GOLB: Is this Israel?

High Tech Investments - grow 'em rather than pick 'em

Some thoughts and speculations about VC Seed investments: does our common use of the term obscure rather than clarify the intent thereof?

 

A few days ago, I found myself giving free advice (worth what one pays for it?) to a pair of colleagues from one of the more conservative countries in Europe, on the subject on how to present seed and early stage high tech deals in palatable form to LPs whose digestive systems, as it were, equate such an arcane diet to, at best indigestible, and at worst, just plain poison.

 

And yet these same LPs, many of them Insurance companies, typically worship at the feet of the Gods of risk reduction. (Why else was the re-insurance industry born?) And how many of these metaphorically if not actually rotund burger/bankers would not leap, or at least waddle hastily, towards any financial equivalent of testing the waters with one finger before whole-body immersion in a costly investment, any and all varieties of which have inherent risk. (‘Come now, you surely exaggerate: a couple of years ago, how could one define an investment in Enron as risky?’ How indeed! The defense rests.)

 

So what is a seed investment in a high tech start-up if not a low $ cost way to test the waters? Of course, there’s lots of work involved, but us VCs are typically overpaid anyway, so we may as well try to earn our caviar-coated crusts of bread. And the eager beaver types amongst us simply do not subscribe to the VC gurus’ view that the return on any investment is inversely proportional to the time one needs to devote to it. True, I’d admit, of first investments in later stage companies – “C rounds” and beyond in VC parlance – but inapplicable to the process of growing companies from seeds, and being able to avoid putting in the big money until the seed has reached the seedling stage as a promising candidate for metamorphosis into a meaningfully large hunk of vegetation, metaphorically speaking, of course.  (Nonetheless, ‘lemon’ trees do not qualify…)

 

My free advice, then to you, dear risk-averse money men is: don’t eschew, but rather espouse experienced high tech ‘agronomists’ who grow your high returns by culling out the lemons before serious money is committed.

Deal-making: Part 2

The first time I used a model to swing a deal is blogged below. The next time this sneaky technique was employed was in my first patent license deal based on our shaped-crystal growth process: but first a bit of background.

 

I forget how it came about, but the New York Times picked up on our activities, the fruits of which were some amazingly long and intricate constant cross-section sapphire crystals, grown with great dexterity from molten alumina at over 2040 °C  (white heat!)  by my young colleague and protégé, Harold LaBelle. The NY Times reporter was intrigued, but also savvy enough to ask what applications there might be for such crystals. Not suffering from excess bashfulness, I reeled off, extemporaneously, of course, a list of ‘applications’ that somehow managed to include an everlasting razor blade. No surprise that the following Sunday, we featured prominently in the Times, the razor blade idea being accorded pride of place. (Actually, since sapphire has a low coefficient of friction, exceptional hardness and extraordinary wear resistance, maybe, just maybe….)

 

The article generated lots of interest, but not a whisper from Gillette. OK, so who, we asked ourselves, is an Avis to Gillette’s Hertz? (Remember when Avis used to try harder?) We decided to target Gem, a razor blade manufacturing subsidiary of Philip Morris (yes, the tobacco giant, but before smokers knew the severe hazards of their addiction) although we were, to any objective observer – not including ourselves, of course – far, far too early in the technology development to merit being taken seriously.

 

Off we traipsed to Richmond, Virginia, armed with hastily grown sapphire ribbon-like crystals roughly in the form of long single-edged razor blades, and a (grossly inaccurate) estimate of the time and cost to perfect the technique and to bring the price per blade down to what we imagined would be an acceptable level. (Ah, the refreshing naïveté of youth and inexperience: so much more stimulating than the somber face of jaded professionalism.)

 

Because the tech-stuff we described to the Gem engineers was leagues more exciting than their usual diet, we encountered not the NIH (not-invented-here) Syndrome of a Gillette, say, but rather an enthusiasm that transcended their habitual engineering torpor.In fact, everything seemed to be progressing smoothly, and uncharacteristically swiftly, until: enter the sharp-faced eyeshade wearers to discuss the financial details of a possible deal, most notably the matter of license royalties.

