Shahin Farshchi of Lux Capital: venture capital in semiconductors / nanotechnology, Part 2

So now we're going to talk about the genesis of a startup in terms of coming up with a new idea and building a plan around it. So, first concept, a lot of people like going out and starting companies because they want to be entrepreneurs. But the reality is that if you look at, I mean, if you think about evolution, for example, there's a lot of organisms that are possible. I mean, you can have, I guess Peter Thiel mentioned titanium winged birds, but there's a reason why titanium winged birds don't exist in nature. And a lot of the same concepts apply to businesses. If a business doesn't exist today, there's probably a good reason why it doesn't exist, probably because that business wouldn't be viable. So there needs to be a unique set of circumstances that are novel to where we are right now in time that would make it conducive to a new business. And so for a lot of us in this room, it has to do with technology. So the availability of new tools to create things that didn't exist where probably demand has started to arise for as well. So it's the convergence of a market that's looking to pay for something that newly available technologies and processes can serve. And so, you know, an example, obviously, for example, with semiconductors, there were a lot of CAD tools that probably weren't available in the, you know, 70s and 80s that became cheap and available, you know, in the 90s and 2000s, which made it easy for a smaller company to generate VLSI chips that probably only IBM or Digital Equipment could have provided, could have developed back, you know, 20, 30 years prior where everybody had to build their own CAT tools. There were foundry services that were not available available back in the 60s and 70s that were available in the 90s and 2000s that again made it possible for a startup to do things that previously were only in the domain of very large companies. So it's the convergence of these several factors. There's the boom in consumer electronics. All these different factors come together and they make it conducive to creating a new company that otherwise didn't exist before. So that's the thought process that in many cases doesn't go into companies go into company creation that leads to those abysmal statistics that I kind of alluded to earlier. So I can give an example. You know, one is imprint lithography. So we invested in a company called Molecular imprints back in 2005, and they've come up with a process using nano imprint lithography to overcome the limitations that come from optical lithography when you're going to the smaller technology nodes. So the question is, you know, the first question that comes up is why now and at that time, given the understanding of resist materials, given the technologies and the tools in terms of rapid prototyping and the ability of a small company to build a huge machine, made it possible for a company like Imprint to enter the game and start building these systems and building these tools for large semiconductor manufacturers to adopt and start using in their processes. So again, it came from an understanding of materials, it came from the information technology that was available at the time to do high throughput characterization, to do many turns on the engineering of these materials that were required to realize this technology. Again, it was a unique set of circumstances that at the time made it possible to do this within a startup concept, within a startup environment. But the reality is that company's required a ton of money so far and they still are a startup and they still haven't gotten to the stage where they're selling commercial equipment. They're selling pilot equipment right now just based out of Austin. Yes, they're getting to that final goal, but it's required a lot of money, it's taken a lot longer, it's been very challenging. However, again, it's something that uniquely became possible at the time that probably wouldn't have been possible earlier. So another example is mram. So this is Magneto Resistive Random Access Memory. This is a technology that was originally developed at Motorola. We spun this out of free scale, which inherited the technology when freescale was spun out of Motorola. And again, this is at a time when consumers are demanding a lot of instant on very inexpensive consumer electronic devices like the iPhone, the teardown of which we'll see later today. And again, there were a lot of tools that became available for being able to quickly develop and characterize these thin magnetic materials that form the basis for this technology. And then also was the availability of multiple vendors being able to do the CMOS electronics that would go underneath the magnetics. So it's all these factors again that came together that made it possible to do this and a market that wanted the technology that made it where it made sense for us at that time to identify the at a free scale and spin it out and create a new company around it. So in that case, if we were to start this company from scratch, it would have taken probably a lot longer and it would have been a lot more difficult. We had the advantage of bringing on a team and a suite of intellectual property that had been developed over 15 years at Motorola. Other startups in the Valley have started this from scratch. There is a company called Crocus, another one called Avalanche, that have started off within a sort of startup environment at Grandis, of course. So Grandis was recently acquired by Samsung, although Grandis is a little bit different because they focus entirely on the magnetics and they weren't selling products. But then, yes, that is an example of an MRAM company. But again, it's a unique set of circumstances, the convergence of a unique set of circumstances where it made sense to do this, whereas it didn't make sense before. Assume that you've come to realize the convergence of multiple circumstances where it makes sense to start a company around the new technology serving a new market. The question is, okay, how do I position this? How do I design the business? How do I position the product? And so, I mean, the answer is very simple. See, how can this innovation have the most impact? So back in Henry Ford's time, he came up with a way, with a new assembly line process and make cars. And he decided the best way to monetize this idea, this innovation is to sell cars, is to use this process to make cheap cars and to sell the cars themselves. Gordon Moore and the guys at intel said, okay, we've come up with this way to make transistors very inexpensively. We're going to use this innovation to sell memory. And that later changed to processors and now it's a bunch of other things. So again, it's how do you figure out a way to have the most impact with your innovation? And then you have to understand the economics of the business that you're in. And we've talked about this earlier, who are the customers? Why would they pay? Why would they pay now? Is this business growing? Is it shrinking? And then you also have to get a sense of how much money you need to be able to make this business a reality. To the earlier question, if it's a Facebook or a Google, getting it off the ground is probably cheaper than it is to get a box off the ground, which is probably both of which are probably a lot cheaper than getting a nano solar off the ground, for example, or a cylinder off the ground. So you have to understand I need to turn this business into a reality and be cognizant of the sources of capital that you need. So for example, if you're starting an energy company, let's say a natural gas, a fuels company, you're probably going to be on the hook to demonstrate this technology on a pilot scale. Now, beyond that, if you want to build up like say $100 million factory, there may be other entities out there that would be willing to invest in building those commercial hundred million dollar billion factories. But the onus is on you to figure out who those people are and what they want to see proven before they're willing to make that level of investment. So Solyndra, for example, you know, they didn't. I wasn't close to this company, but they probably underestimated the amount of equity that they needed in order to become a viable business. And that money was just cut short. And the company failed, unfortunately, because it just didn't have enough money to be competitive on the market. And they were probably. Maybe it was the amount of money that they needed was more than what they actually ended up getting. Or maybe the source of that money was not where they were hoping it would come from. Maybe they were hoping that VCs would pile in more money or the government would pile in more money, which ended up not happening. So it's really important to understand how much money you need to get to where you need to go.