Silicon Carbide: Promising Technology on the Precipice

This post is in a series on the technology Valley of Death. Find the other posts here.

You will eventually find silicon carbide in every single electric vehicle, computer power supply, solar inverter, and battery charger. These devices will be everywhere. These are multi billion-dollar markets. The question is…which companies will survive that long?

As Clayton Christensen wrote in the Innovator’s Dilemma and Geoffrey Moore wrote in Crossing the Chasm, there is a large gap between the early adopters of a technology and widespread commercial adoption (also know as “success”). It takes millions of dollars, years of hard work, and patience for a company to bridge that gap. In this post I’ll describe why silicon carbide is important in the renewable energy industry and how far it still needs to trek to get to the next watering hole.

Introduction to Silicon Carbide — Why It’s Important

I explained in an this earlier post that every renewable energy system required power conversion. The power switches inside the power converters are the single component that generates the most energy losses. They’re also the third least-reliable component in the entire system (only capacitors and circuit boards are less reliable). I provided insight from the key power switch suppliers, in this post.

One of the most promising, “game-changing” technologies in the renewable energy industry is silicon carbide. Instead of making the power switches out of silicon (the same material that’s used to make the chips inside your computer), it’s also possible — but still difficult — to make them out of a much harder material, silicon carbide. Silicon carbide is already used in many ways, including LEDs, lightning arresters, astronomical telescope mirrors, heating elements, jewelry. It’s great for power semiconductor switches because it can operate at 300°C (as compared to 150°C for silicon-based devices), can withstand 20,000 Volts (versus 6,000 Volts), and generates 1/3 the energy losses at high voltages.

The drawback is that silicon carbide is an incredibly hard material. It’s nearly as hard as diamond, which is why it’s also used in cutting tools, Porsche disk brakes, and bullet-proof vests. This means it’s difficult to work with in manufacturing. Since the manufacturing process hasn’t yet been fully worked out, the materials have many defects, especially basal plane dislocations, which can’t be detected by visual inspection. If these defects are present, they gradually cause bipolar devices to fail over a matter of weeks or months. You can rule out mass market adoption of bipolar devices until these issues are worked out! Unipolar devices, such as Schottky diodes, JBS diodes, and JFETs do not suffer from the degradation caused by the basal plan defects, but they can be impacted by other materials defects.

The sweet spots for silicon carbide applications are:

  1. Residential-scale solar inverters – silicon carbide can be used for high-voltage MOSFETs, which reduce power losses, and reduce the system’s size by switching faster and operating at higher temperature. Why is this useful? Image being able to easily lift a small inverter up a ladder and onto your roof and install it next to the solar panels…instead of having to run DC cables all the way to your basement to a heavier wall-mounted inverter.
  2. Computer server power supplies – silicon carbide MOSFETs. Here, efficiency is the main gain.
  3. Electric vehicle power converters – Current Tesla’s have an air intake on the hood with two fans blowing directly onto the inverters. Imagine the cost and size reductions if vehicle manufacturers had highly-compact hardware that could survive in the hot under-the-hood temperatures without special cooling.
  4. Utility-scale power converters – The future “smart grid” will have power converters that intelligently route power to avoid brownouts and minimize blackouts. High-voltage silicon carbide thyristors will make these systems more practical.

Silicon carbide products are made in the following steps. Currently, each step still has reliability and yield issues that need to be worked out:

  1. Epitaxy growth – take a silicon carbide wafer and then grow additional crystals on top.
  2. Device fabrication – take the epitaxy, etch it with chemicals, blast it with ions, expose it to specialized gases, and deposit metals to create a power semiconductor switch.
  3. Packaging – take the finished device, attach  miniscule wires, and surround it with plastic to create a “brick” with 4 electrical terminals.
  4. System integration – take the packaged brick, attach 2 wires for triggering the switch, and 2 heavier cables for the input and output power connections.

U.S. companies working on silicon carbide:

Overseas companies working on silicon carbide (incomplete list):

U.S. universities and government agencies working on silicon carbide:

A Promising Start

DARPA, which is the government’s agency that funds “far out” technology ideas,” funded silicon carbide research throughout the late 80’s, 90’s, and early 2000’s…but then the funding started to dry up. DARPA’s feedback to the research community was: “The technology is advanced enough…now go find some actual applications and deploy SiC as a product.”

So, some startup companies raised money from angel investors and seed money from VCs and started developing SiC-based products. They and other research-focused companies started figuring out how to package the devices so that they could actually be installed inside a larger system.  They partnered with other universities that were developing power converters for electric vehicles and built a prototype residential-scale solar inverter.

The simplest and easiest to manufacture of the silicon carbide products are diodes, so two or three large companies successfully developed silicon carbide-based diodes, launched these products through a major electronics distributor, and saw strong sales.

The Valley of Death

What about all the other promising power semiconductor products? This technology is supposed to be a game changer applicable to all aspects of the renewable energy and electric vehicle markets! Hundreds of millions of research dollars and decades of work resulted in just one mainstream line of products?? The three problems are:

  1. Cost, cost, cost – due to low manufacturing yields and low manufacturing volumes, silicon carbide devices are 10’s to 100’s of times more expensive than existing mass-market silicon devices.
  2. Reliabilityinvisible defects make it impossible to know which devices will fail in the field.
  3. Integration – researchers have been so focused on making the devices work (in the lab) that many of the packaging and triggering issues, required to make silicon carbide work in an actual renewable energy product, haven’t been fully addressed.

Silicon carbide has passed its “proof-of-concept” phase. Early prototypes are under testing. Next comes widespread commercialization…and here we come across a barren landscape riddled with gaping financing holes and prickly technology risks.

Take a look at the figure below; the black vertical bar illustrated the technology Valley of Death. DARPA funded the “Technology Creation” of silicon carbide. The simple silicon carbide diodes — with the backing of large, established companies — successfully crossed the chasm and are being bought by the “Early Majority.”

Startups — funded by angels, seed-stage VCs, Dept. of Energy, and other Dept. of Defense grants — were the “Innovators,” who started packaging silicon carbide and inserting it into actual applications. Due to the issues listed above, however, the “Earl Adopters” are having difficulty using the devices. Working out the remaining issues will take millions and millions of dollars. That black chasm is huge.

Credit: Dept. of Energy. Found here.

The Valley of Death is vast and can be encountered on multiple different paths — both at the start of a company and again when it attempts to commercialize. This National Renewable Energy Lab article and the Renewable Energy World podcast (see the 9/14/2010 entry) have argued that the entire clean tech industry is facing the valley of death. Dot-com startup just need a computer, internet connection, and a desk to get started with coding a new website. Clean tech companies, in contrast, need to spend millions of dollars to build cleanroom fab facilities or high-voltage test facilities…just to get started. The finance industry and both state and federal agencies have recognized this problem and started developing solutions. I’ll discuss these ideas in a subsequent post, but I’ve already provided some links here.

