Category Archives: venture

Boston Display Ecosystem

I was reminded by the announcement that QD Vision had raised an additional $22 million for development of quantum-dot displays of the significant display technology ecosystem around Boston.  A refresher on some of the players:

  • E Ink.  The most-visible star of the system.  Now Taiwanese-owned (note the acquirer changed their identity to E Ink!).  Proved that persistence can pay off, especially if you enable some critical functionality– in their case, high contrast, low power for e-books.
  • Kopin. Also an established (Nasdaq:KOPN) player, supplies miniature LCD displays based on a unique crystalline Silicon lift-off process.
  • QD Vision. With its latest announcement, QDV is returning to its “roots”– seeking to build displays based on wavelength-tuned emission from quantum dots.  Note they have demonstrated/discussed other display applications including better LED backlights, and better color filters as well.
  • Pixtronix.  Founded by ex MIT prof. Nesbitt Hagood, Pixtronix has been relatively quiet.  So I was pleasantly surprised to find videos of a display they built with Hitachi (Japanese, sorry) — based on MEMS shutters at every pixel! [update: raised another $4M in June 2011]
  • Laser Light Engines. A spin-off from contract research firm Physical Sciences Corp,  Salem NH-based LLE is developing ultra-high brightness laser engines to power cinema projectors.  They recently closed a $13 million B-round with IMAX as one of the investors.
  • Luminus Devices. Though not a display company directly, Luminus (another MIT spin-off) supplies high-brightness LEDs for projectors.
One that got away was Iridigm, which started in Boston by Mark Miles (initial prototypes were built at MIT), and subsequently moved to Silicon Valley.  Qualcomm acquired them in 2004 and has subsequently poured enormous resources into commercialization of this interferometric MEMS technology.  The latest promo videos are looking very impressive!
Anyone I missed?
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Soured on Components?

I got an email from a tech entrepreneur with deep experience in silicon and imaging today: “Uh oh, even Matthias Wagner is getting dubious about components?  In that case, the venture guys must be really down on components!

My response:

On the contrary– I love components!  However, they don’t always make good early-stage investments [have been meaning to start a rather sparse list of novel component startups that were successful early-stage investments].  Or rather, the way these investments are done often causes them to be bad investments for the first guys in (including the founding team).  I see the same pattern repeated over and over:

  • Interesting core technology, multiple potential markets.
  • For sake of raising VC, focus on the biggest, fastest-growing market.
  • Because you need to move fast, you hire a complete team from chip to systems to sales to several VPs.
  • Burn a ton of money very quickly.
  • Core component/materials take 5x longer than the initial optimistic estimate.
    • Any more than the 2-3 engineers working on this core piece won’t speed it up.
  • Cut your team down.  If you’re lucky, raise a Series B at a crushing down valuation.
  • Refocus on a less ambitious first market, just to ship something.
  • If lucky and stingy — and the team is still motivated– live to see another day.
I guess VCs and entrepreneurs have to understand the chain of risks with the core technology [the types of failures are almost predictable, because every new device seems to hit them], and agree to a smaller initial “launch market” where you can prove a very simple version of your platform.. even if the headline numbers look a lot smaller.
[From recent conversations with component VCs left standing in the Boston area, I think a new lifecycle model is emerging that addresses this.  However, whenever a venture gets “hot,” discipline goes by the wayside and A-rounds escalate.]

Beware – “Advisors” Slide

It’s instant credibility.  For the fresh entrepreneur.  For the veteran entrepreneur starting in a new area.  The Advisors slide.  I have used them.  I have been used on them.  I have made mistakes on both ends.  Some cautions…

As an entrepreneur you probably know exactly what you are building.  You have very few cycles to spare.  The last thing you are looking for is hours on end hearing from an “expert” why this or that is impossible, has been tried before, etc.

But to show VCs that you have tapped the experts in the technology, market, etc. you need a couple of advisor names.  You network to a few, meet for coffee and a chat, even send a slide deck.  You ask them to be an advisor, with some vague talk about equity.  They say “sure,” and you put them on your slide, and get on with your many other tasks.

I have learned this is a mistake.

For many entrepreneurs the threshold to agreeing to be an “Advisor” is pretty low.  I enjoy helping other entrepreneurs.  I don’t do it based on whether I believe its a $1B opportunity.  Helping someone build something new and interesting, and learning the ropes– that’s good enough for me and many others.

The problem comes when the advisor gets a reference call from a VC.  The truth is anything short of “I love the team, I love the business, I want to invest and/or work with them” on that call is bad for the company.  Even having a big name say “they seem like smart guys, not sure exactly what their current approach is” doesn’t do much for you.

I remember getting an echo of so-so feedback (through a VC) from an Advisor in my first company.  I was pissed.  But in truth I had spent little time actually talking through the business, getting advice and making him feel “heard.”

