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Chang: Optical Invaded by Gypsies, Aliens

SAN JOSE, Calif. -- Opticon 2001 -- Is Milton Chang the only one left in the optical networking industry with a sense of humor?

It sure seemed that way Tuesday morning, when a sullen and silent crowd of roughly 500 attended the serial entrepreneur's keynote speech here at the Opticon show. Chang's speech, peppered with dark humor, reflected on the coming and going of the optical investment bubble, painting a picture of a tightknit, science-driven industry being invaded by "gypsies" and "aliens."

Given the current state of the industry, perhaps the audience was in no mood to hear Chang make light of the market (or maybe there was a preponderance of Gypsies in the audience). But even as he dispensed some medicinal-tasting advice, Chang was cheerful. Or at least, he tried to be.

"Never mind the pain right now," Chang said, telling the crowd that opportunities still exist for startups and established companies in the optical arena. "It's time to take advantage of the money being thrown at us and do something great with it."

Chang is following his own advice, having announced yesterday that he has resigned (see Chang Changes Hats) as chairman and board member of New Focus Inc. (Nasdaq: NUFO) to spend more time running his new incubator, Incubic LLC (see Chang's Investment Shop). There, he will continue to test his claim of never having backed a startup that failed, a streak dating back to 1988, when he first started his life as an angel investor.

Though the audience didn't react to Chang's first joke ("If I say something critical, it's not about you... It's about the guy next to you"), they paid rapt attention to his lessons on investing, which contained a few non-politically-correct opinions on some of the interlopers who've invaded the optical arena over the past few years.

The expectations VCs and other investors placed on companies during the bubble years, Chang said, were "totally unrealistic. It just got really crazy... and was sometimes at the ragged edge of being legal and ethical."

Chang decried the "invasion of aliens" -- i.e. investment bankers and VCs -- into the optical investing space, claiming they often brought "gypsy management" in to run companies whose technologies didn't make sense.

"I couldn't believe some of the deals that got funded," said Chang, who has a solid grounding in optical physics. "Incubic will never do that."

Chang took a sideways poke at venture capitalists when he explained the difference between optical systems and components companies, which he said are completely different businesses, especially when it comes to early investment expectations.

"Most VCs are systems guys, because the problems [at systems companies] are things you can throw money at to get them moving faster," Chang said. Components companies, he said, tend to have problems more related to physics, "and you cannot force-feed a physics problem."

Another joke: "It's like they say... You cannot make nine women produce a baby in one month."

Audience response: Thud.

Though Chang admitted that most of his advice could be found in standard MBA textbooks ("when in doubt, be conservative"), he did offer some salient tips to potential angel investors looking at optical opportunities. Among them: the need to be patient, since optical technologies often take a long time to become products.

And, when considering an investment, "Never fall in love with technology," Chang said, "because it can be a long way from being a product. You have to ask if it can be done."

Other questions to ask yourself, according to Chang: How fundable is the next round, and are the company "visionaries" decoupled from reality? He said to beware of leaders who know the technology buzzwords but don't have the substance and know-how to back it up.

Explaining a slide about a checklist for investing in public companies, Chang told the audience to look for an up-and-comer, a company that could gain new markets while taking market share from bigger companies that wouldn't have as much room to grow.

"If that sounds like New Focus, I'm sorry," Chang said.

Audience response: Zzzzzzzz.

"C'mon, I'm joking," Chang said.

(Take his wife... Please!) Being serious again, Chang said after his speech that New Focus is "in good hands" under Clark Harris, who takes over as chairman. Chang said Harris is a better person to lead New Focus forward, since it's long beyond its startup days.

"I never leave a company in disarray," Chang said, claiming that New Focus has "lots of new customer traction," despite its recent disappointing quarterly report (see New Focus Sees New Losses). By leaving the New Focus board, Chang said, Incubic-backed startups can also have cleaner relationships with New Focus, instead of raising questions about potential conflicts of interest.

