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The science of making money

06 Jan 2005

Thinking of starting up your own business? David Parker, CEO of fibre-laser specialist Southampton Photonics, offers some valuable advice.

From Opto & Laser Europe January 2005

When I was first asked to write this article advising budding entrepreneurs on the pitfalls of commercializing their technology, I will admit to a sharp intake of breath. It is true that I have been involved with numerous firms that have taken a scientific idea and turned it into a successful, money-making product. But it is equally true that my career has also included a few "learning experiences". Here are some thoughts.

My first piece of advice is to make sure that you understand the whole life-cycle of bringing a product to market and never lose sight of the ultimate objective: generating revenue and profits. In the strange world of the late-1990s telecoms boom, large valuations were created for start-ups with just a good story and a slick presentation. Those days are long over. Sanity has now returned to the financial community and, today, valuations are firmly based on a company's ability to perform and deliver "the numbers".

All too often I hear academics and R&D scientists in firms say they really understand a technology and its potential. In my experience, they are actually talking about having an in-depth knowledge of the scientific issues. Before embarking on any commercialization of a technology, it is important to perform a serious appraisal of what is needed to create a viable product. This is vital if the project is to get off to a good start.

Management teams spend most of their time "minding the gaps" between each stage of a firm's commercialization cycle (figure 1) - for example, making the transition from a prototype to a successful manufacturing ramp, or matching a product's features and cost to customer expectations. It is important to have realistic plans to bridge all of these gaps at the outset, particularly when writing a business plan. It is the time spent considering solutions to these hurdles that really pays off later.

The business plan

In presenting a business plan, styles vary, but here are some essential points to cover:

The market: How big is it and how is it segmented? Nothing frustrates intelligent investors more than statements like: "According to market analysts, the global market for widgets is set to grow to such-and-such..." So what? You must be able to demonstrate how the market is segmented and where you are positioned in it. The total available market should be broken down and the sector where your product sits scrutinized. Ideally, your target product area - often referred to as the serviced available market - should be large and easy to enter. It is your ability to penetrate the market, along with a realistic view of the speed of execution, that will allow the revenue plan to stay on track.

The product: What is it and how is it positioned? There are two primary considerations here. Firstly, ensure that you have a solid product definition at the outset. This may well change as you engage with the market, but being able to clearly articulate what your product does, what advantages it offers or what problems it solves for customers is key. The second issue is to define at what point in the supply chain the new venture operates. One way to do this is to identify the core competencies of your enterprise, and then think about how to maximize their business impact. However, few small-to-medium-sized enterprises thrive by trying to do everything themselves, so don't overestimate your capabilities.

Skills: Focus on the gaps in the commercialization cycle (figure 1) and ensure that you have (or can bring in) the skills within the organization to bridge them. This should result in a balanced team with complementary experience in the fields of science, management and business execution. Also be aware that as the business evolves, so will the leadership emphasis. It may be appropriate for the founding team, and specifically its leader, to pass on the baton. Handled well and in a timely manner, this should be viewed as a success in itself. The inability of founding teams to initiate handover themselves is a common major failing. Accepting this point and openly scenario-planning for it will gain credibility for the company in the eyes of the investment community.

Going to market: Think carefully about your channel into the market and consider all the options, such as direct selling or forming OEM or distribution partnerships. The optimum model may change with time as the enterprise becomes more credible, so beware of getting locked in to any partnerships too early. This will destroy value. Finally, analyse the customers' buying cycle. They have their own dynamics and rarely buy just because you have a product ready to sell.

Resources and the financial plan: If the items above are well-addressed, the resource plan should be the easiest bit. Ensure that the revenue plan is achievable and is not over-optimistic. You should build in enough time for development and the inevitable pothole or two. Think about the amount of money you are raising and its timing, as funding always comes in distinct rounds. Too much too early is dilutive, but too little can hinder real progress and potentially kill a company before it has had a chance to get off the ground.

Having done all this and prepared a thorough business plan, you are ready to start seeking capital, which brings me to my next point...

Raising money

Here is some advice about dealing with the financial community and raising funds:

Contacts: Work with high-calibre individuals and firms. Yes, you want their money but, perhaps more importantly, you also want them on your team. Their experience, credibility and network of contacts should be an asset. Think about the consortium and their geography. It is also an advantage that Series A investors will have a long-term view and the financial resources to follow through. Premature exits or fundraisings based on investors' agendas rather than the company's rarely maximizes value.

Find a coach within a few firms: Take their views into account early in the fundraising process. In addition, make sure you have someone on your team who can open a few doors. Cold-calling is a very inefficient process. The other role of this team member is to guide you through the "deal" - remember the investors want to make money too.

Have a prototype: Make sure you can demonstrate the technology and have done enough customer research to show there is real demand for your products. This is key to achieving financial backing.

Intellectual property

How the company's intellectual assets are to be managed and protected will be a topic of ongoing discussion. One thing is for sure, IP generation is not for intellectual credibility, it is a business tool. Put simply, it should be managed as a business process like any other.

Getting the balance right between proactive and defensive use of IP is crucial if scant resources are not to be squandered. The balance between IP covering the "how it works?" (fundamental technology) and "what is it for?" (application-specific) is also important.

Southampton Photonics (SPI), a company I am involved with, illustrates many of the points discussed in this article. Formed as one of the many start-ups developing optical components for the booming telecoms sector in the 1990s, it suffered badly in the severe downturn that followed. However, in the past two years, the firm has been transformed.

SPI's skill base has been broadened and a ruthless assessment of its real core competencies carried out. Since then, we have concentrated on enhancing the company's strengths in optical-fibre technology, and improved the power and performance of our fibre lasers. This, in turn, enabled a new product strategy outside of telecoms to emerge as a provider of fibre lasers for applications in industrial materials processing, aerospace and healthcare.

SPI has achieved this high level of diversity by concentrating on its competencies, combined with good positioning in the supply chain and the ability to produce standardized building blocks. The company is a good example of how focusing on the basics can allow a dramatic mid-course correction in an extremely difficult market environment.

There is no magic recipe that brings success. The reality is that you need to marry strong vision, a real focus on the basics, and a load of hard work from everyone in the team with just a smattering of that fickle ingredient: good luck.

Photon Engineering, LLCBRD Optical Co., LtdAUREA TECHNOLOGYALIO IndustriesOcean InsightDelta Optical Thin Film A/SOmicron-Laserage Laserprodukte GmbH
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