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Funding the startups Silicon Valley way - Starting the Startups

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Funding the startups Silicon Valley way - Starting the Startups Powered By Docstoc
					Starting the Startups
 Silicon Valley Way
         Dr. Janusz Bryzek
                 CEO, Jyve Inc.
               janusz@jyve.mobi


                 APCOT 2010,
         J. Bryzek, APCOT 2010, July 9, 2009
      Transducers, Denver, CO, June 21,2010    1
         July 9, 2010, Perth, Australia
Outline
 Introduction:
 VC funding
 Impact of VC funding
 VC Startup filters
 Five phases of Company evolution
 Disruptive innovation
 Learning from the Scars
 Summary




                   J. Bryzek, APCOT 2010, July 9, 2010   2
Introduction
 Typical Silicon Valley Startups are funded by Venture Capital firms
 (VCs).
 This short course introduces the formation and funding process of new
 companies in Silicon Valley.
 The foundation for this course was developed in process of:
   Founding and running my seven startups in Silicon Valley.
   Performing due diligence on startups for several Silicon Valley VC firms.
   Being on Board and Advisory Boards of multiple startups.




                      J. Bryzek, APCOT 2010, July 9, 2010                      3
Technology Commercialization
 There are two phases in commercialization technology:
                       (per late Bob Sulouff from Analog Devices)
    Phase 1: use money to develop technology.
    Phase 2: use technology to make money.


 While the first phase is reasonably easy, it is dramatically more
 difficult to get to Phase 2.
 Venture Capital Industry developed a model enabling increased
 probability of success and acceleration of the cycle time to “printing”
 money.




                      J. Bryzek, APCOT 2010, July 9, 2010              4
Why To Start the Business
 Multiple motivations for different people.
    Gain financial freedom.
    Create work place.
    Have control.
    Gain fame.
    Return to society.
    Change the world.
    Solve world’s problem.
    Enable giving to charities
 Team must share motivational components.
    At NovaSensor, each of us shared them, but in different order:
       Kurt Petersen focused on fame.
       Joe Mallon focused on control.
       I focused on financial return.



                       J. Bryzek, APCOT 2010, July 9, 2010           5
VC Funding
Why VC Commercialization Model
 VC industry is formed by companies raising money from investors
 with an objective of delivering above average returns through
 investment in new startup companies.
 VC industry developed a successful commercialization model:
   Credited with 15% of US innovation, while representing only 3% of R&D
   funding.
     (National Bureau of Economic Research, Cambridge, MA, 1999)




                        J. Bryzek, APCOT 2010, July 9, 2010                7
VC Success Formula
P = N * W – (1-N) * L >> 0
    P: profit
    N: percent of winning companies in the portfolio.
    W: average win
    L: average loss (≤100%)
  Example:
    N = 50%
    W = 300%
    L = 100%
    P = 100%
    Despite losing 50% of companies in the portfolio, VC fund
    made 100% portfolio profit.




                    J. Bryzek, APCOT 2010, July 9, 2010         8
VC Mindset
 Win big whenever possible, as some of your portfolio companies will
 not survive.
 Marketing is Everything
 (It’s not the engineering!!!)
               Regis McKenna, Silicon Valley marketing guru
 Be only Number One or Number Two in every business
 (Only top dogs make decent margin)
               Jack Welch, CEO, GE




                       J. Bryzek, APCOT 2010, July 9, 2010         9
US VC Funding History
(Quarterly)




                                                    Source: PWC MoneyTree

              J. Bryzek, APCOT 2010, July 9, 2010                  10
Funding by Market




                                               Source: PWC MoneyTree

         J. Bryzek, APCOT 2010, July 9, 2010                  11
Funding of Biotech, Software, Energy
Biotech            Software                       Energy




                                                   Source: PWC MoneyTree

            J. Bryzek, APCOT 2010, July 9, 2010                   12
Funding by Stage




 First phase funding very low.




                                                          Source: PWC MoneyTree

                    J. Bryzek, APCOT 2010, July 9, 2010                  13
Funding by Region




                                               Source: PWC MoneyTree

         J. Bryzek, APCOT 2010, July 9, 2010                  14
Greentech Funding 2009
 VCs pumped $4.5 billion into greentech in 2009
 Solar power was once again the leading greentech investment
 segment at more than $1.4 billion in 84 deals
   VC firms financed more than 250 new solar firms in the last few years.
   Each one of these 250 firms is looking for a 10% market share…




                     J. Bryzek, APCOT 2010, July 9, 2010                    15
Global VC Funding, %GNP




 Note: US funding is through VC firms; other countries include Government funding.
 US represents about 90% of private global VC funding.
                                                                                       Source: OECD
                                             (Organization for Economic Co-Operation and Development)

                        J. Bryzek, APCOT 2010, July 9, 2010                                   16
Why US Dominates VC Funding
US law allows founders to start company without money and share a
significant percentage of the reward for success:
   Founders get common shares at low price
      Company may even lend founders money to pay for them.
   Investors buy preferred shares at significantly higher price.
   At the liquidation event (IPO), both shares have the same value.
Top Universities foster startup activity:
   Teach Entrepreneurship and run real startup competions.
      My son won MIT $50k competition in 1999.
   Enable product development in their labs with IP entirely owned by the
   startup.
   Provide very reasonable licensing terms for technology developed at the
   University.
Risk oriented mentality of investors:
   Failure is a mandatory component of success.


