When I had been employed with a VC firm in the D.C. area, I had been tasked to do the due diligence on local companies and present my conclusions to the investment committee. One company of many I reviewed stood out in my thoughts. The founder was the head the Physics Department of a major state university. The product related to lasers – a topic dear to my heart since my freshman year in college, I studied physics with an emphasis on lasers. I visited the professor twice to get a grasp on the technologies. One technology seem interesting since it involved the ability to change frequencies using interference, but the other, I thought had a greater impact, could have had a transformational development on optical switching.
Optical switching technologies at that time had two types of technologies – MEM or OEO. MEM represents miniature optical mirrors, and was highly expensive since it entails miniature mirrors bouncing light to other fiber optic strands in fractions of a second. The other technology relied on converting the optical signal to electrical one and back to an optical route. Both switches delayed the network transmission since both changed the signals through a different medium.
The technology the Professor was demonstrating was the ability to use a strong electromagnetic signal to “bend” the light. Anyone who has studied Physics knows that gravity can bend light – the evidence demonstrated during solar eclipses. Why not strong electromagnetic fields? And if this technology had been feasible, then optical switches would be more efficient – a major revolution. It did not require a mechanical device to reflect or transform the signal fundamentally.
But the company needed $10 million dollars to move forward – from a lab to some viable product. Not a small amount of funding for a start-up. The Founder – the department head – was an academician. And, even though I admired the scientist, he had been in academia all his life attempting to be an entrepreneur. As always, I presented to the board and I stated that the company needed an experienced operational manager to run the company. Well, the professor nixed that in the head, but was able to raise that round from a major optical company founder, who like him, had been a physics professor.
Out of curiosity, I kept in touch with the professor. First thing he decided to do with that money is build a “clean room”. Now you can lease one, which, in a world of limited capital, would the right option. He decided instead to build one which not only represented millions in construction costs but also delays in rolling out the product.
I always recommend to an entrepreneur to spend every dollar as if it is last one. You have no idea what could happen while developing product. I try to save every penny. In one start up I worked on, my new landlord told me that he had considerable furniture to dump, one of which was a conference table. I immediately seized that opportunity, and saved more money on the budget. I have seen companies spend $700 a chair to look high tech, but unless you are already having substantial cash flow, is that where you would spend your limited capital? A couple of years back, I went around a few auctions from bankrupt companies and spotted those same chairs – at a fraction of that cost. I wondered if that company could have survived had it spent its capital more judiciously.
The next remark the professor made related to personnel. He told me he hired a General Counsel. An attorney? Why? As a start up with no products in the foreseeable future, I could not see why one would need an attorney on a staff with a limited budget. Let’s go to one of the tenets in Coase’s Theory of Firm – a firm internalizes its costs when it is cheaper than outsourcing. So, unless his legal fees exceeded the costs of hiring one full time, he should have used an outside firm. Now, what kinds of transactions should the in-house counsel cover? Invoices, contracts, leases, sales agreements, corporate minutes, and the like. Given that this company had no viable product and a small team, I question the choice to hire an expensive in-house counsel.
Needless to say, that if the Founder-Professor kept making these choices, he would burn that capital in a year. That is what happened and returned to teaching at the university. I use this company as another example –whatever funding you get, don’t go out and buy the kitchen sink. Use whatever capital you have efficiently.