Why won’t my customers buy an entire system?

Several aerospace companies are very interested in licensing a nondestructive testing system we developed on government contracts.

Aug 1st, 2006

Milton Chang

Q:Several aerospace companies are very interested in licensing a nondestructive testing system we developed on government contracts. They plan to incorporate the sensors in their products. I am running into resistance with my customers when I try to sell them the entire system and sensors. What are my options?

A: I visited your Web site and found your technology interesting. However, I did not see “patent pending,” which could mean you have a weak intellectual-property (IP) position.

Assuming you have strong IP, the next issue to clarify is whether the investment required to gear up for business justifies the investment. Ultimately, you have to address capital efficiency and return on investment.

I recommend that you develop a patent strategy and build a patent portfolio to “circle the wagons” and strengthen your patent and negotiation position. Here, the sophistication of the patent strategy could make or break your opportunity, so you’ll want to find the best possible patent-strategy lawyer.

I see you as a sensor development company. You can transforming into a sensor production company, but doing so has significant risks because you need to add a product development and manufacturing team and a business team, neither of which you have. If you license the technology to your customers, you would have commercialization success to differentiate yourself from other R&D firms, providing a competitive advantage to get contracts. You would be able to build an R&D business and be exposed to commercialization opportunities with new inventions. The flipside is if you demand more than what you can realistically get, you may wind up with nothing. The time to make an objective decision is limited because of product-development cycles involved with getting your part incorporated in a customer’s product.

Q:We have developed an optical subsystem for biophotonic applications and are having ongoing discussions with interested OEM customers. Why can we not get VCs interested even though we project over $100 million in sales in five years?

A: VCs should be very interested if indeed you can generate that revenue that quickly. While $100 million is a nice round number, I suspect you lack solid backup for this claim, which degrades the integrity of your entire business plan.

Component or subsystem manufacturers are at the bottom of the food chain and can rarely generate that kind of volume quickly. Also, margins are usually squeezed and your success is dependent on the success of your customers, which is not within your control. Assuming your part is 5% to 10% of the manufacturing cost, your customers have to sell $1 billion to $2 billion worth of goods to get you your revenue. That’s not easy. You need to substantiate your claims before you can get funded.

Q:I report to a senior VP of business development, and am frustrated because the company leaders won’t listen to my input about the problem of our product positioning. What can I do to make them listen or should I just change jobs?

A: The problem you describe is more human nature than specific to the management you work for. People often want to remain in their comfort zone until the problem is staring them in the face. That means you are likely to run into the same frustration working anywhere. You need to have more critical mass to have your input not brushed aside. You may consider putting together a professional report with marketing studies, specific statistical data, and customer quotes to make your point. In the process, you may also find out whether you are right or not. Writing a thorough report gives you a chance to practice building a business case, which is a useful skill in a business development role no matter where you go. You probably don’t want to change jobs too quickly because you have already invested yourself in working to a high enough level to get meaningful recognition.

MILTON CHANG is managing director of Incubic Venture Fund, which invests in photonics and in businesses related to core technologies. He was CEO/president of Newport and New Focus and currently sits on the boards of several companies, including Arcturus Bioscience, OpVista, Rockwell Scientific, and YesVideo. He holds a Ph.D. from the California Institute of Technology in electrical engineering. He is a Fellow of the Optical Society of America and the Laser Institute of America (LIA), and is a past president of the IEEE Laser Electro-Optical Society and LIA. Recently, he was elected a member of the Board of Trustees of Caltech. Visit www.incubic.com for other articles he’s written.

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