What does it take to land venture capital for photonics-driven startups?

In 2000, nearly $3.7 billion of venture capital (VC) went into optical components and system firms fueled by the network and internet infrastructure build-out. Optics was a significant portion of the over $30 billion VC investment going into semiconductors and network equipment that year, which took in over 30% of all VC outflows. However, by 2010, 6% of VC investments went into electronics (including semiconductors), dropping to under 1% in 2022, with the photonics segment being a fraction of that. In 2016, only 35 electronics firms received initial early-stage institutional capital, compared to over 1700 internet and software firms, according to PWC data. 

To understand that funding gap and how one company seeks to close it, I spoke with Alex Fang, Greg Fish, and Eric Hall, investors focused on photonics at Entrada Ventures, an early-stage venture capital fund.

John Dexheimer: Entrada Ventures is one of the new breeds of funds that focuses on serving the needs of deep-tech, early-stage university technology spinoffs. The three of you come from photonics backgrounds, but are now investors—what is Entrada Ventures’ origin story, and what is its profile?

Alex Fang: Entrada is a seed-stage venture fund that was a natural extension of our interest in building companies. We were all grad students at UC Santa Barbara and then spent several years founding and building technology companies. After leaving UCSB in 2008, I co-founded and served as CEO of Aurrion, Inc., which developed PiCs for data center networking applications. We were fortunate to have some great photonics mentors and angel investors, managing to be relatively capital-efficient and leading to the acquisition of the company by Juniper Networks in 2016. We also realized the capital ecosystem appears to have a gap for early-stage deep tech companies. Few venture capitalists are equipped to properly due diligence semiconductor deals, and the resulting boot-strapped and angel-funded deep tech companies don’t build in a way that has the appropriate hygiene to take venture capital at Series A. We decided to fill that gap. 

We typically like to invest before Series A. We define this as when the product market fit still hasn’t been validated, and the concept of the business is still being sorted out. We enjoy working with founding teams during this stage because there is still a lot of blank space to sort out how to think about how to effectively deliver value to the customer in a way that is efficient and at a clear advantage over the industry status quo. We found that our semiconductor backgrounds give us an advantage here and can make the greatest impact on improving investment outcomes. We look to help with balancing all that and setting up the company for a trajectory of success. We have offices in Santa Barbara and Silicon Valley and are investing out of our second fund. We have investments around the U.S., in Canada, and one in the EU, many of which originated out of great university labs with NRE funding to move up the TRL [technology readiness level] and MRL [manufacturing readiness level] stacks.

Dexheimer: Do you have a technology or market focus? Your portfolio has companies focused on non-photonics technologies like batteries and haptics. 

Greg Fish: Entrada has several themes where we think there will be interesting opportunities for investment of relevance to the Laser Focus World audience and several with interest in areas where photonics can solve real problems. These are typically hard problems and require patient investors who know the development time involved and understand that it may be several years before revenue. 

Prior to Aurrion, I was co-founder of Agility Communications, which became part of JDSU, now Lumentum. We’ve lived that journey, so we not only understand it but also know how to manage various aspects like non-dilutive capital. If we believe in the founders and their vision of scaling their product to meet a big opportunity, we are very interested in partnering. We have investments in segments of semis, cybersecurity, instrumentation, VR, and, of course, AI and quantum. 

Dexheimer: You mentioned “scaling,” which is often a buzzword for VCs. What does that mean in the context of photonics? How do you identify which companies will be able to scale in that way and appropriate for investment?

Eric Hall: This is an interesting question because it opens up the discussion of who is the right investor for your business. Not all companies are appropriate for venture capital, which doesn’t mean that such businesses cannot be very successful. I think we see this a lot with photonics. A company can have a great but niche technology that might generate $50 million/year in revenue with good margins. The founders are happy, the employees are happy, and even the right investors will be happy, but the company may not be right for venture capital. It is important to know your investor. 

Funds like Entrada serve an important part of the capital ecosystem by funding high-risk projects. By definition, many of these are likely to fail, so outcomes from our winners must be big enough to overcome that drag. For a business to scale to that higher level, the target market must obviously be large, but it is also heavily dependent on the technology’s position in the ecosystem. The company needs to offer a complete solution to a big problem. 

Dexheimer: Can you expand on that last statement? Perhaps with an example?

Fang: A good example would be Quintessent, a silicon photonics company with integrated laser technology. With our background, there is obviously a lot we think we can contribute to this company, but to be honest, we have been pitched a lot of silicon photonics companies and, at this point, have only invested in Quintessent. Many of those others where we passed will likely be successful, but it is interesting to look at why we chose to back them. 

Quintessent has a quantum dot technology to create comb sources on silicon photonics, and we were excited by CEO Alan Liu’s vision to enable new network architectures for AI clusters based on this technology. Too often, we see incredibly smart technologists working from the bottoms-up: “I have a cool technology to make a comb source so I can sell that,” but to Eric’s point, that component’s place in the ecosystem is problematic. You are a component vendor to a module vendor that ultimately controls and caps your revenue. You are fundamentally a step away from delivering value for which the customers are desperate. 

Dexheimer: From your comments, it seems technology is important in your evaluation, but customer development and market seem more critical.

Fish: I think that is a correct statement. Anyone reading Laser Focus World is smart, and the technology they have developed likely breaks world records they can quote. The key question is whether customers will pay for that innovation. 

Hall: Getting to that answer of whether the customer finds real value in your innovation usually requires the founder to spend a lot of time directly in dialogue with the customers. It used to be easy advice that if a customer paid you real money, it was a strong sign of commitment. In most of these markets now, however, there are just a few massive customers who are willing to fund multiple competing options for perceived roadblocks that their in-house engineering team might break through anyway. It is important for the company to spend the time to really understand the roadblock that the customer faces at the most fundamental level, including other technologies that may be important parts of the solution. Having this understanding allows the company to compare its technology value proposition to alternatives in the same way as the customer. 

At Aurrion, while we started in Santa Barbara, we quickly established an office and built up a team in Silicon Valley so we could be close to the key network equipment customer design and test teams. The exciting thing is that when the company understands the capabilities of the technology better than anyone in the world, this approach often creates opportunities to find better solutions than the customer is proposing, leading to new IP and a much stronger competitive position.