                      J. Bryzek, APCOT 2010, July 9, 2010                17
Top Tier VC Firms Performance
Kleiner       IRR         Sequoia             IRR           Matrix             IRR
Perkins                                                     Partners
Caufield &
Byers

1992 fund    39%/y        1992 fund         110%/y          1995 fund       223%/y
1994 fund    122%/y       1995 fund         175%/y          1997 fund       516%/y
1996 fund    287%/y       1998 fund          93%/y          2000 fund        -30%/y
1999 fund    -21%/y       1999 fund          -5%/y          2001 fund        -39%/y
2000 fund    -16%/y       2000 fund         -25%/y




                                                                Source: Venture Scoreboard




                      J. Bryzek, APCOT 2010, July 9, 2010                                    18
Top Tier VC Firm Statistics
    Kleiner Perkins (KP) is one of the
                                                         Examples of KP stars:
    most successful VC firms:
                                                           Google       240x return
        Through 1988 it funded 225
        companies employing 120,000                        Netscape:     80x return
        people, selling $44B with market                   @home:        87x return
        capitalization of $85B (Q2 99).
                                                           Amazon.com: 44x return
    As of September 1988, their 79
                                                           Exite:        73x return
    companies have gone public. The
    statistics:                                            Rambus:       51x return
        19 (24%) were big hits                             Citrix Systems: 40x
        5 (6%) were trailing Nasdaq                        return
        55 (70%) were trading below first day
        close price.


Source: Fortune, October 26, 1998



                               J. Bryzek, APCOT 2010, July 9, 2010               19
Best VC Investments
 eBay Inc.
   In 1997 Benchmark Capital invested $5 million in exchange for
   22% of the Internet auctioneer.
   In late 1999, the shares were cashed at about $4 billion, or
   800x (80,000%) return to Benchmark.
 Cisco
   Sequoia invested $2.5M
         Due to avalanche Company growth, money was never needed
   Sequoia pulled back about $2B (800x)
 Google
   Fastest company to reach $1B sales: 6 years
   2004 returns at IPO :
         Kleiner Perkins (Doerr) turned $12.5M into $3B (240x)
         $550M ’99 fund turned IRR from -23$/y to +30%/y
         Sequoia (Moritz) turned $12.5M into $3B (240x)
         Seed investor Ram Shriram turned $300k into $600M (2000x)
 Forthcoming: Facebook?


                           J. Bryzek, APCOT 2010, July 9, 2010       20
Corporate VC Investments
($ in
$20 billions)

                                                    $16.9


$15



$10
                                           $8.4



                                                                $5.0
 $5

                                 $1.7                                      $1.9
                       $1.0                                                          $1.2      $1.4
         $0.4   $0.7
 $0
        1995    1996   1997     1998      1999      2000        2001      2002      2003       2004

                                                                 Source: Steve Bengston, PWC

                          J. Bryzek, APCOT 2010, July 9, 2010                                  21
Impact of VC Funding




       J. Bryzek, APCOT 2010, July 9, 2010   22
VC Created Jobs in 2000
Industry                       Created Jobs                  Revenues


Consumer                         1,126,462                    $204B
Computer related                  850,187                     $132B
Medical/Health                    646,429                      $80B
Communications                    293,722                      $61B
Industrial/Energy                 265,238                      $55B
Electronics                       237,308                      $54
Biotechnology                      61,090                      $15
Other                             802,696                     $134B
Total                            4,283,132                    $736B
Subtotal California           978,877 (23%)                 $179B (24%)




                      J. Bryzek, APCOT 2010, July 9, 2010                 23
Growth
                            Fastest Growing Companies Ever
                 $2.5
                            Ebay
                            Dell
                 $2.0
                            Yahoo
                            Microsoft
Sales, billion




                 $1.5       Nike
                            Cisco
                            Starbucks
                 $1.0       Wal-Mart


                 $0.5



                 $0.0
                        1     2         3         4         5         6           7      8
                                              Year from Inception


                                                                              Source: Fortune October 18, 2004

                                            J. Bryzek, APCOT 2010, July 9, 2010                            24
Billionaires
Name            Age       Net            Company                   VCs helped
                          worth
Bill Gates      48        $48B           Microsoft                 Yes
Warren Buffet   74        $41B           Berkshire Hathaway        No
Paul Allen      51        $20B           Microsoft                 Yes
Alice Walton    55        $18B           Wal-Mart                  No
Helen Walton    85        $18B           Wal-Mart                  No
Jim Walton      56        $18B           Wal-Mart                  No
John Walton     58        $18B           Wal-Mart                  No
S. Robson Walton 60       $18B           Wal-Mart                  No
Michael Dell    39        $14B           Dell                      Yes
Larry Allison   60        $14B           Oracle                    Yes

                                                            Source: 2004 Forbes 400

                      J. Bryzek, APCOT 2010, July 9, 2010                       25
Silicon Valley Richest
Forbes 400   Name                      Age    Net worth     Company               VC helped
10           Larry Allison             60     $13.7B        Oracle                Yes
43           Larry Page                31     $4.0B         Google                Yes
43           Sergey Brin               31     $4.0B         Google                Yes
49           Gordon Moore              75     $3.8B         Intel                 Yes
60           George Lucas              60     $3.0B         Lucas Arts            No
68           Charles Schwab            67     $2.8B         Charles Schwab        No
74           David Filo                38     $2.6B         Yahoo                 Yes
74           Steve Jobs                49     $2.6B         Apple Computer,       Yes
79           Charles Johnson           71     $2.5B         Franklin Resources    ?
87           Riley Bechtel             52     $2.4B         Bechtel               No
87           Stephen Bechtel, Jr.      79     $2.4B         Bechtel               No



                                                                      Source: 2004 Forbes 400

                             J. Bryzek, APCOT 2010, July 9, 2010                          26
Largest Number of US Patents/City
City                     Awarded patents 1976-April 2003
San Jose                                     29,018
Palo Alto                                    15,209
Sunnyvale                                    15,045
San Diego                                    14,646
Cupertino                                     9,857
Fremont                                       9,552
Mountain View                                 9,522
Los Angeles                                   9,512
San Francisco                                 9,502
Los Altos                                     7,961


