How can a startup prove its mettle? With execution

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Can you rely on a startup?

Successful new companies take a lot more than a grand vision.

PETE NAGY, Iphotonics

As communications networks quickly grew in the late '90s, keeping up with market demand became an issue for fiber-optic equipment suppliers such as Lucent, ONI, Ciena, Cisco, and Sycamore. These companies juggled the growing demands of production and testing on one hand and shortened development cycles of next-generation products and technologies on the other. Th Bl

A contract manufacturing industry was already in place on the electronic side of the business. But while these players saw opportunities in optical communications, many found it extremely difficult to move into optical manufacturing. The automated, high-volume assembly and manufacturing of traditional electronics just doesn't work well when it comes to optics-where volumes are lower, skill levels need to be higher, equipment is very technical and sophisticated, and there's lots of customization. Thus, many equipment manufacturers were pushing their component suppliers to fill the void in integration and manufacturing services.

The founders of Iphotonics saw an opportunity as an independent supplier of optical integration and manufacturing services to these OEMs.

Iphotonics' three founders each had close to fifteen years' experience in the industry. The team had a very good perspective, all of the members having been in the component industry and witnessing the evolution not only in the growth of the business, but also in the need for more and more integration.

At previous jobs, the three principals had already been selling to top-tier equipment makers. They were aware that many OEMs were asking for more and more integrated functionality. As the OEMs' internal manufacturing became increasingly limited, these equipment companies started to ask their key suppliers for help. In essence, OEMs were forcing their suppliers to develop and support integration capabilities.

Perhaps the biggest challenge for Iphotonics and other startups is to find customers. As a new company presenting a new business model, Iphotonics had to market itself so the customer could understand the advantages of doing traditional production in a completely new way. Up until this time, the traditional method was to produce internally, or have the job done by the component suppliers with whom the customer had an existing relationship.

Iphotonics had to first educate potential customers to a different way of thinking. Convincing potential customers that there were more advantages than disadvantages proved challenging. The OEMs could only compare Iphotonics' approach with what component manufacturers were offering. Th 1086lwe100

As an independent contractor, Iphotonics integrates optical subsystems and offers system-level manufacturing services to component suppliers and equipment manufacturers.

Iphotonics' advantage as an independent optical integration services provider allowed component selections from many suppliers. It was not manufacturing components, and communicated this very clearly to potential customers. Since a company's primary concern is selling its own products, there is little room for flexibility. And it's difficult to get one component manufacturer to work with another to achieve the best results with regard to technology, price, buying capabilities, and so on. What Iphotonics brought to the table was neutrality.

As an independent contractor, Ipho-tonics was also able to forge a more open relationship with some component suppliers and not be locked into one supplier, which was a problem for many OEM network systems integrators.

The company received its first purchase order over the fax machine on the president's dining room table. At this point, Iphotonics needed to execute. The principals had convinced a customer to move forward, and if the company could execute well, there would be a good opportunity to move to the next level. The principals were very careful not to over-promise.

It just so happened that one of Iphotonics' initial customers was a major OEM network provider. That job brought Iphotonics industry attention, and this was helpful in finding additional financing and in securing other customers.

Iphotonics had some initial "angel" investment. It developed a business plan from day one and focused on sticking to and managing that plan. The three founders kept a keen focus on cash flow and cash management. Cash flow is the fuel that runs a business. The number one reason for business failures is that companies run out of money. Both customers and vendors look at cash resources as an indicator that the company is able to buy the equipment and the resources to execute the job.

The company's first purchase orders provided two immediate opportunities to prove its capabilities. Initially, Iphotonics did not have a facility or a labor force. In solving the first challenge, the company bartered consulting services for facilities and completed the work on a loaned site. Whatever equipment was needed was rented in to meet the customer's needs.

In another case, the customer was on a critical time frame to have its system ready to demonstrate at SuperComm, an important industry trade show. The customer was having a great deal of difficulty using traditional paths. The startup would be given the order, but had to complete the prototype for a complex optical module in 30 days (see Photo). All the design team had was a black box design and some functional specifications. They had to select the components, design the function of the module, take care of the testing and packaging, and include the circuit board design. Through a tremendous amount of focused effort, they were able to execute the project.

That's another advantage of being a startup. The company was able to devote the full attention of roughly a dozen people to the project. Due to the tight time frame, the design team had only one shot; there was simply no time for revision. Iphotonics delivered the product on time. The customer assembled it the night before the show, and they were very successful in demonstrating their new system.

As a result, Iphotonics received a very large order. Now came the really big test: showing that the company could deliver on a larger scale. At the time Iphotonics got this order it didn't have the facilities, staff, or resources to do it. But within just 60 days, Iphotonics had taken occupancy of a building and started its first production line. It required close coordination and involved a lot of attention.

Fortunately for Iphotonics, its first successes were with market-leading customers, which laid the groundwork for succeeding rounds of investments. The company was founded in February 1999 with an initial injection of seed capital. By February 2000, an additional $5 million had been raised. By building on its initial successes, additional investment capital could be attracted. By September 2000, Iphotonics had raised $28.9 million in equity financing and loan facilities.

Any startup, regardless of the industry, must prove itself. It's absolutely vital to the investment community, as well as suppliers and potential customers, to be able to show how the company is able to execute. A company has to demonstrate that it has both the financial resources and the expertise to execute its business plan.

In the case of Iphotonics, investors and customers were more than willing to act as references, which increased the startup's credibility.

Once Iphotonics began to secure orders and ship product, one of its biggest challenges was handling the supply constraints prevalent in an industry that's growing as fast as the optics segment.

Iphotonics' founders fostered communication with the supply community through vendor visits, trade show participation, and lots of plain old legwork. It also involved making sure that the component developers knew that Iphotonics wasn't going to compete in the component business.

Another important area of development for a startup operation is building a reliable labor force. In the last two years, Iphotonics has needed to add a large staff of workers. People are a critical success factor. It's always a challenge to find good people, regardless of the economy, the market, or the business plan. First, the company needed to attract good people in leadership positions.

The work environment was also a plus in attracting technical employees. At Iphotonics, an engineer is exposed to a very broad range of technologies and experiences and has a chance to do cutting-edge work in a fertile environment.

Iphotonics' president and chief executive officer Susan Trumbule speaks with every employee, every week, to share the values of the company. That was one of the things the founding team discussed before starting the company, and something they all agreed on. They had seen too many companies run into trouble-or lose their people before an IPO-because the employees could not come together as one culture. Creating this environment is a big challenge for any rapidly growing organization, but it is absolutely fundamental to its ultimate success.

At the Optical Fiber Communications Conference in March where there were more than 1,000 vendors and 35,000 attendees, it was readily apparent that there is tremendous activity in component technology and equipment manufacturing. But there was still limited activity in the area of optical-subsystem and system-level manufacturing.

The electronics contract manufacturers are interested in this area, and some will eventually get into it. But it's not easy to find the resources, the suppliers, the right people, and the technology needed to operate successfully as an optical-subsystem integrator and manufacturer.

Iphotonics' formula was well received. Today, Iphotonics operates from a brand new facility of 77,000 sq. ft. and currently employs more than 200 people. Life as a startup trying to sell integration and contract manufacturing services as a new business model is challenging, but it also has its rewards.

Pete Nagy is vice president of operations and chief operating officer of Iphotonics (Glen Burnie, MD). He can be reached at 410-590-0320.

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