micah t collins

Can a startup build the next great CE device?

bijan:

Much has been written about capital efficient startups. Needless to say, I’m a big fan.

Typically, capital efficient startups come in two different flavors:

1 - One type are those that burn little/modest capital in the first stage (generally 0-2 years) while at the same time learning a lot and creating signficant value. At that point, they can raise follow on rounds (for growth, ad sales, staffing, scale, whatever) at a higher price which is good for all inside shareholders and also reduces the risk for the new investors.

2 - The other type are capital efficient companies that reach profitablity with little invested capital and then can grow from profits.

I’ve seen startups come in both configurations and it’s a beautiful thing. We have a number of them in our portfolio and I am confident we will continue to invest in capital efficient startups.

But over the break, i’ve been thinking about companies that require signficant capital upfront — before they prove anything or reach any meaningful milestone.

Specifically, I’ve been thinking about consumer electronics. In our world of capital efficiency, is it possible for a startup to build our next generation phone, television, tablet, ereader or game console? Or do we all have to wait for Google, Microsoft and Apple to make these things? Are big co’s the only ones that can innovate and bring these products to market?

I believe that startups can build these things. Just look at Tesla for inspiration.

It’s going to take a special combination of entrepreneurs, operating excellence, capital and audacity. But it can happen.

And I hope we can invest in some of them - in addition to our capital efficient tech startups.

If you ask me, the answer is yes!  One key piece of operating know-how needed in any CE hardware startup is an understanding of sourcing and forming partnerships in Asia with manufacturers who are willing and able to share some of the risk.  Unfortunately, not having this skill-set or access can be a quick recipe for burn-rate inflation.  It’s also hard to avoid the fact that should a firm succeed in building a device, funding a hardware distribution model requires supply chain management skills that are not your typical VC-stage skillset, as well as either a reserve of working capital to fund a quick ramp, or the time horizon to wait out a slower volume ramp along with the early cost premiums associated with the same.  The matter of rapid hardware commoditization and copy-cats is also a frequent deterrent and a easy hip-shot made by cynics, but those aren’t your likely sources of capital anyways.

The value-prop is there for numerous software-supported, hardware-dependent solutions that serve consumer needs in ways that ecosystem-friendly architectures are not wont to service.  Similarly, with soooo much media and information available, there are far more ways to slice it and pivot on it that is valuable for a consumer, that the market will likely sustain a greater variety of solutions, so long as they are affordable.  I am convinced that traditional household electronics and appliance foot-prints are ripe for disruption with such a model, and I am not holding my breath that the guys who build PCs and smartphones and count on the fact that tablets and netbooks hold the same TAM will be doing the things quickly and optimally to serve markets that are one or two orders of magnitude smaller, yet still financially appealing for innovation capital.