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Startup sausage-making: from idea to company

Great companies are built around brilliant ideas, great people and strong execution. It takes a lot of work to take a brilliant idea and turn it into a fundable company, and we are proud to invest in founders who put their blood, sweat and tears into doing so. At Lux Capital we invest in seed stage, and sometimes even pre-seed stage, companies and hence often find ourselves as partners with the founders in doing the messy work that is involved in moving from idea to a company. We sometimes politely call it startup sausage-making.

This kind of startup sausage-making is messy. It is not always fun. And it is not always successful. Trust me we have lots of debates internally how much of our efforts should focus on such super early stage opportunities…but as entrepreneurs in our previous lives, some of us cannot resist the temptation to take the risk and put in the hard work in bringing such companies to life. We fall in love with ideas and we fall in love with entrepreneurs. We also don’t always succeed but for sure its always a team effort at Lux, and we give it our best.

I was recently discussing some of the things involved in such startup sausage-making with a friend and thought it was worth sharing so founders we have yet to invest in would know where we have some experience and can help:

  • Completing the founder team — this is the toughest, and frankly most frustrating. You can’t really hire a search firm to help find the missing founder (trust me, I have tried). Yet, we regularly meet founder teams that are incomplete. Either all technical with nobody understanding the business/market/customer needs, or all business and nobody really having the technical depth and breadth to address issues quickly. At Lux we maintain a wide network of experienced entrepreneurs across all kinds of spaces who can be pinged as opportunities arise where they might be able to play a critical role. But there is no magic formula to it. The process of dating takes a long time, and even then there is no easy fit. Arranged marriages have their advantages and disadvantages. Most important for us at Lux is to have an honest dialogue with existing founder(s) on what we think is missing, and then getting on the same page vis-a-vis what we would like in an ideal co-founder(s).
  • Technology to product — Technology doesn’t sell, product does. Yes all companies go through this process but in some industries this step can be too time consuming, expensive and/or unpredictable. It is important to understand that early. Supplementing in-house competences and capabilities with knowledge gained from experienced consultants maybe the best way to triangulate on this at early stages. Understanding this also helps determine how much funding would be required to take company through to exit velocity.
  • Customer discovery — Companies get built around customers. Early conversations with customers help build the right product, the right team, and the find the right investors. This is very tough if the business team is incomplete or does not exist. Investor team can help pitch in, and we open lots of doors, but somebody is needed to own the problem and build a vision for the product with customer input in mind.
  • Financing — Very early stage companies have to delicately balance their pitch between being bold/visionary/change the world and here’s what we will do in concrete/focused/viable fashion over next 12-18 months. We spend time helping companies understand not only the art of pitching to investors, but realizing that a good pitch is also a document that can be used to help with recruiting and in organizing execution.
  • Ugly details — Depending on the nature of the startup there are often lots of loose ends that need to be tied up for the company to succeed in the long run. For example company registration issues, IP licenses, non-compete agreements, no-hire agreements, visa issues, payroll, HR policies etc. Oddly these these are things that pester entrepreneurs most (esp first-time entrepreneurs) but fortunately these are areas that investors understand well and typically have lots of vendors and partners who can help companies gets et up the right way.

SBIR/STTR grants are great. ‘SBIR shops’ are not.

As a partner at Lux Capital I search for, and invest in, technologies that are often based on fundamental innovations in science and engineering. Our team is not turned off when we encounter deep scientific facts or publications. In fact, we thoroughly enjoy learning about them – a lot of our internal communications are around discovering/sharing amazing inventions in all kinds of domains. We regularly spend time with academic researchers and small companies who are recipients of non-dilutive SBIR/STTR grants. As such we are supporters of government funding programs to sponsor translational research and invention-to-commercialization efforts.

