Category Archives: Innovation

The crisis and the American model

I seldom do it this way. I will not translate my French post about a personal analysis of the crisis and the American model. A crisis which is much more general than the financial and economic crisis. It is also a crisis of creativity, invention and innovation at least in Europe. So we look at the USA for a model and solutions. This creates tensions. Many of my friends and colleagues disagree with my fascination for the USA, which by the way, is limited to a very small number of things!

So I give a few directions including a previous post on the book by Lee Smolin, The Trouble with Physics. Go to French or if you do not, at least go and watch No One Knows About Persian Cats. Where’s the link? I think our crisis is about individuals and society, the inability of the university, of the school, of the family, of the society in general to let people express their dreams, their self-confidence, their creativity and their inventiveness. The pressure is so high that (self-)censorhsip and fraud prevail sometimes.

You may think I am out of my mind. So let me finish with the way I finished my book by quoting Wilhelm Reich from “Listen, Little Man”. A small essay by the number of pages, a big one in the impact it creates. “I want to tell you something, Little Man; you lost the meaning of what is best inside yourself. You strangled it. You kill it wherever you find it inside others, inside your children, inside your wife, inside your husband, inside your father and inside your mother. You are little and you want to remain little.” The Little Man, it’s you, it’s me. The Little Man is afraid, he only dreams of normality; it is inside all of us. We hide under the umbrella of authority and do not see our freedom anymore. Nothing comes without effort, without risk, without failure sometimes. “You look for happiness, but you prefer security, even at the cost of your spinal cord, even at the cost of your life”.

I am quite convinced that our crisis at least in Europe is about self-confidence, trust, creativity, inventiveness and innovation. It has not much to do with the technology, the economy and a lot to do with how individuals can grow in the society. If you followed me until now, thanks! Please, please, react!

The Good Old Days

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Two pieces of news caught recently my attention. One is entitled Frank Quattrone, Star Banker of Technology Ventures, Talks Wistfully of the Good Old Days—Before Netscape’s IPO.

The other one is less nostalgic because of the web site name, which I quite like: You’re in Deep Chip Now.

Here is the full text captured from the site:

I will not comment this but let me come back on Quattrone. Quattrone was a star of the IPO world as you may read from this Xconomy blog. What is striking is that in the last 8 years, following the Internet bubble, there has been less venture capital, fewer IPOs. The reasons are many. But the key question remains: are we facing a major innovation crisis? After the transistor in the 60’s, the computer in the 70’s and the PC in the 80’s, the Internet and mobile communications in the 90’s, what have the 00’s given us? And what about the 10’s… I do not have any answer. What about you?

What Have VCs Really Done for Innovation?

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“What Have VCs Really Done for Innovation?” This is the title of a post by Vivek Wadhwa dated September 20. You can find the full account on Techcrunch. I have to admit I was not happy with the content. Instead of saying immediatly why, I will let you read comments made by others as I shared their point of view. You can also read the post and all the comments, but they are numerous!

So, for example, I agreed with the following three comments:

by Ashok
It is true that the claims made by VCs are not realistic and vastly exaggerated. But, at the same time, we cannot forget that they have played key role in many innovative fields. By its very nature, a Venture Capitalist will invest only in a new promising project where he can hope to earn a handsome profit. There is nothing wrong in a VC selectively investing in projects. After all, we have to appreciate that for every one grand success, a VC may have seen 9 failures losing his money invested in projects which could not lead to big money. So, you have to judge the role of VCs also by their failed projects. Who would like to invest in a project which is likely to fail? Yet, it is a fact that a big percentage of projected financed by VCs fail. Does it not show the high risk involved in what VCs do? This being the position, what is wrong if they are selective in financing the projects? Therefore, the author’s observations “The fact is that VC’s follow innovation, they don’t lead. They go where they smell blood.” are not fully justified.
What about their failed projects? Did they not smell blood? Then why did they invest? Why did they fail then?
Unfortunately, the author has tried to present one-sided story without taking into consideration the problems which VCs might be facing.
Of course, at the cost of repetition, I would say that the tall claims made by the VCs are also not correct. To conclude, it is neither black nor white; it is some shade of grey. Truth lies somewhere in between the two extremes

