Learning From The Follies Of Venture Capital Process Keynote, IEEE TMC Conference San Jose, 2011 miltonchang@incubic.co

1. Learning From The Follies Of Venture Capital Process Keynote, IEEE TMC Conference San Jose, 2011 miltonchang@incubic.com www.incubic.com

2. The conventional approach is to raise a lot of venture capital to gain first-mover advantage • Haste-makes-waste mistakes can be fatal • Statistically 10 out of several hundred business plans get funded and maybe 3 would get to a meaningful exit • This low-yield approach can provide a satisfactory return to investors from a portfolio perspective…but takes a toll on the entrepreneur Conventional Approach To Start A Business Is Hard On The Entrepreneur

3. Always Fall Back On Fundamentals • To succeed, a business must create value efficiently to provide its investors and stakeholders an attractive return • Follow project management principles: • Do the right thing: Useful product concept, sizable market, valid business strategy, sustainable competitive advantage… • Do things right: Execution… identify and resolve show-stoppers, get the right amount of capital at the right time from investors who can help you succeed

4. Starting A Business Can Be Almost Risk Free! • If you start with a niche business within your field of expertise and make a long-term commitment to build-out the business over time one logical step at a time • This sensible approach lowers risk and enables you to make efficient use of capital to create value which is by definition what entrepreneurs do

5. You’ll Achieve Capital Efficiency Naturally… • Launch a niche business within your field of expertise. Risks are further reduced if you grow the business over time and work toward an early acquisition • You’ll have insider insight and expertise to provide a competitive advantage • Initial capital would be low, you can manage with common sense, and mistakes are recoverable • You can get new product ideas from customer, make efficient use of existing infrastructure to grow the business, and raise additional capital at an attractive valuation

6. Gaining First-Mover advantage is not the only way to succeed • Instead, for example, strengthen IP to avoid being shut out of the market and learn from mistakes made by pioneers

7. Take an orderly approach, which is to verify assumptions and refine strategy before making major commitments: Technology, market size, organizational makeup, operational details…Get everything right • Pass the acid test by getting orders from opinion-leading customers • …Then decide whether to build out the company quickly, develop the business over time, work toward an early acquisition, or abandon the project ! It is Prudent To First Develop A “Prototype Business” Even If you Want to go Fast

8. Business Prototyping Is A Useful Concept • It enables you to achieve capital efficiency • A proven business prototype is valuable because it enables potential acquirer to recognize the value the business could bring

9. A Tale of Two Startups & My Own Experience • Jim and Janet Baker founded Dragon System, a speech recognition company in 1982…Acquired in year 2000 with 350 employees…whereas all other high-flying startup companies in this field failed. • Segway, the personal transporter startup burned $150M of investors’ money • Every one of the dozen or so built-over-time companies I incubated were successful: Newport, New Focus, Uniphase (JDSU), Iridex…, whereas investing as VC, we did no better than VC averages

12. Because capital is being put to use efficiently • For the startup company: The founding team is most productive in the developing stage • For investors: They get higher ROI without having to take additional risks/dilution • For the acquiring company: It is capital efficient to develop a business concept that has been validated. • …That is system optimization! Makes Sense for All Involved To Entertain An Early Acquisition

13. Start with an ambitious goal but proceed with prudence following project management principles • Identify a product concept in your field of expertise to provide a competitive advantage • Be well prepared and make a business case based on reality • Either start with a niche business to grow over time, or develop a prototype business before making a major commitment to build out the business quickly • Always work toward an early acquisition Recap

14. Knowledge, reputation and network are your resource to start a business. • Become an expert in a chosen field because generalist cannot compete • Also become broadly knowledgeable and aspire to become CEO. Never stop learning and take an interest in business and management • Work for a a well-managed company to prepare yourself. Take on projects to learn professional and leadership skills. • Reach out and develop relationships. • Yes, you can!!! To Students In The Audience…

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16. Proceed With Confidence Milton Chang Incubic Management LLC miltonchang@incubic.com www.incubic.com