Starting a company need not be as difficult as you might imagine. I will briefly describe a nearly failsafe way to start your business. The validity of what I present here has been empirically verified by my own personal experience.
Many of the concepts we have about starting business actually set us up to fail. For example, pursuing a “hot idea” is likely to turn out to be a wild goose chase because you don’t know what you don’t know and you’ll be competing at a disadvantage with those who are true experts in the field or with well-financed startup companies that can outspend you to gain a competitive advantage. Another folly is to believe an entrepreneur must “take the plunge” or should just get going even though there is inadequate due diligence or insufficient investment capital committed. Proceeding without adequate funding is like skydiving without a parachute; For sure you are out of business when you are out of money. Starting a business is a serious endeavor requiring thoughtful planning to take only calculated risks.
A significant number of the painful mistakes startup companies make can be mitigated if you start a niche business that capitalizes on your professional expertise to serve a well-defined need in an industry with which you are familiar. Your first product or service would likely be on target to avoid market risks when you know the industry dynamics, and you can manage a modest business with common sense to provide you time to become business savvy. Taking this approach does not mean your business has to remain small. You’ll be in touch with customers to get valid product ideas and grow by making incremental investments capitalizing on existing operational infrastructure, and you’ll be able to use your track record to raise additional capital at an attractive valuation to expand the business when you encounter a truly big opportunity. You are in the game! This stepwise approach is capital efficient which is consistent with the definition of entrepreneurship, and it is sensible.
My experience can provide a context as to why I am convinced of this approach. My first foray into entrepreneurship was joining Newport Corporation as its seventh employee two years out of school after working as a research engineer in an aerospace company. The business of Newport at that time was research hardware for lasers, which is the field both the founder John Matthews and I worked on in graduate school. I took on the responsibility of VP marketing and was able to overcome my lack of business experience by knowing what prototypical customer wanted. We were able to grow organically using cash generated from revenue. I became the president and was able to take the company public without additional outside financing. I went on to form New Focus two years after I left Newport and that too went public. During that period I worked with a dozen startup companies, all of which were built on the same principle. These companies, including Newport and New Focus, provided six IPOs and seven acquisitions; none failed. Later I co-invested with VCs in companies with the intention to gain first-mover advantage, only 40% of these companies succeeded. Now I am back to investing in companies where the management has a unique capability and is committed to building their company stepwise rationally over time.
So, how does one go about commercializing a proprietary knowhow or an invention? Get real! You have to make an objective assessment of whether there is a business to be had, and if so, whether the technology provides you overwhelming defensible competitive advantages to safeguard against companies with abundant resources, and for that matter you have to know whether you can raise an adequate amount of capital to support your business objectives. Then you have to come up with a self-consistent concrete plan to develop your company. You may just have to scale back to a less ambitious goal that’s within grasp. A fallback approach is to partner or to in some ways use an existing business to develop your idea into a business. I am not suggesting that it is easy to “sell” your idea, but it can be done if you are truly committed to your goal and have a realistic expectation of what your invention is worth to that partner.
A more relevant or immediate issue to most wage earners to address is how to prepare to put yourself in a position to start a company. First, you have to take an interest in business and management early to gain insight. How can you start without the necessary tools? You have to be an achiever every step of your life, as a student, as an employee, and as a manager. Each step provides you the learning opportunity to gain skills and confidence, and the recognition to launch you to the next step. You want to choose a well-managed company to work for, take on project management responsibilities and work diligently to excel on the job, learn to work with people and hone leadership and management skills, build relationships with suppliers and customers, and reach out to volunteers in professional societies and in community action groups to broaden your horizon and build your Rolodex. This mode is a “win-win” for you and for the company.
If you do want to start, write a thorough business plan, verify all the assumptions, leaving no stone unturned to clearly define the reasons why you can succeed. Develop a grandiose vision by all means, but clearly identify a specific milestone to focus on. And be sure to raise sufficient investment capital to comfortably get to that milestone because you need validation to convince your investors to support you for the next round of financing.
Indeed, every business can succeed but it is never accidental or by luck. You have to work at it by broadening your interests to include business and management and you have to be doing the right thing and do it right every step of the way. My recommendation is to speed up the learning by attending seminars, taking MBA classes, and by reading magazines such as Fortune, Bloomberg, BusinessWeek and Forbes…and my book! (wwww.miltonchang.com) Doing so can only enhance job performance because none of us can fully reach our learning capacity. If you do start, keep in mind that it is better to have a small success than a big flop. Consider starting in a niche to launch your entrepreneurial career and commit to the long term to build it into a sizable business.
Have fun, and I wish you success.