then by Chris Yeh
This is one of the most dangerous and wrong-headed posts that I have read all year. And I’m flabbergasted by the lack of critical thinking displayed in the comments section.
There is definite truth to some of what Vivek has to say. The NVCA’s estimates are bogus, because they equate investing in a company with being responsible for its success. This is an egregiously egotistical assumption.
It may very well be true that the venture industry as a whole trails index investing. It’s hard to pick winners. But so does the entire actively managed mutual fund industry.
But the statement that “VCs at best have little to no impact on these companies and at worst have a negative impact” is absurd.
First, there is a major survivorship bias problem with the data. By interviewing successful companies, the study fails to prove whether VC makes success more or less likely. All it says is that the majority of successful new businesses in the US do not rely on VC.
A number of commentators seem to be of the impression that VCs make easy money by investing in companies after all the risk has been removed by the entrepreneur. This is talking out of both sides of one’s mouth. If the VCs aren’t taking risks, then how can they be delivering sub-par returns? By definition, they must be taking risks.
Venture capital plays an important role in the startup ecosystem. It provides high-risk equity capital to startup companies. Not every company can be a bootstrapped consumer Internet company. Many important businesses (semiconductors, hardware, biotech) require significant up-front capital. If VCs went away, would there be enough funding for these business? Do you seriously think banks would start lending to these companies?
I also wager that most of the commentators pooh-poohing VC would be glad to accept funding for their startups.

finally by ethanboss
… Of course there are VCs that don’t add value. As there are entrepreneurs who fail.: most of them. How ridiculous to claim that Sergey and Brin had already succeeded when KP and Sequoia invested. That shows a total lack of understanding of what it takes to build companies.
Also, I suppose capital would also grow on the trees for these “innovative” companies to go and harvest, so there is no need for VCs…
In the old days, when capital was hard to access there were some great entrepreneurs (few) that could get to profits without much help and capital. Some still do it but are the exception. The real world is a little different. You need capital and help with networks and other things to build a LARGE innovative company. Those things don’t grow on trees.

so here is the comment I made on September 25.

Vivek

I agree with many other people that you are too single-minded. I do not fully disagree with some elements of your analysis, which explains why you have so much support, BUT…

I was once a venture capitalist and I have neither an MBA nor a law degree but engineering degrees including a PhD and more importantly two years spent in Silicon Valley where I developed a passion for innovation and start-ups which I translated in becoming a VC.

One more fact in addition to the other contributions:

Surprisingly, Bill Gates had venture capitalists: this is taken from Microsoft IPO prospectus: “Mr. Marquardt has been a director of the Company since 1981. Since 1980, Mr. Marquardt has been a general partner of TVI Management. He has been with TVI Management since 1980. He is also a director of Archive Corporation and Sun Microsystems, Inc.” TVI had about 6% of Microsoft shares before the IPO.

Now what have VCs really done for innovation? You would have been more credible by saying what are they doing. But if you use the past, let me put some historical perspective:

– If investors (VC was not developed yet) had not funded Fairchild in 1957, Intel in 1968, Silicon Valley may not exist as it is. Your friend Vinod is maybe an exception, but there were many others. Arthur Rock helped in funding or funded directly Fairchild, Intel, Apple Computers.

– The story of Genentech is well-known (go on my blog for more if you wish): when Bob Swanson, a former VC at KP became convinced biotech had a future, he first convinced Boyer, the researcher, then his former colleague Tom Perkins to try. Both were skeptical, so you are right Entrepreneurs are in the driving seat, but without the inventor and the investor, Genentech and then the biotech industry may not have existed. The innovation did not exist yet and the VCs contributed a lot.

