Building a Tough Tech company is hard. This advice can help.

The world has radically changed since I founded my first company in 2004, but the fundamental challenges of building a cutting-edge technology company remain the same.

By Phil Inagaki, Operating Partner at The Engine

At The Engine, we don’t shy away from investing in Tough Tech companies at foundational stages, and we often work with technical first-time founders. These are people at the forefront of science, engineering, and technology wrestling with solutions to pressing global challenges: What does the next generation of zero-emissions energy look like? How can we use cellular engineering to cure diseases like Parkinson’s? How do we build faster, more flexible, and more efficient computing systems? The list goes on.

Out of the 27 companies in our first fund, the majority of founding CEOs were less than five years out of academia. In response, we’ve launched Blueprint, a startup development program, to encourage grad students, post docs, and research scientists to explore the commercial opportunities of their particular breakthroughs.

While we do not solely invest in first-time founders, we do believe that they hold a unique combination of bold vision, cutting-edge knowledge, and an incredible passion for bringing their ideas to life.

Phil has held Co-Founder, CEO and Executive Chairman roles at venture backed start-ups in a variety of Tough Tech fields, including advanced materials, semiconductors, nanotechnology, micro-electronics, energy, 3D printing, robotics and AI. Phil has raised over $100mm in funding across five start-ups and has 15 years of experience as a tech entrepreneur and executive. He holds an A.B. in Physics from Princeton University magna cum laude and 12 US patents.

The advice in this piece is aimed at young technical founders and is rooted in my personal journey. When I was 24 years old, I spun-out Polyera, a semiconductor startup from Northwestern University. I served as its CEO for 11 years until we merged the company into a joint venture with SAES Getters, a public company.

I have seen how our founders are able to leverage the resources that we offer to accelerate the growth of their companies and often find myself thinking, “I wish the Engine existed when I started Polyera.”

Be part of the critical mass.

In 2006, I was looking for space to start scaling Polyera’s R&D activities. The technology was licensed from Northwestern and I felt tethered to the greater Chicago area due to proximity to the academic members of the founding team. I was on the hunt for lab space with a particularly high density of fume hoods — something we’d need for all the chemistry we’d be doing. We conducted a very thorough review of our options, and the most viable one ended up entailing close to $200k in renovations and signing a 5 year-lease. At the time we had raised $650k in equity funding. Even worse, while I didn’t fully realize it at the time, we were in an environment that had a scarcity of like-minded people. Looking back on it, it was damn lonely.

Ideally, early-stage Tough Tech companies should not spend a dime on renovations or commit to long-term leases. And especially in the case of young founding teams, they should be in an environment where they can soak up knowledge and experiences from peers. Truthfully there are only a few places in the country that have such opportunities for young Tough Tech teams, the Boston area being one of them.

The advice to future founders is this: make every effort possible to establish your company in a place with the highest density of Tough Tech entrepreneurship possible.This is different than establishing your company in an innovation-dense area. Centers of academic innovation are not necessarily the same places where those ideas are spun out into businesses. At first, it may seem important to be close to the birthplace of your technology, but that will quickly grow less important. What will always remain important, however, is surrounding yourself with like-minded peers, potential employees, investors, and strategic corporates.

So. Find that critical mass of entrepreneurs and go there. If you’re doubting the logic of a potential cross-country relocation, try thinking a few moves out. What happens when your company starts to grow? Will you tell your employees to pack up and move with you? Logistics get complicated fast. Before that first check is cut, ask yourself: if I stay where I am, do I have access to the people and resources I need to change the world?

Know what experience looks like.

As one of my mentors told me early on, “to start a Tough Tech company you have to be either tremendously courageous or tremendously naive.” I was the latter. I did not know what I did not know, especially when it came to what true professional industry expertise looked like.

Talent is always crucial, but if you’re a Tough Tech founder mistakes can be especially punishing in terms of money, time and reputation. Think of updating software versus recalling cars. As a Tough Tech founder you will likely be building something physical and sophisticated and will be navigating complex supply chains. To do that efficiently you’ll need people on your team that have done something similar before. Preferably more than once. Preferably people who are the very best in the world at what they do. But how do you know what those people look like? How do you find and recruit them?

