example, in Scenario 1, consider building a world-class Company with eight retired Fortune 100 execs. You then might have a strong Company (with strong backing) with nothing to sell.

So which approach is right for you: Technology or Company?

A. Established Markets Suggest A “Technology” Approach

If your technology serves a definite need in existing markets, chances are good that there are others that already have mature infrastructures – it probably doesn’t make sense to create your own, so a Technology approach probably makes sense. For example, if you came up with the next best cell phone, you’re better off perfecting the technology and, concurrently, begin discussions regarding licensing, channel partners, distribution arrangements and even plant a few seeds for an early exit. The last thing you should consider, in this case, is to build your own sales or service force. Even if your technology is the hands-down leader, exploiting an existing channel or considering a license model could be far more lucrative than building your own major infrastructure.

B. Technologies Which Require Customization Tend Towards A “Company” Approach

If your technology is wrapped around unique intellectual property that is highly customized or involves a non-trivial installation process, you’ll probably need to look at a Company approach. An example might be a technology that solves a new problem in a relatively new industry. You’ll probably need to hire key personnel to support initial sales and service calls, i.e., you need a Company infrastructure as much as you need the Technology.

Most start-up firms begin (and unfortunately end) trying the Company approach, and do not give the Technology approach fair consideration. Their egos simply get in the way and so they are driven more by the dream of building a great organization rather than a great return.

So what’s the right answer?

1. Give genuine consideration to both approaches. Write a mini-business plan for both and update them regularly. If you don’t know how to plan one or the other, get help.

2. Start down the Technology approach first. In virtually all start-ups, it’s probably the lowest risk approach with the lowest burn rate.

3. Launch the Company approach only after exhausting all options on the Technology path. Don’t close the doors on licensing discussions and channel partners … you’ll probably need them later.

4. Once you’re up and running (using either approach), revisit your market segmentation. Find an attractive slice of the market that is still untapped, then go back to step 1 and revisit your decision for this particular segment.

5. When it’s time to exit, look at your list of partners from the Technology approach. Don’t be surprised if you find your potential suitors on that list.