 

The concept that had emerged from the discussions with the techies and the marketeers was a one-piece razor comprising a fancy plastic handle bonded to a sapphire single-edge blade. It would be advertised as ‘everlasting’ – as older versions, at least, of the wedding ceremony also proclaimed.

 

OK then, we needed to agree on a royalty rate (1%? 3%? 5 %?), but as a percentage of what? We, of course, sought to make the royalty base the net selling price of the fancy ready-to-use razor; they, no surprise to learn, insisted that the royalty base be the cost of the sapphire part only. Reasonable? In a pig’s eye! Since they would be manufacturing the blades, even if we made the pre-sharpened ribbons, they could assign an arbitrary ‘cost’ to the blade, making it a very small fraction of the selling price of the sexy razor. Our royalty would then be a very small percentage of a very small percentage: phooey!.

 

My youthful chutzpah not having been seriously eroded, I insisted on talking to THE boss-man, a very senior Philip Morris executive, maybe even the President. This was neither a request for which they were prepared, nor one with which they could quickly comply – luckily for us, it turned out, since we needed some extra time.

 

For this crucial meeting, probably to be scheduled for no more than 15 minutes, a show-and-tell deal-unbreaker would be needed: no trenchant arguments, no how-can-a-giant-like-you-beat-up-on-a-small-company-like-us sort of thing, no verbal foreplay, just one swift knockout punch. Call in the model-maker!

 

The prop I decided on was a sapphire-bladed model of an old-fashioned ‘cut-throat’ razor with a teak handle, to nestle, of course, in a red velvet-lined teak box. (From the previous blog you now know what razors and thermoelectric generators can have in common.)

 

Wonderfully ingenious Harry LaBelle figured out how to grow a long sapphire crystal with the same cross-sectional geometry and dimensions as the blade of a classic ‘cut-throat’ razor, but with a rounded rather than a sharp ‘cutting edge’. (We couldn’t afford the risk of a slashed Philip Morris exec, and anyway, we were far from being able to put a seriously sharp edge on our crystals.) Notwithstanding its tenuous relationship to the goal of the actual project – but that was for said exec to fathom – the result was a thing of beauty.

 

Back, then, to Richmond with the precious prop, and to a room full of weasel-faced nay-sayers  arranged in an arc around the massive desk and presence of  ‘His Nibs’ the unmentionably senior Philip Morrisite. “OK gentlemen” he said, but in a tone that made ‘gentlemen’ sound more like an insult than an approbation, “what’s the issue?” He was addressing his cohorts, but focusing on the box that I was slowly unwrapping. The senior eye-shaded cohort ranted on about the unreasonableness, illegality even, of our demand that the royalty base on the to-be-developed ‘everlasting sapphire-bladed razor’ be the net selling price of the whole fancy razor, and not just the novel blade. But by then, the exec had the box in his hand, had opened it, had carefully taken out the ‘razor’, had run his manicured fingers along the shiny sapphire ‘blade’, had held it up admiringly to the light, and had acquired that visionary demeanor to which only the most overpaid execs are allowed to aspire. “Give them what they’re asking”, he proclaimed: exeunt the corporate plebes, spluttering and muttering, but to no avail.

 

Said I: “May I be allowed, sir, to request that you keep, as token of our appreciation, the …, the….”(What should I call it? Not ‘model’ surely.) No need to worry: his piercing stare defied me to request the return of whatever it was to be called.

 

At the negotiated royalty rate of 4%, we would have attained wealth beyond the dreams of avarice – if only the damn project had been successful. But then, us research types are, well let’s hear it from the thrice-married but still virginal Ms. Smith: “Married for the third time?” expostulated the incredulous gynecologist. “Well”, said demure Ms. Smith, “my first husband was killed in a car accident on the way to our honeymoon; my second husband may have had a stiff you-know-what, but his wrists were big-time limp; and my present husband is an R&D Director who keeps telling me how good it’s going to be when it happens.”