                                                      Source: SJMN 1/31/04



                J. Bryzek, APCOT 2010, July 9, 2010                     27
Top US Cities for Patents/Capita
City                                 Patents/100 residents
Portola Valley                                          42
Del Mar                                                 41
Los Altos Hills                                         31
Rancho Santa Fe                                         29
Los Altos                                               29
Woodside                                                28
Palo Alto                                               26
Felton                                                  22
Saratoga                                                20
Atherton                                                20
Cupertino                                               20
                                                             Source: SJMN 1/31/04


                  J. Bryzek, APCOT 2010, July 9, 2010                         28
VC Startup Filters




       J. Bryzek, APCOT 2010, July 9, 2010   29
VC Funding Stages
Stage       Objective                                   Expected return
Seed        Proof the idea                              >10x in 5-7 years
Series A    Deliver prototypes to customers             4-8x in 4-6 years
            and get production commitment
Series B    Start production shipments                  3-5x in 3-5 years

Series C    Production expansion                        2-3x in 2-4 years
Series D+   Financing to liquidity                      >10%/year




                  J. Bryzek, APCOT 2010, July 9, 2010                       30
Typical Funding Statistics
 Only 1% of companies submitting Business Plans is invited to the
 next phase: presentation to the VC firm partners.
   For top tier VC firms, 95% of Plans advancing to presentation is
   introduced by formerly funded executives.
 Only 10% of presented plans gets funding.
   Only 1 out of 1000 business plans for a given VC firm.




                     J. Bryzek, APCOT 2010, July 9, 2010              31
Preliminary Sort
 Sexiness of the market segment.
   VC firms like to go in the same directions.
   Current fashion: greentech, bio, Internet.
 Expected total funding to positive cash flow for a given
 industry.
   $1M for iPhone Apps.
   $65M for fabless semiconductor.




                   J. Bryzek, APCOT 2010, July 9, 2010      32
VC Startup Selection Filter
1. Product/Service Excellence
2. Outstanding Management
       Best people with so-so technology will be more successful than best
       technology with a poor management
3. Strategic market focus on:
       Large, rapidly growing and underserved market
4. Reasonable funding strategies
       Underfunding delays product introduction and hiring best talents
       Overfunding reduces the hunger for success and ROI
5. Sense of urgency
       Market will not wait for you; either you deliver or someone else will

   (John Doerr, Internet Funding Father, Kleiner Perkins in Silicon Valley radio talk, 2000)




                                J. Bryzek, APCOT 2010, July 9, 2010                            33
Product/Service Excellence
 Responds to market need.
 Has leadership position proved by a premium gross margin (>60%).
 Creates a “must have” value proposition.
    Solves customer problem.
 Has sustainable competitive advantages.
    In customers’, not founders’ eyes…
    Has compelling follow up products/services.
 Creates barriers to entry for competitors.
    Compelling, defensible, difficult to “engineer around” IP.
    Trade secrets
    Gurus
 Represents a “whole product”:
    A minimum set of products and services necessary to ensure that the
    target customer will achieve the compelling reasons to buy.


                       J. Bryzek, APCOT 2010, July 9, 2010                34
Product/Service Appeal
 When searching or validating a product idea, it is useful to split
 product appeal to customers into four categories:
    “Must have”
        E.g., heart attack warning device.
    “Nice to have”
        E.g., newer car, while the current one is good enough.
    “I don’t care.”
        E.g., toothpaste (for most people).
    “I don’t want it”
        E.g., a bra for most men.
 Highest probability of funding and business success is for “must
 have” product ideas.
 “Must have” can be developed.
    E.g., acceleration sensor in iPhone to rotate the image on the screen.



                         J. Bryzek, APCOT 2010, July 9, 2010                 35
Outstanding Management
 Delivered impressive results in given field.
 Per Stanford University study, US had.
    1% creators, capable of creating “new” from nothing.
    4% implementers, capable of converting the “new” into revenues.
    95% followers.
 Startup should have a healthy mix of creators and implementers.
    Traditional skills (followers) can be recruited after funding (CFO, GM,
    Ops).




                       J. Bryzek, APCOT 2010, July 9, 2010                    36
Cofounders/Key Personnel
 Expected track record of key team for the new startup:
   (First phase) CEO:
       Starting a similar VC funded business.
       Managing (P&L) of a similar business.
       Strong technology background and clear vision where/how to go.
       Bringing financing.
   CTO:
       Guru/visionary in the startup’s field.
   VP Sales/Marketing
       Working knowledge of target market segment and target customers.
   VP Manufacturing/Operations
       Managing similar operations at target revenue level.
   CFO
       Arranging equity and debt financing
       Starting accounting system and procedures from scratch.
 Business-enabling people must be on the founding team.
   Other members can be recruited after Company is funded.

                        J. Bryzek, APCOT 2010, July 9, 2010               37
Strategic Market Focus
 Large market segment: SAM >$200M
   Served and Available Market segment.
   Often is a small fraction of the total market.
   Could be served by alternative technology.
 Rapidly growing: >25%/year
   >3 times growth of SAM in 5 years
      Growth creates opportunities, dampens reaction of competitors and reduces risk.
   “Hot” market segment: large market cap to sales ratio
   If a product addresses a replacement for existing solution, there should be a
   compelling reason (must have) for market conversion.
 Underserved: customers need a better solution
   Current products/services creates pain for customers, e.g., in terms of lost
   revenues, increased cost, tarnished market image, reduced growth potential.




