The dos and don’ts of crafting frontier-tech companies

Powerful tools, amazing talent and endless dollars flowing from eager investors makes today an amazing time to start tomorrow’s technology companies. Curious and ambitious founding teams are putting their skills to work toward solving real-world problems. Here’s how to build hard value while avoiding common pitfalls in nine exciting startup categories that will brighten our future.

Augmented and virtual reality

Virtual and augmented reality have been just around the corner for almost a decade. However, despite the flurry of new VR content, portals and hardware, traditional 2D content continues to be king.

DON’T build consumer hardware. Yes, virtual reality headsets are expensive and bulky, while augmented reality technology is still low-fidelity. Magic Leap has done an excellent job raising the immense amount of capital needed to build and market hardware; however, the business of designing, building, distributing and marketing consumer electronics is generally outside the realm of startups.

The likes of Sony, Google, Samsung, LG, Lenovo, HTC and Apple have the benefit of all the machinery in place and seemingly endless amounts of cash to fund these efforts. Meanwhile, other startups have attempted to become a destination for consuming VR/AR content. Again, the big media companies, as well as startups such as Amazon, Netflix, Apple Google, and Facebook, have poured money into marketing their platforms (i.e. Oculus, SteamVR) and funding content to seed them.

DO set out to build the magical content that will entice consumers to part with their cash and dedicate their time to experience it. Atari was able to create experiences magical enough to convince consumers to part with almost $800 (inflation-adjusted). Though the graphics and sounds are laughable today, the success of Atari’s original titles puts modern content to shame.

Creative talent is needed to create AR and VR-native experiences, as opposed to putting lipstick on 2D. It is the equivalent of the pan, zoom and monologues that distinguished photographs from motion pictures. It is the equivalent of arcades and movie theaters as venues for consuming VR content that’s needed. Unfortunately, hoping that people will use their mobile phones as headsets or set up rigs at home is no longer a strategy; the AR and VR content is still in the pre-Pong era.

AI

Academics and big companies have strapped AI to a PR missile. Cheap compute is reducing this decades-old technology to practice, and the notion of algorithms being able to read checks and identify cats in photos is being extrapolated to fears of homicidal robots taking over the world.

DON’T start an AI company and hope for the best. The days of investors and talent gravitating toward this sexy tagline are coming to an end. It is more likely that AI will make existing products and businesses better, versus uniquely enabling new multi-billion-dollar venture opportunities.

Starting an “AI company” is equivalent to starting a cloud company, a mobile company or an internet company. For every Salesforce, Facebook and Amazon there were many thousands of failed startups. There were also many incumbent companies that leveraged the technology to their benefit. The failed startups did manage to raise money and recruit around the hype; but without a strategy for building real business, they didn’t manage to get very far.

DO seek to leverage AI as just one of many tools toward improving products and accessing new markets. Ideally, you want AI as your secret weapon underpinning a superior product, or giving your business the reach or efficiency in acquiring customers that puts it in its own category altogether. In fact, you probably don’t want the market viewing you as an “AI” company, but rather as a company that is creating new markets with magical products, with AI working somewhere under the hood.

Hardware-accelerating AI

AI chip companies are white-hot. Intel’s $400 million acquisition of Nervana and Nvidia’s skyrocketing stock price have catalyzed a flurry of startups building chips to train deep neural nets in the data center and run them on portable and embedded devices.

DON’T optimize traditional digital chip designs for AI. Building a chip company is HARD. Many chip companies fail because it takes too long to ramp sales. Chip companies sell a complicated product to fickle, conservative electronics companies that require an army of people to support. It is typical for a chip company to get crushed supporting customers that are purchasing in small volumes. The chip startups end up having to raise more equity dollars to achieve better economics by going on a new technology node, and the cycle starts over again unless there is a watershed event with a customer.

DO ask customers what they can do with your chip that they otherwise can’t do with the chips from their current suppliers (e.g. Intel/QCOM/Nvidia/TI). If it’s less than a 10x improvement in performance, cost and size, you are walking into a gunfight with a kitchen knife. Think about how your orders-of-magnitude improvement could potentially lead to a new category of products. Successful chip companies like Broadcom, Qualcomm, InvenSense and Atheros empowered new product categories (cable modems, cell phones, motion-sensing video-game controllers, Wi-Fi in laptops and phones, respectively). What magical product can your chips enable?

