Dr. Peter Dudin, head of business development at EnCata and HACKSPACE Capital consultant, speaks about what inventors and entrepreneurs need to do in order to establish a successful new tech startup. Join us in discovering the ways to make the process of a new product launch fruitful.
In recent years, I've seen hundreds of scientists and researchers willing to commercialize their lab invention. Engineers and scientists, having worked for one or two decades on new product development, often dream about their research to be brought further in the form of a device, industrial technology or product. At the same time, nearly all of these innovators had one thing in common, which is a lack of understanding of how to make a new product launch process successful.
To cut a long story short, the success of a hi-tech startup in bringing the product to the market depends on a number of factors:
- working technology;
- appropriately allocated investment;
- product development workflow;
- great team (investor is a part of the team);
- entrepreneurship skill of the founder / CEO;
- competent leader who is able to push the project through different hardships.
But where can a scientist or an engineer find these ingredients of success?
Risks, chances of success and investment
New tech startups usually come across several risks:
- Technology risks – “Will the engineers be able to put the process of product development through to batch production?” Note that the idea itself may require considerable effort and investment to demonstrate the worthiness.
- Team risks – presence of an entrepreneur in the team. Ability to work together and ability to play down ambitions and focus on project delivery. Presence of an engineer in a founding team as a CTO / product owner.
- Market risks – “Will the product fit into the opening market window? Is there a market demand for the product?”
Statistics say more than 90% of new tech startups fail at the earliest stages. According to the world-famous accelerator Y Combinator, only 0.4% of startups become successful. Do you remember the much-discussed failures of hardware startups, such as Juicero, Pearl and Hello in 2017? And these are just the failed hardware startups featured in the media. Most of the others died quietly and never grew into a large company or business with a positive cash flow. From investors’ point of view, high risks of project failure mean high interest rates. That said, venture capitalists expect to receive at least 35% return on investment per annum (doubling the invested amount every 3 years after the project exit), because the likelihood of the startup's death is extremely high. Thus, most of the investors are indeed quietly hoping to invest in “the next unicorn”. However, there is one paradox here: investors’ money can’t buy a great team or motivation. And technologies are worthless without a product and cash flow.
Have you ever heard about a scientist combining entrepreneurial, managerial and engineering skills? Hardly ever. So the team should comprise professional design engineers, electronics engineers, software programmers, manufacturing and production engineers and marketing and PR specialists. In my opinion, demonstrating neat management execution is absolutely crucial as most of the challenges the startup will face will not be easy. There are numerous examples of "multi-specialists", such as when a talented scientist manages and supervises further business development as a CEO.
As the startup develops, the importance of technology owners, engineers, manufacturers and market specialists increases. During the R&D stage, the role of the scientists and engineering team in new product development skyrockets, as working out technology and building hardware are critically important at this stage. R&D management is another tricky thing – development never goes predictably smoothly and there are a great number of compromises to be made.
When the product is developed, it’s time for a marketing and sales specialist to rise and shine. There is nothing more important than first sales for any startup. A talented entrepreneur and manager are this "glue" that sticks together the mosaic of the project and the team.
Technology is the foundation of a startup. New products are emerging on the basis of technologies, allowing the startup to create value for consumers and achieve substantial additional benefits, and ultimately recoup their invested capital. Not every startup can offer a breakthrough invention. Historically, new technologies tend to emerge either in centers of excellence created in the past 100 years by a willful decision of the state for military advancement (Silicon Valley in California, Houston, Minsk, Novosibirsk, the LAVI project in Israel), or within the universities and large corporations (MIT, MFTI, Bell labs, Samsung, IBM, Xerox, Toyota, Dupont and others). The main asset of these centers of excellence is smart people who create future technologies in the labs. Sometimes, these technologies, having found no application in military or in corporations, emerge as startups in public life. Based on my experience, some scientists and investors lack the understanding that their idea or even technology has an extremely long way to mass application and investment. In reality, in order to bring your technology to the market, you have to pass nine circles of hell, in other words, stages of technology development. When assessing the stage of high-tech projects, we actively employ the methodology of technology readiness levels (TRL) developed by NASA. It’s hardly possible to get from an idea and laboratory prototype to the batch production of your product without a substantial sum in your bank account.