                       J. Bryzek, APCOT 2010, July 9, 2010                      38
Market Cap/Sales
 Sampling of companies shows 1000:1 range of market capitalization
 to sales ratio.
   For the same sales, market value of the Company varies greatly.
 It is less important what Company does, than in which market
 segment it does it, thus:
   Positioning of Company in the market segment with competitors enjoying
   high cap/sales ratio (“hot”) increases probability of funding and success.




                      J. Bryzek, APCOT 2010, July 9, 2010                  39
Market Cap to Sales Ratio
    COMPANY   Cap/Sales          COMPANY            Cap/Sales
     QCOM         7.92               INTC             2.71
     CRM          7.34              MMSI              2.67

     GOOG         7.19              MEMS              2.03
     ATW          5.31               IBM              1.54
     ORCL         4.62               HPQ              1.05
     AMGN         4.32                VZ              0.99
     AAPL         4.05                HD              0.62
     MSFT         3.80               WMT              0.59
     CSCO         3.62               PHM              0.52
     EBAY         3.56                AIG             0.13
     MCD          3.13                GM              0.04

                                                                As of 8/20/08


              J. Bryzek, APCOT 2010, July 9, 2010                          40
Importance of Gross Margin
 Gross Margin = Sales - Cost of Sales
 Gross margin is defined by competitive forces and and is relatively constant
 for a given industry, e.g.:
     Hard drive industry                   15 to 20%
     Automotive industry                   20 to 50%
     MEMS sensor companies                 35 to 60%
     Linear IC industry                    50 to 75%
     Telecommunication industry            50 to 70% (in good times…)
     Software                              60 to 80%
 Low gross margin leaves no room for errors and requires high funding level
 for a given % growth.
 High gross margin increases market valuation.
 Selection of market segments with competitors enjoying high gross margin:
    Improves probability of the startup success
    Improves company valuation



                         J. Bryzek, APCOT 2010, July 9, 2010               41
Sources of Competitive Advantage
Factor                                                        Weight
Superior performance                                              4.23
Customer service                                                  3.97
                                                                                   Scale:
Product quality, reliability                                      3.71
                                                                                   5 - most important
Dominant position, Niche                                          3.42
                                                                                   0 - not important
Management expertise                                              3.10             1216 MIT companies
                                                                                   reporting
Innovation technology                                             2.92
Market image, brand recognition                                   2.76
Time to market                                                    2.20
Price leadership                                                  2.04
Government programs                                               0.58

 Source: Bank of Boston Special Report:MIT: The Impact of Innovation, March 1997


                               J. Bryzek, APCOT 2010, July 9, 2010                                      42
Dropout as Billionaire Advantage?
Executive       Age   Title                                         Dropped out of…

Bill Gates      48    Chairman and Chief Software Architect         Harvard University
Carl Ichan      67    Financier, took over Texaco, USX, TWA         New York University
                      in 1980s
David Geffen 61       Cofounder of Dreamworks SKG                   University of Texas at
                                                                    Austin
Michael Dell    39    Founder and Chairman of Dell Inc.             University of Texas at
                                                                    Austin
Sheldon         70    Chairman and principle owner of Sands         City College New York
Adelson               Inc. (Venetian Casino in Las Vegas)
Larry Ellison   59    Founder and CEO of Oracle Corp.               University of Illinois
Wayne           65    Owner of Miami Dolphins                       Calvin College
Huizenca
Steve Jobs      49    CEO of Apple Computer                         Reed College
J.R. Simplot    95    Founder of J.R. Simplot, agribusiness,        High school

                                             Source: American Way Magazine, September 1, 2004

                              J. Bryzek, APCOT 2010, July 9, 2010                            43
Location, Location, Location…
 Location can increase or decrease probability of success
 Silicon Valley:
   Grabs about 1/3 of all VC investments
   Large fraction (70%) of all VC firms is located within driving distance
   High density of high-tech businesses (10s of thousands) provides rich pool
   of employees
   High density of service organizations provides easy access to
   sophisticated services
   Very large vacant facility base (10s of millions square feet) offers even
   clean room space and piped liquid nitrogen
   Anchor universities (Stanford, UC Berkeley) provide:
      Pool of employees
      Advanced facilities at low cost to jump-start development
      Rich IP for licensing
   Large pool of experienced legal firms


                       J. Bryzek, APCOT 2010, July 9, 2010               44
… Location
 Many locations outside Silicon Valley provide significant financial
 incentives.
    Eliminates one of the startup stumbling blocks.
    Compensates for significantly increased cost of doing business outside
    Silicon Valley.
    Enables undertaking of longer term more challenging projects.
    Opens the options for hiring Silicon Valley experts as advisors and
    consultants.
       Knowing what not to do is more important to knowing what to do…




                       J. Bryzek, APCOT 2010, July 9, 2010                   45
Starting in a Downturn?
Company                        Funded          Unemployment     Prime rate
Apple Computers                   4/76                 7.7%       6.8%
Oracle                            6/77                 7.2%       6.8%
Sun Microsystems                  2/82                 8.9%       16.6%
Intuit                            5/83                10.1%       10.5%
Cisco                            12/84                 7.3%       11.1%



Funding and traction is difficult...




