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					How to start your own business
This first article in a new series          create cooperative relationships with        see that it’s most appropriate to raise
explains why engineers and                  industry. These relationships can add        venture capital when you've already be-
scientists should give serious thought to   relevance to your research and will in-      gun to operate and you need an infu-
starting and running a high-                fluence your students’ attitude to           sion of capital to drive the business.
                                            succeed in the industrial workplace.         Venture capitalists serve a very useful
technology business.                        Some funding agencies are more likely        purpose under those circumstances.
                                            to support your research if you’re do-       Reputable venture-capital investors
                                            ing it in the context of an industrial re-   generally don’t provide seed money to
I  believe the most efficient and direct
form of technology commercialization
                                            lationship.
                                               For those of you working in large
                                                                                         brand-new companies.
                                                                                           These investors tend to have shared
                                            companies, taking an interest in busi-       opinions about what’s hot; that is,
is when an engineer or scientist starts
                                            ness is a way to gain greater control        which fields are candidates for invest-
his or her own business. Such high-tech
                                            over your life. Engineers who under          ments at any given moment. For sure,
startup companies are, in fact, a
                                            stand business and are willing to man-       the optics industry hasn’t been hot for
uniquely American phenomenon and
                                            age people often command larger sala-        a long time, not since the mid-1970’s.
one of our major competitive advan-
                                            ries. And a knowledge of business is         Very few laser and optics companies
tages. They can serve as natural incu-
bators for developing new technolo-
gies. Our culture, our financial in-
frastructure, and our government en-
courage us to form new enterprises.
   Regardless of whether you start your
own high-tech company, this series of
articles will sensitize you to the busi-
ness aspects of what’s happening ar-
ound you- I strongly believe that en-
gineers and scientists can fundamental-
ly improve their contribution to society
and benefit themselves as well by
learning more about business. Every na-
                                            essential if you want a greater Say in       have been successfill in getting venture
tion, every company, every person
                                            how companies manage product de-             funding. Once venture-capital investors
must deal with the issues of productiv-
                                            velopment and allocate resources.            commit funds, they need an objective
ity and competitiveness. Our standard
                                               Technical training positions engineers    measure of whether the company is on
of living depends on what we produce,
                                            well to succeed in business. Technology      track; thus, managers have to be con-
and engineers and scientists, more than
                                            call provide a competitive advantage         cerned about meeting the milestones
any other group, can create wealth for
                                            in any industry, even low-tech business-     on the business plan. This management
society because they are directly cou-
                                            es. Certainly in a high-technology mar-      approach can be costly for a small
pled to the engines of productivity.
                                            ket, business decisions are best made        company; it can lead you to spend
                                            by people who understand both tech-          money before the business really re-
What’s in it for you?                       nology and business. In general, I think     quires it, in order to complete tasks
An awareness of business will help you
                                            engineers can learn about business           that look less important now than they
make more-informed decisions in your
                                            much more easily than business people        did when you wrote the plan.
career. In the past, engineers obtained
                                            can learn about technology.                     Consider this, too. Venture-backed
job security by joining a stable compa-
                                                                                         businesses have high failure rates —
ny and completing their assignments
with dedication and excellence. Today,
                                            Getting started: raising money               perhaps only about 10% of them be-
                                            Most books, and articles about start-        come big successes. This failure rate is
we obtain job security by being com-
                                            ing a business, and also most people’s       partially due to the fact that the win-
petitive in the job market and by
                                            concepts about starting a business,          ners have to compensate for the losses
making sure our actions directly con-
                                            pertain to the venture-capital model.        sustained by the other 90%. For that
tribute to the company’s success. That
                                            In that model, you identify an oppor-        reason, venture capitalists tend to have
means knowing who the company’s
                                            tunity in a large and growing market,        high expectations for the return on
real customers are, what problems they
                                            hire a complete team of experienced          their investment, typically 50% per year.
need solved, and how our actions af-
                                            and successful managers, raise a lot of      The only way they can get that type of
fect other parts of the company.
                                            money, and spend it to accelerate            return is to take a high percentage of
   If you’re a university professor, a
                                            your business development. Just by           your business for their investment, es-
knowledge of business could help you
                                            reading this simple description, you can     pecially when you approach them too
early in your development. In that          tinues: customers multiply, and your          duct. At that point, venture capitalists
sense, venture capital is expensive.        business grows. You achieve stepwise          were interested in investing. Today the
Another problem is that venture capi-       goals consistent with the resources at        company is the leading manufacturer of
talists generally assume engineers can’t    hand. At each stage, you are building a       ophthalmic surgery equipment using
manage this kind of business. Also,         profitable business.                          high-power semiconductor lasers.
when venture capitalists are disap-            A company formed in this way can              Ted Boutacoff, one of the founders
pointed, they are quite willing to “pull    be flexible, informal, and idealistic.        of Iris, tells the story this way: “Venture
the plug.”                                  Rather than being tied to your objec-         capitalists have to reconcile the inher-
                                            tives, you’re more likely to do what          ent conflict between their need to
The low-risk model                          feels right. For example, if your busi-       maximize return and their need to mini-
Chances are you won’t be able to hus-       ness is developing more slowly than           mize risk. They look for opportunities
tle venture capital the first time ar-      you expected, you can put off hiring a        where the risk is sufficiently low and
ound. What you read or hear about           vice president of finance for six             the potential gain is sufficiently high to
startups generally doesn’t apply to         months without concern that someone           make an investment. They examine risk
you; in fact, business writers often pre-   might accuse you of failing to operate        in four areas: management, technology,
scribe the opposite of what you             according to plan. You can raise in-          regulatory issues, and the market. When
should be doing. Instead of going the       vestment capital as you grow. And it          we first went to them they weren’t in-
venture-capital route, I recommend          won’t be as expensive, because your           terested because they saw high risk in
following a low-risk start-up model         company will receive successively high-       all four areas.
