High failure rates prompt startups to probe tech, manufacturing risks

Some call it “the hump” or “the gap.” Others call it the “valley of death.”

It’s that peril-filled zone between coming up with a good idea and making money from it. For an ambitious entrepreneur or startup business, getting past that obstacle is a risky journey.

No matter how brave they are, not everyone who embarks on the trip survives.

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“People are convinced that they’re the next billionaire,” said Tom Bugnitz, chief executive of Boulder-based nonprofit Manufacturer’s Edge. “But then they hit the valley – they don’t know how to get capital, how to get their product manufactured, or how to market it. God bless ‘em for trying – but there’s a big difference between somebody who has an idea and somebody who knows how to build it.”

Mike Freeman, CEO at Fort Collins-based incubator Innosphere, has seen the results firsthand.

“While there are multiple reasons a company doesn’t scale,” he said, “one major factor is that they were never able to address manufacturing-risk reduction.”

About half of all startup companies in the United States fail within the first five years, and a recent report from the Colorado Innovation Network found that the failure rate is higher in Colorado – but that’s not all bad news because the businesses that survive grow faster in Colorado than the national average, and some of the ones that fail do so because technology entrepreneurs often start their businesses quickly and then end them just as quickly if the technology doesn’t prove viable.

Most of the time, Bugnitz said, success or failure is a money question, not a technology question.

Money is the hump facing Lockett Wood, CEO and president at Avivid Technologies Group LLC in Longmont. His company is building individual prototype water-purification test units that could be of use in the oil and gas, mining and agriculture industries.

“If they work out, then we’re going to have devices built by the dozens or hundreds,” he said. “But if they can’t be built at a reasonable cost, we’re not going to be in business.”

And Wood wants to know who would build them. “Do we have that capability in Colorado? Out of state? Offshore?”

What happens if it can’t be done?

“Then I’ll go out and find a different technology,” Wood said. “The trick is to stay in business long enough to find one that works. We just get up in the morning and start over.”

Some startups can do that. Others can’t.

Fort Collins-based SmartMove was launched in 2012 with what it thought was a great idea for an insole that monitored the wearer’s activity and served as a virtual coach. “We were primarily a tech company,” said Doug Bartlett, who was the company’s vice president for engineering. “So if we were going to succeed, we were going to need to partner with somebody with an established name.

“We thought we had one,” he said. “We thought we had a match made in heaven. But they didn’t have the ability to develop it on their own. After many months, they had a change of heart. We were putting all our wood behind that one arrow. Basically, we ran out of money – and pulled the plug on the company last summer.”

Innosphere is taking steps to help its client companies address such risks, Freeman said, by influencing the areas of pre-engineering, prototyping, proof-of-concept presentation, supply-chain development and manufacturing.

Bartlett is part of that process, sharing the hard lessons he learned through mentoring startups as part of Innosphere’s SAGE program, or Social Advisory Group for Entrepreneurs.

“A lot of our work is helping startups define what their market is,” Bartlett said. “A lot of them are not at a point where they’re ready to manufacture yet.”

“They’ve got to have a manufacturing team that has a willingness to work with a startup,” he said, and they also have to invest slowly and find companies that hopefully can build their prototype right the first time, “because a startup can’t afford the waste of a rework.”

Innosphere is taking its own advice, finding partners to help its clients.

“A huge part of the strategy Innosphere now has around product risk mitigation is focusing on paid pilots between companies and corporate strategies,” Freeman said, “which is why the partnerships with Arrow and Manufactures Edge will be so valuable to Innosphere client companies.”

Starting this summer, Centennial-based Arrow Electronics will use several of its programs to help Innosphere startups bridge the gap. Arrow Consulting Engineering Services, or ACES, has 35 vetted, trusted design partners whose expertise can accelerate a product’s time to market, said Murdoch Fitzgerald, Arrow’s director of supplier marketing and intelligence systems. Its Arrow Manufacturing Supply Solutions, or AMSS, can provide a company with everything from prototyping to full manufacturing runs, he said. And its two-day intensive Adrenaline workshops are run by geographically deployed Internet-of-Things development managers whose consulting work can help startups find new ways to leverage their technology.

“Ultimately, it comes down to the monetization,” Fitzgerald said. “Do we see a path to revenue, and what would that revenue stream look like?”

The consultants study a startup’s design, software, hardware, and even where each production component is in its life cycle, Fitzgerald said. “If they have 26 weeks of lead time, that’s a barrier to production,” he said, “so maybe we can find alternatives that are more cost-effective.”

At Manufacturer’s Edge, formerly the Colorado Association of Manufacturing and Technology, Bugnitz said the top job is to get startups connected with companies that can economically fill that gap by building prototypes or execute manufacturing runs.

To help grow its services and customer base, Manufacturer’s Edge last month received a five-year, $8.34 million grant from the Boulder-based National Institute of Standards and Technology, or NIST. Meanwhile, Innosphere in late March applied for a grant from the state Office of Economic Development and International Trade.

“There are a large number of programs aimed at manufacturers in Colorado,” Bugnitz told CompanyWeek last month. “We look at all of those programs and ask one question: How can we use our resources to leverage those programs and create better results for manufacturers?”

Dallas Heltzell can be reached at 970-232-3149, 303-630-1962 or dheltzell@bizwestmedia.com. Follow him on Twitter at @DallasHeltzell.