Monday, June 11, 2012

What kills tech startups

I have heard visionary or highly technical founders blamed repeatedly for the failure of a company because the technology didn't work--in some countries, they are blacklisted for life for this "failure." I don't believe I have ever seen a company fail because of bad technology (although I have seen one where the founder simply but unintentionally fooled himself). The visionary ideas are the hardest--new materials that will "fix" the memory industry, a new device that will make solar profitable again, or an electric car that will break all the paradigms. These big, bold ideas often represent new platforms or are category-defining companies--technologists love platforms because they can sell their technology to multiple markets and that makes the TAM much bigger than anyone focused on a single vertical. Now some VCs also love platforms, or at least those that can be truly category-creating--but startups should try to sell into multiple verticals. It's too damn hard.

Investors want to find these deals that will change the world, but the perennial problem for tech is finding someone to pay for that change--to do that we need someone who cares, ideally a customer. The company can raise some seed money to flesh out their idea, maybe do some engineering prototypes or simulations to show it "can" work. Then, they will take these to a group of potential customers to try and find the visionary who can share their vision. The investors will go talk to these potential customers and get excited about what could be, but it needs a little more work--it will change the world, but it needs some more cash to get a prototype together and validate it. OK, great--so, Mr. Customer, how much are you willing to pay to be the first to have access to this revolutionary technology? Er...well, we don't do that sort of thing...

Now, there are some big, brassy, bold investors out there who will happily forge ahead and fund these revolutions; you find them a lot on cleantech, healthcare, and semi. Often, it's the only way that these things will change because customers are so terribly conservative and slow to change that they can't see the future until they are thrust into it. But even these investors have a recipe to de-risk these swing-for-the-fences deals.

There is an old adage in physics that to solve a problem you have to turn the problem against itself--put another way, all physics students know in multiple choice the answer that seems least likely is usually the right one. Two companies I co-founded ran into fundamental technology problems where basically the technology didn't work. In one, the material died at any practical operating temperature, so we had to change to a market that was comfortable with high-temperature stuff; in fact, that needed products that could withstand those temperatures. In the other the technology worked, but it required so much unique manufacturing equipment that it could never be practically deployed--the solution there was to sell the company to someone who was awesome at manufacturing so they could get it "inside," and they did about 7 years later. Death for a startup, but just a single design cycle for them. :-)

Elon Musk made the electric car revolution work by partnering with everyone who was best-of-breed in making the critical elements he needed--Panasonic for batteries, Toyota for engines and their parts chain, etc. He also had them write the big checks to finance the idea --so a crazy (who in their right mind would try to compete with Detroit? Japan...) idea became a stellar IPO. Of course, you don't hear about the other 5 startups that preceded Tesla and failed...