 

OK, a flippant account, this, but of actual events – and with a powerful message. Maybe professional intellectuals, philosophers and the like, can ‘buy’ an idea from words alone, but most men/boys (women are less likely to still be girls) often need a tangible something to open the clogged passage through their cynical ‘yea, tell me another’ attitude, the metaphorical Kevlar vest to protect them from idea salesmen. That ‘something’ will best be a physical model that can be played with, e.g. disassembled and reassembled, or at least a ‘toy’ that can be handled and admired. What it really is, in context, is a metaphorical drill to burrow through the veneer of adulthood into the spontaneous receptivity of the youthful mind.  (Wow! Did I say that?)

 

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Deal-making tip: We males get older, but do we ever grow up?

Maybe used car salesmen and other peddlers of tangible goods know it, but do many of us self-nominated sophisticates appreciate the value of physical props (toys) in selling ideas, deals and the like? I think not: when it comes to toys, not only will boys be boys, but often men will too. So use it!
 
A couple of examples, in this blog and the next one, may titillate you. Back in the late 1960s when the development of portable energy sources rose high on the list of US Government interests, priorities even, thermoelectric generators (T/Es for short) – namely devices that produce electricity from heat, with no moving parts – were being disinterred from their previous obscurity. The basis for their possible resurrection was two-fold: more efficient active materials – semiconductors, of course – and long-lived heat sources, like radioactive isotopes that emit only easily stopped alpha particles that heat what stops them, but don’t produce those nasty gamma-rays, the bodily absorption of which is cancer-causing, for a start.
 
On the basis of a crash course in thermoelectrics – not literally, I’m glad to report, since the expertise was acquired by reading the thankfully short classic text on the subject during a flight from Boston to Washington DC – I proudly presented to various funding agencies there a ‘novel idea’ (are there any other kind emanating from us techie hucksters?) for the development and construction of an efficient T/E generator. The reaction? Well, as a Royal might say to a plebe: “We are not amused.”
 
Back to the drawing board, from which emerged what we thought was a rather fetching design for a compact, efficient T/E generator that no serious evaluator could fail to recognize as such. Ha! Based on the frequency and consistency of rejections from those self-designated pundits in Washington, however, we might well have given up on thermoelectrics and sought a text on, say, fuel cells instead. But wait… I felt a rush of neurons that could signal an inspiration.  “Build a model”, spake the proverbial still small voice – which I interpreted literally, not being an economist or an academe.
 
Our in-house jack-of-all-trades built this beautiful model of the T/E generator, using various colors of transparent plastic, held together by brass screws, nuts and bolts. A red velvet-lined teak box housed the necessary tools to eviscerate and reviscerate it. (Apologies to Webster’s and the OED.) Gorgeous!
 
So off I went back to Washington DC to confront the severest critic of our previously paper-only proposal, but the man (boy?) with the license to dispense funds summarily for projects of his choice. He sneered at me, as his version of a welcome, but focused on the package that I peeled the way Gipsy Rose Lee used to peel herself.  Without a word, he reached over and captured the model and the teak box.
 
With something approaching animation – a quality not before exhibited by this guardian of US Government funds – he lovingly disassembled the model, reassembled it, and once again did both. In response to a signal he must of sent via an under-the-desk button – this was, after all, the US Atomic Energy Authority – a minion appeared, whom he instructed : “Write this man a contract”. To me: “You can go now”, his hands encircling the model and the tools in a manner that quite effectively discouraged me from requesting their return.
 
Not many weeks later, we received official approval for our proposal, in the full amount requested. (Of course, the project never achieved its goals, but the Final Report was masterly!)

 

 

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Body Language? OK, but Eye Language is the Bees Knees

Here’s a tidbit about an incredible deal, vintage early 1970s, with a phalanx of major companies, three of them Japanese. But first a bit of background: while at Tyco, I became a solar energy devotee, specifically in the direct production of electricity from sunlight by means of low-cost silicon solar cells. These deceptively simple-looking devices – no moving parts except electrons (OK you purists you, ‘holes as well), just bluish wafers, typically square and thin, typically with a parallel set of metallic lines on the surface – were actually the miraculous means by which it became possible to provide electricity for orbiting satellites. Why not then, said some of us (myopic?) visionaries, for terrestrial electric power production too? Easy answer: too expensive.