In the meantime…an immensely promising technology is on the precipice. Silicon carbide will eventually inhabit countless vehicles, computers, and renewable energy installations. Which companies do you think will survive long enough to reap the profits?

The Intel of Renewable Energy

I ran into one of my EE classmates at Princeton University reunions (supposedly the largest single order for Budweiser in the country, ahead of the Indy 500). He works in Germany for a power electronics company and is the only other EE classmate of mine who ended up working in a power-related field. We chatted again last night via Skype. He provided so many insights that I decided our conversation was worth a blog post. My thanks go out to him for being willing to share his thoughts.

Topics (pick à la carte):

  • Power semiconductors, the workhorse of all renewable energy systems,
  • Explosive product demand and large capital investments,
  • Germany’s electric vehicles charging network,
  • The silicon carbide market,
  • Renewable energy jobs in the U.S., Germany, and globally,
  • U.S. vs. German corporate culture.

My college friend asked me to keep his name private. Everything he shared with me is public information, so don’t expect to get any insider info here…just some insight (hopefully).

The Intel of Renewable Energy

If PCs have the “Intel Inside” sticker, most renewable energy systems should have an “Semikron Inside” or “Fuji Electric Inside” sticker. These companies and their peers make the power semiconductor chips like MOSFET and IGBT switches that route the power for renewable energy systems. Have a wind turbine? Their chips are used to turn the wild AC power into the grid’s regulated power. Have a PV array on your roof? Those same chips turn DC into grid AC power. Dreaming about buying a Tesla or Nissan Leaf? You’ll also be buying the power semiconductor chips located between the car’s batteries and its motor.

Unlike Intel, these companies are more vertically integrated. They make the “bricks” that are used to package and cool the power chips. They also make the driver boards to safely turn the chips on and off. Many even build full switching assemblies, including heatsinks and capacitors, which would be analogous to Intel building its own PCs at the same time as supplying its chips to Dell.

Huge Demand, Huge Capital Investments

At the beginning of 2011, my Semikron sales rep was quoting me 6 to 10-month lead times for standard components in early 2011, due to a Chinese wind turbine manufacturer buying up all their production capacity. My classmate said that his company was making huge capital investments to bring more power semiconductor manufacturing online. One typical plan in the industry this year was to invest about 20% of revenues…pretty much all of their profits! My friend mentioned that some companies are not only investing their own capital to finance expansion but have also successfully asked customers to finance this expansion.

Customer-Financed Growth: My friend cited one example with Infineon’s “Capacity Insurance Program.” Customers are so desperate to get parts pay up-front in order to get guaranteed capacity, which won’t be available for another 1 to 2 years! This helps to 1) get additional cashflow for capital investments and 2) locks in customer demand. Not only is this a sign of strong market demand for products, but also demonstrates the critical role that power electronics play in enabling renewable energy technologies.

Jobs: Keep in mind that much of the job growth from these capital investments are in Germany. Believe President Obama when he says that the U.S. needs to play catch-up if we want the clean tech jobs of the future to be here in the U.S. Germany’s progressiveness is paying off with a 6% unemployment rate as compared to an 8.7% unemployment in the U.S.

Growing Too Fast? Since all power semiconductor companies are investing hugely in expanding capacity, it’ll be interesting to see what happens to prices in the next two years. The PV module industry went through a similar capital investment explosion about 3-4 years ago, as many new entrants (especially from China) drove the competition that spurred a 35% drop in prices. Ouch.

Image credit: Solarbuzz

However, my classmate that higher barriers to entry in the power semiconductor business will prevent a market glut. Unlike PV modules, for which the fabrication equipment is readily available and production techniques widely known, the power semiconductor industry better protects its technology. Today’s market leaders have invested for decades in R&D to build deep know-how. Their vertical integration reduces the risk that their special “recipes” leak out. In addition, the industrial customers who use these devices set very demanding requirements. For example, Siemens Wind Power needs to be able to trust the high performance and reliability of the parts it buys. Since there are so few potential suppliers, it also requires that its suppliers will be able to consistently deliver the $1000 components needed for its $1 million wind turbines. It would take years for any new entrant to develop the levels of trust needed to establish themselves in the business, just like it would take decades — if ever — for anyone new to compete with Intel.

Electric Vehicles

I was surprised with my classmates’ answer to my question about electric vehicle (EV) charging stations. Apparently, utilities in Germany are already rapidly building out a large network of EV charging stations. The utilities are the ones who invest in EV charging stations because there is high PR value in Germany with appearing green and progressive. That’s a far cry from the attitude in the U.S., where utility customers revolt when their utility wants to install smart meters…for free.

Image credit: Photographer unknown. Found here.

He commented that if you own an EV, you could probably could drive around most of Germany almost worry-free because all of the major utilities already have or are building out charging stations Here are links to German-language sites from E.ON, RWE and Vattenfall. (Open them in Google Chrome to get translations.) Tesla points out in this interesting article that only five charging stations (strategically placed, of course) are needed to drive across England.

The tradeoff is, of course, that Germans pay $0.30/kWhr, which is 3x what we pay here in America, in order to be able to afford new clean tech infrastructure like this (though since gasoline also costs ~$9 per gallon, E-mobility still remains economically competitive). Clean tech doesn’t come cheap (yet).

Silicon Carbide

Silicon carbide (SiC) is one of the most promising “game changing” technologies in the renewable energy industry. I mentioned to my classmate, however, my theory that SiC is peering into a deep technology “Valley of Death.” More to come about this in a future post. If you’re not familiar with the Valley of Death concept, here is some background.

He didn’t seem convinced about my theory, but we both did agree about the two sweet spots for SiC:

  1. Replacing MOSFETs in residential-scale solar inverters and computer and server power supplies.
  2. High voltage switches for “smart grid” utility-scale power converters.

I found a chart on Infineon’s website that displays #1 quite well graphically.

Image credit: Infineon’s IFX Day shareholders meeting R&D presentations.

He mentioned that many big power semiconductor companies (like ST, Toshiba, Infineon, Panasonic, and Cree) are all developing their silicon carbide technology in-house. I’m aware of a slew of small and mid-sized companies that were founded specifically to focus on SiC technology. It’ll be interesting to see which survive, especially given how many big players are also pursuing this market.

Renewable Energy Jobs

I gave my classmate my list of the top cities and regions for renewable energy jobs in the U.S.:

  1. Silicon Valley, California
  2. Boston, Massachusetts
  3. Austin, Texas
  4. Boulder, Colorado
  5. New Jersey
  6. Detroit, Michigan
  7. Pittsburgh, Pennsylvania

However, he suggested I think more globally and provided a list of countries, each with different interests and motivations to adopt renewables:

  1. China – lots of people + lots of growth + not enough energy + government willingness to make big investments = big player
  2. Germany – engineering competence, highly environmentally conscious, heavy government involvement to “make” green markets
  3. Japan – one word: Fukushima
  4. Certain places in the Middle East (lots of capital, lots of sun, plus the oil cash cow won’t last forever; of many projects, Masdar is one of the most impressive
  5. India – similar to China, minus the capable government, but plus a dash of “Gandhian engineering;” already home to innovative companies in the space such as Suzlon

Within Germany specifically, he cited the southern states of Bavaria and Baden-Württemburg, which are the industrial heart of the country, and arguably Europe. Munich, in particular, boasts the headquarters of well-known technology names such as BMW, Siemens, Semikron, Infineon, Epcos (capacitors), and TUV (safety compliance testing). I might just consider moving there…I’d be much closer to where my father grew up grew up.

