Start-ups: The Right way, the wrong, and my way…

The Right Way…

Maybe refined silicon was in the water? Or maybe it was traces of photo-resist? But it seemed that growing up in Silicon Valley, I just naturally wanted to be a high tech entrepreneur since I was able to ride my bike with the training wheels off. I wasn’t alone either. I used to hang around the local pool with a girl named Patti… Patti Jobs, had this cute older brother named Steve… (yes that Steve).

Sure, lemonade stands, everyone did that as a kid right? Well, I didn’t wait for customers to come to me. For months, I asked neighbors to save the green plastic baskets that strawberries were sold in. I then took ripe lemons, limes, and a few leaves, placed them in the baskets, wrapped them attractively in clear plastic wrap, and sold them door to door.

I formed my first “real” company when I was fifteen years old. OK, so my Dad helped me do it. But everyone needs investors and mentors ! My company, After School Science Enterprises, sold microscopic polymer spheres (2 to 10 micron diameter). I obtained the raw materials from my father’s company, processed it in our garage, packaging it in recycled bottles. My father taught me how to write quotes, keep inventory, write invoices, keep accounts, etc. I did everything myself, of course, having no employees.

This was the right way to learn about entrepreneurial start-ups and business (Thanks Dad!).

The Wrong Way…

Maybe you have seen this? I know I certainly have.

Two guys are eating lunch in the LargeCorp, Inc. cafeteria, bitching about how stupid their boss, the product, and the marketing team of LargeCorp, Inc. are. They both agree that they could do it better. Plus, they both want to be their “own boss”. So they agree that they should develop a better product in their spare time. They both have the same skills and it turns out had had nearly the same idea for some time now.

They build the new and best in class widget. Everyone who see it agrees. So, they get their wives to agree to a second mortgage and set about getting an office and found SmallCorp, Inc. They realize that they don’t have any skills at sales… so they hire the guy in LargeCorp’s sales department that had also been grousing about how he was never appreciated there.

But things don’t go well. They can’t seem to make more than token sales. The team hires the marketing guy that the sales guy insists was a “great guy” he used to hang with at JustAnotherCorp, Inc. The new marketing guy says that they need to advertise in all of the trade magazines, that will accelerate their sales. But that too only increases by a small amount.

After burning through their seed funding, the two founders agree that they need to bring in more capital… so off to Sand Hill Road (or the local equivalent)… and wonder why they can’t raise that Series A.

Lessons to be learned? Good investors look at four risks that I call the four M’s: Management, Market, Money, and Magic.

Venture capitalists invest first in people. Experience counts, quality counts. A start-up needs stars, not just adequate players. The people need to be the type that one would be glad to have next to them in a fox hole when things go south.

The market needs to not only be sufficient to support a start-up, but set to grow rapidly, to allow a new entrant to carve out a large share, to enable an exit with a valuation multiple in a short enough time that the VC fund will see a large Internal Rate of Return on deployed capital. That means the market can’t be one that an established large company already has cornered.

The venture capitalist needs to also be assured that there can be follow on rounds sufficient to allow the start-up to grow fast enough to secure a large share of the growing market. If the VC is concerned that the team won’t be able to secure follow on rounds, then she will pass on the opportunity.

Finally, there has to be Magic. This can be in an “unfair advantage”, some increase in the barriers to entry that the start-up creates by entering the market. It could be an amazing IP portfolio (patents, trademarks, an amazing brand, etc.). Or it could be a really audaciously new and “crazy” idea that no one is likely to follow fast enough to muscle out the start-up.

The wrong way of starting up is a company that ignores these four M’s.

My Way…

It started one day in the mid-‘80s when I looked over the shoulder of a colleague as he worked on an early laptop computer. Typical of mid-80s Liquid Crystal Displays (LCD) it was so low contrast that I asked sarcastically, “Is it on?”

This got me to thinking. It is a maxim of start-ups that one should have several key ingredients. First, it should be serving a very fast growing market. Second, that it should provide a product, technology, or service that is a significant improvement over existing (and anticipated) offerings in that market. Third, there should be an “unfair advantage”, something that increases the barriers to entry AFTER your start-up gets into the market.

I knew next to nothing about flat panel displays. But I’m an autodidact. I began reading everything I could find on the subject… and began filling a notebook on ideas of my own.

As I developed ideas of how to manufacture I spent every other Saturday at the Sunnyvale City Library Patent Collection, conducting prior art searches. This was all done manually in those days, wandering through tall stacks of A4 sized paper bundles, so I was also exposed to a lot of other ideas in the field. It was an excellent education, catching up to the state of the art, often stopping to read an interesting patent that just happen to fall open at random.

