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18 Feb 2009
Economic conditions are going to remain difficult, but photonics companies should not stop looking for inward investment. Bill Magill explains why strong projects can still attract the attention of venture capital.
Bill Magill is a venture capital (VC) general partner with over 20 years experience in technology, including hands-on engineering, market consulting, equity research and venture investing.
How do VCs regard photonics?
The collapse of the telecoms bubble left some scars, but they are diminishing. At that time photonics was an industry of extreme interest to the VC community and companies incorporated words like photonics or optical or all-optical into their names as if it was a magical solution to any problem. Those days are behind us. Today what matters is how you address a particular market and the pain in that market.
What do companies do wrong?
At the top of the list now would be business plans that are too capital intensive. A lot of the plans that have been funded over the last five years in, for example, the solar space are fairly capital intensive, but there has been a substantial fall off in interest in plans like that. Investors are now looking more sharply at how much has to be invested and over how long in order to get a product commercialized.
Another issue concerns technologies that can be flexibly applied to four or five markets. Flexibility is attractive in itself, but it can be a red flag for investors because each application may address a small niche market and require a separate product to be developed, possibly separate sales teams, and so on. Investors prefer a product that has one big market and which can establish a competitive position in that market.
A third concern is the inability to precisely identify the market pain that you are resolving. You have to be bringing a product to market that targets a tangible need or a pain point that no one else is successfully dealing with.
Are companies still going public via initial public offerings (IPO)?
The IPO window is closed until further notice, and unfortunately the fallout from that trickles down to the early stage investors in photonics technologies. As some of these companies postpone plans to go public, their private equity backers are conserving more cash and the net result is less investment capital available for other early stage companies. It makes for a very tight market this year for companies trying to raise capital.
Which sectors will recover first?
This downturn is going to be protracted and I don't expect to see a turnaround within the next 12 months. It is difficult to say what markets are going to be the most appealing and receptive to new technologies when the recovery does ultimately come. After all, at one point the cleantech sector carried a stigma not unlike that attached to optics, but has since become the most attractive investment sector in the industry.
What I do like about photonics, however, is that as a family of sciences and technologies, it has a lot of opportunities to address a variety of different markets and needs. I think that there will continue to be photonics technologies invented, developed and deployed, almost regardless of the ultimate end application.
Will the new US president help?
It depends on how effective the new administration can be in funnelling funds into certain markets that are primed for innovation. President Obama has talked about the need to push cleantech forward, and about the cleantech industry being a mechanism for regenerating growth in the wider economy. There is a lot of enthusiasm in the investment community that the cleantech sector will receive favourable attention from the new administration. That expectation has to be tempered by the pace at which government tends to work and by the realities of what one man is capable of accomplishing, but there is a sense that this administration can get us pointed in the right direction again.
Is investment capital still available?
It will be a slow year for venture investment and the wider private equity world, but that doesn't mean that there is no investment capital to be found. The investment community is going through a process of deciding where to place its capital and because the ground underneath is shifting in unpredictable ways – markets up and down, a new president, changing programmes in Europe, China slowing down – they are being very cautious. The investors are trying to understand how to allocate their capital for investment and that is creating this climate of caution.
But even so, some venture funds are out there raising new funds because they understand that the march of innovation continues. Smart people continue to graduate from the best engineering schools and they still want to do great and exciting things. The market need for better solar cells, new life science technologies or improved telecoms systems continues to march forward, even if it is at a less confident pace.
My suggestion to start-ups and entrepreneurs is to be sober about the prospects of raising money this year, but don't let that stop you from continuing to pursue your ambitions. Investors who want to put their money into the best plans are still out there. They are just being particularly selective.
Although the period of this downturn is yet to be determined and there is scepticism about the timing of the rebound, the wheel will turn and the markets will recover. In the meantime there is a lot of private equity available, sitting on the sidelines. If you have a compelling business opportunity, you will still be able to find capital.
• This article originally appeared in the February 2009 issue of Optics & Laser Europe magazine.
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