U.S. vs. German Corporate Culture

Lastly, my classmate commented on how different the corporate culture is in many German companies compared to what he’s seen in the U.S. Instead of laying off employees during the recent economic downturn, companies furloughed workers and utilized the the government’s “Kurzarbeit” program to make up the difference in salary. This was the alternative to the U.S. system of the government only pays unemployment benefits upon full termination. The German policy comes at the cost of higher taxes, but it allows companies to retain talent during the downturn and fosters good relations between labor and management.

Interestingly, a quick Google search shows that several U.S. states allow employers to opt-in to programs, called “Work Sharing Unemployment Insurance,” similar to Kurzarbeit. Why haven’t we heard more about this, especially for startups and service companies? If you have any experience with these programs, please contact me.

Apparently nearly all small- and medium-sized German companies still family-owned and some large German companies as well (like Bosch and Semikron…even BMW is still 46% family owned). There’s also much less of a push amongst smaller companies to go public. The result of not having shareholders is typically a longer-term outlook and avoids some of the shenanigans seen in public companies in order to make their quarterly numbers.

By this point, it was close to midnight in Germany, so my classmate had to sign off. Thanks for all his insight. If we were still at reunions, I’d go get him a Budweiser…or a good German Hefeweizen.

Mechanical Engineers should be Renewable Engineers

This is an updated post from my ongoing series on The Great Clean Tech Talent Gap, which I painfully experienced while trying to staff my growing renewable energy startup.

It has shocked me over the years how deep the shortage is of mechanical engineering skills in the renewable energy industry. When I say this, the first response is usually: “But renewable energy is related to power generation and electricity. Wouldn’t we need more electrical engineers?” NO! Wrong.

This widely-held belief — that energy-related topics fall mostly under Electrical Engineering (EE) — is harming the industry’s growth, hurting innovation, and are a lost opportunity for MechE professors to win research funding.

GE 600kW solar inverter. Height: 7’8″, Weight: 7000 lbs.
Contents: 25% Electrical Engineering. 75% Mechanical Engineering.

This topic is important because we need more U.S. students to become engineers…and once they decide to become engineers, we need them to specialize in areas where they’re most needed. Many students enter the field that they think will provide the best job prospects. When my classmates and I were picking our majors in college during the heat of the dot-com boom, everybody was flocking to EE and Computer Science (CS) departments. English majors were entering the CS department and suffering through three years of courses they hated in order to improve their job prospects. No wonder half of my EE and CS classmates went to Wall Street or other non-tech jobs after the bubble burst during our senior year.

My college degree says I’m an electrical engineer with a focus on embedded controls, which is heavily software-based. Through experience, however, I’m a power electronics engineer, embedded controls engineer, engineering manager, technical sales moonlighter, and entrepreneur. I believe this mixture has given me a good perspective on what training I was lacking despite attending one of the best engineering schools in the world and therefore had to teach to myself or supplement through hiring.

Research Funding

In the past five years, new research centers have been sprouting up on college campuses around the country, including the following. Note that this is not an exhaustive list, so if I’m missing one please send me the link. For a list of schools that have strong energy and power programs, see the end of this post.

Princeton’s center is headed by a MechE professor and MIT’s is headed by a physics professor. All others are spearheaded by EE departments. While the centers usually try to be cross-disciplinary, it’s difficult…professors are busy focusing on their own, ongoing research. With renewable energy depending so heavily on mechanical engineering skills, I believe these centers represent lost opportunities for funding really interesting and impactful MechE research. Improving the integration of the necessary disciplines presents opportunities for boosting the effectiveness of the government’s research dollars.

Examples of Renewable Engineering

(If you’re willing to take my word for it and aren’t interested in the technical details, then just skip to the end of the list below.)

Other than the obvious — like designing wind turbine blades and towers — here are some examples of the work that goes into designing some critical components within any renewable energy system. You’ll notice that they’re all taught in mechanical engineering departments.

  • Reliability under extreme conditions: One DOE manager told me that a major solar inverter manufacturer was providing sheepalong with their product. He was serious. The inverters were located in the middle of nowhere, so instead of mowing the lawn and having the grass clippings clog the ventilation intakes, the sheep took care of a major reliability and maintenance headache.Renewable  energy systems not only need to survive but they also need to continue operating optimally and safely under extremely hostile environmental conditions: in the baking sun, under strong winds, exposed to salt water spray, in downpours where the rain comes in horizontally, under condensing humidity, subjected to lightning strikes, and in grimy industrial environments. They need to do this, ideally, for 20 years with only nominal maintenance and minimal degradation of performance. We need MechE’s!
  • Control Theory and Modeling/Simulation: I haven’t seen a single renewable energy system that isn’t saddled with control problems. Power converters require control of their switch trigger timings. Motors and generators require specialized controls, which vary widely based on how they’re constructed. The grid as a whole requires complex distributed controls to remain stable. Wind turbines require controls for the pitch of their blades to maximize energy capture and other critical controls to make sure they don’t fly apart during a grid outage. Even stationary hardware like PV panels and batteries require max power tracking and charging/discharging controls, respectively. Smart grid components such as thermostats require controls. The list is endless. Control theory courses are usually taught in the MechE department.In dot-com product development, if your code fails then just reboot your crashed computer. In renewable energy development, if your code fails then your hardware blows up, you lose thousands of dollars, and someone could get injured. Renewable energy equipment is so large, expensive, and energetic that systems must be modeled and simulated long before anything is built. We need people who can perform these simulations in a realistically yet efficiently.
  • Mechanics (mounting heavy components, designing for shock & vibration): Power equipment is heavy (minimum of 20-100 lbs for residential, 500-2000 lbs for commercial installations, and much higher for industrial utility-scale systems). For these heavy components, mounting considerations and shock and vibration stresses during transport are incredibly important. I’ve seen several pieces of hardware (typically $5,000 to $20,000 apiece) get destroyed in transit due to overlooked mechanical design considerations.
  • Enclosure / packaging design: Between 25-44% of a solar installation is the “balance of system” cost (mostly mounting hardware) and installation labor. The high-tech solar panels are only 50% of the cost. MechE’s have the same potential to reduce the cost of solar installations as the well-funded photovoltaic cell researchers receiving billions of dollars in government and VC funding. The large size of renewable energy systems drives materials cost, manufacturing labor, inventory  overhead, shipping costs, and installation costs. In most cases, a MechE needs to figure out how to pack 2 pounds of stuff in a 1 pound bag or how to assemble things faster.