Let us apply this line of thinking to a specific case. I recently encountered a three-person company with a computer software/hardware security system and a grandiose plan to turn it into a substantial business serving the needs of government agencies and the healthcare industry. Internet security is a “hot” area and the needs are genuine, but it is hard to imagine how this company would be able to gain credibility in the marketplace and not get “muscled out” by strong competitors even if the technology is superior. One possibility is to first tackle a less challenging market for an application that is easier to penetrate, for example, where customers just want to feel secure even though they know they are not likely to be hacked by sophisticated intruders. This company could also provide the expertise to partner with a substantial company in these markets and one that has a long-standing trust relationship with these targeted customers.
Many of you have a technical Building a business is very different from getting research grants although in both cases you want to capitalize on your expertise as a starting point. Make no mistake; running a business is very different from managing a research project. The purpose of research is learning. Even failure can be considered success, because we learn something in the process. In business, a failure is a failure. Cut and dry. Also, it takes more than technology to build a successful business, you’ll have to have adequate financial resources and the ability to make sound business decisions and execute them well.
one simple principle I go by is “Raising some money to get going is a trap!”
So, don’t even start unless one has some idea on how to get adequate fnancial support for long term projects.
On the other hand, it is not realistic to line up all the capital to carry the work to commercialization
So the sequence goes something like this.
Set a realist but substantial goal.
Raise adequate funding to acheive that goal. The company is dead if that goal cannot be achieve to impress early investors.
Use that validation to develop an understanding on how adequate funds can come from.
Then take the plunge.
In your case, maybe focus on one military applications which UNM has connections with. Focus, focus, focus!
This follows my line of logic about building a prototype business.
Hope this makes sense to Les.
With best wishes,
I would like to tell you a little about myself to provide a context for what lies behind my business and management philosophy.
I came to the United States from Hong Kong to go to college. I worked my way through college supplemented by tuition scholarships and I graduated with highest honors in electrical engineering from the University of Illinois and went on to get a PhD from Caltech.
I landed a job in an aerospace company in Los Angeles after graduation and was soon dissatisfied with my work as a research engineer. I left after two years to join a startup company, Newport Corporation (Newport Research at the time) as its seventh employee. I took an interest in entrepreneurship while at Caltech and opted to stay on the business side. I took on the position of VP marketing as the sevenths employee, knowing nothing about marketing. That was 1971.
Small businesses are simple and can be managed by using common sense. My simplistic view was and still is, marketing is to know what customers want and what their choices are, and sales is to keep customers happy by giving them what they want. That was the principle I abide by. I worked long hours and what I don’t know I learn by reading and by talking to knowledgeable individual.
Newport started with only $150,000, considered a small amount of investment for starting a company even in those days. The company grew organically with cash flow generated from the business. We did not raise additional capital until we became a public company. We succeeded because the business is in an area where the founder John Mattews and I knew well. Our customers work with lasers, an area John and I did our thesis research. Eventually I became the CEO, grew the business to a sizable company and took it public.
We managed the business adequately by using common sense because the business grew slowly until it reached a critical size. What I don’t know I learn by reading, attending seminars, and talking to knowledgeable people. My simplistic view is, and still is, marketing is about knowing what customers want, and selling is to keep customers happy by giving them what they want.
I invested in eight startup companies while running Newport. And I invested in two additional startup companies in the Bay Area after leaving Newport. I served on their boards and was able to develop a strong professional working relationship with the management of these companies. I was engaged and freely shared management skills and contributing to their strategy. All these companies were successful; they either went public or were acquired. I started New Focus in 1991 and the company went public in year 2000.
After that, I started Incubic Venture Fund to co-invest with venture capital firms in Silicon Valley. Approximately forty percent of the portfolio company were successful. Ten years later I scaled back Incubic to doing angel investing again and spend a great deal of time mentoring entrepreneurs.
There are several important lessons I have learned, albeit with 20:20 hindsight.
Follow your instincts. I left a secure job when my instinct was telling me I was going nowhere. I can’t say joining Newport was not an impulsive move. Deep inside though, I know I could handle the job because I have been thinking about starting a business all along and have been actively learning. Again, I trusted my instinct.
Another lesson I’ve learned is how to start company in the VC mode did not work out as well for me as my also felt one of the reasons why angel investing worked for me is because I as able to develop a professional working relationship with the founders so that inputs are taken into due consideration. The management of venture capital funded companies on the other hand often does not have a trusting relationship with VCs and therefore the working relationship is often “Give me money and leave me alone.” Once I was branded as a VC, are often invested in companies To compensate for my lack of experience, I learned. I read business books and every issue of Business Week, Forbes, Fortune and the Wall Street Journal, and all the trade magazines. And I ask people questions. I found people were generous with their knowledge, happy to share their insight when they feel I was genuinely interested.