However, it is unfortunate that along with many amazing entities that truly benefit from SBIR grants, I also routinely see entities that are frankly called ‘SBIR shops’ in the industry jargon. These are life-style organizations that frankly feel like leeches feeding off these government programs without any real interest in commercialization, or in bringing their technology into the real world. They go from one SBIR grant to another for years, some times decades, and their teams have professional grant writers who are paid to do nothing else but submit successful grant applications into multiple agencies. My problem with these organizations is not that they are not accomplishing the explicit goals of the SBIR/STTR programs, but that they are sucking away precious resources from the system that would otherwise be available to enterprising technical entrepreneurs, especially younger researchers, who are genuinely interested in commercializing their inventions. They are hurting innovation in the long run.

SBIR/STTR programs are sponsored by several large government agencies (such as Departments of defense, agriculture, commerce, energy, homeland security, EPA, NIH, NASA and NSF). Approximately $2.5-3B are awarded in such grants every year. These are not small dollars, and if utilized properly, they can provide much needed capital to support commercially relevant technical innovations in new biology, materials, devices, systems, and software. SBIR awardees produce >2500 patents per year and more than 15% receive outside funding to continue with their ventures. A lot of good has come from SBIR grants in the past, but much can be done to improve the system, and to get rid of the ‘SBIR shops’.

Formally none of the awardees can receive a Phase III grant without external funding towards commercialization, but these ‘SBIR shops’ have figured out how to perfectly game the system. They move from agency to agency, and from one set of grants to a different one. When I meet young researchers who are working on securing their first SBIR grants, they appear nervous and unsure if they will get it…In contrast, these ‘SBIR shops’ are easily identified as they exhibit complete confidence in their ability to secure multiple grants worth millions of dollars per year to continue to operate for years to come. They abuse the system, and can be easily identified when they pitch to venture investors, but unfortunately the SBIR management system itself doesn’t have enough resources to put the right checks and balances in place to stop them in a timely fashion.

I am not sure what the solution is…maybe angel/VC community can be more actively involved in awarding and management of SBIR grants? Maybe there should be a limit on the total number of grants (not dollars) that can be given to any single entity/organization? Maybe there can be an easier and faster way for people to identify ‘SBIR shops’ so award administrators can investigate abuse of the system? Other ideas? Lets improve the system so our resources can be used to more efficiently foster technical innovation.

As an aside: if you are a technical entrepreneur int’d in securing SBIR funding, or an investors looking to unearth gems among previous recipients, SBIR Source can be one of the more helpful resources.

Celebrating Mario Molina, Nobel laureate in Chemistry, and my Ph.D. advisor.

Mario next to the equipment I used to understand phase transitions in atmospheric aerosols.
Mario next to the equipment I used to understand phase transitions in atmospheric aerosols.

I am headed to UCSD tomorrow to join generations of previous graduate students, post-docs and research collaborators of Mario J. Molina to celebrate his 71st birthday, and his receiving the Presidential Medal of Freedom in 2013 (Mario Molina Symposium).

Mario was my Ph.D. advisor at MIT from 1998-2003. Mario’s contributions to science earned him the Nobel Prize in 1995. He, along with Sherry Rowland and Paul Crutzen, discovered the fast chemical reactions in the stratosphere that were destroying the ozone layer. And then worked tirelessly to prohibit the use of CFCs by industry, leading to the passing of Montreal Protocol that banned the use of ozone depleting substances. He was the first Mexican-born citizen to receive the Nobel Prize.

My Ph.D. work with Mario focused on phase transitions in atmospheric particles, and heterogeneous chemistry that affected the troposphere. Climate models (that are used to predict global warming) carry uncertainty due to their inability to predict indirect effects of aerosols in the atmosphere (cloud albedo etc), and my work focused on understanding when, where and how cirrus clouds form, and how global warming inducing carbon soot particles are washed out of the atmosphere.

Some of the work we published together:

My time spent with Mario is among the most memorable in my life. I didn’t just learn chemistry from him…he was a role model on how science (and engineering) was critical to solving some of the most important problems facing the world. He was a strong supporter of environmental causes, but his views were not based on philosophy – he was a student of science and rational thought. He was a lead author on the IPCC reports, and we frequently discussed the benefit of such outreach beyond the scientific community. He took his role as an ambassador of science and environment very seriously, and worked tirelessly (including sometimes sleeping overnight in his office). We published technical papers together, I read and commented on drafts of his book on pollution in megacities, debated whether governments or industry would be first to take action on environmental causes, discussed science and engineering more broadly for developing countries, and traveled to Mexico together for several months on an international field campaign to understand air pollution in Mexico City. He was also instrumental and very supportive of my decision to not purse academia as a career after my Ph.D. and convinced me to spend some time at a DOE national lab (PNNL) before I began my career outside the academia.