  • Magnetics: Motors, generators, inductors, and transformers are all examples of magnetics. Several magnetic components are found in every single solar, wind, electric vehicle, and power distribution box. I’ve seen that MechE’s are the best at the 3-dimensional visualization of the cores, windings, and magnetic flux lines, which is necessary in doing the magnetics design. This is a lost art and I can count on two hands the number of engineers I’ve encountered who are good magnetics designers. If you want job security, teach yourself magnetics design.
  • Thermodynamics (thermal and airflow design): This is a huge topic and a huge challenge. To put it in perspective with one example: an industrial-scale solar inverter dissipates in losses the same amount that 2 to 4 homes consume. All that power needs to be dissipated out of just six brick-sized components. Doing that without overheating anything…over a period of 10-20 years…is a huge mechanical engineering challenge.
  • Rotating machinery: Many renewable energy systems, most energy efficiency improvements, and all electric vehicle systems include a rotating machine like a motor or generator. I’ve run into the problem way too many times of having an EE who doesn’t understand how the machine works and a MechE who doesn’t know how the power system works…and the two don’t speak the same engineering “language.”
  • Materials: Capacitors are designed by chemists and physicists, but their reliability and cost are determined by the MechE who packages them. Batteries are designed by chemists, but MechE’s make the packaging safe. They also make sure the materials inside every type of renewable energy system don’t corrode under salty, humid, or high-voltage conditions.

We need more renewable engineers with mechanical engineering skills!

Tear Down the Silos

It’s risky for me to make such broad generalizations. Someone can easily say “XYZ skill is purely EE or chemistry” or “the best engineers are cross-disciplinary.” I recently visited MIT and spoke with a computer science professor. He knew virtually no EE professors and referred to the various departments as “silos,” with little interaction between them. From my own experience, I know that undergrad education doesn’t cross disciplines very frequently…after taking their electives, students typically need to focus the majority of their course load on their specific major. Freshman be forewarned: if you know which industry you want to enter, you need to make sure you get the appropriate mix of classes, regardless of how the departments and curriculum are structured.

As for the research centers…from the outside it seems that MechE professors are not seizing on the opportunity to become the leaders in renewable energy research and education. Maybe the issue is that MechE departments have focused on airfoils and engines for so long that it’s difficult to jump into this 21st-century industry which also requires EE skills as well. Maybe this is a sign that the traditional divisions between MechE and EE are outdated.

Regardless of the reason, if universities want to become leaders in renewable energy research and want to create the highest-performing engineers in this hot field, then topics that have traditionally been taught in the mechanical engineering department need to become requirements for anyone interested in renewable energy.

Update:

I’ve received some interesting responses to this post, especially the following from Yogesh Nama:

Erik, There is no shortage of mechanical engineer. How many do you want?? Most of recruiters in the US and UK simply do not bother to look at the CV properly. They simply run a search for a keyword. If it’s not in the resume then the candidate isn’t considered for the job.

In this post I tried to make the argument that either (a) we need more mechanical engineers with an inclination towards working in renewable energy and the necessary additional skills to work on renewable engineering technologies or (b) we need to cross-train EEs in traditional mechanical engineering skills. I’m sure there are plenty of MechE’s being trained with the skills necessary to work at Ford or Boeing…and enough EE’s with the skills to work at Intel…but very few with the necessary mixture of skills to excel in renewable energy work.

Renewable energy engineers don’t just need the standard materials, mechanics, and thermodynamics training necessary to build airplanes and cars…they need slightly broader training. If they did have that training, I believe they would be the best for most clean tech engineering jobs.

As for the comment about keywords on resumes…I completely agree.  Reviewing resumes that are receive “over the transom” for keywords and just spending one hour interviewing someone results in poor hiring results. References and working with someone on a trial basis are the only way to know for sure whether a person is a good fit for the position and the company’s culture.

Image credit: GE. Found here.
Chart credit: John Lushetsky, Dept. of Energy Solar Energy Technologies Program. Found here.

Walt Disney’s Advice to Engineers

“We don’t make movies to make money;
We make money to make movies.” – Walt Disney

Techies are usually the ones who start companies. There’s a big problem with that…we techies (I’m one of them) love our technology too much. That love of technology and the realities of business — developing viable products; selling, selling, selling; staying on budget and on schedule; surviving to fight another day — frequently don’t go well together.

I’ve seen it time and again, we let our love for the technology get in the way of making sound, logical, calculated business decisions. If you think this doesn’t apply to you because you’re not on the leadership team, think again…the same holds true for the engineers working in the trenches as they make their product design and development decisions. Being in love with your technology leads to bloatware, unnecessarily complex designs, distracting features, and the associated schedule delays and cost overruns. Keep it simple, stupid (K.I.S.S.)

I saw a classic example in one company I worked with. A brilliant inventor came up with a new idea. The team developed it into a commercial product, which was DOA because its cost was 80% higher than the existing commercial products…and the customers were only willing to pay 25% more for the solutions the new technology provided. The inventor and the team had sold themselves on the technology, so they modified the product for military use. The technology solved even more problems for the military, but even they weren’t able to pay the cost premium. The team finally decided on a two-pronged approach: they’d use their patented technology for niche applications and long-term product ideas but would use the industry-standard technology for their “bread and butter” products.

This company built a decent, recurring revenue-generating, profitable business using industry-standard products, combined with a few niche plays using the new technology. Despite these business successes, the inventor’s impression was incredibly negative. He felt that the team had “abandoned” his idea and gone down the wrong path by using an “inferior” solution. He ignored the important fact that the profits from the standard products allowed the company to grow its research team. He also overlooked the fact that having real products out in the field — instead of continuing to slave away in the lab — taught the company invaluable lessons, allowed it to hire a manufacturing team, and attracted additional customers. The inventor had difficulty accepting that revenues, profits, and viable products had to come first before the company could afford to take additional risks with its new technology. You need to make money to make movies.

This behavior doesn’t surprise me. People who invent something new, especially something that goes against a conventional approach, face huge hurdles in gaining acceptance. Skeptics repeatedly tell them their baby is ugly. They have to develop thick skin. They spend years telling themselves that their solution is the best for certain applications. At some point, however, they risk making the leap in logic that they have a solution for every customer problem. “When all you have is a hammer, everything looks like a nail.” This perspective, combined with mental toughness, ends up getting in the way of sound business decisions.

Not only do techies love their technology, but we love the scientific method. We love questioning, debating, analyzing, and playing devil’s advocate. Sometimes, unfortunately, we’ll do that right when the sales guy is near the end of a sales cycle and the customer is reaching for his wallet. For the sake of argument, we might mention that one technical risk that only has a 2% chance of actually occurring…and we’ll kill the deal. We think too much. PhD’s, in particular, are accustomed to the pontificating of academia. We’re thinkers who have lots of ideas and long-term vision but might be short on execution. In my first company there were four co-founders, all fresh out of school. We thought the best way to work together was to debate until we had some consensus. WRONG! The best way to make progress is to have someone make a freakin’ decision, have everyone charge forward in the same direction, expect that half of your decisions will be wrong, and to be OK with that because you can quickly learn from your mistakes and pivot in the right direction.

