Thinking about Technology Risk (and the perception thereof)

September 29, 2010

While on vacation this summer, I read Making PCR, is a great look at one of the early companies in the biotech space (Cetus) and the invention and development of PCR.

What struck me as interesting was that the initial reaction by some scientists to the invention of PCR was either:

(1) Boredom…”why do you want to make all of that DNA anyway?”
(2) This is so simple, if it works then “why hasn’t someone thought of this before?”
(3) Come talk to me when you have some data

But the idea was pushed through by a few visionary managers and scientists…rightly focusing on proving the technology first.

Sometimes we get the same reactions (1-3) from outside experts when we are looking at a new technology to commercialize. Whether in clean tech or life sciences, our experience is that disruptive technologies rarely get a universal thumbs up. We invested in several portfolio companies despite the fact that a majority of experts said that the technology probably would not work (they were wrong). We’ve learned that a better question to ask the expert can be “how big can it be if it does work?”

I think that it is really hard for scientists or investors to put aside “it probably won’t work” and answer the question of “how big can it be if it does work”. On one diligence call, when I asked the second question multiple times, the answer, multiple times, was “well….it probably won’t work.” But that’s not the question!! If you can see a way to deal with the first risk of “does it work” with a small amount of capital, the question VCs should be asking is “how big can it be?”

Where the answer to that question is REALLY BIG, we get excited. Don’t get me wrong, understanding and believing in that science can work is important (the valley of startup death is littered with the bleached bones of investors that did not appreciate the science and underestimated the difficulty in answering the first question).

Bottom line: It makes total sense to invest in opportunities to invest $100K or even $1M with a reasonable chance of opening up a huge market opportunity. The really transformative ideas are often discounted initially (as with PCR)…that’s where the investor science judgment comes in to figure out whether it has a reasonable chance and whether it is possible to change the probability of success with a focused initial investment.

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