What I tell a young person about creating your own luck
Starting off, you’ll need a job. To get that, you have to gain expertise in an area.
Most of us can earn a satisfactory wage. Do you ever wonder how much more we could contribute to society if our self-image evolved from being a technical specialist to being a savvy all-around capable individual who has a technical background? This viewpoint would unshackle us from a narrow definition of our career.
Our technical training enables us to do much more; knowledge is enabling, limits are self-imposed. There is no reason why we could not use problem-solving skills we acquired in the complex technology arena to become a professional in any field. Given the application of technology is ubiquitous, having a technical background can provide a competitive advantage in any field. We can invent and design and build anything electronics, of course. We can also choose to move on to become a manager and leader of our company, a politician, or an entrepreneur. Anything! Optimizing our productivity enables us to make greater contributions to society and also enriches our careers. And a side benefit is more young people will choose a technical career when they see technical education as a gateway to opportunities.
Preparing for career optimization
We all want to self-actualize __to fully reach our innate potential. As a young person starting off, you must first develop a vision of your ultimate goals and along with it a roadmap to get there. But, be prepared to modify your goals and roadmap as you proceed because you don’t necessarily know the realm of possibilities or what your passion may ultimately be.
It is necessary to first gain a technical expertise to start your career. Getting an advanced degree is a good thing. Your academic and professional credential is the only thing an employer has to judge you by. Choose a job based on the learning and growth opportunities it offers rather than on a handsome compensation package. An ideal job is one that also offers project management responsibility for you to practice managerial skills.
Work diligently to excel on the job, learn to work with people and hone leadership skills, build relationships with suppliers and customers, and reach out to volunteer in professional societies and community action groups. Work as if you are working for yourself, because you are. You are being paid to gain experience and build a reputation to enable you to start your own business if you ever decide to do so.
Never stop learning to broaden your exposure to the realm of possibilities beyond your specialization and take an interest in multiple technologies and in business and management. Doing so does not diminish your ability to achieve technical excellence in your chosen field because none of us can fully reach our learning capacity.
Multi-disciplinary cross-fertilization enables you to see unusual combinations to make breakthrough innovations. Not only that, you may discover in the process what you really like to do and have an aptitude for.
Having an insight on business and management enables you to make engineering tradeoffs to benefit business, provides you a context to interact effectively with your managers, and empowers you to take on managerial responsibilities to guide those who are current on technology. That sidesteps the issue of obsolescence in a pure technical career, and also prepares you to start your own business. You can learn by attending seminars, taking MBA classes, and reading magazines such as Fortune, Bloomberg, BusinessWeek, and Forbes. Learning is easy if you are really interested.
Entrepreneurship is a career option
Entrepreneurship is not for every one; but you don’t have to avoid starting your own business out of fear of failure. I believe, based on my experience, every startup company can succeed because many of the fatal mistakes can be avoided.
In short, instead of following the pack to pursue a grandiose “hot idea,” which often turns out to be a wild goose chase, start in a niche that capitalizes on your professional expertise to serve a need in an industry you know. Doing so will naturally avoid many of the pitfalls startup companies make to set them up for failure. Your first product/service is likely to be on the mark to avoid market risk, it is easier to raise a small amount of capital, and you can manage a modest business with common sense. This approach does not mean your business has to remain small. You’ll be gaining practical experience to become business savvy, getting valid product ideas from customers, and using existing operational infrastructure to grow the business efficiently. And you’ll be able to raise capital at an attractive valuation to expand the business when you have a track record under your belt.
The common sense approach I described is rational, and is consistent with the definition of entrepreneurship, which is to make effective use of capital to create value—being capital efficient. What I have described is how I grew Newport and New Focus to initial public offering, and incubated about a dozen companies as an active angel investor…none failed.
Yes, we can!
Technical career can evolve. SpencerStuart, a major executive search firm, found that 33% of the S&P 500 CEOs’ undergraduate degrees are in engineering and only 11% are in business administration! (http://www.businessinsider.com/ceos-majored-in-engineering-2011-3?op=1). I worked my way through college and was a working engineer in an aerospace company before I attempted entrepreneurship. I did it, so can you!
I worked long hours at Newport with a great deal of enthusiasm because I was learning and growing.
• Starting business in an industry you know and capitalizing on your expertise to serve a niche market significant lowers the risk of failure. And grow the business logically; Ramp investment only after the business model is proven to be sound.
• Starting a company to pursue a hot idea without industry insider insight is likely to be a wild goose chase.
• An entrepreneurs must not reject inputs out of hand; Intellectual arrogance is a sure cause for failure.
Creating your own luck