Smith and Furbershaw have codified the process with an appropriately descriptive name: "venture design." And the energizing principle behind that has a name, too—Big Bang.
Big Bang means getting to an idea or start-up company at the beginning, exchanging industrial-design services for equity at the garage or even the back-of-the-envelope stage. Then Lunar can add enhanced support—and an infusion of capital, if necessary—as the prospect blossoms, by hooking it into Lunar's virtual network of technologists, consultants, and other business experts.
Big Bang's trust—aside from getting to a prospect early and becoming vested—is to lure motivated people to work on just-budding ideas, giving them an equity stake to spur them on. "We want talented people to participate with us simply to garner more passion and energy," says Smith. Not only is the process more inspired; it's also less costly. "Doing a transaction for equity this way gets you a lot further, and quicker, down the road than otherwise," Smith adds.
Since embarking on this initiative, five years ago, Lunar has made five Big Bang investments. But now it's stepping up the pace, expecting to make three or four annually, totaling about $250,000 each year. (Smith and Furbershaw have also invested personal funds in the Big Bang projects.) Lunar will take a portfolio approach, much like that of a venture-capital firm, setting return targets (30% a year over five years for each investment). The expectation is that a few big winners will cover the bets that bomb.
From Lunch To The Global Market
Lunar's first, and now most mature, investment began in the mind of Gary Cantu, formerly an engineering manager at Silicon Valley company Spectra Physics and Molecular Dynamics. Six years ago, Cantu retired to Bozeman, Mont., where he stayed retired for all of about three months. One day, during a visit to the dentist, Cantu began thinking: What if you could replace dental X-ray film with a laser-based sensor technology, thereby reducing harmful radiation and eliminating heavy metal waste in the process?
Seeking an industrial-design concept for the product he had in mind, Cantu called Jeff Smith at Lunar. The two had previously worked together, and Cantu knew that Lunar had the right stuff. He came around at just the right moment: Smith was pondering how to propel Lunar into venture design. Over lunch in November 1993, Smith's eyes widened as Cantu laid out his idea. "Jeff could immediately see that the market was huge," recalls Cantu. Smith and Furbershaw became early-stage investors in the company. (In 1995 Lunar would buy 14,356 shares of its stock at $1.60 apiece. Eventually, Lunar would get another 4,503 shares at $4.37 each.)
Then the three set about leveraging the company and creating the Big Bang. DenOptix, as the new company was called, subleased 1,200 square feet in a research-and-development consultancy. Lunar did the industrial-design work and engaged an East Coast company, Product Genesis, to do the initial mechanical design. Much of the rent and the consultants' work were paid for in DenOptix stock, meaning that the company spent only $45,000 of its precious cash during its first year of business.
And by the end of that first year, DenOptix had a working prototype that proved to be so compelling that Cantu was able to raise $1 million privately from dentists in less than three months. Then DenOptix ramped up. Four months later it had three market-ready units in the field—and it had spent less than $500,000. "We went from proof-of-concept to functional prototype to commercial unit in five months," says Cantu. "That's significantly compressed." He says that normally the whole process would take close to a year, but having expert players, all with an equity incentive and moving in concert, made the difference. Even more startling, a total start-up investment of $1 million took DenOptix to the break-even point. In 1997, DenOptix—which had been renamed ALARA—licensed the technology to Dentsply International, the world's largest distributor of dental equipment, and Dentsply is now selling the product around the world. DenOptix's first product would generate $25 million in retail sales in 1998. And the company's sales are projected to double to $50 million in 1999, with all of that growth in sales funded out of cash flow.
Just as surprising is the fact that because DenOptix was able to so efficiently leverage the talents of its creators, Cantu still owns roughly 20% of its 4 million shares, even though he has not worked day to day at the company for two years. He says that most Silicon Valley founders are lucky to keep 10%, or even 5%, of the stock—and that's if they stay with the company. Lunar Design, meanwhile, owns 18,859 DenOptix shares, valued at about $10 apiece—a roughly sixfold return to date on its original investment.
Cantu has gone onto create another five companies, all based on the Big Bang model. Lunar Design has invested in two of them: ReSponde Systems, a company that uses global-positioning system technology for a series of consumer products; and PhorMax, which is taking DenOptix's solid-state X-ray sensor technology and moving it into medical markets. "It's the exact same business model as DenOptix's," says Cantu.
On a deeper level, Cantu sees Lunar's embrace of the power of the multiple not just as a better way of doing business but as a new chapter in his career. He says that he spent 10 years at Spectra Physics, a $300-million company with an ample research budget. "After I got pulled into start-ups, I had a real hard time for three months, but then it clicked," he says. "This is where I want to focus the rest of my career. The energy, the level of desperation, and the excitement can't be matched. Everyone is unified and moving in the same direction." To Cantu, an engineer, a self-described "connector of dots," there are other thrills that come from working in the vanguard of venture design. "You are working with cutting-edge technology," he says. "You get to see things two to five years before the market sees them, and you get to play a big role in their development."
Moonshine and Moonrocks
Smith and Furbershaw plan to grow the venture-design portion of Lunar's business from its current 2% of sales to 30% in the next 10 years. Moreover, Smith envisions a second stage to this strategy, which he labels "R&D," and he expects it to account for another 10% of sales, also in 10 years' time.
At Lunar, R&D relates to internally generated ideas, ones that will be developed and taken to market in the same way DenOptix was, with Lunar in this case being the major shareholder, just as Cantu is with DenOptix. Tog et the process rolling, three years ago Lunar set up an initiative dubbed Moonshine, an effort, says Furbershaw, to get staff designers engaged in "design exploration." through it, the Lunar staff entered various design competitions. "Moonshine had a marketing focus," says Lunar's vice-president of marketing, Kris Bailey, "but it also was the blue sky. It gave our designers and engineers an opportunity to play around with various concepts." It became a way to energize the staff and get them thinking not just about designing products but also about developing them.
