Business Forum: Getting investor attention

Feb. 6, 2014
Here, I interview John Dexheimer, president of LightWave Advisors, who has advised over 100 financings or partnerships in photonics, Internet/software, communications, and electronics.
John Dexheimer
John Dexheimer

Here, I interview John Dexheimer, president of LightWave Advisors, who has advised over 100 financings or partnerships in photonics, Internet/software, communications, and electronics. As an investment banker, he led Uniphase’s IPO and early acquisitions. He currently serves as a director of INDO-US MIMTec; an advisory member to the NSF Institute of Mathematical Applications; and a partner of First Analysis Private Equity Fund IV.

Milton Chang: How does the investment community view the photonics industry?

John Dexheimer: Right now, there are very few U.S. investors focused on photonics—whether public analyst, money manager, or venture capitalist (VC).

MC: Why is that?

JD: The reality is companies are commodities to investors. Technology doesn’t matter—only profits or anticipated profits do. Buy/sell decisions are usually rational. Photonics is generally an enabler, not the end application that investors typically track. Growth creates interest and covers a lot of sins, but ultimately real profits and a business model that sustains them are what drive investment flows. A great saying I learned in managing IPOs in the ‘90s is public investors are not really owners, but short-term “renters.” I think that mentality has inflected the VC market to a degree—as the VC market became “institutional,” it created a game of focusing on sectors with easily seen momentum.

MC: What you are really saying is that photonics companies have to deliver what investors want to get their attention. I also think we should reach out as a group to get exposure to the investment community. Our professional societies have a role to play there.

JD: That’s right. There are a lot of great examples of photonics-enabled business applications and exceptional opportunities that can reward investors. Yet, on the surface of looking at photonics, investors are more seduced by Google’s gross margin of 60% and continued 15–20% annual growth. Photonics companies did have attractive metrics in the late ‘90s, but not today. The issue is they weren’t sustainable; unlike software businesses, these companies lack customer stickiness from which to mine profitable recurring revenue, and to be able to turn up or down the growth knob without dealing with messy issues like manufacturing factories and supply chain.

MC: OK. What it is, is! But photonics is more than telecom. Can you cite a few success stories that are in a less cutthroat business?

JD: IPG Photonics is a great story for technical entrepreneurs to learn from. The company started in 1991. It bootstrapped its growth moving upstream, leveraging its specialty fiber base into laser applications. 1995 revenue was only $1.5 million and in 1998 it was $8 million. It had its first outside investment in 2000, but went public in 2006. Today, the company has over $700 million in revenue and market capitalization approaching $4 billion. It’s a great lesson in taking advantage of multi-site international locations and developing key bill of materials (BOM) strategy early to access skills and cost mix to be capital-efficient and create a cost leader position. With consistently over 50% gross margin and 35% pre-tax, they’ve created a model attractive to investors.

Cree is a wonderful example of aligning IP, early lead customers, and production partners to create a financing path for a capital-intensive business. Spun out of ONR/NCSU in 1987 with 10 patents around SiC materials, it leveraged government contracts and gathered support from GE, Siemens, and Sumitomo as early customers for its LEDs, never had VC investment, and did a small IPO in 1993 when revenue was $2.9 million in the prior year, 50% of which was R&D contracts. Like the Uniphase IPO that you and I had a role in, Cree pursued nonstandard financing models that are not very dilutive. Today, the company has over $1 billion in revenue and a $7 billion market cap. It highlights how leading-edge materials technology and IP often needs to be built upon to move upstream to serve customers in order to monetize an IP position—in their case, the market they serve is no longer “just” selling semiconductors, but providing a range of solutions for lighting and energy management.

First Solar is another good example, as its CdTe photovoltaics highlight that patient capital beyond 10 years is needed for materials innovation to really gestate. Founded in 1984, the founder had over 100 patents in optics through prior companies created and sold. In 1999 it brought in a “super-angel”—Walmart’s Walton family as the sole investor, who put in $350 million in private capital prior to the 2006 IPO, which helped fuel its ability to achieve nearly $5 billion in annual revenue.