That type of awareness requires exposure from early on to talent of the highest caliber in their respective fields.

If you’re a Tough Tech founder, no matter your age, you have a bold vision, incredible passion, and are most likely one of the world’s foremost experts on the technology you are commercializing. Do not underestimate the power of this vision and expertise to attract industry veterans that can accelerate the growth of your company.

Stay modest. But be unabashedly greedy when it comes to talent.

Understand your ecosystem.

Tough Tech ecosystems are often difficult to navigate. As an example, Polyera developed novel semiconductor materials that could enable flexible displays (think of a tablet or smartphone that can bend in two). The commercialization of such a technology requires a manufacturing partner on the speciality chemistry side (e.g. BASF), a manufacturing partner on the display panel side (e.g. Samsung), an electronics contract manufacturer that will integrate the display panel (e.g. Foxconn), and a brand company that will design and sell a final product (e.g. Apple).

Adding to the complexity are innovation dependencies. In our case, while we supplied part of the solution that enabled a display to become flexible (let’s call it the “electronics part”), it wasn’t enough. Amongst other layers, the substrate technology also needed to become flexible, which required a new kind of highly specialized glass or plastic developed by other “parallel” ecosystem players (e.g. Corning).

First time founders should map their ecosystem in detail and develop key relationships as quickly as possible. They should also avoid the common trap of wasting time in partnerships where the commitment level isn’t high enough. Are you working with the largest business unit of a Fortune 500, with visibility and support from the C-suite? Or are you working with corporate R&D, as 1 out of 100 exploratory programs?

Just as investors must do their due diligence on you, do your due diligence on them. Identifying first investors that have robust networks and expertise in your sector is paramount. A connected and intelligent investor can break down walls that would be impossible to surmount as an upstart company.

Choose your first sources of capital wisely.

Tough Tech founders have access to a variety of capital with which to fund the development and commercialization of their ideas. Some of the most readily accessible, and therefore tempting, types of capital for early-stage companies are non-dilutive. Whether a government grant or corporate research dollars, these types of capital can provide a new company with a sizable amount of cash without cutting into equity or adding debt.

But there is risk. Too much non-dilutive capital, too early, can pull an early-stage company away from their primary function of commercialization. This can lead to non-productive cycles of research fulfilling the terms of the grant. My colleague Orin Hoffman wrote an analysis of such grants in a piece titled “On Growing Companies, Not Programs” that you can read here.

Even in cases where non-dilutive capital is strongly aligned with a company’s commercial work, the resources which a strong institutional VC can bring are often highly desirable. For better and worse, at Polyera we were successful in quickly securing revenue from engineering fees and pilot sales from Fortune 500s, and did not raise institutional venture capital until several years into the company’s life. Unfortunately, even though we eventually raised upward of $60M in equity funding, this meant we “grew-up” “out of the venture network.” Tough Tech companies often remain at a pre-commercial stage for years and cannot be easily evaluated through metrics such as user or revenue growth. It takes a significant amount of deep diligence to invest intelligently in Tough Tech, and this makes the credibility which a first tier VC investor can lend to a start up all the more valuable.

As a Tough Tech Founder, you will likely need to access large amounts of capital. Securing that capital will require credibility, business momentum, and a clean cap table. Even if you have access to other sources of early capital, securing a quality seed VC investor can dramatically impact your fundraising trajectory. While your company will have more milestones under its belt as it grows, in some ways it actually gets harder in later stage rounds to break into the venture network.

There’s never been a more exciting time to be a Tough Tech entrepreneur.

As I write this, the richest man in the world is a Tough Tech entrepreneur, there are a growing number of emerging funds focused on Tough Tech, and we’re also seeing established funds returning to Tough Tech investing.

Software might be eating the world, but all software runs on semiconductors, and all semiconductors run on electricity. Tough Tech is the foundation upon which society is built.

As The Engine continues to evolve, one thing remains constant: we’re not afraid to support founders with massive, daring ideas — those who are willing to take a risk, to take a leap, and help build a better world.

There has never been a greater need or a more exciting time for Tough Tech entrepreneurs. Whether you are a first-time or experienced Tough Tech founder, I’d love to hear from you.

Built by MIT, we help founders create the next generation of world-changing companies. Visit us at engine.xyz.