– Who do you think were the first VCs such as Gene Kleiner and Don Valentine and many others? They were former entrepreneurs who had the vision that funding the next generation would fuel innovation.

I am also doing an analysis of startups created with Stanford technology or by Stanford Alumini. The surprising fact is that so far about 30% of the companies (I have a total of 2’700) were funded by VCs. It does not mean VCs were responsible for their success, but they had their contribution (in the group are companies such as Cisco, Yahoo, eBay, Google, Rambus, Atheros and so many others)

Paul Graham says that for innovation, you just need nerds and rich people. I agree with him. The nerd is the brain and the investor is the blood. And then both will need a team, managers, employees which will constitute the full body. VCs do not contribute to inventions, but they help in their commercialization, which is I think the definition of innovation.

You are not only singled minded but I think you are hurting the innovation ecosystem. I see too many entrepreneurs and future entrepreneurs scared with investors because they focus on your point of view. Of course, there have been terrible stories. But do not forget entrepreneurs need resources to succeed. Repeat entrepreneurs may bypass investors, business angels may help when resources are not too huge (maybe like in software though this is not even always true). But what about young people who develop semiconductors, biotechnologies, green technologies and have no money.

Money is never cheap or fun. But you need it. Let me finish with two quotes which show that I support some of your views but I still disagree with your overall vision.

In the book Founders at Work, one entrepreneur says about investors: “You can’t live with them, you can’t live without them” and even better Robert Noyce, Intel’s founders: “Look around who the heroes are. They aren’t lawyers, nor are they even so much the financiers. They’re the guys who start companies”

cheers

Herve

Sweden and start-ups

Entrepreneurs and Revolutions

Three Things Every Startup Should Do

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Xconomy is becoming one of my favorite web sites. Here is a short post about three things every startup should do

—Focus on one thing. Whether you make a location-based tracking device, an energy-efficient motor, or a social network for job-seekers, carve out the specific market you’re going after. And then make your product a must-have for that market, using every possible competitive advantage you have. Do what you do better than anyone else, but don’t try to do it all.
—Work on what you’re passionate about. Every successful startup has a story about why it does what it does. That story should ring true with the founders’ backgrounds and expertise. Investors (and customers) can tell right away if a company representative is going through the motions.
—Cut to the chase. What is your company doing that’s special? How is it different from your competitors? People will decide whether your company sounds promising in the first 30 seconds of your pitch, so make sure you answer those questions upfront.

I will be in Stockholm next week delivering 2 talks on start-ups, one being about success and failure (Stockholm Innovation), the other one about what we still have to learn from the USA (Av slutningskonferens 2009). I certainly could have used these 3 points.

Entrepreneurship during recession and economic crisis.

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Does the crisis have an impact on entrepreneurship. This was the question I was asked by Manuela Salvi on the Swiss Radio (RSR) today. You can listen to my answer (in French) by ckicking here.

Here is my answer in more detail: reality is complex and I am not aware of complete studies on the topic. However the Kauffman foundation has published an interesting report on the topic: Entrepreneurs and Recessions: Do Downturns Matter?

The data set used for this study was a comprehensive list of all 8,464 companies that have gone public on U.S. markets from 1975 to 2006. There were nine such [recession] periods in the timeframe in question: 1907–1908, 1918–1921, 1929–1939, 1953–1954, 1957–1958, 1973–1975, 1980–1982, 1990–1991, and 2001–2003. The figure below does not show big differences between recession and growth period with the exception may be of World War II and also the recent years. But it may be too early to say about the 2001-2006 period.

In another study entitled Economic Crisis Survey, the Kauffman foundation shows that 71% of American people believe that “in light of the economic crisis, it has become more difficult to become an entrepreneur in America”. However anecdotes are many which show real success: Texas Instruments, Revlon were started during the Great Depression, Microsoft, Apple during the Oil crisis. Without even talking about company creation, product launch such as Pampers in 1961 and the iPod in 2001 show that a crisis does not prevent innovation.