                          J. Bryzek, APCOT 2010, July 9, 2010                46
VC Funding Example
Funding       Founders &            VC firms             Pre-   Post-
round         Employees                                 money   money
Seed          $10k -100%                  -
Series A       $0 - 50%           $10M - 50%            $10M    $20M
Series B       $0 - 40%           $10M - 60%            $40M    $50M
Series C       $0 – 32%          $20M – 68%             $80M    $100M
Series D      $0 - 25.6%        $30M – 74.4%            $150M   $180M
IPO @ $500M     $128M               $223.3M
ROI            12,800x         12.8x Series A
                                3.3x Series D




                  J. Bryzek, APCOT 2010, July 9, 2010                  47
Five Phases of
Company Evolution




       J. Bryzek, APCOT 2010, July 9, 2010   48
Peeking into the Future
 Many entrepreneurs believe they can run Company for ever.
   Are surprised when their role is force-changed by investors.
 Company structure and required skills of its CEO evolve with
 growth:
   What is critical source of success during the startup phase, is disruptive
   in a mature phase.
 Inability of management to understand its organization development
 problems can result in Company being either “frozen” in its present
 stage of evolution, or in failure, regardless of market conditions.




                      J. Bryzek, APCOT 2010, July 9, 2010                   49
 Evolution of Leadership
    Greiner* researched the evolution of companies:
        Found five distinctive phases of company growth (evolution) separated
        by distinctive periods of crisis (revolution).
        Each phase is strongly influenced by a previous one, thus a
        management with a sense of its own organization’s history can
        anticipate and prepare for the next development crisis.
    My personal experience confirms Greiner findings.




* Larry E. Greiner: “Evolution and Revolution as Organizations Grow”. Harvard Business Review, July-August
     1972.
http://www.blackwell-synergy.com/links/doi/10.1111/j.1741-6248.1997.00397.x/pdf



                                  J. Bryzek, APCOT 2010, July 9, 2010                                   50
Evolution of Companies
Organization size
Large   Evolutionary periods of company growth
        (blue) are terminated by revolutionary                                  5. Crisis of
        turmoil (red).                                                               ?

        Each evolutionary period is                              4. Crisis of
        characterized by a management                            RED TAPE
        problem that must be solved before the
                                                                                 5. Growth through
        growth can continue.
                                                                                 COLLABORATION
        Each revolutionary period is              3. Crisis of
        characterized by a dominant               CONTROL
        management style change necessary to                     4. Growth through
        sustain the growth.                                       COORDINATION
                                   2. Crisis of
                                  AUTONOMY
                                                  3. Growth through
                                                     DELEGATION
                 1. Crisis of
                LEADERSHIP
                                   2. Growth through
                                       DIRECTION



                1. Growth through
Small              CREATIVITY                                                   Organization age
        Young                                                                                  Mature

                                 J. Bryzek, APCOT 2010, July 9, 2010                                    51
Growth Pain
 Each growth phase is both an effect of the previous phase and a
 cause for the next phase.
 The principal implication of each phase:
   Management actions leading to crisis must change to the next phase
   style in order to enable the continued growth.
 Attempts to maintain a given phase management style through the
 crisis (e.g., to save CEO’s power) are unproductive.
 Transition between phases varies:
   Companies in high growth industries will transition through all five
   phases significantly faster than companies in medium growth industries.
   Companies in slow growth industries may go through only one, two or
   three phases in their entire life.




                     J. Bryzek, APCOT 2010, July 9, 2010                 52
Growth 1: Creativity
 The first phase requires creativity to enable development of both
 product from scratch:
     Initially, the concepts are an itch in founders heads.
     With time, these ideas are converted to sketches, then often to
     business plans.
     With more time, business plan is funded and company starts its
     operation.
 Very small number of people* is capable of developing something
 from nothing:
     1% people are creators.
         Can create something from nothing.
     4% of people are implementers.
         Can implement creators’ ideas.
     95% of people are followers.
         Need to be guided by the first two groups.

 * Stanford University lecture, Executive Management Program, 1987.




                            J. Bryzek, APCOT 2010, July 9, 2010        53
Crisis 1: Leadership
 Focus on creativity creates problem:
   Creative people gain confidence with Company’s growth and start to be
   more creative.
   Company starts moving in too many directions.
   CEO and founders enjoy it…
   Company loses focus on money making…
 Solutions of the problem is not easy.
   Usually founders are too close to the problems to be able to understand
   and implement the system solution.
   The Company needs to transition to Phase 2, dictatorship.
   This often can be effectively done only through hiring a new CEO. This
   starts the next phase…




                     J. Bryzek, APCOT 2010, July 9, 2010                 54
Growth 2 : Direction (Dictatorship)
 New Management will make multiple changed, such as:
   Clear separation of development from manufacturing and sales
   activities.
   Implementation of incentives, budgets and customer requested
   standards.
   More structured communication within company focused on developing
   company culture.
   Strict cost control.
 All employees start to march to the beat of a single drummer, the
 CEO.




                     J. Bryzek, APCOT 2010, July 9, 2010                55
Crisis 2: Autonomy
 Dictatorship creates a demand (cry…) for autonomy from tightly
 managed employees who have direct accountability for the company
 growth and success.
 As the CEO doesn’t usually want to give-up the power and the
 employees are not accustomed to make decisions for themselves,
 Company starts developing a crisis.
 The correct solution is a transition to next phase.




                   J. Bryzek, APCOT 2010, July 9, 2010         56
Phase 3
 Growth: Delegation
   Growth is enabled by empowering managers (delegation).
      Multiple Dictators.
   With time, they become more and more independent, and no
   longer need funding and directions from parent company to be
   successful. This leads to…
 Crisis: Control
   As a result of divisions operating too independently, they loose
   synergy with parent company
   Correct outcome of this crisis is…




                      J. Bryzek, APCOT 2010, July 9, 2010             57
Phase 4
 Growth: COORDINATION
   In this phase, special systems are implemented to achieve a greater
   coordination between business units. This leads with time to the next
   crisis…
 Phase 4 crisis: RED TAPE
   Proliferation of control systems leads towards bureaucracy taking
   precedence over problem solving, damping progress. The outcome of
   the revolution system is the next phase.