Some advice for entrepreneurs:

  • Clearly separate “advisor” from “Advisor.”  It’s great to have lots of advisors.  But list only capital-A Advisors in your slide deck/website.
  • Make the threshold for official Advisors high:
    • A certain number of hours per month; per week leading up to fundraising.
    • Make them a shareholder.
      • Preferably with cash out of pocket so they have skin in the game… and you have tested their commitment to your vision.
  • Prep Advisors well before you pitch VCs: walk through the pitch, in person, and answer questions/objections.  Either walk away agreeing it’s good, or take them off your slide.

Some advice for potential advisors:

  • Keep an open door for entrepreneurs seeking advice.  It’s good for the community.
  • Draw a clear distinction between informal advice and being an Advisor.  Before agreeing to the latter answer: would I be comfortable sitting with the team at a VC pitch?
    • If not, tell the team.  Don’t take stock.  Give them occasional advice if you have time.
    • If so, get a stake in the company.  Work with the team to really understand the business.  And get ready to take reference calls as if they were a continuation of the pitch.

Advantage: Cost?

(Could be subtitled: Learning from Some Past Mistakes!)

Have a Series A startup that makes a new kind of device for a hot market?  Photovoltaics, displays, 2D or 3D image sensors, intertial sensors, batteries, solid-state lighting, FLASH memory replacement?  Is “• lower cost” a bullet point on Slide 1 of your pitch?  That’s probably a mistake– unless you have a comfortable 10x cost advantage on the competition.

As I was reviewing my venture experiences & observations, it dawned on me that this low-cost promise to customers and investors is the root of many, if not most problems with venture-backed device startups.  It is such a tempting promise to make, however.  Who doesn’t like the concept of “plug-compatible, half the price?”  You should have some enthusiastic customers.  Hiring a sales team won’t be much of an effort.  So, VCs love it too– and let’s just admit it: they are the primary customer of an early-stage device venture (they buy a lot of stock!).

The problem with the promise is that it sets you up for a race you can almost certainly not win.  The rare case that “wins” is where a big sucker buys the company in a competitive frenzy.  The more likely case is that you run out of money somewhere on this trajectory:

The Timeline

  • Discovery – “it works!” in the lab and it looks simple to manufacture.  Claim big cost/price advantage over last-generation incumbent.
  • First hiccup – choose from hiccup sources below.  Adds 25% to cost to fix it, and 1 year to development.
  • Second hiccup – same deal, over again.
  • Finally ready to go!
  • Low volume production start at high cost… catch up with incumbent with volume, experience.

Each time a hiccup hits, you’ll observe with increasing dread the falling prices of the incumbent technology.  In a hot market, you better reckon with 20%/year price reductions.  So if your original 3-year commercialization plan turns into 5 (optimistic), the incumbent has dropped prices by 67%.  You’ve added 56% to your anticipated costs.  That has eaten up a 5x initial cost advantage.  Add a 2x margin, and you see where my 10x rule of thumb comes from!

Hiccups
For device startups, there are three typical hiccups (besides the technology turning out not to work).  If you’re lucky, you only experience one.  More likely, you’ll deal with two or three.  My entirely redundant illustration:

  • Operating condition failure.  Doesn’t work properly at temperature, voltage, vibration, etc.
  • Reliability failure.  Doesn’t survive accelerated testing.
  • Yield failure.  Doesn’t yield well off the production line.

Manufacturing Scale
By the time you are ready, the minimum manufacturing scale has grown significantly.  This means a bigger manufacturing investment, and even higher early costs.  The resulting cumulative losses in the early production years are often unsustainable.  Any reaction by incumbents can make this gap significantly more painful.

In the Obama era the strategy to fill this gap (for solar or batteries, at least) seems to be to insist the taxpayer should fund it.  That’s not something a new venture can count on.

Related/Resulting Venture Problems
There are a couple of potentially fatal issues that result from the “race for cost advantage.”  They can be the basis for future posts here.  Briefly, they are:

  • Premature bulk-up / spending.  Have you seen the ventures with only 5 possible industrial customers for their device, no beta units to ship, but featured in the New York Times and other “hot tech” outlets?  It’s a symptom of a team that has grown too quickly and in the wrong dimensions.
  • Wobbly technology tower.  Running too fast causes you to assume too many things, and work on conjecture.  You fail to do properly designed experiments.  You fail to measure capabilities. You develop in parallel to mate up with high-risk paths at fantasy dates.  One result is that when there is a hiccup, you often end up doing enormous amounts of work over again instead of having a good foundation to build off of.

So – What?
My advice is to find an axis other than cost on which you can compete– even if in only a niche of the overall market you are targeting.  If your technology’s only advantage is lower cost, think twice about starting in a hot market (if it’s a stagnant market, and you can create a new segment, it’s a different story).  Ideally, you have a near-term “performance” story, and a long-term cost advantage story that can be realized as volume grows.

