Build a better mousetrap and …

A press release on Monday noted

L-1 Identity Solutions, Inc. (NYSE: ID), a leading provider of identity solutions and services, today announced it acquired substantially all of the tangible and intangible assets of Retica Systems, Inc. including iris-on-the-move and iris-at–a-distance product inventory, algorithms and software, and related intellectual property rights and customer contracts.

Sigma invested in Retica early on and, along with John Mandile, I was a board member for the entire journey. Retica’s tale is a cautionary one, but one which will be repeated many times, whether histories like this are remembered or not.

”Build a better mousetrap and the world will beat a path to your door” has been a siren song for inventors for over 100 years. Such sentiments are the cause of much entrepreneurial angst, and failure. None are totally immune to the lure of building a better mousetrap.

Sigma invested in Retica a few years ago, when its primary technology was retinal scaning equipment for security/ID uses(think Minority Report). The world did not beat a path to our door. Despite retinal scans being superior in many ways, the world’s security experts had already staked their careers on iris scanning as the solution they were going to use. Retica founder and CEO David Muller saw the opportunity to reuse some of the company’s IP in this field and, with Engineering VP Marc Friedman and his technical team, managed successfully to pivot the company to the new direction within a few months.

Entering commercialization, Barry Morse led partnership efforts with all the industry leaders, and sales efforts with government agencies, first as COO and then CEO (on Muller’s departure to a new startup). By the end of 2009 we had the best dual-iris scanner, the best iris algorithms and beta versions of the only system that can identify people walking at normal speeds at distances of up to 30 feet. Surely success was just around the corner.

For those who are well-versed in reading the tea-leaves of such a press-release, this was not a great outcome for Sigma or for the Retica team. Unable to achieve a path to commercial sustainability, the board and investors had decided we needed to sell the company or its assets to recover as much of our investment as we could. When you sell a company in such circumstances, it rarely leads to fabulous outcomes. The team built a better mousetrap, but the world did not beat a path to our door. Why not?

I believe this came down to distribution – our path to making sales in the industry. Customers of security equipment buy from large, well-established companies. These customers may not like their vendors, and may even know about better mousetraps being developed by startups, but they are afraid to purchase from small firms with all the attendant risks. Startup companies who successfully partner with the larger firms can do well, but creating such partnerships can take many years, not least because they upset existing supplier relationships. No-one gets fired for buying from the big guy, even if the mousetrap isn’t quite so good. Thus it was with Retica. The government agency procurement teams were understandably wary of a small startup with no balance sheet and no track record, however good the technology. Commercial buyers (of security systems for banks or casinos) waited to see if the government buyers would validate the system by making purchases. Large integrators were happy to continue to sell what they had previously been selling; it was almost as good and had far less risk in their eyes.

It is possible to succeed with a better mousetrap. Disruptive innovation usually involves bringing a better mousetrap to market. But the more entrenched the existing players, and the more conservative the buyers in the marketplace, the more difficult it becomes to achieve such success. Venture capital is about trying to calibrate all the varied risks, including this one.

So, knowing all this ahead of time (which we did), why did we invest in Retica? Two reasons; we loved the team, and they were building a better mousetrap.

2 comments:

stefano said...

Nice post, Richard. So much of what is written on the subject is filled with mystification: a focus on attributes of the entrepreneurs and outcomes instead of what they actually did and considered. This is a very clear, honest and analytical assessment of an interesting case with some cool technology (a better mousetrap). Well done. And congratulations!

Dan Greenberg said...

Indeed, a nice post. Falling prey to not having the world beat a path is frequent, even for large, established players trying to bring innovation to conservative customers like the government. For a startup, it's just plain insurmountable most of the time.

What I've learned, though, is that sometimes you can take a technology whose goal is catching mice and use it for something else while you are proving it to the conservative mice-catching market. That gives you revenue, time, and (eventually) credibility and the right partners.

A good case study is CDMA. Now ubiquitous in 3G, Qualcomm could not get conservative telcos to adopt it. (In fact, some of their potential customers were simply in disbelief that the technology worked.) So Qualcomm set up a different business: truck telemetry. There is a decent market in tracking shipments, especially in real-time status of refrigerated carriers. That kept Qualcomm going... and the rest is history.

So, maybe it is that Retica was too focused on a linear path to the prize. Perhaps they should have found a partner in digital signage and brought the Minority Report vision (pun intended) to life.

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