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Entrepreneurship 101: From Idea to Start-up

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Many of us engineers, if given the opportunity, surely would like to start our own businesses.

Milton Chang, Incubic Management LLC

During the telecom bubble of the 1990s, the photonics industry was euphoric, with people barely out of school getting funded to start companies. But the free economy is simply too efficient to allow a company to succeed unless it offers overwhelming competitive advantages to challenge the establishment. By the early part of 2000, most of the “bubble companies” had disappeared.

Most bubble companies had capable technologists as well as the technology to improve some aspects of an existing product, but what they didn’t consider is that it takes more than technology to break into a market. Customers, especially OEM customers, will not switch to something new if it offers only a few advantages because they worry about the long-term performance of a new product, and they worry whether the start-up company will survive when price cutting occurs – as it invariably does. Existing suppliers will not sit still either but will counter with technology and other capability features, which makes life difficult for the newcomer.

The number of photonics start-ups has subsided significantly since the heady days of the late ’90s – not from a lack of people interested in starting companies, but from a lack of investor interest after having been burned by the telecom bubble. For the good of the photonics industry, we must get investors back by having a higher percentage of start-up companies succeed.

What it is, what it isn’t

Venture capitalists interested in this general technology area have shifted in the meantime away from telecom into nanotech, energy, biotech and medical, semiconductor and display fields. As in the past, there is undoubtedly a continuous stream of small business innovation research companies being started on a shoestring to develop niche photonics technologies early in their commercialization cycle.

The telecom era has given the entrepreneurs in our industry a wrong impression of what entrepreneurship is all about. During the bubble, there was a great deal of confusion about the distinction between “entrepreneurship” and “the ability to raise a lot of money.” By definition, an entrepreneur is “an individual who creates value in an economy by moving resources out of areas of low productivity into areas of high productivity and greater yield.” It is incredible to me, even today, that people still want to raise a lot of money to pursue an unproven product with unsubstantiated market potential and with a business plan that just says, “We are a bunch of smart technical guys.”

The current funding environment, however, is very difficult, aggravated by today’s economic turmoil. According to the research by Mark V. Cannice, associate professor of entrepreneurship at the University of San Francisco, Silicon Valley venture capitalists’ confidence has declined to its lowest level in five years. He added that from “a Darwinian perspective … the current harsh environment will help identify the strongest firms with sustainable business models that make for good venture investment.” What that says is that a really outstanding investment opportunity may just get funded, and I suspect Cannice’s comments are applicable pretty much everywhere in the US.

There is no denying that, at the moment, it is difficult even for business plans that make sense to get funding. Venture capitalists are limiting their funding mostly to companies in their portfolio, having stopped making capital calls to their investors for more than a year now to avoid the embarrassment that the investors may not be able to pay up. Angel investors have all but disappeared from making venture investments. They realize there is no need to gamble when, with a lot of cash, they can buy public company stock at valuations not much more than one-time revenue and sometimes even at less than book value. The good news is that, like the bubble, this too will pass.

Your business model

In starting a business today or at any time, you must ascertain that you have a unique product idea with features not easily surpassed by existing products. Then combine that product idea with adequate financial backing, a viable model to make your business defensible and a team with business experience to execute your plans with speed and effectiveness. Developing a solid business plan with customers’ input and thorough market research is a must before you start, and even that is not a guarantee for success.

What about the business model? Thinking back to before my semiretirement, I would say my Newport and New Focus experiences provide a useful generalization on how an engineer inexperienced in business could start a company. Both companies were started with little capital and built over time by working hard and living within our means. It took Newport nearly 14 years and New Focus 10 to become public companies. In the meantime, we learned a great deal about running a business, gaining the experience and credibility, which allowed us to get the financial resources to capitalize on opportunities that invariably would occur in the photonics arena. “Start small and build over time” is intrinsically lower risk compared to the “horse race” approach of trying to gain first-mover advantage by building out the entire company from the start, which could lead to an all-or-nothing outcome.

A logical question you might ask is, “What if my idea has a short market window?” Market windows are rarely clear-cut or well-defined. It can be argued that taking an orderly approach could avoid the pitfalls of being too hasty and actually more than make up for the lost time. If market windows were critical to doing well, we would have seen many more start-up companies that had instant success.

The prototype model

You can improve your chances of success by setting goals consistent with the number of necessary materials you have on hand. If indeed the market window is short, then you’ll have little choice but to proceed with the model of “raise as much money as possible to build the company as quickly as possible.” If you’re an engineer starting a company for the first time, you must also be prepared to give up control, because this type of start-up needs an experienced CEO (which is a very rare breed); there is no time for on-the-job training. You also should be prepared to give up substantial ownership of the company to share with the other professionals needed to build the company … and, of course, to give up a fair share of the company to investors for the substantial funds they provide.

Even if you have a “hot” idea, you still want to proceed with building the company in steps, concentrating on one thing at a time. You should do just enough to pave the way for later steps while you focus your limited resources on near-term goals. The first step may very well be to validate that the product can be made and that the business model makes sense. Getting a leading indicator on how your business might fare based on the “prototype business” could spare the expense of building out the company only to find that it is a wild goose chase. This is not unlike what we do in engineering: We build a prototype to sort out unanticipated problems before committing major resources toward putting a design into production.

Once you have your product in hand, you will be able to get concrete feedback; with that, you will be in a position to test the market with a limited production run targeted toward a well-defined segment of the market. With solid data on costs, performance needs and even a few potentially big orders, you will be in the position to make an informed decision on the next steps. If a big success appears to be in the making, you will be able to use the data to convince appropriate investors to give you additional funds to build out the rest of the company at an attractive valuation. If the opportunity appears to be modest, you may decide to get acquired. I do not mean to imply that getting acquired is easy, but it can make sense from a value creation point of view. It can be more efficient to make use of an existing distribution channel and business infrastructure to bring a product to market than it is to start from scratch, as in a start-up company.

What is really important to remember is the definition of entrepreneurship: maximizing the value that is being created. Ultimately, the financial reward for an entrepreneur is tied to the value that is being created by the business. This could very well imply that, in most cases, the “prototype” approach is what would provide technical founders the highest financial rewards, because they are most productive working on familiar ground.

The prototype model makes good sense. Having an explicit strategy to focus on will give you the confidence to proceed in an orderly manner without falling into the temptation to “move just a little faster” – which will increase risk by building overhead that could be delayed.

We can bring investors back to the photonics field if companies work synergistically and do things right.

Meet the author

Milton Chang is semiretired, working with portfolio companies and mentoring entrepreneurs. He has been an investor in the photonics industry and was CEO and president of Newport Corp. and New Focus Inc. prior to forming Incubic, a venture capital firm. Milton graduated from the University of Illinois and earned his PhD in electrical engineering from Caltech. He is a fellow of the IEEE, LIA and OSA, and was past president of LIA and LEOS. He is a Caltech trustee, a member of the Committee of 100 and a director of Precision Photonics.

Photonics Spectra
Jun 2009
CommunicationsenergyFeaturesindustrialOEMsphotonics industrytechnologists

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