 

At Mobil Tyco Solar Energy Corporation, the JV blogged just before this one, we developed a very ingenious novel technique for growing, directly from the melt, crystals of any constant cross-section, including silicon ribbons. Since the largest part, by far, of the cost of a silicon solar cell was the single crystal itself, this ribbon-growing technique, of not-quite-but-almost-single crystals, offered the prospect for a large-scale manufacturing process capable of producing solar cells that would compete as energy sources with those nasty conventional pollutant-spewers like fossil fuel-based power stations. (If a nuclear power plant begins to spew, ‘yishcadal ve yishcadash’ is about the best one can do.)

 

It was this technology, at that time more putative than proven, that was the subject of the deal to form Japan Solar Energy Corporation, the joint venturees to be Kyocera, Sharp, Matsushita, Mobil and Tyco. The one who was negotiating on behalf of the Japanese group was the truly remarkable individual, Mr. K Inamori, founder and President of Kyocera. He and I, when his company was called Kyoto Ceramics, had earlier negotiated a license to the basic Tyco shaped crystal growth ("EFG") process, as applied to sapphire – which is nothing more than single crystal aluminum oxide: chuck in a trace of chromium and bingo, you have ruby.

 

From those previous negotiations and subsequent interactions, I had come to know Mr. Inamori as an exceptional entrepreneur, businessman, energy powerhouse, and model of integrity and probity. And yet, although I suspected that he understood all that was said, I could never calibrate the strength of his grasp of the English language because he was always accompanied by an interpreter.

 

To negotiate the Japan Solar Energy Corp. deal, it was agreed that Mr. Inamori plus retinue would come, for a week if necessary, to Tyco’s modest facility (early 1970s) in Waltham, Mass. In preparation for the visit, we scurried around looking for easily accessible eating establishments commensurate with these top-tier visitors. (Wouldn’t you just know that, for lunch, they asked for McDonalds hamburgers?)

 

Came the fateful Monday morning when Mr. Inamori, his interpreter, Arthur Jonishi, General Manager of Kyocera’s California operation (a friend of mine from the previous deal), and several older Kyocerans, arrived straight from the airport. Seated in our conference room, the older contingent all promptly fell asleep, woke for lunch, ate, went back to sleep, and were only again awakened when dinnertime rolled around. I hope that they, at least, knew who they were and why they were present: I certainly never found out.

 

Contrary to the myths of how Japanese business is conducted, it became fairly obvious to me that we might actually come to an agreement, and an MOU (memorandum of understanding) that very day. Just in case, I slipped out at a coffee break and called Josh Berman, Tyco Counsel, Chairman and nominal though off-site CEO: I was the on-site President and COO. “Josh”, says I, “you’d better come here this afternoon because I’m probably going to have to commit us to a deal today”. Says he, “When did they arrive, and how long did they plan to stay?” “Arrived this morning and available to stay the whole week”, was the snappy answer. “Ed, young lad” – this from one younger than me, but with a presence that suggested that he had been born at age thirty – “I’ll come on Thursday afternoon; nothing serious will happen before then.” “Josh”, said I, “Mr. Inamori is not your garden-variety Japanese. He and I have done business before, and we trust each other, even across the great cultural divide”. (Of course it’s very doubtful that I actually used such immaculate prose, but poetic license is deemed to be indiscriminately available.)