Illumina is another worthwhile case study. The public markets clearly define it as a biomed-life sciences firm, highly followed with a $13 billion market value and over $1 billion in revenue. What is often forgotten is that it was created in 1998 as a spin-out of Tufts with its IP and expertise on fiber optics and biochemistry. The founders were able to pull together other applications IP from multiple universities and quickly bring in multiple corporate partners for different application and distribution relations. Illumina illustrates that it often pays to combine talents to move upstream to address end-customer pain points and economics. For the entrepreneur, it means think about accepting a smaller percent of a big economic pie rather than gestating slowly and in relative isolation down the component food chain.

Investor success stories include Cree, First Solar, Illumina, and IPG Photonics.

MC: I am inspired by these examples. Reducing it to practice…what works for a typical technical entrepreneur in today’s tough VC environment?

JD: Starting a company does not always require investor capital. “Lean” is in, although it really always has been in the real world other than during those brief investment bubble periods. Figure out ways to bootstrap and be creative in funding via R&D contracts, customers, angels, and partners. You can team with your suppliers, with other domain experts, and with early key customers.

MC: How about crowdfunding? I also think a lot of photonics companies can take advantage of the JOBS Act that makes it easier for companies to get public money.

JD: Angel funding is bigger than institutional VC now. Many investment thought-leaders think regulation 506(c) that went into effect in late 2013 will open a floodgate of new financing from angel/private sources. A few data points are worth noting—the PublicLab DIY spectrometer kit got its funding from Kickstarter, and there are 30+ material firms and 300+ medical device firms listed on AngelList. Crowdfunding is embryonic—it should create more capital sources, but flows will still go to the “path of least resistance”... one has to create a business model that is understandable and compelling for customers and investors.

MC: So, which photonics application areas are more likely to get investor attention?

JD: Biophotonics seems to be an area with opportunities if it can address throughput to reduce costs or serve large under-served markets at much lower cost. Also, the game is hardly over for innovation in communications and laser processing. In addition, thinking of photonics as sensing elements opens up a huge array of “machine-to-machine,” big data analytic, and automated decision processing opportunities in imaging, lidar, and chemical sensing.

MC: Any final words of wisdom to entrepreneurs?

JD: You are obligated to move from being technology-driven to customer- and profit-driven if you take in capital. With or without investors, you cannot sustain long-term success without understanding upstream customers, their economics, and the competitive climate they are in. Talk to customers, and their customers, a lot. Understand what drives their economics! Think hard about business models—how to reduce risks and how to produce sustained profit on rising revenues.

About the Author

Milton Chang

MILTON CHANG of Incubic Management was president of Newport and New Focus. He is currently director of mBio Diagnostics and Aurrion; a trustee of Caltech; a member of the SEC Advisory Committee on Small and Emerging Companies; and serves on advisory boards and mentors entrepreneurs. Chang is a Fellow of IEEE, OSA, and LIA. Direct your business, management, and career questions to him at [email protected], and check out his book Toward Entrepreneurship at

Sponsored Recommendations

Request a quote: Micro 3D Printed Part or microArch micro-precision 3D printers

April 11, 2024
See the results for yourself! We'll print a benchmark part so that you can assess our quality. Just send us your file and we'll get to work.

Request a free Micro 3D Printed sample part

April 11, 2024
The best way to understand the part quality we can achieve is by seeing it first-hand. Request a free 3D printed high-precision sample part.

How to Tune Servo Systems: The Basics

April 10, 2024
Learn how to tune a servo system using frequency-based tools to meet system specifications by watching our webinar!

Precision Motion Control for Sample Manipulation in Ultra-High Resolution Tomography

April 10, 2024
Learn the critical items that designers and engineers must consider when attempting to achieve reliable ultra-high resolution tomography results here!

Voice your opinion!

To join the conversation, and become an exclusive member of Laser Focus World, create an account today!