Mexico issued a stamp in Mario’s honor.
Mexico issued a stamp in Mario’s honor.

There is a funny side-story about me becoming a member of his lab. After admission in to MIT’s graduate program in chemistry, I reached out to several faculty members to learn about their research interests. I was entering MIT after an undergrad degree at a liberal arts college, and my grasp of chemistry was rather basic. MIT faculty profiles were not just impressive, they were intimidating. Some faculty members  had distinguished memberships into national academies, others were founders of companies, and some were advisors to major corporations, institutions and Presidents of various countries. Back in 1998, Mario had a short web profile that probably some IT guy had dug up and put online. It had no mention of any of his accomplishments, but just his research interests in aerosols and chemical kinetics. I thought “here is this nice guy from Mexico, another developing country. He doesn’t seem to have many awards etc either. I should join him because unlike other faculty, he might actually have time and attention to give it to a lowly student like me”. I sent him an email indicating my interest in joining his group and asked if he would please point me to some of his publications so I could read up. Mario’s reply was essentially “I apologize I am not very internet savvy. I don’t have a website. But somebody has posted some of my publications online and you can go here to find them.” And the link he sent was something like www.nobel.se/…. I was flabbergasted when I got that mail. In my search for a not-yet-as-accomplished advisor, I had somehow landed in the lab of a Nobel laureate! He was a superstar in the chemistry department. I guess Nobel laureates don’t have to advertise the awesome work they do. He was humble, awesome…and loved hosting gatherings at his house. He was generous with me, his family met my wife before my own family did, and he even wrote a letter to the US State Dept to encourage them to give me a residency permit so I could stay in this country and start my company. In fact my startup conducted our early experiments in his lab with his students’ help.

Thank you Mario, for continuing to be an inspiration. We follow in our teachers’ footsteps.

Mario, my wife and I at his favorite eatery near the MIT campus.
Mario, my wife and I at his favorite eatery near the MIT campus.

Dial-for-dollar calls from some VC associates

This will likely get classified as a rant. So be it.

I love VC associates. I love VC Principals. I was myself one until not too long ago. I don’t believe VC firms need to be just partners. Associates do play an important role at VC firms, and for companies VCs end up investing in. Associates are not only good eyes and ears into the community (esp among younger founders & entrepreneurs) but they also provide a helpful outside-in perspective to VC firms. They also provide valuable day to day help to portfolio companies (e.g. in recruiting). In my experience VC associates who do well typically have a few characteristics:

- they are startup enthusiasts. In another life, another time, and perhaps in the future, they aspire to be entrepreneurs
- they work hard, not just long hours, but really spend their mental energies understanding core businesses, themes, spaces, business models
- they do their research in spaces they are looking into to sound genuinely ‘knowledgable’ and ‘thoughtful’ when they reach out to companies
- they know their limitations and are upfront about the intentions. i.e. ‘I want to learn enough so I can put this in front of a partner and see if there is interest at our end’

Recently as more VC firms have gone towards late-stage VC and growth equity investing, I have seen a rapid increase in the number of dial-for-dollar VC associates. These are not the same as the associates I describe above. I am ranting below to possibly help them get their dirty job done better, without wasting precious time of entrepreneurs they reach out to.