that gives you the opportunity to learn     er valuations. You’ll end up with a              “So we started the company with
management skills while you grow your       much bigger share of the company and          our own funds and began to take ac-
business. And when a big opportunity        control your own destiny.                     tions that would reduce risk in their
presents itself, you’ll be able to seize                                                  eyes. We reduced the management risk
it.                                         Case history: starting small                  dramatically by adding two entrepre-
    The two models aren’t necessarily in-   Iris Medical Instruments Inc. (Mountain       neurs as founders and members of the
compatible or inconsistent. The opti-       View, CA) illustrates the principle of        board of directors. We reduced techni-
mum approach for you may very well          starting small and building value in          cal risk by building a prototype in a ga-
be to adopt the low-risk model to           steps. The founders wanted to devel-          rage in Los Altos. We also took steps
start your company, then raise venture      op novel equipment for ophthalmic             to move through the regulatory cycle
capital when your business is headed in     surgery based on high-power diode las-        and validate the market. By doing all
the right direction                         ers. They tried to raise venture capital      those things, we reduced the risk suffi-
    The low-risk model is a common-         at the beginning, but they couldn’t           ciently to attract venture-capital in-
sense approach to business. You start       generate any interest. So they broad-         vestment.”
small, build a solid foundation, and        ened their team of founders by adding            Starting a business is hard work, but
learn the ropes as you grow. You raise      entrepreneurs with general management         it’s not as difficult as you might think.
a small amount of money from friends,       experience and started the company            Don’t be discouraged by statistics of
family, or other entrepreneurs. You         with their own funds. Over the next six       high failure rates- With proper prepara-
learn to watch cash flow and to spend       months, they built a breadboard sys-          tion, you have a good chance to
money wisely — if you run out of mon-       tem to prove the technical feasibility        succeed.
ey, you’re out of business. You hire the    of their idea and hired a graphic artist
team appropriate for building a small       to illustrate their concept of the pro-
company now and hire more experi-
enced people as you grow.
    You deliver a product or service that                 Two ways to start a business: a comparison
you can provide better than anyone
else. You take a “bottoms-up” ap-
proach to marketing; rather than quan-                             Venture start-up                 Low-risk model
tifying the world market and figuring
you will capture a certain share, you        Funding assumption    Deep pocket                      Finite resources
focus on what it takes to get one cus-
                                             Investment risk       High-risk gamble                 Every company succeeds
tomer to part with his money. Once
you succeed, you’ll have an easier time      Investment decisions Herd instinct                     Shared vision
selling to a few more customers. Then        Priorities            Market size\technology\people People/technology/market size
you serve those customers so well that       Market research       Top down                         Bottom up
nobody can take them away from
                                             Management team       Complete from beginning          Add as needed
you.
    This approach forces you to address      Management belief     Technologist can’t do it         Technologist can learn
the most fundamental of business prin-       Driving force         Meeting milestones               Do what feels right
ciples, which is to serve your customers
                                             Company culture       Traditional                      Informal, frugal, idealistic
particularly well. The low-risk model
doesn’t imply that the company has to        Spending burn rate    High, according to plan          Lower, like spending own money
remain small, because the process con-
                                           When to take the plunge                     oratories are also eager to support
  Starting your own business               Any time is a good time to start a          small companies by providing access to
                                           company. People who find reasons not        characterization facilities.
In this series of articles on the basics   to start today will find another reason
of starting and running your own           tomorrow. A startup company based
company, author Milton Chang shares        on the low-risk model is not particular-
what he learned the hard way about         ly affected by the overall economy                Starting a business
the electro-optics business in the last    because it is targeting a very small seg-          is hard work, but
24 years. You’ll find a heavy dose of      ment of the population. And there are
common sense and a tremendous                                                                it’s not as difficult
                                           tradeoffs that work to your advan-
emphasis on people, along with the
                                           tage. During good times, people are
                                                                                             as you might think.
nuts and bolts of putting together a
business. Each article will also explain   more willing to spend money. But dur-
business principles and the philoso-       ing tough times, you’re likely to find
phy behind them.                           better employees, and more suppliers
                                           will be willing to work hard for you and       Let’s face it. Who is better equipped
Series topics                              extend you credit.                          to take advantage of the vast oppor-
Getting started: the low-risk model           Many aspects of today’s business         tunities brought about by rapid tech-
Preparing yourself                         environment actually favor the forma-       nology changes in all types of business
Deciding on a business                     tion of small companies. Until recently,    than you are? If you think of your
Developing the business plan               people wanted to work for big com-          training as enabling rather than limiting,
Finding startup money                      panies. Now the best people want to         your possibilities are unlimited.
Forming the team
                                           join small companies. Because people           You've worked hard to gain your
Developing your first product
Manufacturing and operations
                                           are the key ingredient for success, this    technical skills. If you’re willing to
Marketing and sales                        is an important trend. Design and simu-     broaden and extend yourself a little
Finance, administration, and               lation software and computer work-          more, you will gain more control over
 informationsystems                        stations are affordable and accessible      your own destiny, earn more respect
Selecting and working with outside         to almost everyone. Universities and        from others, and create more wealth
 professionals                             big companies are much more open            for society. Let us seize the day!
Maximizing value creation                  and willing to make their facilities and
                                           their people available. The national lab-