Here is an extract from the first report:

“At a high level we essentially are concerned with the relationship between the supply of companies (“births”) by founding period, and the outcome achieved by those date-based founding cohorts over time. To deal with this supply aspect, a few broad points can be made. The first is what we might call the scarcity argument. It says that fewer companies are founded during difficult economic times, so we can expect disproportionately fewer successful companies to emerge from that economically constrained population. Why might we expect fewer companies founded during recessions, for example?

There are several reasons. First, entrepreneurs might decide to delay creating companies until the economy into which they anticipate selling products or services is more robust. This argument applies most strongly to entrepreneurs in service industries where there is little lag time from company founding until first product/service sale. If there is a longer lag between company founding and product launch, we might not expect entrepreneurs, all else being equal, to hesitate as much in starting their new ventures. Why? Because first revenues might be anticipated to more likely coincide with a resurgent economy.

There are other reasons to expect fewer companies to be founded during economic downturns. One has to do with entrepreneurs’ unwillingness to leave their current places of employment during a weak economy. Another, and perhaps more compelling, obstacle to company founding in weak economic periods might be the limited availability of risk capital during such periods. To the extent that it is difficult to raise money for a new entrepreneurial venture, we might expect fewer companies founded during such periods.

The preceding touches mostly on supply issues—why we might (or might not) expect more companies to be founded during weaker economic periods. There also is a demand issue. Even if similar numbers of companies are founded, it is plausible that more of these companies do not achieve material financial success due to the poor economy at founding, thus leading to poorer longer-term outcomes for cohorts of companies founded during weak economic periods.

In summary, we can plausibly make three broad points. First, it is reasonable to expect that fewer companies will be founded during weak economic periods. Second, companies founded during those periods might be expected to fail at higher rates than companies founded during more economically receptive periods. Third, the combination of lower birth rates and higher failure rates would conspire to deplete company cohorts founded during recessionary periods.”

There is therefore some difficulty in assessing the impact. As a way to finish this post, without concluding, let me quote another blog (in French) envie d’entreprendre which explains why an entrepreneur would have a higher likeliness of success in periods of crisis:

“Since financing is more difficult to obtain, those who know how to operate in a low-cost, frugal environment have an edge. Since many people wait and see, even are “frozen”, using the crisis as an excuse not to act or cannot act because of lack of financing, there is less competition. Since there is less competition, the employment market is easier [and more talents are available]. Finally, the fact of being unemployed may be the opportunity to start the entrepreneurial adventure. ”

I like these arguments,
– less competition
– more talents available
– better efficiency because one has to be more frugal.

Periods of recession and crisis seem to create more opportunities but it remains clear that entrepreneurs always try, whatever the difficulty of the times.

Can Business Schools Teach Entrepreneurship?

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An interesting post by Xconomy on the topic. It’s been a on-going topic and there are no clear answers.

Check the post at Can Business Schools Teach Entrepreneurship?

In “vibrant ecosystems” such as Route 128 and Silicon Valley, business schools are embedded and students easily find or develop ideas. But I am less sure Business Schools really teach. They explain, they expose and of course they teach management. As I comment on that post:

There is a talk by Prof Byer (Stanford) about the Silicon Valley and Stanford ecosystems, where the author claims about 5% of companies are direct transfers of technology:http://spie.org/documents/Newsroom/audio/Byer.pdf
It is not clear how many companies Stanford alumni have created. At least 2′500 but probably many more. Now the role of business schools is another subject of interest. You have stories on both sides, i.e. pure engineers or scientists (Google, Yahoo, Cisco in the academia, Apple outside) or entrepreneurs from bus. schools (Sun Micro, eBay).

Entrepreneurial Impact: The Role of MIT

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A new report has been published about the Entrepreneurial Impact of MIT

It is full of data and even if obviously self-serving, it remains very interesting. Let me just quote what I noticed:

– Growth: the number of “first-time” firms has increased from about 2’000 in the 70s to 6’000 in the 80s and 10’000 in the 90s.

