ENTREPRENEURIAL FINANCE

Why Some of the Most

Groundbreaking
Technologies Are a Bad Fit
for the Silicon Valley
Funding Model
by Greg Satell
APRIL 05, 2018

Jurgen Ziewe/Getty Images

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 Over the past few decades, Silicon Valley has been such a powerful engine for entrepreneurship in
technology that, all too often, it is considered to be some kind of panacea. Corporate executives seek
to inject “Silicon Valley DNA” into their cultures, and policy makers point to venture-funded
entrepreneurship as a solution for all manner of problems.

This is a dangerous mindset. The Silicon Valley model, for all of its charms, was developed at a
specific time, for a specific industry, which was developing a specific set of technologies. While it can
offer valuable lessons for other industries and other problems, the model is not universally
applicable.

The myth of Silicon Valley is that venture-funded entrepreneurship is a generalizable model that can
be applied to every problem, when in actuality it is a model that was built to commercialize mature
technologies for certain markets. We’re now entering a new era of innovation, one that the model
doesn’t quite fit, and we will have to develop new approaches to build the future.

The Silicon Valley Model

In 1968 an investor named Arthur Rock backed executives from Fairchild Semiconductor to start a
new company, which would become known as Intel. As AnnaLee Saxenian explains in her study of
the rise of the computer industry in the Bay Area, Regional Advantage, this transaction in large part
became the model for the Silicon Valley way of doing business.

Back east, established firms worked with big banks to launch new enterprises. In the Bay Area,
however, small venture capitalists, many of whom were ex-engineers themselves, invested in
entrepreneurs. Stanford provost Frederick Terman, as well as existing companies such as Hewlett-
Packard, also devoted resources to broadening and strengthening the entrepreneurial ecosystem.

Yet as Saxenian later pointed out to me, this was largely the result of a somewhat unique confluence
of forces. Because there was a relative dearth of industry in Northern California, tech entrepreneurs
tended to stick together. In a similar vein, Stanford had few large corporate partners to collaborate
with, and so sought out entrepreneurs. It was these characteristics that led to a different way of doing
things.

The early success of the model led to a process that was somewhat self-perpetuating. Engineers
became entrepreneurs and got rich. They in turn became investors in new enterprises, which
attracted more engineers to the region, many of whom became entrepreneurs. By the 1980s, Silicon
Valley had surpassed Route 128 outside Boston to become the center of the technology universe.

The Hard Road of Hard Tech

In 2014 a graduate student at Stanford named Etosha Cave and two colleagues began their
entrepreneurial journey. Her lab had discovered new ways to convert carbon emissions into useful
products, and they believed the technology had enormous commercial potential.

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 Living just a short walk from Palo Alto’s famed Sand Hill Road, where many venture capitalists are
located, the obvious thing to do was to go to the VCs that have driven Northern California’s
technology boom, but they were soon disappointed. If the group had had an idea for a smartphone
app, they would have been off to the races, but there was little interest in hard technology like theirs.

The problem that Etosha and her cofounders ran into when they first sought to leverage the Silicon
Valley ecosystem to get their business off the ground was that venture investors typically want to see
a real product. All they had were some chemistry papers, scientific data, and an idea to change the
world. They estimated it would take $1–$3 million to build out a working prototype, money they
didn’t have and had no idea how to get.

“The venture capital model works well when the primary risk is finance risk — as the entrepreneurial
team works to scale their business model — but it doesn’t work so well when technological risk and
market risk coincide,” Errol Arkilic, an investor that specializes in hard tech ventures, told me.
“There are just too many unknowns, and that requires a different approach.”

Ilan Gur, founding director of Cyclotron Road, a program that incubates advanced technologies in
partnership with Lawrence Berkeley National Laboratory, also points out that industrial technologies
face a far more complex selling environment: “Compared to consumer markets, industrial
technologies need to check off a lot more boxes before you go from an expressed interest to a
validated market opportunity. For deeper technologies, you can’t always innovate at a venture
capital cadence, where you have to get big super fast.”