 

Josh’s wisdom notwithstanding, by late afternoon on that first day, we had agreement on all the basic issues but one, and that particular one had not yet been raised, namely (substantial) minimal annual royalties for the exclusive license – a condition that was an obligatory component of my negotiating mandate. Loath as I was to do so due to forebodings of culture clash, I tried to slip in, casually and apologetically:  “We will need to agree on the amount of the minimal annual royalties (by implication, that need to be paid upfront) that are a standard component of exclusive license grants.” Standard? Not according to the brief but unmistakable hint of a wince, signaled only by a flicker of the eyes of the inestimable Mr. Inamori. A very short burst of eye language, but one that seemed to me to imply chapters on the subject of mutual trust, commitment and business ethics – namely many of the elements quite often missing from the souls of dealmakers, and represented only by dry legal prose in their grudgingly arrived at agreements.

 

Luckily, my psychic antenna was finely tuned that day to cross-cultural radiation, so, with hardly a discernible pause, I added: “But, of course, these minimums (minima?) can be put in escrow in your local Bank, and drawn on only as and when royalties become due.” This fast bit of situation appraisal was rewarded by the, so to speak, opposite of a wince, namely a special kind of smile – all this transpiring with no involvement of the (why-was-he-there-anyway?) interpreter, good old Arthur, except that his smile was broader than that of his master.

 

That sealed the deal, barring the odd dangling participle. So off we went to dinner at one of Boston’s legendary eating-houses, namely Locke-Ober’s. There, written with a fountain pen on a gravy-stained napkin, a seven-point heads-of-agreement was composed covering the main terms, plus a few hints to the lawyers on how to render the whole into that opaque brand of syntax in which that profession seems to revel.

 

Before I signed it, I excused myself, apparently to pee but actually to call Josh, who lived nearby – on Beacon Hill, of course. (Note for the benefit of Bostonians.) “In about ten minutes from now, I’m going to sign this napkin – Memorandum of Understanding, that is – unless you want to zip over here and change anything.” Well, those of you who were ever fortunate enough to have known Josh will never think of him and of the word “ruffled” in the same sentence – unless it was Josh doing the ruffling. But ruffled he came suspiciously close to appearing when he showed up seven minutes later - in a hurry, immaculate garb, and Locke-Ober’s. While introductions were being made to Messrs. Inamori and Jonishi, their colleagues continuing to remain anonymous and simulating(?) sleep.

 

Josh surreptitiously scanned the now almost illegible napkin, the ink having seeped around a bit. Thoroughly back to suave personified, Josh gave me the nod and his fountain pen. Mr Inamori signed; I signed; hands were shaken; the deal was done. My “Please see, Josh, that nothing material is added in producing the final documents” produced a condescending Beacon Hill-brand optical zap. (Try to remember, Ed, to quit while you’re ahead.)

 

Body language? OK in its place, but oh the subtlety of the far more sophisticated yet trenchant eye language.

Large and speedily executed deals between small companies and industrial giants? Implausible, but not impossible.

The way in which Mobil Tyco Solar Energy Corporation, a Joint Venture between then quite small but now infamous Tyco, and the mighty Mobil Oil Corporation, came into being was, in retrospect, so implausible an occurrence as to contain many interesting lessons for aspiring deal-doers. Driven by the need for a solution to a pending crisis that, in context, rated mention on the Richter Scale, namely the almost assured demise of Tyco’s ~100 person laboratory - the company name back then, early 1970s, was Tyco Laboratories Inc. - and having as a tool only chutzpa-tinged instinct, I set about a rescue operation for the crisis which I, perforce, had created by hiring, as successor President and CEO to me, an archetypal US hard-core executive who would surely take very little time to decide that what he most certainly did not need in acquisition-of-profitable-companies-based Tyco was a bunch of scientific types whose best bottom line performance would be to cost the company less rather than more to maintain.

 

Although the lab had lots of projects supported by a variety of Agencies, the only activities with even conjectural commercial viability were in the area of the growth directly from the melt of any constant cross-section shaped crystal by the Tyco-invented EFG process, e.g. putatively, at least (at most?), silicon ribbons for low-cost terrestrial solar cells. At that time, however, the closest we had to a ‘silicon ribbon’ was a few-cm long hunk of silicon that was somewhat wider (~ 1 cm) than it was thick (~0.5 cm) – clearly (sic!) the precursor of continuous silicon single-crystal ribbons 100 cm wide and ~0.2 mm thick, hundreds of meters long, wound on drums in preparation for fully automated solar cell manufacture. (We leave shrinking to violets... )

 

‘Clearly’, says he: there’s chutzpa for you. No, no: there was back-up data, which just happened to fit on the back of an envelope, to the effect that, for the paltry sum of $50 million (early 1970s dollars, that is) spent competently over a ten-year period, I posited that a process could be developed for the production of ribbon-based silicon solar cells that would produce electricity at a cost per kilowatt-hour competitive with that produced by conventional power stations.