Space technology

Internet-turned-space-entrepreneur Elon Musk proved to the world that you don’t need to be an aerospace insider to build an out-of-this-world company.

DON’T rush to lay down infrastructure for the space economy. As Mark Twain has been credited for quoting: “History doesn’t repeat itself, but it often rhymes.” Investors lost billions laying down railroads during the industrial revolution, though they greatly benefited the industries that relied on rail transport. Investors also lost billions laying down infrastructure for the internet, but benefited the e-commerce, social, mobile and SaaS companies that later put them to use. How are the prospects of launch, space communications, mining and microgravity laboratory services going to be any different?

DO build businesses that will leverage space toward serving massive existing and future markets. SpaceX set out to serve the needs of existing government and commercial satellite operators. Planet built and launched a novel satellite design to create a new market for cheap, frequent geospatial imagery.

Before putting together a plan to build, launch, service or provide comms services satellites, take a moment to forget about space. Assume you are building a generic business that has an upfront cost (i.e. designing, building and launching satellites), and has a long tail of cash flow associated with it. That cash flow has to generate a substantially higher return (or in finance terms, IRR) than any other project, regardless of whether it’s in, or out of this world. That return needs to be high enough to compensate for the risk being taken on an unproven product team and, in some cases, a nascent market.

Driverless cars

It is difficult to resist the temptation to start a company overcoming the many obstacles on the road to autonomous cars. Speaking of roadblocks…

DON’T start a company building point solutions. There are almost 50 big companies going after various levels of the technology stack, ranging from sensors to computer vision, to classifying people/objects, to predicting behavior, to planning, to communicating with other cars and roads and more. On the back end, there are many companies building development tools, maps and even cyber solutions to keep the cars safe.

Unfortunately, driverless technology is so nascent that it is still to-be-determined as to how these pieces will fit together. An analogy I like to give is compute in the 1960s: IBM would do everything from fabricate chips and circuit boards, bend metal cabinets, as well as produce programming environments, compilers and the applications that ran on their machines. Heck, I wouldn’t be surprised if they had IBM-designed wipes for screens and keyboards.

DO take a hard, close look at the supply chain you are selling into. If you are enabling driving-assistance features in conventional cars, then understand the nature of the existing automotive supply chain, which has traditionally been a meat grinder for startups. What makes your company unique/special in a sense that it will grow/thrive in a market startups have gone to die?

If you are building technology for robo-cars, how easily does your technology plug into the systems that are being built, predominantly at startups or R&D groups at big companies? My guess: It won’t be easy. Get to know your customers EARLY before you start building technology. Avoid pursuing a product that has to be redesigned for every customer, which, unfortunately, isn’t conducive to a rapidly growing venture.

Human-machine interfaces

Controlling machines through our minds, or controlling minds through machines has been left to the realm of science fiction. More recently, scientists have been leveraging modern AI tools to take a deeper look into our minds, toward potentially curing disease and building tomorrow’s interfaces with machines.

DON’T try to build machines that can be controlled by our minds, or mind-controllers (scary). We are born with an incredibly sophisticated brain-machine interface: our bodies. We have been able to speak, sing, dance, draw, write, create music and tell stories probably before the invention of the wheel. An Emoji that can be encoded with 4 bits, perhaps drawn in the dirt with a stick, can probably better communicate emotions better than the very best headsets powered by sophisticated deep learning. Finally, our wideband senses of sight, sound, hearing, smell and touch, coupled to our intuition, already serves as a superhighway into our brains.

DO work with the rich, existing input/output system of our bodies to invent unforgettable experiences. Does this advice sound familiar? Yes, similar to what AR/VR founders should do. The joystick was a critical aid for Atari’s success, but it was Pac-Man and Pong that compelled arcade gamers to pump machines with quarters and parents to part with more than $800 (inflation-adjusted) for an Atari 2600 console.

Can a brain interface, coupled with sight, sound and smell, and perhaps trained by an individual’s history, deliver an unforgettable experience? Is there a combination of stimuli, generated by artificial neural nets tailored to a unique individual, that will lead to a sensual experience like no other?