Venture Pay Reset?

Looking at a piece in the Wall Street Journal covering one of the annual venture compensation studies, I was struck by how out of touch venture CEO pay has become with results.  In ways, it’s simply a scaled down model of what has occurred in public companies.  But there is more to it.

Something happened to the venture industry after 2000.  And it didn’t just happen to the greedy VCs who are often criticized for oversized funds with 2% “I buy a new plane whether you get a return or not” management fees.

The same mentality set in with CEOs and management teams.  Instead of a big exit being everyone’s singular focus, it became a “nice to have.”  Part of this was just facing up to reality, of course.  But part of it grew from a circuit of recruiters and roving “professional venture CEOs“– and of course the compensation surveys themselves.  To hire a top-quality CEO, the story goes, you need to pay above-average salaries (especially if you are in an expensive area like CA, MA, NY!).

I have seen it first hand, and yes, participated in it.  It’s infectious.  One popular rationale is “it’s the VCs money, and they make a $1M+ per year regardless– why should it be different for us?!

That is a far cry from when we were starting Aegis Lightwave in 1999, paying ourselves living expenses, and going down to zero for months on end when cash got short.  Everyone on the team got the idea, and counted pennies.  That frugal culture has persisted at Aegis, and helped make it consistently profitable.

The Web 2.0 generation of startups is resetting expectations— both for VCs and for entrepreneurs.  Let’s hope it translates to other traditional VC-backed industries.

Device Death Blossom

It looks like a beautiful flower.  Sniff it too long and you’ll have plenty of time to dream about it.

I have seen probably a dozen component venture presentations (I just found one of my own!) that have what I call the “Death Blossom” slide.  Apologies to those who aren’t B-Grade SciFi fans and have seen The Last Starfighter.  The GunStar (wow, I remember I was blown away by those graphics!) is equipped with the “Death Blossom” feature which spins the ship like mad and fires its missiles to vaporize every bad guy in sight.

Ventures formed around a materials science or novel device breakthrough often imply they can do the same.  More likely, they will spin out of control and launch a battery of very expensive missiles into deep space.

The Standard Optoelectronic Death Blossom

The Standard Optoelectronic Death Blossom

Yes, I’m picking on optoelectronics for this one– since I’m familiar with building this diagram myself 12 years ago.  The one where you have a device that allows some exchange between electrons and photons… and it can do everything better than what’s in the market today!

The temptation, particularly among first-time entrepreneurs, is to develop the “platform” and license off applications to companies who actually build things.  This may work in pharmaceuticals– I am no expert on that market– but it certainly does not work in optoelectronic devices.

The simple truth is that to commercialize a single device, with a single advantage over the incumbent technology, typically takes 5-10 years.  It requires an incredibly focused, systematic effort around a specific set of requirements.  Usually you need to make a lot of system trade-offs around the peculiarities of the new device– and hopefully to bring its advantage to the fore.

So pick a market for your device that is big enough at the system level, and can grow quickly. Pick an axis along which to compete— and unless you are beating the competition by 5-10x on cost at the device level, don’t pick cost (subject of future post).  Put the blueprints for world domination of every other sector into your “future ventures” file.  And start working!

“Lean” Hardware Startups

Jeff Bussgang of FlyBridge Ventures wrote a good post today about application of “lean startup” concepts to capital-intensive ventures.  It’s something I have been contemplating quite a bit after having started and run two optoelectronic system ventures, and then dipped my toes in the software world.

Obviously there are some significant differences in what gates progress in web/SaaS/software and component/system ventures.  Whereas risk in web start-ups resides mainly in the market (or “product-market fit”), most component ventures are gated by technical risk.  Often market risk can be reduced very quickly (A/B tests, test campaigns, etc.), and progress measured on a daily basis (e.g. conversion rates).  In components, risk reduction cycles (often it’s done using the ur-A/B test, “designed experiments”) may take weeks or months.

As CEO, it’s tough to go to a board meeting and say “the wafers are still in the fab, just like last time,” so you are inclined to make other forms of progress.

The most insidious form of artificial progress is hiring.  At the early stages, it’s usually a small, tight team that is doing all the core risk reduction.  Hiring additional layers before you reach well-defined technology or product gates is a recipe for painful down rounds.  It takes time, it integrates cash burn, and takes an emotional toll when you have high-paid, high-powered applications, systems, and sales people sitting on their hands.  Then you have more cash burn and endure more pain when you pivot the company and have to replace many of those layers.

I like Jeff’s (and FlyBridge’s) model of $500,000 seed money to build a prototype.  But even a Series A in these ventures typically has lots of risk left in it — and spending must be gated according to core development milestones.