                     J. Bryzek, APCOT 2010, July 9, 2010                   58
Phase 5
 Growth: COLLABORATION
   This phase focuses on intelligent, more flexible and behavioral resolution
   of collaboration problems between business units
 Crisis: ???




                      J. Bryzek, APCOT 2010, July 9, 2010                  59
Lessons Learned
 Experienced managers understanding the evolution of companies,
 may successfully manage the company through multiple phases of
 its growth.
 Extracting people with scars from one evolution phase to another
 could be a path to disaster:
   VCs are often bringing “experienced” managers to Phase 1 startups.
      Phase 5 guys are lost and can’t build infrastructure.
      Phase 4 guys create red tape and bureaucracy
      Phase 3 guys delegate authority to unqualified people.
      Phase 2 guys focus on direction without creating the strong technology
      foundation.
 Recommended actions:
   Train founders.
   Bring external Board members experienced in the next phase of growth.



                       J. Bryzek, APCOT 2010, July 9, 2010                     60
Disruptive Innovation




        J. Bryzek, APCOT 2010, July 9, 2010   61
Disruptive Innovation
 Continuous innovations doesn’t require customer behavior change
   E.g., using a new toothpaste.
 Disruptive innovation forces customer behavior change.
   Two generic types :
       Paradigm shock (e.g., PC replacing a typewriter)
       Application breakthrough (e.g., voice recognition replacing service personnel)
 Marketing disruptive innovation with classical strategies produced
 failures:
   Initial sales growth is followed by the Chasm, a period of declining
   sales, often destroying the company
 Disruptive technology past Chasm has a potential for Tornado:
   Very attractive to VC firms.
   Needs to be reflected by Company’s strategy.



                      J. Bryzek, APCOT 2010, July 9, 2010                         62
Pain of Disruptive
Commercialization




                                                                      Saffo,com

 Percent household penetration vs. time for a variety of products.
 It takes on average 15 years for a technology to reach wide penetration.

                     J. Bryzek, APCOT 2010, July 9, 2010                    63
Pioneering Work
 Geoffrey Moore while working at Regis McKenna discovered the
 source of the problems with disruptive technology and published two
 books:
   Crossing the Chasm.
   Inside the Tornado.
 This section summarizes the findings.




                    J. Bryzek, APCOT 2010, July 9, 2010           64
Technology Adoption Life Cycle




                                  Sales
Continuous Innovation
(e.g., new model of car)




                                                                                                                 Time from introduction
                                                          Early
                                           Innovators                         Early Majority   Late Majority   Laggards
                                                         Adopters
                                           Types of customers:



                               Sales
Disruptive Innovation (e.g.,
word processor replacing
typewriter)
                                                                 The Chasm




                                                                                                                 Time from introduction
                                                         Early
                                          Innovators                         Early Majority    Late Majority   Laggards
                                                        Adopters
                                          Types of customers:



                      J. Bryzek, APCOT 2010, July 9, 2010                                                                    65
High-Tech Marketing Model
•   Market development sequence for disruptive High-Tech products:
    •   Start selling to innovators.
    •   Follow up with target sales to early adopters.
    •   Leverage endorsement from Early Adopters to develop Early Majority.
    •   Follow to sell commoditized products to Late Majority.
•   Benefits of the above model:
    •   Promise of virtual monopoly over a major new market development if the
        company:
        y   Can get there first (First Mover Advantage).
        y   “Catch the curve”.
        y   Ride it up through the early majority segment.




                             J. Bryzek, APCOT 2010, July 9, 2010              66
    Innovators (Technology Enthusiasts)
•    Techies excited with exploration of new technology.
•    Do not have money.
•    Important gatekeepers to the rest of lifecycle: only with their
     endorsement can a discontinuous innovation get a hearing.
•    “Seed” them with free samples.




                          J. Bryzek, APCOT 2010, July 9, 2010          67
Early Adopters (Visionaries)
•   Users excited with exploitation of new technology.
•   See their future products based on offered discontinued innovation
    with closed eyes (dreaming).
•   Want to be first to exploit new capabilities to achieve dramatic
    competitive advantage over the old order.
•   Have extraordinary influence because they are the first constituency
    who can and will bring money to the table.
•   They brag a lot about the new technology, creating good PR.
    Each visionary demands deep customization taxing the startup’s
    R&D.




                        J. Bryzek, APCOT 2010, July 9, 2010              68
    Early Majority (Pragmatists)
•    Make the bulk (1/3) of all technology purchases.
•    See future products based on offered discontinued innovation with
     open eyes (realistically planning).
•    Believe in evolution not revolution.
•    Look to adopt new technology after it has a proven track record of
     useful productivity improvements including references from people
     they trust.
•    Prefer to buy from market leaders because:
     •   Everyone makes products compatible with market leaders, thus
         systems based on leader’s products are going to be most
         reliable.
         Leaders attract many third party support, in essence providing a
         better “whole product” value.



                          J. Bryzek, APCOT 2010, July 9, 2010               69
    Late Majority (Conservatives )
•    Make the bulk (1/3) of all technology purchases.
•    Adopt new technology only if world threatens to pass them by.
•    Are very price sensitive, highly skeptical and very demanding.
•    Are not willing to pay for extra services they demand.
     To benefit from this group, products must be commoditized.




                         J. Bryzek, APCOT 2010, July 9, 2010          70
Laggards (Skeptics)
 They are ever present critics more then customers.
 Not a real marketing target.