An Alternative Path
Disappointed, but still determined, Etosha got a break when she attended a cleantech event hosted
by the TomKat Center for Sustainable Energy in the summer of 2014. The center’s director, Brian
Bartholomeusz, told her that technology like hers was exactly the kind of technology he was trying to
transfer out of the lab, and he encouraged her to apply for a grant.

Soon after, she and her technical cofounder also received a grant from Cyclotron Road. These, in
turn, led to further support from Breakout Labs, a nonprofit fund by supported the Thiel Foundation,
and later on to an SBIR grant from the National Science Foundation. It was only with support from
these nontraditional investors that Etosha and her colleagues were able to start their company, which
they decided to call Opus 12.

In a sense, they were lucky. None of these institutions existed before 2009, and they were all, in
whole or in part, created in response to what is slowly being recognized as a deep hole in our
entrepreneurial system. If you have an idea to apply mature technology to a well-understood
problem, it’s relatively easy to get it financed. But if you develop a new technology with the potential
to truly change the world, you’re going to have a tough time getting support from venture investors.

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 “If I had to do it over,” Etosha later told me, “I would have focused less on learning to write business
plans and more on learning to write grant applications. All of our early funding came from either
nonprofit or government sources.”

Finding a “Hair On Fire” Use Case

The early grant funding, as well as the access to Lawrence Berkeley facilities that Cyclotron Road
provides, allowed Opus 12 to build a working prototype that it could show to prospective investors
and customers, but it still had to find a viable market and business model. So Opus 12 applied to the I-
Corps program and was accepted.

Founded in 2011, and based on Steve Blank’s lean startup principles, I-Corps was designed to help
bridge the gap between discovery and commercialization often known as the valley of death. It is
something of a boot camp for scientific entrepreneurs like Etosha. It stresses that “no business plan
survives first contact with a customer” and requires its participants to “get out of the building” and
talk to dozens of potential customers in search of a sustainable business model.

At first, Opus 12 targeted the largest addressable market it could find: ethanol, an additive of gasoline.
With more than $64 billion worth sold in 2016, it looked like a great opportunity. Alas, it soon became
clear that, because of the large scale of the plants, the market was a nonstarter for a small,
bootstrapping company.

What startups need to get off the ground are not large markets but a hair-on-fire use case, somebody
with a problem that they are desperate to solve. Opus 12 found it in specialty gases, which are useful
for many industrial processes, but are difficult and expensive to distribute. With Opus 12’s ability to
create those gases on-site, it can significantly lower costs and increase reliability of supply.

Creating a New Ecosystem

Today, four years after the journey began, Opus 12 is finally beginning to get some interest from
more-traditional investors. It expects to get its first customer order in the next year and then scale
up. “Our first product will be about the size of a dishwasher, then we’ll move up to a refrigerator, a
shipping container, and finally a plant-size machine,” Etosha told me.

Still, because most venture capital firms operate on an investment horizon of five years, the Silicon
Valley model is poorly suited for hard tech startups, which need to validate not only a business
model but also the technology itself. We need to come up with a new model based on a new
ecosystem of investors, entrepreneurs, and technical talent.

Clearly, the core of this ecosystem will be the loose network of federal government programs and
nonprofit foundations that helped Opus 12 get started. However, it is also clear that more resources
are needed to support a true hard tech ecosystem if we are ever going to replicate the success of
information technology in other industries.

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 One possibility may be state and local governments, which have already shown themselves to be
willing to contribute to the manufacturing hubs established under the Obama administration to
support local industries. I visited a facility in Detroit managed by two of the hubs, one for composite
materials and another for lightweight metals, designed to support the auto industry.

Another possibility may be corporate venture funds, which often have the technical expertise to
evaluate hard tech investments. These can serve the dual function of giving support to scientific
entrepreneurs and helping to infuse established firms with innovative technology.

Most of all, we need to understand that the Silicon Valley model doesn’t apply to every technology
and every industry. No innovation strategy fits every problem, so we need to keep expanding the
toolbox.

Greg Satell is an author, speaker, and advisor. His first book, Mapping Innovation: A Playbook for Navigating a Disruptive
Age, was chosen as one of the best business books of 2017 by 800-CEO-READ. Follow his blog at Digital Tonto or on
twitter @DigitalTonto.

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