Another reason techies struggle with cold business logic is because we can’t get it through our thick skulls that “better” is the enemy of “good enough.” Even after the product is done, we love “polishing” it. If someone else wrote the code, we think we have a better way of doing it, so we’re tempted to rewrite it from scratch. We give this process a fancy name — “refactoring the code” — in order to bewilder inexperienced project managers. For an excellent lesson-learned from Netscape on why you should never start something from scratch, read this article.

What Treatment is Available?

We need to remind techies that in order to keep playing with their toys, the company first and foremost needs to make money to keep making movies. How do we do that? Three simple steps:

  1. Set Immovable Deadlines – Define deadlines based on the resources you have, and then make the deadlines absolutely immovable. Be aggressive in de-scoping your projects in order to eliminate the fat. Make there be hell to pay if a deadline is missed and celebrate the small victories when the deadline is hit.
  2. Provide Financial Insight – I think startups have too much internal secrecy surrounding their financials. This decouples engineering performance from the company’s financial performance. Management should set revenue through an operations plan at the beginning of the year, share the financial forecasts with the team and update the team on a regular basis, and show how delays impact the bonus pool in a real way.
  3. Discourage Professorships – Foster a culture biased towards action. Cut debates short. Don’t let meetings last longer than an hour. Make sure someone has the authority to make executive decisions and that they’re competent. Tell people who come asking for approval to JFDI.

That didn’t work…what else can I try?

Keeping a team of engineers focused is a full-time job — it’s the reason for project managers, who are worth their weight in gold if they do their job well. Here are some other mechanisms that can help. (As I write more about these, I’ll link the articles.)

  • Have engineers interact with the real world. Send them to conferences and customer meetings. It’ll make them realize that (a) the competition isn’t standing still and (b) the customers really only care about price and a couple of key features, not the kitchen sink.
  • Create small, focused teams and give them budget authority. Matrixed organizations create chaos…avoid them.
  • Track project spending vs. actual milestone completion.
  • Create a “parking lot” for good ideas so that they don’t become distracting tangents.
  • Don’t over-specify. Figure out what the customer really needs and have everyone focus on that. Big specs can easily become distractions and make-work exercises.
  • Celebrate small victories.
  • Exercise management by walking around (MBWA) in order to keep your finger on the pulse of the engineering team and correct people going down a tangent.
  • Reward on-time delivery.
  • Get expert input to prevent engineers from re-inventing the wheel.
  • Do weekly company-wide demos of people’s work. Peer pressure and interim milestones are wonderful motivators.
  • Implement agile development, especially scrum.

Remember what Motivates Us

Nobody wants to waste time. Everybody wants a sense of accomplishment. Nobody wants to toil on useless features. Everybody wants to see their products released into the wild. Unfortunately, there are countless distractions along the way…distractions that make us lose sight of what the customer actually wants.

As you get closer to your product release date, remind your techies that “we don’t make movies to make money; we make money to make movies.” The customers are the ones who pay the bills…and the bills are what allow them to continue developing cool, new technologies. Or, in the words of Walt Disney’s Mickey back in 1928.

This is it guys, when these doors open, we got to make a very first impression.

…and it better be a good one.

The Grid Needs You

This is a post from my ongoing series on The Great Clean Tech Talent Gap, which I painfully experienced while trying to staff my growing renewable energy startup.

Our generation has already built the Web. We’re overhauling the power system as our next great technical challenge. – me

Shortly after I started Princeton Power Systems, my co-founders and I attended two conferences: one for the electric utility industry and one focusing on renewable energy. The average age of the attendees at the utility conference was retirement age. The average age at the renewable energy conference was college graduation age. Little did we realize that these demographics would have a huge impact on our business for the next decade.

The U.S. has experienced a huge “brain drain” away from engineering, and especially away from power systems. Half of my Princeton electrical engineering and computer science classmates went to work on Wall Street instead of working in technology fields. When I graduated from Princeton, I asked one of my electrical engineering professors when the Princeton EE department would start teaching power electronics in addition to the usual “mili-volts and micro-amps” necessary for dot-com engineering.  My professor literally laughed.

My father, who has been working on power electronics and high-voltage systems for 30 years, once joked that “only C-students went to work for utility companies.”  I know he didn’t intend this as an insult because in the same breath he said “the utility grid is the largest and most complicated machine ever built…and those students are the ones who built it and kept it running reliably for the last 100 years.” The grid is a marvel of engineering that powers every activity in our society. It enables our standard of living. When it malfunctions either due  to man-made events (the Enron-precipitated 2001 California energy crisis) or technological failures (the 2003 Northeast blackout), people die and billions of dollars are lost.

Credit: NASA/GSFC Scientific Visualization Studio

In 2001, the perception was that power electronics and power systems weren’t “sexy.” No innovative work was occurring there and research funding wasn’t plentiful. By and large, that impression was correct; the most meaningful innovations over the past 20 years in these industries are silicon carbide switches — which are still a nascent technology — and various types of resonant converters — which still have huge cost disadvantages.  Most research has made improvements “around the edges.” Of course this is a generalization, but I challenge anyone to name other major innovations in the power industry that have succeeded in widespread deployment as products over the past 20 years (leave your responses in the comments section).

21st-Century Challenges

God bless the grid; while it is really dumb, the electricity it has provided was, for many years, cheap, and always ubiquitous and reliable — so reliable that most Americans have never even asked themselves where it came from, how it is made, or how it winds up being immediately available to flow out of the wall sockets on demand. We just expect it to be there, and when it isn’t, even for fifteen minutes, there is hell to pay. – Tom Friedman in “Hot, Flat, and Crowded”

This lack of innovation was largely caused by utility companies having strong financial incentives to keep the grid reliable…and therefore shying away from new technologies that hadn’t had all the bugs worked out through decades of operation in the field. I’ve visited with the engineering departments of major utility companies and have seen this (justified) conservative thinking first-hand. “Why would we buy that electronic transformer to reduce energy losses when we can reproduce the same old transformer that has worked for the past 30 years? Nevermind the fact that no engineers still remain alive who know how that old equipment was designed. We’re compensated for providing reliable power. Energy efficiency is great, but the risk from new technology is too high.”

For better or worse, however, the requirements imposed on the utility grid are changing rapidly, for the following reasons:

1. Renewable energy integration – Wind and solar energy come and go based on the whims of the weather. As certain regions see high “penetration” of renewables, this variability will cause significant instability that grid operators will need to offset with very fast-responding generation sources or energy storage systems.

