New 'Innovation Accelerator' Wants To Put The Excitement Back In Hardware

A new funding venture has emerged with an unusual goal for the world of technology venture capital funding -- a focus entirely on hardware and core technologies as opposed to the more recent popular investments in cloud, software and applications.

The goal of the SKTA Innovation Accelerator is to to revive core technology startups to reinvigorate the hardware ecosystem. The Innovation Accelerator, unveiled Thursday and funded by SK Telecom Americas, is looking to invest $1 million in services, facilities and administrative support in semiconductors, telecom, health care, telemedicine, the Internet of Things, wearable technology and more.

The Innovation Accelerator isn't being dismissive of the potential of cloud and software technologies but is, rather, looking to ultimately support their growth, said Angel Orrantia, business development director of SKTA Innopartners. While the buzz is all around the cloud, he said, without building out the underlying core technologies, cloud and other growing technologies will not be able to reach their full potential.

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"I think the loss, it's hard to speak to other markets, but certainly here in [Silicon Valley], innovation is going to be required. The position of the cloud is going to drive this innovation, whether it happens here or happens elsewhere, it's going to happen. It has to," Orrantia said. "The loss in the U.S. is that those jobs likely will go overseas. More importantly than that, it will likely slow the expansion of the cloud, the Internet of Things and some of these other technologies that look like they could really explode provided there is the underlying technology."

The problem is that the industry has created a cycle where consolidation in the hardware market has limited the number of companies out there producing core offerings such as chips and networking components, Orrantia said. In turn, that limits the exit potential for startups, either through IPO or acquisition, by limiting prospects to handful of options. With those end-goal options diminished, venture capital funds are less inclined to invest, Orrantia said. This then cycles to even fewer core technologies in the market to invest in hardware startups down the line.

"It just creates disincentive upon disincentive for those entering to take the risk," he said.

The bigger problem, according to Orrantia, is that diminishing investments in core technologies will create a ripple effect that ultimately will affect rapidly evolving technologies such as cloud, applications and software. Those technologies are currently building on current data centers and other core technologies, but as more smartphones and other connected devices push more data into those centers, the investments at the base level will become even more important.

"To continue that kind of growth you have to change the fundamental architecture of what's being done," Orrantia said.

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The venture capital market is hyper-focused on cloud and software technologies, agreed Larry Augustin, CEO of SugarCRM, which closed $40 million in equity from Goldman Sachs in August, bringing the company's total to more than $116 million in venture capital from Silicon Valley venture capital firms.

"Quite simply, there are more VC firms that want to invest in software/SaaS than there are firms willing to invest in hardware businesses. It’s lower risk [requires less capital], and it’s easier to quickly test market reaction and iterate on product," Augustin said. "Yes, the VC market is very focused on cloud and software companies right now. Those businesses are low-risk investments right now. There’s nothing wrong with that. But it does mean there is likely a contrarian play that, if one is willing to gamble on and be patient, could pay off well in five to seven years. But it requires the patience to see that cycle through."

He said part of venture capital's attraction to cloud, application and software companies is that they usually require less startup capital to get off the ground.

"Open-source software, combined with inexpensive cloud hosting services, has made it inexpensive to start an Internet or SaaS business. That low capital requirement lowers the amount of capital that a venture firm needs to put at risk in those types of businesses. It means that the cost to test the market is very low," Augustin said. "Hardware businesses generally require much more capital to test the market. You need to build something physical for a hardware business before you can gauge reaction in the market. That takes time and money, which means more risk. So when people are buying software and SaaS, hardware is relatively high risk."

The Innovation Accelerator program works by divvying out up to $1 million in funding. The funding can come in the form of cash but will also be in services, administrative support and bringing the startup together with a strategic industry leader partner.

"With the involvement of the strategic partner and us providing all the back-office space, the entrepreneur can stay 100 percent focused on doing what they do best, which is the product development," Orrantia said.

Going beyond the money itself is extremely important, Augustin said. He said his investors were able to provide a lot of added value to SugarCRM.

"They bring tremendous experience, advice, recruiting, customer connections, business partnerships, and much more," Augustin said. "It’s critical for startups to realize that they need more than money and they can’t do everything on their own."

Two companies already have joined the funding program, and Orrantia said he expects to add more going forward.

The overall mission, as given to the SKTA Innovation Accelerator by SK Telecom Americas, the venture capital arm of South Korea's largest wireless operator and technology leader, is to try and "reinvigorate the ecosystem," Orrantia said. He said that he has been charged to reverse the cycle and hopefully get more companies interested in making similar moves in venture capital. There's a few incubators out there making similar strategic investments, Orrantia said, but there aren't enough that are working with strategic partners and looking to invest across the board in core technologies.

That gap, however, might mean it's a good time to get into the hardware business, Augustin said.

"Keep in mind that this can be cyclical. There have been times where software, particularly enterprise software, was challenging to sell and, as a result, investment was low. People have now forgotten that just a few years ago enterprise software was dead. Now it’s the darling of the market," Augustin said. "Personally, I like contrarian investment thesis because of the cyclical nature of the markets. It might be a great time to start a company building hardware. Assuming that company matures in five to seven years, the timing could be good."

The problem goes deeper than venture capital, Orrantia said. He said that he has recently been engaging with many academic institutions, and almost all students are learning software, not hardware. It will continue the cycle going forward, he said, unless there is an opportunity and excitement reopened for core technologies.

"If I do my job correctly ... and it catches on here in [Silicon Valley] in the U.S., sohat we go back to a more balanced approach where you have students as excited about hardware as they are about software," Orrantia said. "I think that will be the truth point that entrepreneurs have been successful, that there's some buzz around the hardware."

PUBLISHED FEB. 21, 2014