BUSINESS FORUM: Considering the 'cool' factor
None of the recent Internet IPO companies—Pandora and LinkedIn, and soon Facebook—is profitable. Maybe in the photonics market we should focus on creating something that's cool, useful, or changes the way people do things instead of building profitable businesses. What are your thoughts?
Q: None of the recent Internet IPO companies—Pandora and LinkedIn, and soon Facebook—is profitable. Maybe in the photonics market we should focus on creating something that’s cool, useful, or changes the way people do things instead of building profitable businesses. What are your thoughts?
A: Interesting conclusion. You got it exactly right that the first order of business is, as you put it, to “creat[e] something that’s cool, useful, or changes the way people do things.” The business also has to make business sense, to satisfy all the basic requirements of a successful business: a competitive product, sustainable competitive advantages, and something that can become profitable eventually, to provide its investors a handsome return.
These companies have actually created value. We can question their valuation, which in theory is based on an estimate of their earning potential. Pandora had $138 million in revenue, a valuation of $2.8 billion at the time of IPO; LinkedIn, $243 million ($8.9 billion); and Facebook is currently estimated to have revenue of $2 billion and valuation of $80 billion.
The concern here is the validity of assumptions used to produce future earnings estimates. This is what a “bubble” is all about. In the case of the telecom bubble, optical networking is cool, useful, and changes the way we do things, but bandwidth requirements did not double every three months as projected—and the whole world merrily went along believing it. Another bubble you may not think about occurred approximately 30 years earlier, when the investment community assumed lasers could work magic and be pervasive. We can safely assume it is only a matter of time before these Web 2.0 companies have to face reality—that they might disappoint investors when their “products” have to hold up to expectations in terms of competition, revenue growth, and profitability.
The point I’m trying to make is that you must be conservative in planning your business—and for that matter, your career. Focus on doing what is within your control because when all is said and done, reality prevails and the outcome is often rational. So, when you develop a strategy to start a company or make an investment, always pay attention to satisfying the definition of entrepreneurship: taking capital from one area to apply elsewhere to get a bigger return…by putting it to more productive use. A measure of efficiency is revenue and profitability relative to the amount of investment required to build the business, as well as the risk profile of the business.
So, how does one go about starting a business in photonics? In my book, I describe in detail a startup model that is almost risk-free: In essence, write a thorough business plan, put all the necessary pieces in place, and make a long-term commitment to build out the business. Start off with a niche enterprise that capitalizes on your expertise and develop it step-by-step over time. You can choose to focus on creating earning power instead of near-term profitability, if you have the stomach for risk and adequate financial resources to carry you through the investment phase. You may win big, like what is projected for Web 2.0 companies. Or you could run out of money if investors lose faith when you do not deliver results as planned and that makes them less optimistic than you are.
The conservative approach is what I recommend to start a photonics company. It is wise to build a solidly profitable company that can become self-sustainable as quickly and with as little investment capital as possible instead of shooting for the moon. You have to consider that photonics is not at the center of what is attractive to the financial community, and there are now established companies in our industry to make it hard on smaller companies that are threatening. Stay under the radar, start small, build strength, and then go for it.
MILTON 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 email@example.com with questions, and visit www.incubic.com for other articles he has written regarding entrepreneurship.