2. Distributed generation – Historically, power has been generated at large, centralized coal, gas, oil, or hydro power plants. Scheduling the power production and ensuring safe conditions for maintenance required coordination between a relatively small number of entities. Solar power creates the possibility for every family to have a mini power generation station on their roof. How do the utility linemen make sure that everybody shuts off their mini-generation station before they work on the power lines? How do we know how much power all those mini-generators are producing so that we can balance energy supply with demand? These are tricky problems when you’re operating the largest man-made machine.

3. Electric vehicles – People are creatures of habit…most return home from work around the same time. Imagine the huge power draw and the destabilizing effect this will have on the grid when all these 9-5’ers plugging in their electric vehicles (EV’s) around 6pm. The grid needs to be capable of handling this influx, or intelligence needs to be added to how EV charging is scheduled.

4. Outages caused by extreme weather events – Climate change is real; weather events are becoming more extreme. Even when hurricanes and tornadoes don’t cause the levees to break, they can take down power lines over a wide geographic area and can knock out major generation stations. The grid will need to minimize regional outages and prevent cascading failures.

5. Transmission capacity limitations – As the population grows, transmission lines become harder and harder to install — nobody wants them in their backyard. The east coast depends on companies like Google to build transmission lines offshore so that we can send wind power to where it’s needed. As transmission lines carry more power, they heat up and eventually reach their thermal limit. During summer days where the ambient temperature is higher, the transmission lines hit their thermal limit with even less power flowing through them. The future grid will need to handle transmission bottlenecks that are sure to get worse, but you’ll only notice these bottlenecks when the lights go out.

6. Microgrids – Diesel generators allow Army bases, national parks, universities, factories, and hospitals to operate either as part of or completely disconnected from the grid. Renewables, new battery technologies, electronic transformers, smart grid software, and other distributed generation technologies will allow  homes and entire neighborhoods to jump on and off the grid based on electricity prices and outage events. The grid will need to remain robust despite these energy vagrants coming on- and off-line.

7. Fuel supply shocks – If oil prices go up, we burn more natural gas. If gas prices go up, we burn more coal. But as China’s, Brazil’s, and India’s energy demands increase, and as fossil fuel reserves become harder to access, what do we do when the prices for two or more fuel sources increase? Tap the strategic oil reserves? The grid will need to supply the necessary electricity despite shocks to the fuel supply.

Losing the New Space Race

The grid has major challenges. Some have called renewable energy and the necessary smart grid the new “space race,” comparable to the challenge of beating the Soviets in the “moon shot.” This time we’re racing against the Chinese and Europeans for jobs, racing against the Middle East and the oil industry for freedom from oil and environmental damage, and racing against the climate to reduce greenhouse gas emissions.

The DOE borrowed this analogy and declared its “Sun Shot Initiative” to get the cost of solar installations down to $1 per Watt — down from $5/W today for large-scale solar installations. (I and many others have argued that dollars per Watt is a terrible metric to use, but that’s an argument for another time.)

By any metric, we’re losing that race. For example, the chart below shows that the U.S.’s share of the global annual photovoltaic (PV) panel production has dropped from a respectable 43% in 1995 to a pitiful 6% in 2009.

Credit: Minh Le, DOE

The federal and state governments has two main levers by which to influence our collective performance in this race: R&D dollars for developing new and improving existing energy technologies and tax/rebate incentives for installing renewables. The chart below shows the federal government has finally woken up to this reality and has increased R&D funding. In prior years, state governments took the lead in providing tax incentives and rebates for the adoption of renewables.

Credit: Charlie Hemmeline, DOE

Training the Next Generation of Grid Innovators

Remember those two conferences I attended in 2001? I could have “read the tea leaves” by observing the trade show attendance. There is a true generation gap in power electronics and power systems training. My company and virtually every other renewable energy company had incredible difficulty in finding experienced engineers in this critical field. There are a few experienced engineers still around, particularly immigrants from the former Soviet bloc. Many have, however, retired and most of those who remain are at a point in their careers where they perform more management than hard-core engineering work.

I’ve been able to find plenty of entry-level engineers, since this is becoming a hot field. India and China are doing an excellent job in training their engineering students. Many “refugees” from the telecom industry are retooling their skills and are developing the embedded control systems and software for the “smart grid.” Both the newbies and the telecom guys still need someone to train them how to be safe around potentially lethal high-voltage equipment and still need to learn power industry best-practices from a mentor. The U.S. is lacking these experienced mentors for the next generation of power engineers.

The U.S. schools that are helping fill the generation gap in power electronics and power systems are linked below. If I’m missing a school, please let everyone know via the comments below.

Role Reversal

Last year I attended a military conference and saw a sign that the times were a-changin’. The Navy and Army were looking to utility companies for innovation! Typically, technology has flowed from the government R&D labs and small business into the large government prime contractors, then into the military, and only then into industry (velcro got its big break through the U.S. space program; the internet came from the Department of Defense’s ARPANET). The Navy has historically developed the power generation, power distribution  hardware, and control software that reliably power the “microgrids” on its ships. The Army has always built its own generators, power distribution boxes, and air conditioning units. Now, however, both agencies are incorporating technologies from the renewable energy boom into their systems.

The innovation will only accelerate as schools open new centers focusing on renewables and power systems, adjust their curriculums, and finally fill the 30-year gap in engineering training in this field.

So, Mr. American Consumer…do you want to enjoy the same electricity reliability despite all these looming changes in how we generate and use electricity? Do you want to continue to improve your standard of living…along with the corresponding growth in energy consumption? If you do, then you better budget more for your electricity bill and you better send your kids to engineering school, because the grid needs them!

— UPDATE 8/15/2011 —
There was an excellent podcast on this topic by Renewable Energy World. Here is a summary of the podcast.

45% of the utility engineering workforce is retirement age. Not only that, but the professors needed to educate the next generation of energy engineers are also retiring:

“The U.S. Power and Engineering Workforce Collaborative estimates that only 2,000 undergraduate, masters and doctoral students get degrees in power engineering each year. That falls short of the estimated 11,000 workers needed in the U.S. by 2013.

Further compounding the problem, IEEE reports that 40 percent of power engineering educators in the U.S. will hit retirement age in the next few years.”

Want VC Money? Think Twice

I was in college during the first dot-com boom.  It was nuts. Billboards would advertise a new, different, supposedly-world-changing dot-com every week. Brainstorming ideas for new companies was a campus pastime. The news was full of IPOs. English majors were switching into computer science (shocking!) to get in on the action.  Everything I read and heard at the time was that the only way to start a business was to raise VC dollars — tens of millions of them. Bootstrapping was a second thought and considered riskier.

That message is still being preached today; just this morning I read the following passage in Entrepreneur magazine (see the footnote for a warning about this publication):

“To maintain control over Gonzo Game’s intellectual property, van Gool wants to grow with little or no outside funding, which means he has to plug revenues right back into the company, making growth slower and business riskier.”

Based on my own entrepreneurship experience, I argue that the opposite is true: Raising VC funding is far riskier than bootstrapping. By “riskier,” I mean “lower expected value.” I’ll explain this more later.

