BUSINESS FORUM: How can a startup avoid the 'valley of death'?

Q: Can you offer some suggestions on how to bridge the ‘valley of death’ gap startup companies face?

A: I Googled “valley of death, startup” and was surprised that none of the many articles written on this subject offered meaningful solutions. So I will attempt to address this difficulty that a great majority of the startup companies in our industry face.

For those who are not familiar with this term, it means startup companies languish because they are unable to raise capital to develop a technology into ongoing business. We can get research funding from many government agencies to develop technologies but often are unable to raise investment capital from the private sector.

The reason, simply put, is the business plan does not make business sense to investors: It either requires too much capital or takes too long to get to an exit and provide a satisfactory ROI (return on investment, usually annualized for easy comparison) to its investors. I believe our industry is still suffering from remnants of the telecom bubble experience. Entrepreneurs still hope to do more of the same—raising a lot of money from VCs to start a grandiose project and build out the business quickly and then exit. Today is a different world because professional investors shun photonics. We must keep in mind that investors want to get the most out of their investments and will compare the various investment vehicles available to them to optimize. Unless you make them an attractive proposition that will net a high return—a more attractive return than the other business plans competing with yours—the likelihood that you can get funded is zero to none!

Given that investors look for higher returns to compensate for high risk, you can improve your chances by constructing a business model that does not require a major amount of capital to get started. It is certainly easier to convince investors to write smaller checks than big ones; you also increase the pool of potential investors who would have adequate capital to participate. To reduce the investment capital required, you can start with creating a solid niche business in an area with which you are very familiar. You are less prone to making mistakes in familiar territory, and being a niche business also means you can start to generate revenue quickly to reduce the time-to-market risk. And for most technical people, this is also a nice way to ease into becoming an entrepreneur.

The business need not remain small so long as you remain energetic. Newport and New Focus were both started this way and we were able to add to our product line, growing the business over time. This approach is a capital-efficient way to expand your business because only incremental investment is required to enhance your existing capabilities and service additional needs, and there would be no shortage of good ideas from the marketplace if you stay close to your customers.

What if you have a significant invention and you feel that you need to move quickly? We all like to think that, but major technological advances usually take a long time to commercialize. A sensible approach is to find ways to start a niche business using some aspects of the technology to get started while you develop related technology and secure your intellectual property to put yourself in the lead when the market develops. Even if you want to become a big success in a hurry, you may consider first validating customer interest—what I called building a prototype business—to decide on the next steps and make it easier to convince investors instead of asking them to take a big plunge based on speculation.

Click to EnlargeMILTON CHANG is founder and managing director of Incubic Management LLC. He is also director of Precision Photonics and mBio. Chang is a Fellow of IEEE, OSA, and LIA. He has received Distinguished Alumni awards from the University of Illinois and Caltech, is a trustee of Caltech, and is member of the Committee of 100. Contact Chang at with questions, and visit for other articles he has written regarding entrepreneurship.


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