The Role of Venture Capital: Turning Science into Money
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MATERIAL MATTERS
The long pre-commercial gestation period typical of materials research and development (R&D) facilitates the emergence of clear scientific leaders around which companies can be built. Identifying these leaders is not hard, and the strong tradition of peer review tends to make straightforward the systematic verification of entrepreneurs’ claims and plans, a process called due diligence. In addition, it is common practice for researchers to establish intellectual property protection during this protracted development phase, an essential competitive requirement for commercial development. The combination of these factors reduces the risk that copycat startups will spread talent and capital across ten times as many emerging companies as
a given market could possibly sustain—a sad legacy that has plagued the VC business for most of its 30-year history. Applied materials businesses usually offer products and services whose economic value to potential customers is easy to quantify based on objective and verifiable metrics. This reduces market risk by supporting a due diligence process that allows prospective customers to assess tangible benefits that they can relate directly to their own financial performance. This can sometimes give start-ups the ability to command premium pricing in what might otherwise be an unattractive commodity market. Intermediate product-development milestones can often be tied to measurable parameters, mitigating the risk of technology failure, an important factor in supporting secondand third-round financing (described in the section on “The Venture Investment Process”). A history of strong manufacturing learning curves once commercialization is achieved and volumes begin to grow helps lift gross margins, provided that care is taken to avoid businesses subject to product substitution and commoditization. Given the disaggregation of R&D and manufacturing in many materials businesses, business models based purely on intellectual property are also possible, offering extremely attractive profit potential as businesses expand. Finally, with the exception of nanotechnology, which is enjoying its 15 minutes of fame, the materials area has been relatively sheltered from the corrosive influence of hype.
2000 Disbursements
2001 Disbursements
The Role of Venture Capital: Turning Science into Money Bill Frezza The following article is based on a presentation by Bill Frezza (Adams Capital Management Inc.) in Symposium X: Frontiers of Materials Research at the 2002 Materials Research Society Spring Meeting in San Francisco on April 2.
Introduction Materials researchers are proficient at turning money into science. While this is a noble end in itself, reversing the process is occasionally required to keep the cycle going. One way to do this is by creating start-up enterprises that exploit materials science breakthroughs. While risks abound and the failure rate is high, the rewards of success are so hugely disproportionate that human nature can be counted on to provide an ample supply of
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