Education

Our educational system is ripe for disruption. We’ve seen edX and Coursera bring the world’s best educators to every corner of the planet, and there is still plenty of room for innovation.

DON’T build within the confines of our classical educational model. Our current system was invented post-depression: in an era with vastly different societal norms, career profiles, employers and expectations from students. In my father’s generation, a four-year education was expected to prepare him for a lifelong career. Adding two to five years of post-graduate education carried the promise of additional income and more job security.

Today, an undergraduate footing a quarter-million-dollar bill for college tuition doesn’t have an extremely high prospect of being able to repay that bill. Exporting elements of a traditional education onto an electronic platform is simply offering another alternative in an already crowded market of educational “products.”

DO expect to constantly anticipate and equip students with the skills they need for the constantly evolving needs of the workplace. Technology is rapidly penetrating every aspect of labor, and, contrary to the headlines, it is not replacing workers; it is augmenting them (more on that below).

Invent educational tools that evolve with the students, and accompany them through their careers. A valuable lifelong educational tool anticipates the changing needs of the workplace and automatically offers training. This concept is not new to healthcare professionals: They are required to stay abreast of the literature and be constantly re-certified. Unfortunately, professionals in less-regulated fields have to have the foresight to individually pursue training, which is challenging with family responsibilities becoming more prevalent with age.

Furthermore, knowledge isn’t as effectively disseminated in areas outside of healthcare. Can AI be used to identify best practices for a given field and disseminate them? Can tomorrow’s educational tools predict required skill sets with the changing workforce and provide personalized training?

Blockchain

The volatility and speculation behind cryptocurrencies, as well as the power of blockchain technology, has compelled many entrepreneurs to take a moment to think seriously about doing a crypto startup, for the sake of doing something in crypto.

DON’T fall victim to the rush of speculation. Many seem to have forgotten the IPO bubble of the ‘90s. To refresh your memory, ANY company that had anything to do with the “internet” and was being offered to the public was only expected to go up. Some purchased shares BY MISTAKE, only to see their shares skyrocket — until the music stopped. Similarly, don’t prey on speculators expecting your coin offering to appreciate simply by virtue of being a coin.

DO ask the simple questions: How will blockchain technology empower your business? Does it enable a unique product? Does it improve the unit economics of an existing product? Does it accelerate penetration or enhance networking effects?

If you’re pursuing a coin offering, make a solid case as to how value will be accrued in your cryptocurrency as you build out your business. What characteristic(s) of blockchain will be core to this value creation? Build a solid hypothesis around how more users and transaction volume will create intrinsic value for the currency.

Robots

There has been a lively debate around whether robots create or destroy jobs. Powerful compute, algorithms and cheap sensors and actuators have created an opportunity for founders to build interesting automation companies that will lead to a more productive and competitive human workforce.

DON’T try to replace humans. Throughout history, inventors have built clever gadgets that mimic humans. However, the most successful machines have been those that augment humans, not replace them. Don’t go off and try to build some bipedal humanoid to serve as a robotic butler. Don’t try to build a contraption that can take the place of a human on the factory floor. Don’t build a robot to run around a fulfillment center and do bin-picking faster than a human.

DO empower humans. Assembly line technology became commonplace because it made factory workers more productive. Conveyor belts and barcodes have made their way into every order fulfillment center because it helps humans break incoming shipments down and put orders together faster.

There is already plenty of automation in factories and warehouses: How can humans be further assisted? How does that robotic assistance impact bottom line? What’s the return on investment for the operators? Does that return apply across a large number of customers or is it limited to a small group of potential customers with very specific needs?

Whether it’s building cars or iPhones, doing Amazon order fulfillment, cleaning rooms, washing dishes, making beds or even gourmet cooking, the question should be 1) how is the robot making workers’ lives better, and 2) what is the quantitative improvement in worker productivity? It’s all about the people.

The advice here is consistent: Prioritize people. Attracting amazing, cognitively diverse people, bounded by strong culture, will empower your startup to over-achieve with very little resources. Investors will be quick to identify this trend of over-achievement and infuse the companies with the money that will attract more talent, which will attract more dollars, hence creating a virtuous cycle that will quickly accelerate your startup ahead of its peers and put big incumbents in its rear-view mirror. New technology enabling new products empowering new markets will be created, and all of humanity will find itself closer to its fantastic future.

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