Isn’t the goal of starting a company to make a lot of money…or at least to make enough money to enable you to change the world with your idea? If money and/or executing your idea are the goals, why would you give up equity and control on day one? I’ll go on a limb and argue: Raising VC funding could signal failure for the entrepreneur. Too many people see raising money as the sign of success. Movies and other media reinforce this fallacy. Here’s why raising several million from a VC could be a bad thing for you as a founder:

  • You’re “selling low.” The average VC-backed company takes $7.5MM in investment…usually before the company had much of an opportunity to build value. This means that founders give away huge chunks of equity.
  • You’ll typically lose control over your company’s destiny. Together with huge chunks of equity go board seats and voting control of the company. The strategy is no longer driven by the founder’s schedule, the market’s dynamics, or the maturity of the product idea…it’s driven by the VC fund’s need to exit within a set number of years and show a high return.
  • You’re no longer your own boss. I can’t say enough about the importance of this issue. Founders have to be passionate about their business. They frequently choose entrepreneurship as an alternative to cubicle-dwelling and reporting to a boss. Those who actually make the leap are typically driven, opinionated, and frequently stubborn. I’ve seen two examples first-hand where these personality traits didn’t play well when investors started changing the path of the company or exercising their voting rights…and a founder ended up being sidelined because he became too much of a pain in the arse.

I haven’t met him, but I have a feeling that Mark Pincus from Zygna has that type of personality:

“I would fight to the end for control, because if you do not have control of your company; you are an employee.” – Mark Pincus

Even consider Facebook, which raised VC money. Think about how different Facebook might be if Sean Parker hadn’t helped Zuckerburg retain control and thereby implement his vision for the company.

That said, however, if you don’t have the business savvy to run a company, sell, and make the tough calls, then you either don’t belong in the startup world or you need a VC-picked CEO.

We Need Some Balance

It could be that I have too small of a data set (1 VC-backed company went bust, 1 angel-backed company fizzled, 1 bootstrapped company is doing well, 1 VC-backed company is just getting started). My perspective might also be skewed because all these companies have built large, expensive, industrial-scale hardware products where cost and margins are important, not web software products where “eyeballs” and “freemium” are part of the vocabulary.

I do know, however, that:

Young and prospective entrepreneurs are not given a balanced perspective on their funding options, nor the necessary exposure through case studies, books, articles, and videos to execute a bootstrapping strategy based on best practices.

If you’re aware of good resources on bootstrapping, please leave them in the comments section for everyone to see.

Why VCs are Considered “Evil”

I’m not one of those who categorically hates VCs. They have an important role in the startup ecosystem and all the good ones create value in the work they do. There is a reason, however, that the industry has earned a certain reputation.

Let’s do a quick back-of-the-enveloped calculation. Say the VC general partners raise the average fund size of $150MM. The average investment per company is $7.5MM. Funds last for about 7-10 years and the LPs aim for an annualized 20% return on their investment. The partners want to avoid spreading themselves too thin, so they limit the number of companies to, on average, 20. (data from the NVCA)

Given these numbers, how much would the portfolio companies have to return? Let’s take the two extreme cases….

  1. All exit: Assuming that all the portfolio companies exit successfully (virtually impossible), they’d each have to sell for $15MM for the fund to return 20% annually.
  2. Only one exits: Assume, instead, that all but one of the portfolio companies go bust. That means the one survivor would have to sell for $300MM for the fund to return 20% annually.

It should now be obvious why VCs push founders to swing for the fences…and why they brush the founder aside when the company stumbles or doesn’t execute the strategy aggressively enough. The VCs themselves are under incredible pressure to deliver four one home-runs within 7-10  years, and preferably at least one grand slam. VC’s actions resulting from this pressure and these financial realities are what have earned them a certain reputation.

I’m not saying that the VC industry is “tricking” entrepreneurs to take their money, dilute themselves, and enter a losing game. VCs do provide value…and in some (limited) cases big money is needed to win in a market. Venture capitalist Mark Suster has several interesting blogs and videos showing that he, for one, understands the risks founders face when raising VC funding and respects the founders’s perspective:

Bootstrapping

There are hundreds of considerations when taking the bootstrap route. Here are just some of them.

  • Learn to pivot. The main advantage to controlling your destiny is not being forced to hit a home-run during your first at-bat. You can change directions until you find the right product…as long as you don’t run out of cash. Always be looking for potential customers and solve their problems for them with your ideas.
  • Win “free” funding, where you don’t need to give away equity, like SBIR and OEM product development contracts.
  • Get loans, especially low-interest ones from state economic development agencies.
  • Partner with universities for incubator space, lab space, specialized equipment, skilled technical advisors, and energetic entry-level hires.
  • Hire entry-level employees…and cross-train so you’re not stuck when they leave in 3 years for a higher salary.
  • Be stingy in spending cash…but not so much that you alienate your employees. Barter. If you’re not frugal at heart, don’t bother trying to bootstrap, go raise $20MM in VC money.
  • Be generous with your equity. You’re bootstrapping in order to preserve equity, so be generous in giving some of that extra equity to all of your employees, especially the ones that are key to your success. Vest.

Doing these things is difficult, but we all knew startups are hard work, right?  Guy Kawasaki, one of the early employees at Apple, said about startups: “If I had known how hard it was to start a company, I wouldn’t have done it.” Doing these things without a large infusion of VC cash makes them even more difficult.

However, taking VC money can limit your options. If your initial product idea is wrong (which it will likely be) or if your market isn’t yet ready for your innovation (which is also likely), then the VCs might not give you a second chance.

Which Route to Take?

Econ and finance majors learn about future expected value. Assign a dollar value to each possible future end-scenario and estimate the probability of each scenario happening. Multiply the probabilities times the dollar values and — voilà! — you get your expected value. (Learn why humans are inherently bad at doing this exercise from Dan Gilbert).

When you start your company, try this exercise for the following cases:

  1. The VC-funded route, where you manage to hang on to 5-10% of the company.
    – 20% probability: You earn a decent salary and in 7 years you get 10% of $50MM.
    – 40% probability: You have a moderate exit and in 7 years get 10% of $10MM.
    – 40% probability: You earn a decent salary and in 7 years the VCs shut you down and you leave with zero.
  2. The bootstrapped route (possibly with angel support), where you retain 30-70% of your company.
    – 30% probability: For the first 3 years you earn only 25-50% of market-rate and occasionally go without pay before being able to afford a full salary. After 8-15 years you sell the company for $10-20MM.
    –  30% probability: You find a good niche and decide not to sell the company. Instead, you make being your own boss a lifestyle. You max out at around 50 employees and pay yourself a $150k+ salary for the rest of your career.
    –  40% probability: You struggle to find your product niche. Since you lack the business skills and aren’t getting advice from an experienced VC or angel, your business runs out of cash within 1-5 years.

