Here is a recent exchange from the LSC mailing list I had with an EDA startup founder
EDA Tools Founder: We are small EDA tools startup. We captured great value because we built a pretty neat product without investment that can match others who were built using >5M-25M investment. Trouble is the software is costly and it takes a long sales cycle to sell.
SKMurphy: Depending on which problem area you are addressing in EDA your customers are not likely to be bargain hunting. If they are spending $4M on a mask set and your software saves them $25K (or even $250K) but introduces an error in the design they will get a dent if their career if not get fired. Investment in EDA is down to a handful of specialized Angels and the ones that are public about their investment philosophy like Jim Hogan advocate bootstrapping to get your first few customers. The EDA market is very challenging for a startup because of the increasing risk aversion and consolidation on the customer side as well. Investment will be difficult to secure, it will not materially shorten your sales cycle, but Angel investors may be able to open some doors for you.
EDA Tools Founder: I believe we need outside investment for the following reasons:
- We have a clear engineering execution plan. Since the core product is ready, the strengthening and adding features is now a parallelizable task.
- We need sales/marketing momentum to start cash flow.
- Investors with networks in this market can also bring in additional momentum.
SKMurphy: Taking each of your points in turn:
- There is little risk reduction or differentiation in your engineering execution, given a clear specification by a customer willing to outsource development or go outside for a solution there are many firms that can implement a workable solution.
- You don’t mention distinctive design insights or design expertise that led you to develop the product but have stressed in a number of posts to this group over the last year that you are able to develop more cheaply. Chip design and now even high speed board design looks a lot like hiring a brain surgeon: customers hire the most experienced provider with the highest number of patients still above ground. It’s an area where promising a bargain does not move the needle.
- There are many folks who can help you reach customers but you have to have a story that promises outstanding results, not a bargain on a piece of software driving a multi-million dollar decision.
EDA Tools Founder: What would you do? I believe investment can speed up both engineering execution and sales. Would you think of another strategy that would work without investment? Are we being cheap or lean here?
My current alternative solution to the above is to focus on other markets where sales cycle is shorter to start cash flow early. However time is precious and we could still execute engineering faster.
SKMurphy: You really need to work on your story:
- The Past: where you have come from, what led you to start your company and what about your background prepared you to be effective at solving this particular problem for your customers.
- The Present: what have you accomplished to date and more importantly, what have you learned from your journey so far.
- The Near Future: what you are actively working on, what you plan to accomplish in the near term, how you will demonstrate traction if your audience asks you “how is it going” in three to six months.
- Who You Are: why do you have an interest in the problem or field that you are focused on, what are the values and the passions that you bring to working on it.
- The Future: what you ultimately hope to accomplish, a vision of a better world you are working to bring about.
Continually stressing how cost effective you are is just not compelling to customers solving high stakes engineering problems. They are willing to spend a lot of money but they must get results that help to differentiate their products. You can still use lean techniques but you have to be targeting emerging problem areas or offer a disruptive tool that allows a new category of customer to get a result that was not available to them before. Also, when approaching VC’s or Angels the “near future” part of the pitch is key. Your current message is that we cannot get started without your money, you want to be able to stay we are started and will make good progress without you but can go faster with funding.