“Many VCs are like a Ponzi scheme, just focused on investors and encouraging you to burn money,” says Sal Bosman, founder and chief executive of Delft Circuits, a company that makes specialist wiring and instrumentation needed to run quantum computers.
In an age when there is a great deal of media cheerleading about big funding rounds, the 17-employee startup has decided not to take part in a model that Bosman considers exploitative for founders.
The serial entrepreneur wasn’t always this negative about venture capital firms. In fact, in January Delft Circuits was very close to signing a funding deal with a VC.
Everything was going well. A lot of due diligence had been done; Delft Circuits had spoken to around 20 VCs and had found a firm that felt aligned on their strategy. That VC firm had, in turn, evaluated 430 business plans and decided that Delft Circuits’ proposition was among the most promising.
I build a fantastic team and then they sell it. And then I am supposed to start a new company again,” he sighs.
The deal would have made Bosman wealthy, on paper at least. And Delft Circuits really needed the financing, with only enough cash for another month.
But in the end, Bosman walked away from the deal. The problem was the drag-along clause, which would have given the venture capital investors the right to force the sale of the company if they wanted to.
“I disagreed with the idea that the investors could sell the company from under me if they want to. That is completely unacceptable,” says Bosman.
Drag-along rights are a common feature of startup funding deals. But for Bosman the arrangement highlighted the fact that, in taking VC, money, he would essentially be giving up control of the company he had worked hard to build and would become part of a hamster wheel of building and selling that can burn out entrepreneurs.
“I build a fantastic team and then they sell it. And then I am supposed to start a new company again,” he sighs.
Some of the small print in funding deals can come as a shock to entrepreneurs raising money. Founder vesting requirements, for example, which require entrepreneurs to lock up their shares for several years, can be an emotionally fraught issue.
“It is putting founders in the employee position,” observes Bosman. He was also wary about the way the VC investors started talking about spending money on things like refurbishing the offices and lab.
“We don’t need a new floor. We needs sales. But it felt like they wanted us to be cash-hungry,” says Bosman.
In the end, Delft Circuits kept itself going through by raising money from a group of angel investors, government grants and some bank loans. Bosman is aiming to make the company cash-flow positive within the next few months to create even more breathing room.
He’s now keen to keep Delft Circuits independent for as long as he can, and with the ownership shared out among employees. He sees family-owned German Mittelstand companies, small-to-medium-sized businesses that can have incredible longevity over generations, as a better model for the kind of business he wants to build.
“Look at companies like Porsche — that is still owned by the family,” he says. Delft Circuits is planning to attend a conference for German Mittelstand companies where Bosman plans to investigate different types of investment.
Long term bootstrapping won’t work for all companies, Bosman admits. In a sector like pharmaceuticals where the cost of trials and certification are high, taking VC funding may be unavoidable. But quantum computing is still a relatively small, modestly-growing market ideal for bootstrapping. It is a pretty small world in which most of the researchers know each other. Delft Circuits doesn’t need whizzy marketing campaign — it sells mainly through word of mouth.
“Quantum computing is still a research market, and I personally know all the players, from the head of Google’s quantum team onwards. It is easy to get our product to market,” says Bosman.
The company operates out of the Applied Physics block on the University of Delft campus and is the first startup to work on the Delft Quantum Campus alongside Intel, Microsoft and the Dutch national quantum lab QuTech. It has carved a niche for itself as a provider of cables for quantum computers.
It is a potentially lucrative segment. Ordinary cables don’t work well in quantum computers which need to be supercooled to temperatures close to absolute zero. At those temperatures, normal wiring tends to break and malfunction. Delft Circuits, founded in 2016, has developed highly bendy cabling that will work at these extremes and supplies many of the national quantum computing labs around the world and received interest from companies and organisations like Google, Intel, Microsoft and NASA.
A basic single-channel cable costs around €400-€600 and a typical customer order is around €6000. Bosman is hoping that by the end of the year the company will have a sales rate of around €60,000=€100,000 a month.
There is a big potential market for quantum computer cables, explains Chun Heung Wong, R&D engineer at Delft Circuits. Each qubit, or building block of quantum computing, needs to be connected with at least four lines. In order to achieve meaningful computations experts believe a quantum computer would need at least 1000 qubits, which means at least 4000 cables per machine.
It is enough to build a business on, and it may be one of the safer bets in what is still a highly experimental sector. The old adage that it is the sellers of shovels who make the money in a gold rush applies here.
Just how long Delft Circuits can resist the lure of VCs, however, remains to be seen.
While the quantum market is still growing slowly it should be no problem. But if there is a boom and a sudden need to step up production, Bosman admits he may have to think again. One alternative might be an early IPO, such as many Israeli tech startups go for. Or perhaps a cryptocurrency-based alternative IPO, although Bosman isn’t sure if he would be willing to become a guinea pig in such a new market.
If he does go for a traditional VC deal, he would like to find investors that have a more long-term vision for the business. Bosman says he would like the investors who understand the company’s approach and culture.
“It’s perhaps too much to ask for,” he says. “But I am convinced they must exist.”
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