“Minimizing risk in the early stages of high-technology commercialization”
Article by Dr. Bernd Geiger,
Managing Partner, Triangle Venture Capital Group
Venture Capital Magazin Startup 2012
September 20, 2011
Those of us who do not equate high technology with the Internet know: Your average investor wouldn’t touch it with a ten-foot pole. In the case of biotechnology, at least, everyone knows that the venture capitalist is really a gambler, and even online investors understand that, like the lottery, it’s (usually) “winner takes all”. Somewhere in between in its complexity, high technology seems both boring and at the same time fraught with uncertainty – but hang on a minute, from the customer’s point of view it can’t be that boring, can it? Although we may groan about the 125th online shoe store with social networking buttons, a successful company founder is thrilled with his snappy sports car that pulls ahead like a Formula 1 car even at 300 km/h, a smartphone user video-skypes with his wife on the other end of the world (a technology which, despite having its origins in the 30s, has been made into a product for the masses by one unrivaled company), and a health nut hops on an scale with Internet connectivity in the mornings and gets a full body analysis on an iPad. The list of gadgets that are fun or useful, and in some cases have become indispensible at work and for process cycles or have been built into other products as components, is nearly inexhaustible. How money can be made with them seems like a question that doesn’t require asking, at least not in this product category. Often enough, that can be attributed to the complex and proprietary technologies operating in the background.
So where do the high technologies come from? Usually from a laboratory – and if they are not, as in industry, developed into a product improvement incrementally and for a specific target, the basic technologies are often accidentally repurposed and even combined with other basic technologies to give them a second use, which then generates cash for the first time. Well-known examples include the heat pipes that were originally developed for temperature regulation in space satellites and are now essential in modern desktop computers with high-speed CPUs, the microwave oven as a byproduct of air defense, and wave-front correction in LASIK eye surgery, a method that came out of early astronomy.
But does that really describe a successful situation for a start-up, and furthermore, for a start-up investor? It’s certainly no case for amateurs. There are many challenges involved, but professional solutions exist as well. Below, a few of the most important:
|How do you design a disruptive product?||Create an opportunity for engineers and market insiders to come together, brainstorm and think outside the box.|
|How can a technology be developed with the fewest possible detours so that the product will optimally satisfy customer demands?||Perform a structured and systematic break down of the performance parameters and their relevance to the respective customer; examine specific requirements, bearing in mind other market conditions such as competing offerings, possibilities for growth, etc.|
|If the product doesn’t work yet, how can feedback from the market be gathered?||Gather customer feedback on the basis of a mock-up and sell the product to the customer now (“sell short, buy long”).|
|Doesn’t early professionalization spoil the whole happy start-up mood?||If this feeling arises, one should either reexamine one’s own “performance parameters” or seek out a less demanding investor.|
|As a seed investor in high-tech start-ups, how do you know when you should pull the plug?||Piloting on the Internet with open source software and 250K won’t usually work with industrial products. Two million are easily spent on defining the proprietary features and developing them into a product with a first customer. Then, at the latest in Plan B, follow-up customers should be found, which often swallows another 1-2 million. To make it through in good conscience, one should utilize the due diligence to take a good look ahead.|
|How is the founder team supposed to learn all the industrial processes in addition to meeting all the start-up challenges?||It’s not. If someone on the team is the creative genius and rapid prototyper, then that person should do only that – professionals from the outside must be found to handle the rest.|
The solutions are a combination of the fundamentals of industrial engineering together with a solid understanding of
business principles and an entrepreneurial mindset. But unfortunately, in reality these elements are not often
lacking in the start-up, and come first from the investor, which is why many products do not really mature until
their companies have been through multiple bankruptcy proceedings (start over!), leaving any number of chastened
casual investors behind.
Conclusion: High-tech start-ups have a very important position in our highly developed, dynamically innovating economies and can be particularly attractive investment objectives due to their unique character – provided one has mastered the fundamental operational processes.