– Origin: Non-US founders had slight visibility in the 40s, grow to 12% in the 90s and 17% in the 00s. 30% of MIT foreign students founded a company at some point.

– Age: Before and during the 70s, 24% of first-time entrepreneurs were under 30, growing to 31% in the 80s and 36% in the 90s. There is no real difference between industry segments.

– Serial entrepreneurs: I have a small disagreement on that point as I am not sure serial matters, but… about 40% are serial entrepreneurs so 60% are not…

– Engineering vs. business degrees: EE/CS degrees is 22%, management is 16% for the 90s. Clearly science and technology matter.

– Location: in the 50s and 60s, majority of companies were in Massachusetts, but thereafter Silicon Valley has become a critical locus. In the 00s, 26% are in MA and 22% in CA.

Then the report talks about the culture and the ecosystem. It is also very interesting. We should always remember that:

– Tons of money went to research from the militaries and space agencies.

– MIT had more of a tacit and hands-off role, but much encouraging.

– Role models: “entrepreneurs could name about ten other new companies before they started their own”. Authors compare to another study where “Few of the Swedish entrepreneurs could name even one or two others like them”. They quote Schumpeter: “The greater the number of people who have already successfully founded new businesses, the less difficult it becomes to act as an entrepreneur. It is a matter of experience that successes in this sphere, as in all others, draw an ever-increasing number of people in their wake”

– Feedback loop: there is a positive impact of such examples and this may be the main reason of the creation to tech. clusters.

– Culture: the best is a quote by Bob Metcalfe, Ethernet inventor, founder of 3Com and now a partner at Polaris Ventures: “It’s not just that MIT’s entrepreneurial environment flourishes under its institutional commitment to technology transfer,” he said. “It’s also that MIT includes both ‘nerds’ and ‘suits.’ Divergent life forms, yes, but necessary to and working together at MIT on entrepreneurial innovation. And what keeps MIT’s entrepreneurial ecosystem accelerating is that nobody is in charge. There are at least twenty groups at MIT competing to be the group on entrepreneurship. All of them are winning.”

… Nobody is in charge…

– Tech. transfer: the majority of the exclusive licenses go to startup companies. The TLO’s strategic dependence on startup companies has been the reluctance of large companies to invest in “university-stage” technologies, because the risk and cost of development is high and the time to market is long.

– License deals: For startups, instead of cash up front and in lieu of some of the royalties, the TLO usually takes a small equity ownership that is less than 5 percent of the new firm.

And some conclusions:

– Universities that are strong in research and technology are at the forefront of knowledge creation and potential application. When the university is able to couple this capability with the inclination and resources needed to connect ideas and markets, impressive possibilities exist for generating entrepreneurship-based economic impact at the local, as well as national and global levels.

– Numerous changes are needed in most universities over an extended period of time in rules, regulations and, more important, attitudes and institutional culture.

– Until quite recently, MIT had followed a “hands-off” approach toward entrepreneurial engagement, in contrast with many other universities in the United States and abroad. MIT has neither created an internal incubator for ventures nor a venture capital fund to make life easier for prospective startups.

– Instead, MIT has relied internally on growing faculty, student, and alumni initiatives, especially during the most recent thirty years, to build a vibrant ecosystem that helps foster formation and growth of new and young companies.

– Educational programs require investment in and acquisition of faculty to develop and teach such programs. Effective and well-trained academics are, unfortunately, still scarce in most entrepreneurship related disciplines. Fortunately, successful practitioners are available everyplace and the MIT history indicates that they are quite willing and enthusiastic about sharing their time and experiences with novice and would-be entrepreneurs.

