Is low-tech business intrinsically less risky?

Oct. 1, 2003
Would you agree that low-tech businesses are intrinsically less risky?
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Q: Would you agree that low-tech businesses are intrinsically less risky?

A: I am not sure one can generalize, given that every business has its risks. There is, however, some truth in the saying "pioneers get arrows in their backs." Since most lasers and photonics companies are started with a technical innovation, it is easy to associate business opportunities with technology and forget business opportunities depend on providing solutions to customer needs—whether it is high tech, low tech, or no tech. Your question gave us food for thought.

In most high-tech businesses, people are willing to pay for performance. So, that could imply a high profit margin if your product offers technical advantages. But if the technology is rapidly evolving, then you'll also need to have high R&D spending to keep on innovating and assuming technical risks. The net result is an overall low-profit business, which is characteristic of companies in our industry. We pursue this line of business because that's our area of specialty, but also implicitly hope we might encounter killer applications that could make us another "Intel." This is reason enough to stay high tech, but to be able to take advantage of these opportunities when they occur, it is important to keep on building capability to follow the evolution from technology to applications.

Low-tech business could mean there are more competitors to keep margins low. In this situation, the only way you can win at the end is to be the "last person standing" by being the lowest cost producer. Even here technology can play a part; innovations in manufacturing and operations could help you be the lowest cost producer and also give your product a performance advantage. It is well known that a small performance advantage in a commodity product could yield a huge increase in the sales volume to make it an attractive business. Many companies fall into the trap of keeping costs low by chasing low-cost labor around the world thinking that's competitive advantage. The reality is that advantage is only temporary because any company can eventually have access to the same labor force.

The conclusion is that it is a tough world out there. For each product and business you pursue, you must be constantly on the lookout for better ways to serve customers than your competitors, and to build sustainable competitive advantages. You just have to continue innovating to keep ahead of the competition.

Q: Is it true that venture capitalists are mainly funding late-stage companies at this time?

A: Yes. To present a more complete picture let me describe the current venture-capital funding environment. The current economic environment is improving and the window for IPO (initial public offering) is expected to open soon. The valuation of private companies is still low because that tends to reflect the current stock market condition, rightly or wrongly. Given that, VCs are starting to invest and in some instances starting to compete for good investments. But as a practical matter, the belief is that when the IPO market recovers valuation is not going to be anything like it was during the bubble. A market cap of a $100 million is considered good. That means the total investment in a company from start to cash breakeven cannot be much more than, say, $25 million, and still make sense to investors. That means there are fewer business plans that are fundable. On the other hand, many companies started during the bubble are valued at a fraction of the total money invested, even though they are much closer to IPO and have many of the technical and market risks resolved. That makes them bargains from an investment standpoint. Many entrepreneurs starting companies still carry the bubble mentality in valuation and the amount they try to raise. So the choice is obvious. Still, if you have an idea that serves a real need, and you have a sound business model that can provide a good return on investment, you can always get funded.

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 www.miltonchang.com.

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