Often the distinction between high- and low-tech startups is measured by the proportion of technical employees — such as fraction of R&D employees or fraction of R&D spending (i.e. R&D intensity).
Still, tech startups are not homogeneous. Some of the distinctions that have been draw are science- vs. engineering-based startups, or industry-specific startups like IT, cleantech, or biotech.
This week I attended two business plan competitions here in Claremont: Wednesday’s business plan competition at the Keck Graduate Institute (which I organized) and today’s Kravis Competition across all the Claremont Colleges.
|Judges at KGI 2013 Business Plan Competition: George Golumbeski, Stephen Eck, Bob Curry. Not shown: Liam Ratcliffe, Paul Grand|
In comparing the KGI plans to the other Claremont projects — or those in our textbook — it seems to me that — at least from a financial standpoint — there are three types of companies: high tech, medium tech and no tech.
What is dramatically different about our students projects was that (with one exception) is that they’re highly capital intensive, requiring $5 to $50 million in outside funding. For example, the winning team — using technology from Children’s Hospital Los Angeles to repair Shortened Bowel Syndrome — estimated it needs $20 million in equity and $5 million in government grants to get to market. This project — like many others — is building on millions of dollars of NIH/NSF/foundation grants already received to develop the basic science. There is a certain minimum scale required to get FDA approval and thus generate first revenues.
|2013 winning KGI team — Hadi Mirmalek-Sani, Porus Shah, Shrina Shah, Rajesh Pareta — |
with Bob Curry, chair, KGI Board of Trustees
Over the years, entrepreneurship researchers (and practitioners) have demonstrated that any new company or product has highest uncertainty and risk up until first customer sale. So from a practical standpoint, I suggest a new metric: how much R&D spending do you need before launching a product? How big a bet — with what scale of outside investment — does it take until the entrepreneur finds out whether (s)he has a viable business?
By this measure, the difference is not the % of the money that goes to R&D but the size of the R&D bet that’s needed to test the marketing hypothesis.
A company that takes 5+ years and $50+ million is fundamentally different from one that can ship a 1.0 (or revenue-generating beta) for less than $1 million. By that standard, after biotech the biggest bets required are for renewable energy. You can start dozens (or hundreds) of software companies for one fully mature biotech, biofuels or solar company.