Successful Strategies for Emerging Entrepreneurs
by Joel M. Pollack
Budding entrepreneurs often are convinced that their innovative technology will be the "next big thing" to revolutionize their industry and hopefully will make a handsome return when the company is sold or moves to an IPO. Before they can get from the drawing table to the exit strategy, however, entrepreneurs must make several business decisions to formulate a strategy at the outset and clearly understand some of the keys to success. Armed with the wisdom from others' experiences before them, nascent entrepreneurs then can chart a clear vision of how they will sell their technology, the markets they will target, and how long it can take to reach their goal.
Entrepreneurs are faced with myriad questions when setting up a new venture-capital-funded business. Perhaps the most pressing question at the outset of an entrepreneurial venture is, "Is it better to license intellectual property or sell components?" There are merits and demerits of either option that need to be evaluated thoroughly before determining what is right for the product, company, and investors. Selling intellectual property has unique advantages that stem from having minimal overhead and no tangible product. There are no costs of inventory or dependence on raw-material supply. The capital investment and staffing requirements are smaller. The risk of producing the wrong thing is reduced, and the margins are higher. Above all, there is greater agility in reacting to market and customer needs, a key concern for a young company with the promise of innovative IP.
With these advantages also come the inherent perils of selling IP. Customers often are inventing in the same space, and commitments are needed from all parts of the supply chain. There are many uncertainties surrounding indemnification especially in technologies where there is a lot of activity and where finding all of the IP may be difficult. Plus, business terms and contracts can require difficult negotiations, and the final approvals usually need to go higher in the management chain.
In addition to all of the other fundamentals of running a business, IP-licensing companies also have to contend with changes in the legal landscape regarding intellectual property. In this category, there are three potential sources of changes that bear watching – each one from a distinct branch of the Federal Government. From the executive branch, recent changes in rule practices before the U.S. Patent Office may make it more difficult to keep "continuation" applications alive in the patent queue so as to have claim flexibility for future infringements. From the legislative branch, Congress is still considering changes to the patent laws that may curtail the exclusive rights, and their enforcement, of patent holders. Lastly, from the judicial branch, Supreme Court patent jurisprudence, in recent years, has possibly adversely impacted the exclusive rights of patent holders to obtain injunctive relief and have made "obviousness" challenges to patents, in the courts and patent applications in the Patent Office, more accessible.
In converse to the IP business model, selling OEM components does have its benefits. Business negotiations are much simpler since there is only a sales contract.A straightforward purchase order results in revenue being received earlier – and in higher levels of revenue. Customers may also be more comfortable with the tangibility of product as opposed to paying for a license, and there is less IP to disclose when selling components.
With OEM components, however, a larger PO means obtaining higher levels of management approval, as well as checking for good credit and substantial amounts, so, in some cases, it might end up being just as complicated as contract negotiations. In addition to the risk of giving the IP to another party – even one under contract – quality control becomes an issue. Large design wins require significant logistics efforts with Just in Time, Kanban Systems, RMAs (returned merchandise agreements), and others. The company becomes dependent upon vendors and their delivery schedule.
With all of these considerations, both IP licensors and component providers must focus on how to get to breakeven revenue in the shortest amount of time to minimize the capital investment in their enterprise. Those selling OEM components will have a faster burn rate, but the unit revenues and cash realization will be better. On the other hand, an IP-based company will have a slower burn rate, but the unit revenues are typically smaller, therefore requiring large design wins to meet a cash-flow positive position.
Keys to Success: Market, Valuation, Teamwork
No matter whether deciding to license IP or sell components, there are several other key success factors that often will impact a business. The first key factor is finding the right market for the engineering focus. This is essential to meet the goal of becoming cash-flow positive in the shortest time frame. Then, finding the first customer to commercialize the technology or product will transition your technology out of the proof-of-concept stage to true market viability. To some extent, this is a matter of market timing and good luck. Product must be ready for the market when the market is ready to adopt, and this product-adoption curve is critical because finding the "first adopter" is key to finding others.
The second important consideration is preserving market valuation for a company and having the right business plan early enough is important to successfully guiding the company along this path. An IP-licensing company has to be very careful about pricing IP high enough to preserve long-term revenue, but low enough to secure early adoption. Selling an exclusive license could speed adoption, but also could depress valuation to a future acquirer, or reduce the attractiveness of an IPO. OEM-component companies have similar issues with setting pricing. For both types of companies, it is far easier to lower prices as time goes by, but if prices are too high at the outset, then a startup may miss early adoption and delay the time to breakeven.
A third key factor is keeping employees engaged and committed to ensure a solid team for the time when the demand materializes. Likewise, management has to keep the investors' confidence high or the investors will not support the inevitable subsequent fund-raising rounds. With the many highs and lows along the path to success, investors will move from dire pessimism to ebullient enthusiasm – sometimes all in the same day.
A First-Hand Look at Entrepreneurial Decision Making
At Clairvoyante, we chose the IP route and have had to deal with all of these factors, in addition to trying to time the market, which is critical to the successful adoption of any new technology. At Clairvoyante, for example, we used our understanding of vision science to develop foundational ideas for improving the resolution of displays. This technology also reduces power consumption through a combination of subpixel rendering and a new layout for the RGB pixels that adds a white subpixel for added brightness. With this IP, we foresaw the market's need for better display performance in mobile devices and moved aggressively to capitalize on the opportunity for invention.
What followed was rapid IP development and refinement, as well as aggressive patent pursuit for the PenTile technology. We were aiming for a sweet spot for our technology at resolutions of VGA and wVGA while the handheld market was just moving from qCIF+ to qVGA. Although the PenTile solution for qVGA is high quality, the biggest demand for power reduction (applications such as GPS, video, etc.) had not yet hit these mobile qVGA products. Only now – almost 3 years after targeting mobile applications – are we beginning to see the onset of demand for high-resolution mobile displays, coupled with the need for power reduction for data-centric and video applications.
Pioneering a Business Approach Takes Conviction
There is bound to be customer resistance whenever a business approach is fundamentally different than standard practice. Despite what providers may say, few are willing to be pioneers into revolutionary technology unless they have the foresight to understand that the risk of not adopting a new technology is greater than the risk of continuing to use legacy systems. It falls to the entrepreneur, then, to convince customers that the company can help position them for the expected demand that will surely come for this new technology, IP, or product.
As a company, Clairvoyante has now engaged with 20 LCD partners and has already developed five different IC sources. Many of these companies are quick to tell OEMs of their capabilities, and the first products integrated with PenTile IP will hit the market in 2008. We expect this behavior will increasingly change as we proceed up the market acceptance curve.
It is all a matter of hard work, future vision, patience, as well as employees and patient investors who believe in a company's potential. Salesmanship and a healthy dose of good luck also are critical building blocks to create a business by selling IP. That said, while selling components has its advantages, we believe the IP licensing model has great promise if done at the right time and in the right way.
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