There’s much more that goes into this decision than just an expected value calculation…the people you partner with and those you hire, market timing, accuracy of your product focus, ability to correct your strategy, your desired lifestyle, etc.

At the least, I hope it makes a new entrepreneur think seriously about his options.

[Footnote: Bloomberg Businessweek recently reported that Entrepreneur magazine, which has the trademark on the word “entrepreneur,” has been actively protecting its trademark by suing any young company or entrepreneur-support organization that uses the term. They have  driven founders into personal bankruptcy. This will be my last issue of Entrepreneur…I’m cancelling my subscription. It’s a hokey magazine, anyways.]

Becoming a “Real Company”

This is the first in a series of articles I’ll write on Startup Operations. The other articles are in the “Menu” links in the sidebar and some are also linked at the bottom of this post.

One debate that resurfaced countless times at my first startup was whether and when to put in place processes, policies, and systems. I found that many of the early employees fell victim to the “startup doll house fallacy.” Startup companies are not dollhouses (small versions of big companies). Just because big companies operate a certain way — they’re organized by departments, have hierarchies, have precisely defined positions, have layers of budgetary approvals, etc. — that does not mean that startups should do the same. The lesson is that if you’re in a startup, take advantage of that freedom…don’t be too eager to act too big, too fast. Wishing your company did things “like a real company” is a sign of immaturity. Do it your way.

In my company, the process-averse guy usually won the debates, so we stayed lean. After ten years of operating this way we brought on board a new CEO. Two weeks into the job, he commented to me, “I’m amazed how well we do the difficult engineering tasks…and how incredibly bad we are at doing the things that should be easy.” We had erred on the side of being too lean. As a company grows, its systems need to grow with it. Four co-founders can work and communicate efficiently by yelling over the cubicle wall or sharing spreadsheets. Those techniques won’t work in a 50-person company, which needs ways to document plans, track inventory, and assemble products consistently regardless of which schmo is doing the work.

Bill Gross provides a great perspective of this with his talk on the four complimentary skills needed throughout the life of a startup (Entrepreneur, Producer, Administrator, and Integrator).

The “entrepreneur” and “producer” personality types — needed most during the early years — tend to avoid new processes like the plague. This works well in a small team. “Administrator” and “integrator” personality types — needed once the company grows and has some paying customers — will want to implement systems in order to improve the efficiency of communication and standardize work methods. The four personality types frequently can’t stand each other, which is why this debate about processes and systems frequently becomes so heated.

So, how do you make sure that your company’s processes develop with the company and make your team more efficient, not less? The default approach for an inexperienced employee is guess how the team will function together and then create a form that someone needs to fill in. WRONG! The better approach, I’ve found, is to muddle through a few times, then have everyone look back and capture in a simple flow chart how they made it work.  If a template document is required in order to standardize things, then create that, too…but think twice or three times before making it mandatory. Then iterate and improve from there.  Be careful…it’s easy for certain employees, especially engineers, to enjoy this type of work. Assign someone the very-part-time responsibility of quality manager so the engineers aren’t tempted to spend hours inventing new systems for themselves. The goal is to make the team more efficient, so spending hours and hours in reinventing or perfecting the documentation totally defeats the point.

Here is a list of some processes, procedures, and tools (in no particular order) that eventually become necessary in startups at various stages in their growth. The ones that have links have a blog post describing them in more detail. My background is in companies that design and build industrial equipment and do a lot of government-funded R&D work. If your company is a dot-com, software, or service company, some of these may not apply. Use your own judgement.

If you’re interested in one in particular…or if you think I’ve missed one…just let me know in the comments section or via email.

  1. Sales bid approval – prevent the sales guys from over-promising and get buy-in from the engineers. Important to implement early on.
  2. Training and onboarding – new employees can take up to a year to be fully productive and are a drain on existing employees in the interim. Minimize that training process. Show them what work has been done in the past, who to talk to for help, where to find information, the company culture and “way of doing things,” etc…and make sure everyone is exposed to the same materials so you all speak a “common language.” The only way to do a good job of this is to start building it early on, a little bit every month (it’s one of the reasons I’m writing this blog).
  3. Project management – define the steps that projects go through, what documents are created and, more importantly, what documents don’t need to be created. Improves efficiency in engineering if they’re juggling multiple projects.

  4. Project baselining and revenue recognition – set deadlines, define billing milestones for accounting, track how much work has actually been accomplished. Important for companies that do government R&D work, especially once their revenues exceed $3MM. Simplifies communication between engineering, management, and BD.

  5. Sales process – adopt a standard software tool like salesforce.com to track leads and opportunities, which is useful once you have more than one or two sales guys. Even earlier, define how sales forecasts are estimated, since actually hitting sales targets is the most important thing to keeping the business afloat (followed closely by actually delivering what you promised).

  6. Financial forecasting – define standard revenue and cost centers, define budgeting process. Important to have a rough process early-on that you can refine as you grow.

  7. Timecard software – incorporate a standard online software tool; there are dozens available. Important for companies that bill hourly — such as service and government R&D companies — and for manufacturing companies for calculating COGS. Track actual manhours spent across multiple projects, allow project managers and accounting to easily generate reports, catch under-utilized people or poorly-run projects early on.

  8. Financial software – adopt a software tool like Quickbooks to keep track of the books. This is probably the first tool implemented by anyone who’s actually serious about running a business.

  9. Inventory and purchase order (PO) tracking – adopt a XXX software tool, which is important for manufacturing and government R&D companies, especially once they grow above 30 people. It improves efficiency for project management, engineering, and accounting.

  10. Configuration control – Disciplined revision control is the most important and least appreciated engineering practice amongst young engineers and entrepreneurs. It’s also a huge time sink if done incorrectly. Initially, excel spreadsheets work fine, but eventually a real software tool is necessary, especially once your engineering team grows above 15 or you start manufacturing.

  11. Templates – Providing templates for specs, data sheets, customer reports, engineering documentation, etc. is one of the easiest ways to save countless manhours of debate and re-work, especially in engineering, and provide a professional appearance in written materials to customers.

  12. Recruiting – Always Be Recruiting. Once you start hiring like gangbusters or get above 20-30 employees, some standardization and tracking is necessary to make sure you’re looking for and finding the necessary skill sets.

  13. Compensation – Not standardizing your compensation method and not communicating it to potential hires and existing employees is the fastest way to piss off everyone. Be open and consistent from day one.

  14. Annual ops plan – 5-year revenue forecasts in glossy business plans are a huge waste of time. It’s difficult to predict what the world will look like one year out, especially in a startup where things are changing every day. If anything, have the team write a 1-year operations plan (ops plan) that sets the targets in stone.

The goal for a startup is to remain lean and efficient. Most of the time being efficient means avoiding bureaucracy and red tape, but on occasion it means standardizing on a simplified, proven way of doing things or using software tools to eliminate clerical work. Startups change constantly, so figuring out how to be work efficiently as a group is a never-ending effort. As you try to find that balance, aim for “progress, not perfection.”