On top of all of this autodidactic education, I worked for a few start-ups, two of them in the display space. I learned a lot by observation.

In the fall of ’98, Microsoft announced ClearType, a primitive form of subpixel rendering. It just so happened that I had pages in my notebook on how to use subpixel rendering to increase the information and energy efficiency of color displays. So, I put a greater effort on finishing a preliminary patent application and contacted the editor of Information Display, the official magazine for the Society for Information Display, to publish an article on biomimetic layouts and subpixel rendering. I created a fictitious business name of “PenTile Matrix Licensing” that was listed in the article as my contact information. The article came out in the December 1999 issue, which actually reaches people a month later, so it came out in January 2000.

After reading the article a number of people contacted me. Several angel investors contacted me, looking to invest in a new start-up based on my technology. I began negotiations with several US and Asian display companies to license the technology. LG Philips was the most serious, inviting me to visit their R&D center in Korea, at their expense.

During my visit to LG, I was asked many questions about the technology, but I also heard one question repeated several times, “How many people in your company?” They assumed that I was a involved in a real start-up. As I sat in the lobby of the very elegant Intercontinental Grand I thought very seriously about what I had learned during my visit. One thing was very clear, I would need help supporting the technology. The LCD companies would not be able to simply license the concepts and run with them. I would need to supply the working algorithms in the form of an integrated circuit chipcore. For this, I would need software and electrical engineers. I would need to found a classic Silicon Valley start-up company. I made up my mind. I would start a company.

Starting a company takes time. There are so many details. It took several months, but I left the start-up I was working at, with their blessings and good wishes, to work full time on starting up Clairvoyante in June of 2000. As I would tell venture capitalists later, the chicken may have been involved with providing breakfast, but the pig was committed. I was committed!

I set up my “office” in the kitchen at home. I’ve heard other woman say that they too used the kitchen table as their first desk. I like to quip, men start-up companies in their garage, women in their kitchen.

A friend suggested that I talk to a man that she had worked with before, Chris Thollaug. That was the best stroke of good luck as it would turn out that he would be with Clairvoyante until the end, as the Chief Financial Officer (CFO). But in the beginning he was a consultant to our team.

I began negotiations with a consortium of angel investors led by a man who had recently been the VP of Marketing of a large chip company. But, as the negotiations dragged on, I became increasingly convinced that they were stalling as my personal savings ran out. Further, I became concerned that the lead angel was not very professional, nor personable. I witnessed him verbally abusing the cleaning service staff at his home. When the deal term sheet was finally presented to us, it was egregiously rapacious. Chris strongly advised that I turn it down. This was wrenching, as I was nearly out of savings and this was the only offer we had. But, I turned it down. Late that evening, the lead angel called me at home, obviously drunk, to verbally abuse me for rejecting the deal. I knew then that I had made the right decision.

Chris stepped up, investing $100K as my first angel investor. I was able to bring in another $200K from two other angels. With these funds, I was able to travel to Asia on a grand tour to talk to prospective partners. Later, during one of those long talks about what the vision for the company would be, Chris and I agreed to convert his investment into founders stock. The VCs I was talking told me that I was “too generous”… but in truth, it was my single best decision I ever made. Chris and I were total opposites in many ways, having completely different, but totally complementary skills sets. Together, we made a great founding team.

In the end, we signed a JDA with Samsung and closed our on Series A the very same week. During the eight years Chris and I managed Clairvoyante, we built up a team of stars, signed up twenty odd client/partners representing 80% of the display market, and filed over 500 patent applications world wide. Together with Joel Pollack, the man we recruited out of Sharp to be the CEO, we sold Clairvoyante to Samsung in 2008.

Interestingly, during the M&A negotiations, Samsung and I negotiated what has to be one of the most innovative post-acquisition business structures. I founded a new company, Nouvoyance, hired my core R&D and engineering staff, and Joel joined me as my Exec. VP. Together we performed all of the post-acquisition earn-out tasks and then some. In 2010, Samsung did it all over again, acquiring a start-up in Israel, Genoa Color, but asking me to manage their team through an Israelis subsidiary I formed, Nouvoyance Israel, Ltd.

Samsung took our technology and featured it in their top brands of smartphones, tablets, and notebooks. Just Google the brand of our technology “PenTile” to see what I mean. I could not have asked for a better validation.

Now, summer of 2014… all of our post-acquistion earn-out goals, for both companies, are finished, the staff all laid off, bonus checks in hand… and I’m free to find my next next.

Maybe yours?

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