Business Forum: What is the preferred startup model in today's environment?

Q: A couple of CEOs who started companies in 2002 were wondering why you have reversed your position from a talk you gave a few years back, in which you advocated more of a VC model, to now endorsing a "bootstrap" model. I do see entrepreneurs reverting to pre-1980 models.

A: I am surprised at this feedback because I have always maintained a balanced view on "the startup process." I wonder if selective hearing is involved here. A few years back, right after the telecom bubble, entrepreneurs thought venture capital was the only way to go.

You will note that in one of the slides shown during the presentation I emphasized "rais[ing] the right amount of money at the right time from the right investors." In the discussion I also made it a point to emphasize choosing a business model appropriate for the value proposition of your idea, your personal objective, the financial resources and capabilities you can muster, your tolerance for risk, and what you are willing to sign up for. (Laser Focus World readers can write to me for the slides of my most recent talk.)

Let us work through a few scenarios that our colleagues in the photonics community are most likely to encounter. In each case, let us assume you have done adequate homework to feel confident that you have a viable technology and a product that serves a real need.

Pick a popular area: Assume for the moment you have a major solar energy invention and your intention is to start a company to slug it out with the big boys. In this case, you have no alternative but to raise money from VCs–big VCs–to build out the business fast. This is a bit like betting on a dark horse: You either win big or get nothing. Well, we all know the statistics on VC-backed startups.

The other possibility is to work toward getting acquired. I am not saying that is easy. An acquisition is not within your control, but you'll have a better shot at it if you address all the details an acquiring company wants to know. Established companies are justifiably risk-adverse. They'd rather pay a little more at a later date when all the unknowns are resolved rather than taking on any uncertainty or assuming any liability.

A potential acquirer can handle market and execution risks; you have to at least resolve technology and manufacturing risks and get IP protection. That's where bootstrapping come in, to prove the "business prototype": garage, government grants, university laboratories, partnering, patient angel investors, etc. This is analogous to first resolving key issues before putting a product into volume production.

The idea here is you have to package what you can offer so an established company can take it and run with it. This is a logical progression in commercialization because you are the one who is committed to the idea and can do the initial "hard" part most effectively, whereas an established company can easily develop the operational part of the business. To them it is a matter of routine; for you, business development is taking a big risk because you start everything from scratch.

Bootstrapping to validate the key issues gives you options; you'll be in a better position to get VC financing if everything makes sense as you learn more. It is only a matter of price for you to get acquired if you indeed have a useful technology.

Most of the successful photonics companies are actually started by committed entrepreneurs who capitalize on their deep insight to start a modest business and bootstrap with tenacity to build up their initial success into a sizable business. I will take on this topic next month.