C. GORDON BELL with JOHN E. McNAMARA - HIGH-TECH VENTURES THE GUIDE FOR ENTREPRENEURIAL SUCCESS vvA ADDISON-WESLEY PUBLISHING COMPANY, INC. Reading, Massachusetts Menlo Park, California New York Don Mills, Ontario Wokinghan, England Amsterdam Bonn Sydney Singapore Tokyo Madrid San Juan Paris Seoul Milan Mexico City Taipei Many of the designations used by manufacturers and sellers to distinguish their products are claimed as trademarks. Where those designations appear in this book and Addison- Wesley was aware of a trademark claim, the designations have been printed using initial caps. Library of Congress Cataloging-in-Publication Data Bell, C. Gordon High-Tech ventures : the guide for entrepreneurial success / C. Gordon Bell with John E. McNamara p. cm. ISBN 0-201 -56321 -5 (hardback) 1. High technology industries-Management. 2. New business enterprises-Management. 3. Entrepreneurship. 4. Computer industry-Management. 5. Computer software industry-Management. I. McNamara, John E. 11. Title HC79.HS3B45 1991 90-25717 620.0064~20 CIP Copyright 0 1991 by Addison-Wesley Publishing Company, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written consent of the publisher. Printed in the United States of America. Published simultaneously in Canada. Cover design by Hannus Design Associates Cover photographs by Kurt R. Hulteen, Lisa LaForge, and John W. Wait Text design by Kenneth J. Wilson Set in 10 point Palatino ISBN 0-201-56321-5 Text printed on recycled and acid-free paper. 6 7 8 9 10-MA-0099989796 Sixth printing, July 1996 CONTENTS Preface v Chapter 1 Introduction: The Formation of High-Tech Companies 1 Chapter 2 The People 10 Chapter 3 The Business Plan: A Road Map and a Scorecard for the Future 34 Chapter 4 Cash, Financeability, and Control 59 Chapter 5 Technology and Engineering 85 Chapter 6 The Technology Balance Sheet 114 Chapter 7 Manufacturing 140 Chapter 8 The Product 152 Chapter 9 Marketing and Sales 201 Chapter 10 The Bell-Mason Diagnostic 251 Chapter 11 Case Studies 272 Chapter 12 Technical Workstations: Heuristics from History 316 Chapter 13 TheFuture 339 Bibliography 368 Index 374 Acknowledgments 387 PREFACE High-Tech Ventures is written primarily for those who are creating the future high-tech world by designing, building, and marketing innovative products. It is equally useful for board members, investors, attorneys, accountants, consultants, and others who are intimatelyinvolved in new ventures. These readers, plus students of the start-up process and other voyeurs, will find here a quantitative evaluation method, which includes a set of rules for examining a company and comparingit with an ”ideal” organization. The analytical approach presented in High-Tech Ventures differs considerably from the anecdotes, testimonials, and confessions so commonly found in today’s autobiog- raphies and case studies. Case studies are by no means ignored in this book, however, since the evaluation rules have been generated from actual cases and an entire chapter is devoted to case studies. But the diagnostic method described here is much broader than the approach employed in typical case studies, which focus on a particular discipline--such as marketing, finance, or management-to enable readers to under- stand a situation that aptly illustrates a flaw or an exemplary action. In contrast, the diagnostic method presented in this book enables users to examine all the critical dimensions that affect a new venture, which could very well reveal multiple flaws in the company.Furthermore, the diagnosticprovides a consistent methodology for analyzing and comparing cases. AlthoughHigh-Tech Ventures is designed to serve embryonic entrepreneurial firms, the guidelines given hereare equally useful for large-company intrapreneurs(individuals within big, established organizationswho are creating new businesses).These pioneers must deal with the same technologies, products, markets, and general environmental V vi Preface rules as entrepreneurs. All too often, however, intrapreneurs’ suggestions are rejected because the new products they propose either do not fit witlun the current business or threaten the status quo. Thus, start-ups are the main arena for innovation in the world market of informationprocessing, even though the basic technology and product ideas often originate in a research laboratory or a large company. As suggested above, most of thsbook outlines a diagnosticmethod that can be used to assess the health of a high-tech venture.The idea of developing a tool for diagnosing start-ups evolved over a period of nearly ten years. The possibility first presented itself when I was vice president of engineering at Digital Equipment