Such associates are typically hired fresh out of college with no real interest in startups per se. Don’t get me wrong, they are smart, driven, and work long hours. But they are the ‘finance-types’ who see VC and private equity through the same lens. Its all about ‘deals’ and working in VC is a job. They are managed not by partners but by other Principals etc, and are often on a budget to make x number of lead-generating calls per week (number x often reaches 20-30!). They are usually given a script that explains in a few minutes what their investment firm is known for, and are let loose with all kinds of databases, access to tech-rags/blogs, and a Salesforce account. They reach out to CEOs of all kinds of companies with similarly scripted emails. I have seen a bunch of them show up at my portfolio companies in recent weeks:

“I am from firm X. We were investors in x, y, z and have backed prominent founders like a, b c in the past. Love your space and what you are doing, and would love to hop on a call with you for 15 minutes to learn more and share our insights in the space”.

Anyways…problem is not that these associates are doing their job, and going gangbusters at it. Problem is that such a cold-call to CEOs may end up fulfilling their quota needs, but ends up wasting a CEO’s time. CEOs who receive these emails often don’t realize that they are one among 5-8 others who got such an email the same day from the same person. They look at the investment firm name and think it is a firm they should not ignore and hence end up taking the call, only realizing after spending 30+ minutes on the phone that (a) the person they spoke to barely knows what their business even does, (b) their ‘insights’ amount to nothing more than names of a few companies listed in an article alongside CEO’s own company’s name, (c) now their company is in some investment firm’s database, and seen to be potentially ‘fundraising’ by a prominent fund when that is not true.

I generally advise CEOs to look up the name of the person reaching out to them on the investment firm’s website to gauge how senior they are so they understand where such a conversation will rank in the investment process. CEOs realizing that this is a dial-for-dollars call don’t have to be rude in their replies, but they may return the email with something like:

“Thanks for reaching out. We are not fundraising right now, but if you have a strong interest in the space, have one of your partners either reach out to me or one of my Board members he/she would likely know.”

I understand that there may be amazing, profitable, growing companies in off-the-beaten-path sectors based in Kansas or Dakotas that no VC has ever heard of….and who would make for great growth equity investments for investment firms…and associates should try to find who they might be…but that should not be the case for previously VC-backed companies in already well understood areas of technology. If you are going to reach out to a CEO, esp if it has already been invested in by other investors, do the industry and your firm’s image a favor and learn a bit more about the space first so you can genuinely say you have an interest in the space; know what the company does, makes, sells, or holds dear; learn who the competitors might be in the space; and help the CEO understand in the email itself that this is a call to learn more and your goal would be to inform a partner if it is worth taking up any more of the company’s time. Depending on the situation, a CEO may actually find that appealing and get on the phone, or a proverbial coffee, with you. Or at least the email text I described earlier.

Again, it is a rant…but not against all associates. And in fact not against dial-for-dollar associates either. This is a practice that simply hasn’t adopted & changed much from its small/mid-cap private equity days to now being deployed for access to ‘hot’ companies in the tech sector. It can be improved much, and I hope it will.

Proud of Helen Greiner, Presidential Ambassador for Global Entrepreneurship

I could not be more proud today that Helen Greiner, my friend and founder/CEO of Lux Capital portfolio company CyPhy Works, has been named a Presidential Ambassador for Global Entrepreneurship (PAGE) by the President of the United States, Barack Obama, and U.S. Secretary of Commerce, Penny Pritzker. The U.S. Department of State and the U.S. Agency for International Development (USAID) are also partners in this effort. She is in Washington D.C. today to meet the group at the White House.

Helen joins an elite group of entrepreneurs in promoting President Obama’s vision of global entrepreneurship. Others members of PAGE are:

  • Rich Barton, Co-Founder and Executive Chairman, Zillow
  • Tory Burch, Chief Executive Officer, Tory Burch; Founder, Tory Burch Foundation
  • Steve Case, Chairman and Chief Executive Officer, Revolution
  • Reid Hoffman, Co-Founder and Executive Chairman, LinkedIn
  • Quincy Jones, Chief Executive Officer, Quincy Jones Productions
  • Salman Khan, Founder and Executive Director, Khan Academy
  • Daphne Koller, Co-Founder and President, Coursera
  • Hamdi Ulukaya, Founder and Chief Executive Officer, Chobani
  • Nina Vaca, Chief Executive Officer, Pinnacle Technical Resources
  • Alexa von Tobel, Founder and Chief Executive Officer, LearnVest

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