learning from the follies of venture capital process keynote, ieee tmc conference san jose, 2011...
TRANSCRIPT
Learning From The Follies Of Venture Capital Process
Keynote, IEEE TMC ConferenceSan Jose, 2011
Conventional Approach To Start A Business Is Hard On The Entrepreneur
The conventional approach is to raise a lot of venture capital to gain first-mover advantage
Haste-makes-waste mistakes can be fatal
Statistically 10 out of several hundred business plans get funded and maybe 3 would get to a meaningful exit
This low-yield approach can provide a satisfactory return to investors from a portfolio perspective…but takes a toll on the entrepreneur
Always Fall Back On Fundamentals
To succeed, a business must create value efficiently to provide its investors and stakeholders an attractive return
Follow project management principles:
Do the right thing: Useful product concept, sizable market, valid business strategy, sustainable competitive advantage…
Do things right: Execution… identify and resolve show-stoppers, get the right amount of capital at the right time from investors who can help you succeed
Starting A Business Can Be Almost Risk Free!
If you start with a niche business within your field of expertise and make a long-term commitment to build-out the business over time one logical step at a time
This sensible approach lowers risk and enables you to make efficient use of capital to create value which is by definition what entrepreneurs do
You’ll Achieve Capital Efficiency Naturally…
Launch a niche business within your field of expertise. Risks are further reduced if you grow the business over time and work toward an early acquisition
You’ll have insider insight and expertise to provide a competitive advantage
Initial capital would be low, you can manage with common sense, and mistakes are recoverable
You can get new product ideas from customer, make efficient use of existing infrastructure to grow the business, and raise additional capital at an attractive valuation
Gaining First-Mover advantage is not the only way to succeed
Instead, for example, strengthen IP to avoid being shut out of the market and learn from mistakes made by pioneers
It is Prudent To First Develop A “Prototype Business” Even If you Want to go Fast
Take an orderly approach, which is to verify assumptions and refine strategy before making major commitments: Technology, market size, organizational makeup, operational details…Get everything right
Pass the acid test by getting orders from opinion-leading customers
…Then decide whether to build out the company quickly, develop the business over time, work toward an early acquisition, or abandon the project !
Business Prototyping Is A Useful Concept
It enables you to achieve capital efficiency
A proven business prototype is valuable because it enables potential acquirer to recognize the value the business could bring
A Tale of Two Startups & My Own Experience
• Jim and Janet Baker founded Dragon System, a speech recognition company in 1982…Acquired in year 2000 with 350 employees…whereas all other high-flying startup companies in this field failed.
• Segway, the personal transporter startup burned $150M of investors’ money
• Every one of the dozen or so built-over-time companies I incubated were successful: Newport, New Focus, Uniphase (JDSU), Iridex…, whereas investing as VC, we did no better than VC averages
Makes Sense for All Involved To Entertain An Early Acquisition
Because capital is being put to use efficiently
For the startup company: The founding team is most productive in the developing stage
For investors: They get higher ROI without having to take additional risks/dilution
For the acquiring company: It is capital efficient to develop a business concept that has been validated.
…That is system optimization!
Recap
• Start with an ambitious goal but proceed with prudence following project management principles
• Identify a product concept in your field of expertise to provide a competitive advantage
• Be well prepared and make a business case based on reality
• Either start with a niche business to grow over time, or develop a prototype business before making a major commitment to build out the business quickly
• Always work toward an early acquisition
To Students In The Audience…
Knowledge, reputation and network are your resource to start a business.
Become an expert in a chosen field because generalist cannot compete
Also become broadly knowledgeable and aspire to become CEO. Never stop learning and take an interest in business and management
Work for a a well-managed company to prepare yourself. Take on projects to learn professional and leadership skills.
Reach out and develop relationships.
Yes, you can!!!
A
Available at www.miltonchang.com
