Purgatory Part-II

Part one was posted previously.

Getting out of purgatory needs 110% focus. You probably have many, many customers, but they each pay a small amount of your revenue--you may have to fire many of them to focus on a few. If you are in multiple segments, you will need to pick one and focus your marketing and sales efforts on that. Now many say yes but the laser market is a mile wide and only an inch deep, so you can't get enough revenue if you focus.Sure, but what’s the point of being in purgatory? You need to make the bet-the-company decision, and put all your energy behind it.

At Lightbit we could not find a way to make the all optical network happen, let alone create a need for an all-optical wavelength converter, so we switched to blue lasers and JDSU decided to buy us. Then they changed CEOs and stopped all M&A, then we did a biotech product, sold that piece of the business, then used the proceeds to create a wireless product higher up the value chain, and, and, and ... ultimately we took the company public, but that’s another story ;-)

In order to make the segment big enough to feed you, you will need to become more than you are. You will need to provide your customers a whole product solution, not just a component--even if you make a turn key laser system, it will need to do something--Cymer made excimer lasers into stepper systems for SEMI; hard to believe a toxic gas laser could ever get into VLSI but it did, despite the efforts of other companies who had better technology and had been around many years longer. This is a common story.

To get out of purgatory you have to embrace risk--it's very likely that you will not succeed in your first target. You will need to refocus, but this agility is the key unfair advantage of the startup--you can't save your way to success or be stuck forever answering the random needs of a large base of small revenue customers as they jerk you from left to right in search of the killer app. You have to target your own killer app and go make it happen.

Another scary lesson is that customers rarely understand what they really need, so in establishing a new market, gathering large amounts of customer data may fool you into the wrong decisions. Now if it’s a large well-established market you can for sure gather a lot of useful G2 about it, but if you are going in there with a new widget be careful! It's very likely that your new technology is better than what is already being used, but it's also very likely to be irrelevant to the customer’s real problem. We can easily convince ourselves that our technology is better--this inside out approach is common to most tech startups. What’s needed is the outside in. Forget what your technology can do, and start understanding what your customer actually needs to do (despite the fact that they don’t consciously know).

Many tech startups have found gold completely outside their chosen technology. In many cases the company finally gets out of making lasers altogether, as it concentrates its effort on better understanding and developing the applications they serve. It’s a scary transition for you as you give up your unfair technology advantage, but it’s a great feeling to metamorphise from a laser jock into a telecom, or medical device, or semi or whatever vertical market person.

Finally, it's fairly likely that you will kill the company when you make a bet-the-company decision. Get used to it--the alternative is survival at subsistence level waiting until the next killer app comes and you can jump on it. But we have all seen that movie, you get a short term lead but before long your competitors are on it and eat up your lead and you are back to purgatory again. You have to look before you leap, but ultimately you have to leap, and when you leap into the void the outcome is always better than purgatory ;-)

Purgatory

This is a two-parter. Those of us who cut our teeth on the laser business have a unique perspective on Purgatory. For VCs it’s the biggest fear in investing--there are three outcomes of any deal: Win, lose, or ... nothing--the company manages to scrape together enough customers to survive and extend for years, and years, … and years, but never grows. In the last tech crash VCs sought to “hibernate” companies but learned too late that technology has a finite shelf life--you grow or you die, you get big or you go home ... like the Roman empire, or the Greeks, or the Persians, or ... the US?

In the laser industry Purgatory was always the status quo: so when the tech bubble burst it actually didn’t feel quite so bad, and interestingly laser industry guys had a unique advantage in how to navigate it ;-)

For the benefit of non-laser people, laser companies are usually driven by technologists who create a wonderful unique new technology (such as a diode-pumped laser producing green or blue, or doubled diode, or direct visible diode): It's amazing, no one can believe it was possible--it's the holy grail. So now, what do you do with it? Initial customers love it, pay big $ to get it, and after a while you figure out that their app is a medical device, or industrial, or mind reading. There is a unique characteristic to your laser that even you didn’t understand and your customer has worked out how to use that to solve a really important problem. So they get paid well for that and grow. You grow too, albeit more slowly, being a components guy.

Now I know that in the telecom bubble things got inverted and components were king for a while--but this is rare (unless you are in semiconductors where all the value is in the chip, not the consumer product). Your customer starts having success, then other really smart technologies jump in and start coming up with other products and technologies to serve him, and you become marginalized. The other unique characteristic of the laser industry, probably because it's so sexy ;-) is that there seem to be way more competitors and small startups for every opportunity than in any other industry--i.e., if a normal vertical can feed five competitors, the laser vertical will have 20 … so you get stuck in the dreaded chasm (Moore).

When we are in the middle of the chasm, we'll do almost anything to try and get to the other side. Raising venture funds can be a good way to do it if you can really scale, but all too often you get stuck in purgatory--get to breakeven but not to the other side. You are still stuck but now you have angry VCs on your body and they are going to hammer you until you succeed … or break. Having suffered through this a few times, I have an idea of what to do.

So how do you get out of Purgatory? Well it involves a lot of Hail Marys … but, at Iridex we integrated up the stack from component to end-user product. We had the unique visible semiconductor laser component that made a unique, and more revenue, and higher margin ophthalmic laser; we had the high-brightness high-power diode subsystem, which made a much better hair removal laser than a component. Clearly, the closer you get to your customer the more of his $ you can earn!