As an engineer, and a founder of and investor in several tech startups, I was given the opportunity to speak about entrepreneurship at the American Association for the Advancement of Science annual meeting, held in February in Washington, D.C.
The theme was “Global Science Engagement,” with a focus on how the scientific community can use innovation to solve societal challenges. Here are some pointers I gave to the audience on how to pursue their endeavors.
Although many people assume that venture capitalists (VCs) are risk takers, they are in fact risk-adverse. Marc Andreessen, a prominent venture capitalist in Silicon Valley, has said his criteria for investing in a new venture includes that it must be a disruptive technology, have enormous market potential and major economic impact, and have a “kick-ass” team. To that I add: A startup company also must have adequate financial backing and a sound financing strategy to develop a “prototype of the business.” If it doesn’t meet all those requirements, VCs are likely to walk away.
Take a hardware startup as an example. Getting seed capital from VCs is no minor feat, even with some US $20 billion of venture capital invested in startups in the last quarter of 2015 in the United States alone. Only a minuscule fraction of seed capital goes to hardware startup companies. Investors readily provide seed capital to Web-based startups hoping to launch another Uber-type company that might explode seemingly overnight. Investing in a hardware company, on the other hand, implies making a long-term commitment. It usually takes 10 or more years to develop the technology and product, gain market acceptance, and build the manufacturing infrastructure before earning revenue. Investors know a lot can happen in the interim.
The response from VCs may very well be different if an entrepreneur has a working prototype and initial validation for market acceptance to enable investors to assess the company’s potential to take a calculated risk. Doing so is important for the founder as well. An entrepreneur would be foolhardy to start a company without adequate preparation, a sound business strategy, and management experience.
HOW TO START OUT
There is no better way to learn about entrepreneurship than under the safety net of working for an established company. Engineers can ease into the business side by providing technical support to marketing and sales personnel, for example. That enables them to get a broader view about the entire enterprise. Technical expertise will get you only so far; it is also necessary to have management and business expertise.
One way to circumvent the difficulty of acquiring seed funding is to start with a modest goal and grow organically. Start by serving customers who need products or services in a niche area in which you have expertise. That way most, if not all, risks associated with starting a business are minimized or eliminated. Once you start selling, you’re in the game.
That was our strategy in forming Newport Corp., in Irvine, Calif., and New Focus, in Silicon Valley. Both companies produced laser and optical products, which was my area of research. We started producing a few components needed by research labs and grew over time. Today, Newport and New Focus are combined as a leading company in the photonics business, with an extensive line of products.
WHERE TO FIND SUPPORT
Angel investors can be convinced when the seed capital is modest. Grants through the government and foundations could provide funds to innovate and develop technologies. Universities can provide opportunities for students and faculty to pursue their entrepreneurial ideas by providing facilities and research infrastructural support, as well as intellectual-property expertise and licenses to put a company on solid footing. Universities also can make more of an effort to encourage partnering with companies on joint projects with faculty and students to broaden their perspective.
Everyone, including professional associations and employers, can play a constructive role. For example, a company can better serve customers when its engineers engage in commercialization activities as what are known as intratrepreneurs, developing products and services in-house. That’s certainly good for the business.
Do you have questions for me about launching a startup? Submit them in the comments section below.
IEEE Fellow Milton Chang has taken two high-tech startups public and has helped incubate nearly a dozen more. He is now an angel investor at Incubic, in Los Altos Hills, Calif. Reviews of his book, Toward Entrepreneurship, can be found at MiltonChang.com.