10 Mar Neah Power Systems – A seed stage venture capital model
Developing a viable technology company requires insight, discipline, and a relentless focus on developing technology, business and marketing plans. Many successful startups create a high-value company by defining a big problem with a large focused market opportunity for the development of new products. Neah Power Systems is a company that is being systematically built with this methodology.
Neah is a successful fuel cell company based in Bothell, Wash., but its success is not dependent on geographic location. It could have started in Wisconsin, Illinois or anywhere with the right mix of ideas and venture capital. The company’s story is one that bears close resemblance to many companies headquartered in Madison.
When motivated students at a world-class university develop new technologies and are exposed to experienced investors who can provide the proper capital and management guidance, these companies often flourish.
There is still no fuel cell cluster in the state of Washington from which new companies might emerge. Yet, when research was combined with careful technology assessment, development of a disciplined business strategy and systematic syndicated financing, Neah found success. Their story is not unlike countless start-up companies in Wisconsin.
When Leroy Ohlsen was a chemistry major at the University of Washington, he was fascinated with the transformation of chemical energy to electricity through the use of a catalyst. He was aware of scientific efforts already being applied to this general area, but received some critical advice from one of his professors – find a material on which to base your fuel cell that is well understood, rather than creating a new material. He realized that in order to significantly improve the potential efficiency of fuel cells, the energy production would need to dramatically increase beyond the capacity of the current generation of fuel cells. Ohlsen decided to see if it were possible to develop a fuel cell based on silicon, the same substance used by the semiconductor industry to manufacturer microprocessors and other chips.
As a scientist, Ohlsen had an incredibly bold new idea, but he envisioned a fairly mundane use for his breakthrough – a way to create longer lasting battery operated toys. Neah Power Systems was formed when Ohlsen teamed up with his high school friend, Mike Fabian and wrote a business plan designed to secure funding.
They submitted their idea to a local angel investor network, Seattle’s Alliance of Angels (AoA). Their idea caught the attention of the groups chairman, Dan Rosen, who at the time was the general manager of new technology at Microsoft, and is now the general partner of Frazier Technology Ventures, which recently established a Madison presence.
Ohlsen’s combination of a strong knowledge of fuel cell technology coupled with his entrepreneurial passion inspired Rosen and his colleagues to evaluate the technology concept. The result was that the newly formed company received an early round of seed financing.
Proof of concept
After securing their seed funding, Ohlsen, Fabian and a group of fellow scientists and engineers moved into a house where they lived and worked. Eventually they were able to share lab space in the Washington Technology Center, a non-profit lab on the University of Washington campus. They now had the equipment they needed to pursue their initial proof of concept of increasing a catalyst’s exposure to a source of energy; the conversion of chemical energy would create a substantial improvement in efficiency. Reflecting back on his professors advice, Ohlsen envisioned etching silicon wafers with small patterns that would provide a huge increase in surface area. The resulting innovation produced a technology called Porous Silicon Methanol Fuel Cells. The company filed an initial patent.
After more than 12 months of discussion, research and evaluation, the founders, aided by Rosen’s business experience, were convinced that their fuel cell technology had true advantages over alternative technologies, especially Lithium-ion batteries.
Rosen guided Neah’s founders to re-examine their initial vast target market applications ranging from toys and appliances to computers. He knew that the company needed to focus on a narrow, but substantial application. This would be their key to success.
“More startups die of indigestion than starvation” Rosen said.
The mobile computing market seemed like the logical target. It offers a customer base measured in the tens of millions, and one that values and demands increased battery life. Thus the company aligned with delivering a superior energy source for mobile computing. These are the building blocks for a broad new category of products, and a tremendous source of value for the company.
Rosen contacted Alf Bredlund former scientist at Madison-based Rayovac, who performed technical and market due diligence on Neah’s technology. Bredlund conclusion was that the company had developed a potential breakthrough in energy production that held significant market potential.
Ohlsen’s company’s financing would be staged across a specific set of milestones, to ensure that the company’s development and financial resources were tied to business strategy, engineering and customer adoption events.
The first of these milestones was creating a revised business and product development plan that allowed the company to have clear picture of its financing requirements and investment opportunities. This endeavor involved linking the financing plan to technology development and market validation.
A prototype, as proof of concept, was the next milestone. This would not be a production-ready fuel cell, but a laboratory version that established the basic validity of the technology’s potential.
The second round
The management team realized the need for a strong investment syndicate and used the well researched business plan, and a clear sense of the financing required to attract the proper level financing from strategic investors. The team assembled a concise 30-minute pitch covering the market opportunity, Neah’s unique technology, and financing plan. They hit the road and delivered more than 30 presentations in 60 days. Most firms didn’t have the expertise to evaluate the fuel cell chemistry and many weren’t willing to take the risk associated with a company so early in its life cycle.
Eventually, they found they found the perfect partners. Intel and Silicon Valley-based venture firm, Alta Partners understood Neah’s potential and invested in the firm. The new partnership allowed Neah to create its first working fuel cell – a lab bench model that would power a cell phone. Shortly before Christmas 2002, Rosen received a 30-second call from Ohlsen on a cell phone running on a Neah fuel cell. With many hurdles still to overcome, this was a seminal moment in Neah’s history.
With series-b funding and a working prototype completed, it was time to begin developing a successful marketing plan. Len Jordan, an investor who was drawn to Neah’s potential, created a marketing strategy and initial marketing plan. Jordan brought more than ten years of senior management experience in marketing high volume, technologically complex products, most recently at RealNetworks, where he ran the largest division at the firm
Jordan hired the first marketing professional, and non-engineer, into the company and then recruited a full-time chief of operations, Dave Dorheim, former president and CEO of AER Energy Resources, a publicly traded battery development company based in Atlanta. Dorheim has experience in building and running battery businesses. He was attracted to Neah because of the compelling nature of Ohlsen’s technology, the business opportunity, and the fact that a Neah had established a world-class syndicate of venture firms that have the resources to fund Neah to profitability.
More than four years from when the founders met the Alliance of Angels, Neah Power Systems is well on its way to creating the breakthrough in mobile computing with the technology that Ohlsen dreamed about. Product development is proceeding as planned, and while the firm tackles a host of technical and market challenges, it’s making solid progress towards having a commercial product on the market as planned.
The Neah Power story illustrates the powerful results of stabilizing, marketing and structuring a start-up company. By intelligently funding an idea-based company in logical, successive steps, venture capitalists are minimizing risk and building a successful company.