Tag 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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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.

Managing Professor Founders

Professor co-founders or advisors can be great assets early in a venture’s life; at the same time they can undermine the management team if not managed properly.

I co-founded one company with professors at Princeton (Aegis Lightwave, which has grown into the leader in optical communications monitoring).  We had a very good experience there.  However, I have watched many ventures struggle with professors as founders and members of the Board.

First, the potential advantages of academic co-founders:

  • Access to IP.  Certainly helps to have the originating professor cooperating when licensing from a university.  Usually important for funding… though rarely is the IP developed in the university sufficient to build a product or company (sometimes it turns out to be completely irrelevant!).
  • Cachet with Investors.  Having a “world-leading expert” on the founding team gives a venture a lot of credibility (sometimes unwarranted) with investors.  VCs always want exclusive access to something valuable, and when you’ve got the world’s leading expert in nanoelectronics on your team, it feels like you cornered the market.
  • Customer Access.  With a new technology in lab prototype stage, it’s much easier to get a meeting with Panasonic if your team includes an MIT professor… again cachet and “credibility.”  Sometimes new opportunities even come in through professors who are approached by industry as consultants.
  • Government Dollars.  Often professors are already funded by agencies that can offer grants for start-ups, including BAAs, SBIRs and STTRs (where the university can be a partner).  Remember academics spend a lot of their time raising money and have a network of relationships.
  • Recruiting.  A prof who has been running a group for a decade or two has churned out a great network of PhDs and MSs who have gotten industry experience and can be attracted back to a venture co-founded by the professor.
  • Technical Radar.  While prof’s are not generally good as part of the core technical team (see below), they are heavily networked and at the edges, making them a good radar for technology threats and opportunities.

Now, some of the things to watch out for:

  • Cachet with Investors.  Yes, I just listed that as an advantage.  If VCs invested in the professor, and not the company, it can undermine the venture CEO and management team.  Professors are used to lecturing, and being the “smartest guy in the room.”  If they don’t understand that a venture boardroom isn’t a lecture hall, get them out of the room.
  • Influence over Tech Team.  Often many of the early team members are a co-founding professor’s former PhD students.  They have great admiration and respect for the professor, and may have just spent 4 years with him or her as their boss.  When the prof drops in for lunch and says “you should try this,” it can lead to confusion.  It’s not unlike a CTO messing with the engineering team while the VP Engineering is traveling.
  • Overhyping the Idea.  Professors are about ideas.  They like to sell them.  And sometimes oversell them- as the solution to everything.  Unfortunately you (the CEO) are the one who has to deliver on those promises.  Good professor/founders understand that an idea/lab demo is 10% (at most) of the mix in a successful venture.
  • Science Smarts != Business Smarts.  I have seen situations where founder/professors get very involved in architecting the business, and come up with cute business structures to keep control of IP, voting, etc.  Beware in particular of attempts to divvy up IP (and attention) between a “portfolio” of companies!

Some suggestions when working with a founder/professor:

  • Technical Board.  Even if they sit on the Board of Directors, maintain a separate, regular meeting to discuss technology and product development with the team at a “CTO” level.  The VP Engineering and CEO should be present.  Address questions and concerns in this session, and make it clear the BoD meeting is not the right forum for this.
  • Strong VP Engineering.  A strong VP Engineering focused on process and execution helps quickly separate the CTO-like role of the professor (long-term technology vision, radar) from product development.  The team should have no question about the weekly plan, even after the prof drops in for a visit.
  • Regular One-on-Ones.  Just as one should do with other Board members, spend time over drinks with the professor/founder to talk through differences.  Feelings are even more important here because you are managing their “creation,” not just their money.
  • CEO Negotiates Licenses.  The prof should not be involved in negotiating any licenses from the university.  This negotiation should be done by someone with only the company’s objectives in mind.  Universities have various ways of parceling out royalties to professors and you don’t want someone with a conflict negotiating the deal.

A well-managed relationship with a professor/founder can be an incredibly productive one!

Another Energy IPO (Hopeful)

The heavily-covered IPO filing by solar panel maker Solyndra (some facts here from Greentech Media) got me to look at the numbers in the “new energy” market again.  They remind me of another science-driven market a decade ago: optical telecom components.  I was right in the middle of that one.

What are some of the features they might have in common?

  • Massive venture capital investments.
  • Dozens of competitors funded.
  • Highly unpredictable, expensive research and development.
  • Negative gross margins – we’ll make it up in volume.
  • Extremely challenging reliability and lifetime requirements.
  • A long, heavily fluctuating supply chain.
  • Calls for government spending when actual customers don’t want to pay.
  • Chinese competitors keep cutting costs of “old generation” products.

The one thing optical communications had going for it, that new energy does not: end users knew they wanted it because it clearly made life better (and possibly even more productive).  Everyone wants more channels, more broadband, cheaper phone service, video on demand, cheaper cloud services.  Most electricity consumers don’t care what color that electron is, as long as it’s cheap.  And, unfortunately, the winds are increasingly against the taxpayer funding green electrons to be delivered at the same price as dirty ones.

Some specifics on Solyndra:
They are the second high-profile cleantech IPO filing this year, and the second one to do so with negative gross margins on products.  A123 is the other.  The idea is that as you scale revenue, you break into positive territory.  If you can maintain pricing.  A quick plot of some critical lines – extrapolated by implication and without a responsible “model:”

The good news is that the (highly unscientific) lines do actually converge.  However, they converge at an annual revenue run rate of about $1.4 billion.  At the 2009 Solyndra selling price of $3.42/Watt, this can’t be provided by Fab 1 and Phase 1 of Fab 2 (to be completed 2012H1).  Of course there are many scenarios I have left out (both positive and negative).

All that said, I salute the team who built a very difficult technology from the lab concept demo to a company that is probably clicking along at a > $200M run rate.  It is no small feat, nor is raising the very large amount of money required to pull it off!  And I hope they get to profit territory soon!