- Paul Kapustka, Editor at Large, Light Reading
http://www.lightreading.com
switchrus 12/4/2012 | 7:57:28 PM
re: Chang: Optical Invaded by Gypsies, Aliens Anyone else at Opticon 2001 notice the general "Funk" hanging over the show floor?

I felt an upbeat energy level at OFC earlier in the year; this show had a GǣstrangeGǥ feel.

Comments ?
Photonboat 12/4/2012 | 7:57:27 PM
re: Chang: Optical Invaded by Gypsies, Aliens I'd have liked to have been at this presentation--nothing better than a "lessons learned" presentation rather than either a marketing fluff or an "isn't my firm great" speech. What insights are there to be had from watching someone trot out PowerPoint slides of past successes?

I didn't see the presentation, but it sounds like Milton came down hard on the VC/financial community. How come there are 1000 companies in this space, 500 of which have minimal revenue? Who's at fault? VCs? Wall Street? Ill-conceived startups? (Sometimes I think that if I worked at a VC I would heat my home by burning the tons of business plans sent my way.)

Bubbles, be they in stocks, Japanese real estate, tulips, or tea, happen in many places. I used to collect postage stamps:
http://www.linns.com/print/arc...

I suppose ECOC will be really depressing. At least tulipmania left The Netherlands with those beautiful fields. Too bad they won't be in bloom. I wanted to take a picture of tulips in front of a windmill.

Wonder if Milton reads lightreading?:
http://www.lightreading.com/bo...

Photonboat
Photonboat 12/4/2012 | 7:57:25 PM
re: Chang: Optical Invaded by Gypsies, Aliens This link explains the stamp market index. Notice how long it takes a speculative bubble to be worked off (witness the Nikkei as well). I'm not an expert on bubble psychology, but once lanced, bubbles take a long time to fully unwind. Everybody still wants to return to the glory days of the first half of 2000.

http://www.linns.com/print/arc...
nisakhan 12/4/2012 | 7:57:17 PM
re: Chang: Optical Invaded by Gypsies, Aliens "He (Milton Chang) said to beware of leaders who know the technology buzzwords but don't have the substance and know-how to back it up."

Couldn't be more true. But how many VCs are capable of differentiating buzzwords from know-hows? Better yet, how many optical company managers can differentiate these days? What is really sad is that often the 'so called' technology leaders aren't aware of the difference and consequently cannot hire the right people either.

MrsFields
Titanic Optics 12/4/2012 | 7:57:05 PM
re: Chang: Optical Invaded by Gypsies, Aliens ...50% of COMPONENT revenue was in circulators
Titanic Optics 12/4/2012 | 7:57:05 PM
re: Chang: Optical Invaded by Gypsies, Aliens >>Explaining a slide about a checklist for investing in public companies, Chang told the audience to look for an up-and-comer, a company that could gain new markets while taking market share from bigger companies that wouldn't have as much room to grow.

"If that sounds like New Focus, I'm sorry," Chang said.<<

Actually, I always have thought Wall Street overrated New Focus from the beginning. I know one startup that told me that if CSFB (New Focus' lead manager) could make NUFO worth $9B, imagine what they can do for their company? I agreed, because I never thought New Focus should have been worth $9 billion.

Historically, its been a nice little test and measurement outfit that in addition to making its little test and measurement widgets also makes a line of bench-top test equipment that has historically played second (or lower) banana to Agilent and GN Nettest (Photonetics). The optics may be decent, in somebody else's box. Wall Street gave a pass to New Focus as being another "baby JDSU", based on its component division, and investors lapped this up. At the time of the IPO, the tunable laser and the other sexy components were mostly in "alpha stage", which can mean a lot. Last I heard, more than 50% of New Focus' revenue was in circulators, a product which is in danger of being commoditised if it hasn't been already. When you see $85 isolators advertised, it can't be long before circulators (similar in manufacturing technique) get commoditised. Or have they already?

All that said, New Focus has always had a good team in place AND IF THEY EXECUTE, Milton is accurate in stating they are a company to watch for.

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