August 3, 2013 - VentureBeat - guest post by investor Tim Wilson.
Entrepreneurship is the operative word these days — not just in the Valley. Universities are organizing business plan competitions, venture capital firms are offering entrepreneurs-in-residence (EIR) programs and corporations are putting programs in place to ensure that the sweet smell of capital keeps ideas and talent flowing through their doors.
Life is great — for some. But underneath all the self-congratulation and excitement, the picture is a little murky.
We’re moving away from the heart of technology innovation — the infrastructure, the machines, the seminal ideas we can touch and feel — to quick fixes (some necessary, but mostly peripheral) that are not setting the stage for the next new thing.
Manufacturing has left the building, as has funding
Last year, nearly a third of all venture investments went into software. Companies that build tangible objects — semiconductors, networking and equipment — accounted for less than five percent. Looking at the state of the VC industry now, the number of VCs in the Valley willing to finance things you can touch is as rare as a Republican in Berkeley.
A CEO in my network successfully raised a new round with a US/China syndicate last year. When scrubbing his list of U.S.-based VCs who took an initial meeting with him, 33 percent of the partners and firms are now gone. Dead. Out of business.
Where does he expect to raise his next round? In China or Taiwan, most likely. That’s where his manufacturing operations are. That’s where his customers export back to the rest of US. And that’s where local investors are willing to invest in IP created on top of the local production capacity.
Hardware is costly and time consuming. And most venture capitalists, hard pressed to return capital to their LPs as quickly as they can, choose to stay away from the cost and the time.
So what’s going on? Sure we can blame capital intensiveness associated with hardware startups, but “made in China” is now the de-facto standard for sourcing production capacity. China can build a factory from greenfield to production in under a year. It took one year to get permits to replace our leaking stucco wall in San Francisco. Something seems a bit off if you ask me.
Entrepreneurs building hardware or manufacturing companies should plan on spending significant time on an airline, traveling to raise follow-on capital.
Kickstarter will help pre-sell your smart watch. It will even raise money for your next dance company or rock group. Or for your app or videogame. In the four or so years of its existence, Kickstarter has raised an estimated $470 million for nearly 85,000 projects — an average of $5,500 per posted project. You can use Kickstarter to validate demand, but to build something big you need access to significant amounts of capital.
Let’s take a look at a few examples. NEST. Elegant design, not that complex, $80 million raised thus far. Kiva Systems. Founded in 2002, raised $30 million in capital and sold 11 years later for $775 million. A Better Place. The electric car charging startup took in $850 million before it filed for bankruptcy. It’s estimated that it would need another $500 million before it became viable.
Most investors aren’t willing to take the chance or the risk
The days when you built a mousetrap and waited for the mice are over. Nowadays you have to know the mouse before you design the trap. Or find VC’s who have the deep pockets to go through multiple rounds of funding and years of R&D.
The new hardware startup may well be uniquely configured: seeded by private investors and corporate investors – corporations that may well be potential customers; developed across borders to take advantage of labor costs and manufacturing excellence; and concurrently marketed in multiple global markets.
This model is the dominant paradigm in the manufacturing of drugs and biopharmaceuticals. It may well become the norm in technology hardware.
Tim Wilson is a partner at Artiman Ventures and focuses on early stage technology investments. He’s also a NSF I-Corps adjunct Instructor for the Bay Area Node.
From 2001 to 2011, he was a general partner at Partech International. He continues to represent Partech and serves on the boards of a number of startups, including InvenSense, Prysm, Five9s, LedEngin and Acco Semiconductor. He also represents Artiman on the board of Kaybus. Previous investments include Teknovus (Broadcom) and Ario Data (Xyratek).
Tim was previously the chief marketing officer for Digital Island, a Partech portfolio company. The company was acquired in 2001 for $350M. Prior to Digital Island, he was a general manager at Lucent Technology where he led the international voice communications product management team (now Avaya) with P&L for product lines generating over $2B in annual sales. Before Lucent, Tim held a variety of senior management positions within AT&T (North America and Australia) and AT&T Bell Labs from 1983-1995.