 

First write a business plan, right? Right! Except that mine comprised a 1½ page letter that would not strain the attention span of even a business mogul. (I still have the grace to blush when I remember the criteria for business plans that I later established as Executive Director of the Israel-US Binational Industrial R&D Foundation, BIRD: 1½ pages indeed!) It offered 80% ownership to the fortunate JV partner for an investment of $50 million. We, Tyco, would get 20% for the technology, the practioners thereof, and the intellectual property (IP).  All that was needed was a partner who could and would go for this once-in-a-lifetime opportunity.

 

Obviously the partner-elect had to be B-I-G, but monolithic to insure that the decision would be made at the top, with no filtering by – perish the thought – techies with genetic ‘not-invented-here (NIH)’ syndrome. OK, let’s take a look at Fortune’s (then) 100: ATT, the leader? Forget it! Wait a bit: how about oil companies? Esso(Exxon), sad to say, had already started diversifying, including some solar cell stuff. Mobil looked good – good enough, in fact, to have the privilege of becoming the prime target. So off I trotted to Mobil HQ on 42nd Street in NYC.

 

With the embellishments that accrue from re-telling, I have almost come to believe that I simply walked in off the street and told a startled doorman/guard that I wanted to see the ‘individual in charge’. Not knowing what else to do, he called the top hauncho and told him that a Dr. Mlavsky had come to see him on a matter of great importance. Not knowing what else to do, said hauncho invited me up to the hallowed Executive Floor. I gave him the letter and, with great portentousness, unwrapped and handed him that then one and only silicon harbinger of a Solar Age. Don’t ask me to reproduce the pitch, but within an hour or so, said he: “$50 million and 10 years? Sounds high to me: how about $30 million over 7 years?” Need it be said that, after the obligatory pause for appearing to give somber consideration to this counter-offer, I accepted. And yes, that was the deal later enshrined in legal gobbledygook, namely Mobil receiving 80% of the JV after it had invested $30 million.

 

OK, so I probably had arranged an appointment in advance. (Picky, picky!)  But the next meeting, very soon after, was with the Mobil President, the Chairman of the Board, and assorted VPs and chief assistants to their respective assistant chiefs. One was the VP PR, who, when instructed to tell the world that Mobil was about to go into the silicon solar cell business, went into red-faced spluttering mode: “Silicone?” said he. “Not silicone”, said the Pres., “that’s the stuff that went into Raquel Welch’s tits. SILICON, that’s a – what is it, Ed?:  right, a semiconductor.”

 

Breaking “n” more rules, where “n” is large indeed, within eight weeks, yes eight  weeks, of my first meeting with them, Mobil, as part of its role in the newly-created Mobil Tyco Solar Energy Corporation, starting picking up the tab for Tyco’s lab, almost all the staff of which were reassigned to the solar cell project.

 

How did it turn out? By chance, Mobil finished up spending about $50 million over about 10 years  (sounds familiar?), namely in the early '80s, before selling off the operation at a truly bargain price - a pity, since the solar panels then being produced by the venture were the most efficient in the industry, and have been surpassed only very recently. And remember, please, that the 'business plan' upon which the investment was made occupied little more writing real estate than the back of an envelope.

 

Moral: start at the top, and go no lower until the deal is made. And remember, Business Plans are for VC functionaries, plebes and Government funding agencies: for top bananas, keep it short and simple. (Put mathematically, it is posited that the ideal length of a presentation is inversely propotional to the stature of the addressee.)

 

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