Corporation (DEC).In that position, I defined rules for testing the management, team, market(ing),product position, and product development in an internal DEC guide formanagers, “Heuristics for Building Great Products.” Since then, I have been involved with about twenty start- ups, including Ardent Computer Corporation (now Stardent Computer, Inc.); Encore Computer Corporation; MIPS Computer Systems, Inc.; Silicon Compiler Systems Corporation (now Mentor Graphics Corporation); Silicon Graphics, Inc.; and Visix Software, Inc. My observations in these ventures-typically, from the vantage point of a tech- nologist and product architect-have, over the course of a long collaboration, been merged with the marketing, sales, and strategic insights of Heidi Mason, founder and, until recently, chief executive officer of Acuity, a strategic marketing and public relations firm in Silicon Valley. Our research has been encapsulated into a series of guidelines, which take the form of questions or rules, known as the Bell-Mason Diagnostic. The Bell-MasonDiagnostic constitutes a rule-based, human-applied, expert system. Its more than six hundred rules are gleaned from experience and research in start-ups and established organizations. Review and feedback from peers supplemented the original work, and testing performed on high-tech companies both by ourselvesand by Coopers and Lybrand provided a cross-check. Finally, the diagnostic was licensed to Coopers and Lybrand for use in assessing high-tech start-ups. As mentioned earlier, the rules reflect the diagnostic’s view of an ideal company, with which an organization can compare itself. These rules take the form of objective questions (e.g., regarding the existenceand content of certain plans and processes) that can be used to gather verifiable information from key people in the company. Formal assessment of a firm includes the following elements: a review of written plans, an evaluation at the company’s site (to secure more detailed documentation and simply look at the organization and its progress), analysis of the information that has been collected, preparation of a written assessment, and a feedbacksession with the principals in the firm.Such a formal assessment should be conducted by a team of two or three individuals who are familiar with the technology and the product and who have a general knowledge of marketing and sales, organization, control, and finance. Preface vii TheBell-MasonDiagnosticcanalsobeused informally.Anyone starting a high-tech venture, or contemplating joining a start-up, can read the diagnostic and answer the questions contained therein to test whether the company is healthy. Although the diagnostic’s rules have been posited, reviewed, and tested, the user is free to change or weight them to assess special situations, to perform a more detailed analysis of a particular type of organization, or to emphasize certain dimensions. For example, accounting and legal firms might add more rules in the cash, finance, and control dimensions. Futurists may be interested in reading High-Tech Ventures simply to learn more about high informationtechnology, including the products, market, and trends. People who suffer from ”technolophobia”and ”graphophobia” to such an extent that they are frightenedby simple graphs and shudder at logarithrmcscales are welcome to skip over the graphs in this book and concentrate on the text. Although the preceding paragraphs imply that the Bell-Mason Diagnostic was developed through a simple evolutionary process, it wasn’t quite that simple. When Heidi Mason and I first tried to apply a small set of rules to diagnose a start-up, we discovered that the rules were inadequate and that, to be effective, they would have to vary in detail with time, just as a new venture’s circumstances vary with the passage of time. We found that we had to precisely define the stages and substages through which a start-up passes in order to create detailed rules that would be appropriate for each stage. In general, a start-up has two planning stages: the concept stage (stage I) and the seed stage (11). These precede the heavily funded product development stage (111) and the even more expensive market development stage (IV),when the company invests in manufacturing and distribution. Finally, if all goes well, the firm enters the steady-state stage (V). In addition to the five time-dependent stages, there are twelve dimensions, or aspects, that can be used to evaluate any company. The combination of five stages and twelve dimensions raises the possibility of a sixty-chapter book! However, two sim- plificationshave been made herein. Namely, only the first two stages, concept and