For those who have been so far, first you should read the full report and second I aggregate below a few tables from the report:

So you want to be an entrepreneur

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So you want to be an entrepreneur, but you’re just not sure. And you wonder: Should I quit my well-paid job in the middle of a recession, raise money on 37 credit cards, build a lab bench in my garage next to my rusty old bike and start a […] company? Hell yes! Leaping into the void leads to freedom and growth, which always lands you on a higher plane. Afraid of failure? You’d be amazed at how many investors prefer to back someone who has tasted the bitter fruits of failure. In failing you learn what not to do. Get your skin in the game and there is no failure—you have opened your mind to growth and yourself to reinvention.

This is how Larry Marshall, a serial entrepreneur, begins an article he wrote in 2001! Maybe not as sexy as Guy Kawasaki or Paul Graham, but certainly as interesting. I just discovered this and his blog yesterday and I thought it is worth reading it entirely. So here is the full paper taken from Laser Focus World.

So you want to be an entrepreneur, but you’re just not sure. And you wonder: Should I quit my well-paid job in the middle of a recession, raise money on 37 credit cards, build a lab bench in my garage next to my rusty old bike and start a photonics company? Hell yes! Leaping into the void leads to freedom and growth, which always lands you on a higher plane. Afraid of failure? You’d be amazed at how many investors prefer to back someone who has tasted the bitter fruits of failure. In failing you learn what not to do. Get your skin in the game and there is no failure—you have opened your mind to growth and yourself to reinvention.

As engineers and scientists, we have natural obstacles to overcome if we are to become entrepreneurs. We look at things from the technology perspective and forget the mantra of the marketplace. Open your mind to a market, understand your customer’s problem, then create a solution that puts more cash in his pocket. While technology can enable a new business, it is not necessary. However, knowing your market and the needs of your customers is mission-critical in starting your business.

Too early to market and you run out of money before you generate revenue to sustain your business. Too late and you’re just another “me too” scrambling for the crumbs of the pie dropped by the market leader. But if you read the market right, then you ride the crest of the market wave all the way to success.

Focus, focus, focus
As a photonics person you should understand focus. In a startup your focus must be diffraction limited—do one thing and do it better than everyone else. With limited resources, the only way to produce enough force to penetrate the market is to focus all your weight on a single point. Don’t wear blinders. You must be aware of and respond to changes in the market. But focus is the key. Pick the one product you think will sell. Talk with your customers to define your product. Make sure that your customers want to buy it. Then, when you have defined it, engineer it, produce it, and sell it fast. Pick the wrong product and you will fail quickly. But try to spread the risk and you will linger in purgatory indefinitely.

Only two things create value in a company—product development and selling (marketing is selling to groups). Research may be the key to your company’s future, but there are bills to pay between now and then. Don’t get into business to do research—find a university and give them some money to do it for you; they’ll do a better job for less money. Your mission is to satisfy a market need and make money in the process. Unfortunately, it is possible to raise money today on the promise of tomorrow’s great technology, but this is a train wreck waiting to happen.

There is another aspect to focus—the customer. Everyone in the company from the janitor to the CEO must focus on the customer. Successful hi-tech companies maximize interactions between their engineers and customers and promote peer-to-peer selling. Customers are not only the source of your revenue, they are also the wellspring of your ideas.

One more thing, answer this question: Do I want to change the world (even a little), or do I just want to get rich quick? Those who start businesses because they want to create something new and better don’t always succeed, but those who are just in it for the buck almost never do. The fire inside your belly sustains you through the ordeal, but greed alone will not.

Did I mention focus?

Raising money
After funding startups in several ways, including using credit cards (37 of them, and in a recession too), friends and family, corporate backing, and venture capitalists (VCs), I have these observations. Bootstrapping and incubation work extremely well if you are smart enough to see far ahead of the market—then you can afford to trade time for money. You can raise an “angel” round to finance your prototype development and line up some real customers before you give away half the company raising venture financing. Although a VC will want 40% to 50% of the equity in the first round of financing (regardless of how much money you raise), if you can’t see more than two years into the future, get VC money (see “Making the pitch,” this page).

