Back to School
November 14, 2005

Published in partnership with Red Herring's Innovation Pipeline newsletter.

Steve Domenik can often be found strolling the campuses Cal Tech, UC Berkeley, Stanford and other universities, looking for the next great technology to fund. This requires a scientist's insight--Domenik has a background in physics and chip design--and a VC's knack for coaxing real companies out of academic research. Domenik has done just that with startups like software company Timbre Technology, which emerged from UC Berkeley, and nanophotonics company Luxtera, which spun from Cal Tech. We asked him what he looks for on his regular trips to the labs.

Why do you go searching for investments at universities?
Steve Domenik: Where else would I look for innovation? That's the only place to find it these days. Corporations have really cut back on their research and development. You need to go to university labs to find ideas to invest in. My most productive time is spent wandering around with graduate students and junior faculty. That's an absolute must. They're excited about what they're doing and they know-and the university often doesn't-what the applications of their research are or whether there is research by a colleague that you should go look at.

VCs don't like to fund science projects. How do you determine whether something is too early or too late?
It's more a dollars-and-cents measure than time. We can afford to be patient but if it's $100 million away from practicality, we're not in it. It's a measure of risk-adjusted dollars.

You were the first VC firm to invest in nanophotonics company Luxtera, which just came out with a silicon-based networking chip that runs on light. How did you find that company?
I was eating cold chicken off a plastic plate while talking with a professor at UC San Diego. He introduced me to Eli Yablonovich from UCLA, who had this collaboration at Cal Tech and that's where the technology for Luxtera was being developed.

Luxtera's technology was designed for the telecom market, which was melting down when you made the investment. What made you follow through?
It was a fundamental enough advance that we just kind of closed our eyes to the telecom market downturn and went ahead with the deal. The short story is that we were dead wrong about the initial market but we were dead right about the technology. And the team is really smart. They found another market. We made the investment because they had something that wasn't just 20 percent better than what was out there, it was really, really different. If something is really different, the timing of the investment is not that critical.

What's the difference between companies that come out of universities and those founded by nonacademics?
At universities, usually there is just a technology and seldom anything more than a technical team. The people at universities are good technologists, they're good at the research but not necessarily at the implementation. The classical approach-and this is where the VC comes in- is to find a business person to attach to the technology and slowly build a team.

Are you starting to see more competition from VCs for these university deals?
We like to partner with other VC firms, so we aren't seeing competition yet. I used to joke that it seemed like we were arm-wrestling DARPA to fund some of these technologies. But in most cases we aren't in competition with DARPA anymore. It's either too late for them or too early for us.

It sounds like a lot of work to find the technologies and then build the teams. Why do it that way?
I love it. You can't find a stupid person at Cal Tech or Berkeley or Stanford or some of these other places. There's no shortage of ideas and talent. When I go visit, it's always a question of, which one of these guys am I going to fall in love with today?

Innovation Pipeline goes inside campuses and corporate labs to cover technologies on the move from lab to market. The monthly e-newsletter, published in cooperation with Red Herring magazine, features innovations in seven sectors: biomedicine, communications, defense and security, electronics, energy, nanotechnology and software. It profiles a promising startup in each sector and provides analysis of its market opportunity, financing and competitive edge.

For more coverage of technology transfer, read the latest issue of Innovation Pipeline.

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