                     J. Bryzek, APCOT 2010, July 9, 2010   71
Strategy for Crossing the Chasm
 Split the Mainstream Market into three sequential stages:
   The Bowling Alley
   The Tornado
   The Main Street
 Change radically the strategy when moving from one stage to the
 next one.
   Bowling Alley: develop niche specific whole products.
   Tornado: ship, ship, ship (mass market adoption).
   Main Street: maximize the market potential with a focus on +1
   customization.




                       J. Bryzek, APCOT 2010, July 9, 2010         72
    Crossing the Chasm
Sales




                                                                Main Street
                                                                 Flesh out
                                                                 potential




                                                  Tornado
                                               Mass market
                                               infrastructure
                                 The Chasm




                                             Bowling
                                              Alley
                 Early                        Niches                                          End of Life
                                                         Mainstream Market
                 Market

                                                                                                 Time from introduction
                       Early
         Innovators                           Early Majority                  Late Majority      Laggards
                      Adopters
        Types of customers:




                                                J. Bryzek, APCOT 2010, July 9, 2010                                73
Crossing the Chasm
•   The only safe way to cross the Chasm (unless there is a proven
    winner) is to put all eggs in one (segmented) basket by:
    •   Identifying a single beachhead of the pragmatist customer with a single
        application (pin) leverageable to other segments.
    •   Accelerating the definition and formation of 100% of their whole product
        (fulfilling a compelling reason to buy).
    •   Winning a niche foothold in the Mainstream Market as quickly as
        possible.
    •   Repeating the process with next pins, one at a time (Bowling Alley).




                          J. Bryzek, APCOT 2010, July 9, 2010                     74
    Bowling Alley Pin Model
•    Each pin (niche) is defined as the combination of the specific
     product application in a specific market segment.
•    Each pin requires its whole product.
•    Adjacent niches provide references.
•    Primary goal of targeting the pins:
     •   Get your product adopted as the market leading standard
         in as many niches as possible.
     •   Dominate a segment with >40% market share (in 12
         months).
•    Secondary goal:
     •   Develop a compelling reason to buy.




                       J. Bryzek, APCOT 2010, July 9, 2010       75
Bowling Alley Development
                          TORNADO
                          ..................
                          ..................
                          ..................

         Segment 3         Segment 2            Segment 1
        Application 1     Application 2        Application 3




                                                             en er
      ol e ct




                                                                  s
   W du




                                                         fe r m
                                                               ce
                                                      r e s to
                  Segment 2           Segment 1
      o
    h
   Pr




                 Application 1       Application 2




                                                         Cu
                           Segment 1
                          Application 1




                    J. Bryzek, APCOT 2010, July 9, 2010               76
    Bowling Alley Strategy
•    Key focus: end-user economic buyer with P&L responsibility (not a
     “techie”).
•    Key criteria for selecting Bowling Alley pins:
     •   Are they small enough? (Do not attack the segment bigger than you are;
         pick on somebody of your own size.)
     •   Will they serve the strategic goal?
•    Over invest when invading a new pin to accelerate your rise to market
     leadership:
     •   Deliver superbly engineered whole product without having to tie yourself
         to ongoing customization commitments.
•    Each pins must be derived from the first pin.




                             J. Bryzek, APCOT 2010, July 9, 2010                77
Product Perceptions
 There are four different perceptions of a product:
 •   Generic product (what is shipped).
 •   Expected product (which customer thought was buying):
     •   A minimum configuration of products and services necessary to have any
         chance of achieving the buying objective.
 •   Augmented product:
     •   Configuration providing maximum chance of achieving the buying objective.
 •   Potential product:
     •   Product’s room to grow.




                          J. Bryzek, APCOT 2010, July 9, 2010                        78
Whole Product
The Whole Product is defined as:
  A minimum set of products and services necessary to ensure that the
  target customer will achieve the compelling reasons to buy.
Objective: creation of a marketplace where the products is the only
reasonable buying proposition.
Company that executes a whole product strategy competently has a
high probability of mainstream market success.




                    J. Bryzek, APCOT 2010, July 9, 2010                 79
Whole Product Model
Whole Product consists of the generic product + whatever it takes to
achieve customer’s compelling reasons to buy, such as:
•   Additional hardware
•   Additional software
•   System integration
•   Installation and debugging
•   Cables
•   Training and support
•   QA certifications
•   Standards and procedures
•   …




                          J. Bryzek, APCOT 2010, July 9, 2010      80
Learning from the Scars




        J. Bryzek, APCOT 2010, July 9, 2010   81
Personal Scars
 Knowing what not to do is often more important that knowing what to
 do.
   Learning curve is long.
   Human nature rejects experience of others.
      Reactive mind…
 Presented examples came from my personal experience.




                       J. Bryzek, APCOT 2010, July 9, 2010        82
Lack of Development Focus
 At NovaSensor, we adopted a strategy of complementing funding
 with NRE for programs supporting the targeted technology
 development direction.
 Over a period of 4 years, we developed about 40 advanced MEMS
 chips.
   Many of these programs were an extension of customers’ R&D and were
   not ready for production.
   We were understaffed to debug problems for most.
   10 years later, products based on 4 chips represented 95% of revenues.
   Required customer support, draining development resources.
      We didn’t factor this in our pricing, resulting in too small a gross margin to
      properly support customers.




                        J. Bryzek, APCOT 2010, July 9, 2010                            83
Underappreciating Manufacturing
 At NovaSensor, we focused on development, underdeveloping
 manufacturing infrastructure.
   Engineering prototypes were not ready for volume production.
   Had problems shipping the existing backlog.
 Allowed a step switch from a manual production scheduling to MRP.
   MRP data base was full of errors.
      Ordered wrong part .
      Built and shipped wrong products to customers.
   Production cycle time stretched to the point of affecting both customer
   delivery times and inventory turns.