Venture capitalists add value beyond mere money. Their portfolio of companies can contain your future customers, their name should greatly leverage your cash, and their networks will open doors through which you could not otherwise pass. If you are a diamond in the rough, they will polish you until you shine, but if you don’t shine they’ll find another rock that will. And whoever gives you money, be it your brother, your barber, an angel, or a VC, make sure you like each other—you’ll go through a lot together in the years to come. Remember: you always need much more money than you think.

How do VCs decide which businesses to fund? Ask yourself how you decide to lend money to a friend. Trust. A VC trusts character, experience, team, and the quality of the idea. The idea will attract them, but the team will hook them. Venture capitalists invest in people first and ideas second. The market will change after you are funded and unless the team responds with better ideas, the business will fail. Startups have a wonderful ability to respond rapidly to change, and this, I believe, makes them the new-product development engines of industry.

Building the team
So what makes a great company? A great team. Clearly, a great CEO surrounds himself with people whose skills complement his own. Technical excellence alone is insufficient justification to hire any individual. It is better to have a well-coordinated team of good players than an ungainly group of outstanding individuals. As a founder you must set the tone for your company and recruit people who share your vision, goals, and ideals. Hire the best people you can find wherever you can find them. And always be on the lookout for your own replacement—after all, don’t you want the best people running your company?

When you start hiring skilled people, many of them will want to “make the move to management.” Few of them are capable. A great manager gathers information first, and then takes decisive action. A great inventor makes leaps of faith based on intuition, and is usually a frustrating manager. A great entrepreneur is a mix of the two. Understand that many people want to be managers but few should be—management is not about ego. It is about serving your subordinates in any way that better enables them to do their job, and then getting the hell out of the way so they can do it.

Even the best team players are working for a paycheck. So, share the wealth. Pay people what they are worth, not what you can get them for. Generally, compensate those who contribute to future value—scientists and engineers—in stock, and those who generate immediate value (sales) in cash. If everyone is an owner of your business they will take pride in it, nurture it, and ensure its success.

And remember, you are the lynchpin of your team. Surround yourself with quality advisors on technology, marketing, and business. These are peers, colleagues, and friends. But most important, find an experienced startup CEO who has built companies like yours before and who is still actively doing it, and make him your mentor.

Build more than a better mousetrap
As technologists we often are fooled into thinking that if we simply create a better technology, the market will be ours. A business creates solutions for which customers pay. So if better technology creates a better solution, then the world will beat a path to your door, right? Wrong! Technologically, visible diodes were a quantum leap from HeNe lasers, yet it has taken 10 years for them to replace the HeNe. It’s much harder than you think to displace an entrenched technology. You need substantial improvements, better cost structure, or both. Cash in the pocket is the customer’s bottom line—if you keep more in theirs, they will put some in yours. There is a fixed amount of cash being spent in any given industry. If you want a portion of that cash, either you can take market share from competitors, or capture cash that is paid to others (lifecycle costs, for example), or (ideally) grow the market by adding functionality. This is the crux of any new business.

In my second business, we created a revolutionary solid-state laser technology to replace the ion laser. We could produce several watts of green laser output from an all-solid-state box the size of a cigar case. This was a big improvement over ion lasers, but only to people who worried about 3-phase power, water-cooling, portability, and lifetime. It turned out that, for many people, other benefits of ion lasers that we had never considered outweighed these problems. We persevered, though, and ultimately found a niche in the medical market creating the world’s first miniature portable photocoagulator. Customers loved it. We also replaced copper vapor lasers in dermatology. Again the customers loved it. But we forgot to grow the market. We had made a box that didn’t need a new tube every few years. It worked so well, that once we sold a unit we never saw that customer again. Your new product should not only offer greater functionality at a lower price—it also needs to grow the market.