This scheme was developed by NASA to classify the readiness of various technologies created and commercialized by scientists and engineers. Each qualitative advance towards the creation of a commercial product or technology at the heart of the product is called a TRL.
There is also a classification of manufacturing readiness levels (MRLs), but this article won’t get you covered with this.
Investments into development
No one is eager to invest in an idea. Virtually none of the professional investors are going to invest in a project that has not reached TRL-4, a prototype "mockup", or PoC (proof of concept). At this stage of development, the project, or technology will be of interest only to desperate business angels with industry expertise or state development institutions that are committed to support research and development.
I often have to see the mistakes of business angels and venture funds investing in a "ready-made prototype", which is actually between TRL 3 and 5. These funds, having no technical insight and expertise in technology evaluation, invest in raw technologies that are at much lower stages of TRL than the startup declares. It all turns out to be a waste of money, time and nerves for the venture capital funds. The majority of angels, having gained the experience of investing "in ready-made prototypes," keep saying it was the last time they invested into a hardware startup.
We believe that the development of a proof of concept (PoC), demonstrating the working capacity of the technology, should take place in the research institute or in a hackerspace, using a startup’s or scientist’s own resources. Technology development can span over several years. The components alone could amount to several hundred dollars. Take, for instance, the case of Jobs and Wozniak who assembled a keyboard and a TV set to create their initial proof of concept (PoC) in their garage, unveiling the first Macintosh prototype. Interestingly, the sales of the Macintosh didn't commence until 5 years later.
TRL levels fit perfectly the investment rounds: pre-seed, which takes place at the development stage, and seed, involving production and market entry. Actually, pre-seed investments are needed to bring the technology to pre-production prototype. Our experience suggests that the necessary investments in developing an industrial prototyping (TRL 5-8) of a hardware product can amount to 50k to 500k. Rare investors take the risks associated with the product technology.
I want to stress this once again: venture and seed funds do not know how to assess such risks because they are not engineers themselves. Risks, associated with the technology, are extremely difficult to identify without going into development. Therefore, at this stage it is very difficult to raise investments from venture funds. But don’t be discouraged – the closer your prototype is to TRL 8, the higher are the chances of receiving the investment.
Professional funds, such as Sequoia Capital, Baseline Ventures, Lowercase Capital, and others, will review a project only at the seed stage, when there’s already a prototype ready for pilot batch production. Though these funds are even more eager to invest when the money is needed for commercialization and market entry, in particular marketing and sales launch. The closer you get to TRL 9, the more money a project will require. Rough estimates expect $2-10 million of investments for batch production, logistics, working capital and marketing. At the same time, you should understand that there are still no sales, and it is necessary to prove the demand for the product by selling it. Thus, you will need a proactive manager (unless you yourself are this guy), talented market specialist and sales guru. The proceeds from the sales of the first product may be spent on hiring additional engineers to improve and optimize the product on the basis of the first customers’ feedback.
Long way to Fiji starts with the first step
Each of the steps, especially the first 4 levels of TRL, can take years of scientific research and laboratory experiments. Therefore, the result of any individual laboratory development, invention and technology is almost impossible to predict. Still, if we assume that there’s a 50/50 chance that a startup gets to the next TRL, then we get a 0.39% probability that a startup will eventually reach TRL 9, starting with an idea, therefore, sharing the statistics of Y Combinator with 0.4% for their projects.
If you managed to demonstrate the efficiency of the technology by creating a basic prototype "with a blu tack and tape", which is TRL 4, then you can easily start looking for cooperation options with successful technological accelerators, namely HAX, BOLT, Y Сombinator, EnCata + HACKSPACE; partner with design studios and design engineering companies, which have experience in development and manufacturing, and bringing such projects to the market.
Partnership with accelerators, development catalysts and engineering companies increases your chances of success in the eyes of investors. Most accelerators engage in cooperation with the projects that have reached TRL 4, and the participation of professionals in a project certainly increases the chances that a team, or specific development will succeed.