                      J. Bryzek, APCOT 2010, July 9, 2010                    84
Starting from Scratch
 In Phase 1, the team needs to create “something from nothing”:
   Converting a dream into a product.
 Most engineers and managers from larger organizations are not
 productive when the infrastructure they used daily doesn’t exist and
 needs to be created from scratch.
 In one of my companies, I hired VP Manufacturing:
   Came from a large company running production of the same product.
   Was paralyzed with lack of infrastructure, and was not ale build I from
   scratch.
   Over the next 6 months didn’t buy any production equipment as was afraid
   of making any decision:
   Left not feeling comfortable.




                      J. Bryzek, APCOT 2010, July 9, 2010               85
Blind Technical Love
 “Blind love” of the invention is typical for bright creative engineers.
    Inventions are (as is the art) an emotional form of expression.
    Love of their brainchild prevents an objective evaluation of technology and
    market, often leading into a business direction which can’t succeed.
    Typical problems include:
       Too small a market size (invented gadget is needed only by a small number of
       users not justifying the development effort)
       Too expensive technology development (exceeding financial resources of the
       company).
 I had multiple examples of such behavior:
    Internally I had to force breaking the endless loop.
    As advisor to other startups, I could only watch.




                       J. Bryzek, APCOT 2010, July 9, 2010                      86
University Halo Effect
 Many smart engineers with degrees from prestigious universities
 face another problem, university halo effect.
 When they start a company based on their Ph.D. thesis, they are
 overconfident.
   Their degree is a proof (in their mind) that invention is great and the
   world will come to get the product based on it.
   They fail to recognize that the market has different rules.
   Often refuse to modify the product to fit customer requirements for a
   subconscious fear of losing face in front of their thesis advisor.
 One of my friends, Stanford Ph.D.:
   Created a product which had a limited operating temperature range.
   Refused to upgrade the design concept.
   After burning $40M from investors, company closed after 10 years.




                      J. Bryzek, APCOT 2010, July 9, 2010                    87
Process Neglect
MEMS and Nano traditionally required both design and process
development.
Multiple software tools enable performance simulation of new designs
with a high degree of confidence.
Process development, however, is another story.
  There are very few standardized processes,.
     Sandia’s Summit V and MemsCap’s MUMPs are notable exceptions, however,
     have limited capabilities.
  New MEMS or Nano processes has very low predictability.
  New process development also carries a high price tag.
One of the startups developed low cost acceleration sensor for haed
drives.
  Invented two new MEMS process steps.
  Spent $400k on the MEMS foundry over 2 years, trying to debug the
  process yielding 1%.
  VCs called me for the advice: restructured company to do something else.

                     J. Bryzek, APCOT 2010, July 9, 2010                 88
Cash is the King
 Many of executives brought to startups by investors (VCs), have
 poor respect for cash.
   In their large organizations usually they got what they wanted, as the
   business was generating cash flow.
   They tend to treat investors as a replacement for their previous company
   finance department, assuming that if they will need more money, they
   will get it.
   Sometimes it is true, but at the expense of significant employee equity
   dilution.
   Sometimes it is not true and the company is shut down.
 I hired a CEO to one of my companies.
   Spent $10M in one year not making any progress.
   It took me 4 years to get investors to let him go.




                      J. Bryzek, APCOT 2010, July 9, 2010                 89
Failure is Mandatory…
Based on multiple studies, failure is a mandatory component of
success.
  When crisis came, successful companies recognize a failure and put
  corrective actions in place, which leads to future successes.
  Companies which did not recognize their failure (blaming the market,
  competition, scapegoats, etc.), were not in position of developing a
  corrective action and thus subsequently fail.
One of my engineers was European Ph,D.
  Took him 2 years to optimize design prior to release, as he was afraid of
  making a mistake.
  US based engineer managed to release tapeout few times a year,
  delivering the product 2 times faster, learning from his mistakes.




                     J. Bryzek, APCOT 2010, July 9, 2010                  90
Killer Delegation
 Managers brought to startups by investors are used to managing by
 delegation.
 They continue to manage a startup this way, creating problems:
    Pick “Yes Sir” people to manage programs.
    Hate and can’t work with gurus.
    Personally don’t contribute, degrading the morale.
    Depending on Yes Sir people to learn about problems.
    Can’t micromanage technology development.
    Blame others for lack of results.
    Create walls between departments, with job title defining the responsibility.
    Department “ownership” and “turf” becomes more important than results.
 Delegation is a disease which often kills startups.
    Created major problems in my two companies.




                       J. Bryzek, APCOT 2010, July 9, 2010                   91
Trusting Computers & Systems
 People have tendency to trust nice images, reports and studies.
 In one of startups we needed FEA software, we considered:
   Ansys, which at that time was very difficult to use by EE.
   User friendly expensive software.
   My Stanford/MIT EEs made the model with expensive software, saw
   pretty results, and wanted me to buy the program.
   We were interviewing FEA expert at that time.
        He changed one of the dimensions by 1 µm, and stress changed by 300%
        (due to automeshing).
 We switched to Ansys and got fantastic acceleration of time to
 market.




                      J. Bryzek, APCOT 2010, July 9, 2010                      92
Conclusions
 VC industry provides significant help in increasing probability of
 startup success:
    Market research reflected in the investment directions.
    Funding model.
 There are two generic startup strategic paths:
    From technology to market
       Big breakthrough examples: Apple, Microsoft, Facebook, Google.
       Probability of success is low.
    From market need to the product.
       Probability of success is high.
 Funding outside of Silicon Valley becomes more and more
 attractive.
 Many of YOU should do it.
    MEMS/NEMS/BIO technologies are enablers of many new applications.



                         J. Bryzek, APCOT 2010, July 9, 2010            93
Thank You

				
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