Running your business
The marketplace is a crucible that burns away all irrelevancies and leaves one pure product—profit. If you don’t make money, your business will fail, and no amount of excuses can save you. No excuses is a core principle of business. Keep your commitments! If you tell Wall Street you will make $1/share earnings—do it. If you fail, have a recovery plan and be sure to eliminate the source of the failure. The market hates failures, but it hates excuses more.

The market rewards results, not effort. As R&D people we learn there is no such thing as failure; even a null result is valuable. Not in business. If you spend a year working on a contract that then goes south, you just wasted a year. You failed to generate revenue and you took food out of the mouths of your team. You should be shot! I hope you had a backup plan.

As your company grows, it will change. Businesses tend to excel at only one thing, but that thing evolves over the life of a business. A typical cycle would be technology, then execution, then manufacturing. JDS Uniphase (JDSU; San Jose, CA) is a great example—it penetrated the market with a great technology, gaining knowledge and experience that enabled the company to execute better than everyone else, and ultimately developed a world-class automated manufacturing system that produce long-lived quality products at a lower price. Now JDSU has fine-tuned a process that allows it to buy new technologies and quickly integrate them into that finely tuned manufacturing machine—that’s an ability that’s hard to beat.

Are you the CEO?
I’ve been lucky enough to report directly to several different types of CEOs whose backgrounds were technical, sales, marketing, and engineering. The two best were technical and marketing. The latter person had a natural advantage over the others in that he valued technology for its ability to reach the customer, not as something of intrinsic worth. He was customer-focused and hired great technology people (I like to think I was one of them) to create his vision.

The technology person was a truly visionary CEO. He immersed himself in his customers’ market. He spent a lot of time working alongside his customers to understand their needs, and thereby won both their trust and their business. He understood their problems and solved them. If you can do this too, you will win! So what are you waiting for?

ACKNOWLEDGMENTS
I have been fortunate enough to learn from some outstanding people and I thank them here: Josh Mackower, Milton Chang, Ted Boutacoff, Don Hammond, Bill Lanfri, Walter Koechener, Paul Davis, Bob Anderson, Robert Haddad, Bob Byer, and Dan Hogan.

ABOUT THE AUTHOR
Larry Marshall is the CEO of Lightbit Corp, a next-generation telecommunications components startup. He has angel-invested in three startups, and personally done three others, including Light Solutions Corporation, which merged with Iris medical, and went public as Iridex, in February 1996 (Nasdaq:IRIX; Mountain View, CA). Marshall is an active inventor, holds nine patents protecting 16 commercial products, and has over 100 publications and presentations. He is chairman of the OSA Conference on Advanced Solid State Lasers, is an editorial advisory board member to Laser Focus World, and is on the board of directors of two telecommunications startups. Larry Marshall is founder and CEO of Lightbit Corp. P.O. Box 20453, Stanford, CA 94309; e-mail: larry@lightbit.com.

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Making the pitch
When you write your business plan and pitch to a venture capitalist, you only need to answer seven basic questions:

What problem or need will you solve or serve?
Who are your customers?
How much will they pay?
What is your product?
How much will it cost to build and sell?
Who are your competitors and how will you beat them (barriers to entry or exit)?
How big is the payoff and when will it happen?

Your single-page executive summary should answer these questions and is likely to be the only part of your plan an investor actually reads. Write concisely and honestly.

When you write your business plan remember that a little bit of “hype” goes a very long way—the wrong way. And don’t believe your own hype. If you claim, for example, that “there are no competitors” or that “they are inferior,” you are actually telling investors that you are either a genius or a fool (and they will assume the latter). It’s actually pretty easy to sell a story and there have been some great cons. But if you do sell a story you’ll spend the next several years building a business doomed to fail—and who wants to do that?

It is hard to be honest with your own ideas, so take them for a test drive with friends. Surround yourself with quality business advisors who are not afraid to tell you the truth and you can quickly separate the lemons from the gems.

Start-Up

What we may still learn from Silicon Valley