Wanted: innovators who anticipate the complexity of future RFID networks
By Steve Smith
You know that line chart projecting billions of revenue for the RFID market by 2008? Leave it out of your next pitch to venture capitalists.
“Everybody’s got the hockey stick chart,” says Aaron Cheatham, principal at Mobius Venture Capital.
Claiming that your company will ride the same wave of RFID revenue as everyone else is among the most common mistakes RFID startups make when trying to woo VCs. And too many companies regurgitate the same IDC tech research when they cultivate investors.
Pitches like that tell VCs that you have no unique market insights to share. Half of being a VC is determining where general industry knowledge is wrong, says Cheatham.
Startups often make another mistake at pitch meetings. “They think time-to-market is a competitive advantage,” says Byron Deeter, principal at Bessemer Venture Partners. “That does not appear to be the case in RFID.” Big players are already offering infrastructure solutions. Without a distinct technical advantage you can maintain long term, being first to market with a me-too solution just means “IBM is going to roll right over you.”
The Best Defense
Sure, money is flowing into RFID, but VCs are high-risk, high-return investors. They seek out companies with unique positions in the market that competitors can’t easily rival or buy out.
Patrick Ennis, managing director of Arch Venture Partners, invested in chip technology innovator Impinj, in part, because chip development requires special expertise, can be patented, and is hard for competitors to copy. VCs want companies with technical innovations that will maintain competitive advantage over the long term. “What does your intellectual property picket fence look like?” he asks companies.
Generally VCs are avoiding simple extensions of existing technology or database applications. Such companies may be bought or trampled by traditional players or produce the simple, modest returns that don’t interest the true capital adventurer. The firms look for solutions unique to this industry, technologies that lower the price of tags or applications that are two steps ahead and ready to exploit the complexity of existing RFID networks.
“Grid computing fits hand in hand with changes in RFID,” says Ennis, because the terabytes of data these systems create will require massive computing power to interpret.
Chad Brownstein, managing partner ITU Ventures, has invested in companies that deliver something that is unique, such as Organic ID, a company which manufactures low-cost printable tags. But he is also looking for “full systems approach” companies that will handle both tag and bar code management, because “one won’t displace the other completely.”
Cheatham looks for innovation that anticipates the new complexities of future RFID networks. “The task of coordinating dense-readers is a very difficult problem to solve, so it starts with different technology,” he says. He is looking both at companies that manufacture Gen 2 tag readers and companies creating software algorithms and hardware that coordinate these readers in mature RFID environments.
Once a capital investor finds a company with long-term viability, then it’s all about the team and its clear path to revenue, the VCs say. Your company needs both recognized technical experts and good educators. Having leaders that other companies respect and who can explain complex technologies to customers is worth more than a huge marketing budget.
“Is the team well-rounded?” Ennis asks. Too many startups recruit colleagues with the same skill sets. Because RFID is inherently interdisciplinary, he looks for people with digital, analog, radio and systems engineering expertise because “customers buy systems, not components.” Brownstein likes to see executives with experience in similar industries such as bar code technologies, because they won’t bother trying to “re-create the wheel” with RFID, when simple bar code tracking will suffice.
Investors see a lot in the company you keep. Evidence of strong working relationships with customers who give feedback and act as close collaborators as you refine the product early on is important. “You need some level of lock-in commitment for collaborative development,” says Deeter. These early customers may become evangelists to their peers. And even though you may not have contracts with Wal-Mart or the Department of Defense, you need to fit into the two big RFID industries they represent. If you are not on that chart, questions arise, says Cheatham.
Always keep in mind that investors want to know specifically how you will spend their money. “Show me how you will use the capital efficiently and how product differentiation will create value for the dollar invested,” says Brownstein. Prove your value proposition with a small amount of capital, and the VCs will be more amenable to giving you more money later.
Establishing an early revenue stream means more than making fast money. It means your company has gotten customer feedback and solved the early problems so that it is positioned to exploit the RFID market at just the point when it does take off.
“Smart companies will find ways to do small implementations over the next few years,” says Brownstein. “The ones out there deploying and doing the hard work up front will be successful.”
What Sets You Apart
Pitching to venture capitalists can make the most visionary startups play it conservative and safe, but keep in mind that VCs usually make their money by avoiding the herd mentality.
Contrarians stand out in this world. Lead with how your vision and product are different. A good presentation takes only 20 minutes, but if you have something important to say, “you will get it out in 10,” says Brownstein.
And don’t forget the human touches, like being courteous to the VC’s receptionist and staff, says Ennis. He routinely asks office staff whether visitors only reserved their politeness for the money guys. “It’s all about integrity,” he says. “It says a lot about a human being if they come in thinking they are better than anyone else.”
This article originally appeared in the June 2005 issue of RFID Operations.