Business Forum: Can a "half-baked" idea get VC funding?

Q:I have an early-stage concept for a telecom component. Since so many photonics companies with half-baked ideas are getting VC funding, why shouldn't I go for it?

Milton Chang

Q:I have an early-stage concept for a telecom component. Since so many photonics companies with half-baked ideas are getting VC funding, why shouldn't I go for it?

A: Start-up companies do not generally disclose the details of what they do. So it is not a good assumption that their ideas aren't any good. Undoubtedly some companies are going to fail; hopefully, many more will become productive companies.

Venture capitalists are under pressure to invest the large sums of money they have raised. They are taking greater risks than in the past because the payoff is so high with each success. If they bet an equal amount on ten companies, and nine fail but one gives them a hundredfold return, their overall performance is tenfold! Taking greater risks therefore works for them. And with enough resources thrown at a project, even some half-baked ideas can make it. Keep in mind, most VCs are very smart people.

Unfortunately many technical people are now taking your viewpoint of "Why not go for a ride?" So the question is what is the down side for you. Aside from reputation, your penalty is opportunity costs. That is, if you are working on an idea that has little chance of success, you will not be able to pursue a really good idea in the meantime. My advice is to quantify the technical risk, develop a solid understanding of the marketplace, and take time to develop a really strong business model before starting the company. The golden rule here is to spend investor money like your own.

Q:I'm not sure what marketing does; what should I look for in hiring a vice president of marketing?

A: Defining what marketing does will go a long way to helping you define what to look for in this person. What helps me think through an issue is to list all the interfaces, in this case, the customer/company interface. Because people in sales, service, and sometimes accounts receivable also interact with customers, you must have a sense of how they work in concert to take care of customers. Customers also buy from other companies, so you also need to think about what the company wants to be relative to other companies.

A business-school definition of marketing is four P's— Product (definition), Place (distribution), Price, and Promotion. What marketing does is get the customer's attention and provide everything else leading up to a salesperson making a sale. Image is a major component in making a buying decision, so a good marketing person plays an important role in positioning the company. Marketing at a car company will define, for example, whether the company is in the business of selling luxury cars or just a basic means of transportation.

Closely related to that is "branding," that is, what comes to mind when people see the name of the company. A good marketing person thinks a lot about branding because one can expand the product line based on that reputation. People assume that anything from Mercedes is a well-made luxury product; therefore, Mercedes can extend its brand and be successful in selling perfumes or designer watches. This is what makes a company's reputation valuable. Marketing will also make sure everything the company does maintains that image so as not to diminish the value of the brand. Because of the importance of branding, it is not uncommon for marketing people to have a strong influence on product definition or to help sales select customers.

Other responsibilities of marketing include promotion and channel strategy (getting the word out and reaching customers). In short, someone in this position should be very strategic in his or her thinking, have a deep understanding of the industry, and be quite a good business person. Beyond that, you want to make sure there is a common value system and personality fit, just as you would for anyone you bring on board.

Q:After many interviews I am ready to hire a VP-marketing candidate who can do the job but is not as strategic as I would like. Will the CEO I intend to hire later be able to supplement the VP's skills?

A: Given that both CEO and VP of marketing are strategic positions, the CEO can be quite helpful in supporting the VP's activities. On the other hand, a CEO is responsible for all areas of a company, and you shouldn't bog that person down with someone else's job. It is not fair to the marketing candidate either, because if you begin with a lack of confidence, the likelihood of that person succeeding is practically nil. Hiring is a defensive game: when in doubt, don't. In addition, you may consider hiring the CEO first, and let the CEO choose a marketing person he or she can work with.

MILTON CHANG is chairman of New Focus and Arcturus Engineering and has recently founded Inc.ubationPartners. He currently sits on the boards of Agility Communications, Euphonix, Gadzoox Networks, Iridex, LightConnect, Lightwave Electronics, and Optical Micro-Machines. Send your questions on personal career matters, starting and running your own high-tech business, or manufacturing and operations to Milton Chang at [email protected] Visit the New Focus Web site at www.newfocus.com.

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