Startup Secrets Case Study: Actuality Systems

Case Study:
Actuality Systems
6.14.19With Gregg Favalora

Confidential & Proprietary @underscorevc
Gregg
Favalora:
Principal,
Optics for
Hire
Founder of Actuality Systems
@gfavalora

Building and
Commercializing
3-D Display
Products:
Startups are Hard
April 2013
Gregg Favalora
Principal, Optics for Hire
Founder, Actuality Systems (1997-
2009)
gregg@opticsforhire.com

Actuality
Systems,
Inc.
● Founded 1997
● At its peak, 23 employees
● Laid everyone off: Friday, Apr. 24, 2009
● Product: Perspecta Spatial 3D System
○ Developer tools, Perspecta medical, Perspecta
Viewer
● Target Markets: Medical Imaging, Military, and
Entertainment
● First product released on less than $2M
● Total Raised: $15M
● 20 customers, $1M in government grants
● 19 patents - strongest 3D Portfolio in the sector
● Assets acquired by Optics for Hire: December, 2009
● Real exit: 2011 patent sale

Actuality Systems
Actuality
Medical
Acquisition
by OFH
Patents
sold to “X”
1997 2004 2009 2011
Series A
$1.5M
Note
$0.8M
Series B
$3M
Series C
$6.5M
Note
$2.5M

Case Study:
Actuality
Systems
(Basic)
● Setting the Scene: 1997
○ Market Need
○ Technology: Spacial 3D
○ Company: Initial fight for $$$
● Three Lessons Learned for Startups
● Getting your foot in the door with
prospects
● Four challenges at Actuality and
how we overcame them
● Things we were glad we did a lot of
● Things we wish we had done
differently
● Regarding optics, imaging
● The 3D industry

● Setting the Scene: 1997
○ Market Need
○ Technology: Spacial 3D
○ Company: Initial fight for $$$
● Three Lessons Learned for Startups
● Getting your foot in the door with
prospects
● Four challenges at Actuality and
how we overcame them
● Things we were glad we did a lot of
● Things we wish we had done
differently
● Regarding optics, imaging
● The 3D industry
Case Study:
Actuality
Systems
(Basic)

The First Few Years:
Harder Than You’d Ever Think
What to expect when starting up

I Started
Working
in 3D in
1988

T -3 Years
Before
Funding:
1996 -
Prototype

1997 -
Met
Chairman,
entered
Bplan
comp.

In 1997, people actually said “cyber-”

1998
and
1999

1999:
Met key
journalist
at MIT

Getting
Your
Ducks in
a Row for
Funding
● Get an amazing mentor who made VCs richer
● Have a clue about your market!!
● Read Crossing the Chasm so that you know all the elements of a product
● IP
○ Have and use an NDA to avoid messing up your patent rights
○ File several provisional applications (See: Patent it Yourself,
Pressman)
○ Do a decent prior-art search
○ After funding, when you’re filing patent applications, remember:
attorneys will agree to cap their fees!
● References: talk to warm-blooded customers who like you, and get money
or purchase orders from them. And ask them to be references to investors.
● Plan for future expenses: get quotes on key components and processes
● Founders work for free to make prototypes, and sell whatever you can
● Don’t pitch any investors until you’ve practiced your pitch on “friendly fire”
● “Consultants” - Don’t rack up $$ in payables -- investors won’t want to pay it,
and you’re probably not getting anything in return anyway.

Build it,
baby!
2000-2004
Actually, a ton
of fun!
● 6 full-time employees
● Tiny office in Reading (128)
● Engineering
● Ship betas and product
● Rounds of funding
● Winning awards, getting grants
and customers
● Bringing in seasoned executive
team
● ...a whole new set of challenges
and excitement!

How do we do this?
Technical Interlude

Under the
Hood
(ca. 2001)

12-Year
Fishing
Expedition

12-Year
Fishing
Expedition
● For many years, a few employees and I searched “wide and
deep” for a market that would sustain Actuality, while we
improved the core 3D product. This felt backwards.
● Every one of these markets seemed like a good fit, but
ultimately, none felt the $100k ASP provided good ROI:
○ Virtual prototyping
○ Molecular visualization
○ C4I/battlefield visualization
○ Air traffic control
○ Diagnostic medical imaging (PET, orthopedics, cardiac)
○ Interventional medical imaging
○ Radiation therapy
○ 3D luggage scanning
○ Video games
○ Petroleum

Traditional
Radiation
Therapy
Pinnacle3 (Philips Medical Systems)

Beam
Planning

PerspectaRAD

We won technical
awards, but
markets and larger
investments weren’t
materializing.

Actuality’s
Financing
Rounds
1999-2008

Acquisition
● 2004: CEO transitioned out. I was asked to be CEO during the search
● 2005: Frankly, a very difficult year for me -- large team, 70% travel, etc.
● 2006-2009: Pivot: new CEO stops 3D displays, contemplates merger, and
starts work on software for prostate cancer treatment
● Mar. 2009: The financial market tanks. CEO exits to help reduce burn
● Apr. 2009: I lay off remaining staff
● 2009: Not a good year for selling IP!
● Dec. 2009: A flurry of patent attorneys
● Dec. 31, 2009: Formal decision for OFH to acquire Actuality Systems
● Jan. 2010: Acquisition

While
working
at OFH
Summary: I got a job at product-engineering firm OFH.
We approached 150 prospects to buy the ex-Actuality
patent portfolio. One deal came close to completion,
and collapsed a few months later. About 6 months
after that, a buyer was identified. We were all quite
happy about this exit.

Happy
Ending:
2011

3 General
Lessons
for
Hardware
Startups
In my opinion:
● “Technology looking for a market” is very hard
● It is very difficult to raise money for hardware plays.
Best bets are savings*, SBIR, and angels. The exception
is if your CEO already made money for VCs. Convince
your accounts to become paying customers.
● And…
*Be prudent about this. Do not risk your family’s savings!

Sales for
Dummies
● One-paragraph, iPhone friendly email intro, “I’m a student…”
● Explicitly respect people’s time
● In demos, “you,” not “I”:
○ NO: “With our feature-rich software, I can click here…”
○ YES: “You can learn about your customers with ClientSort
2.0…”
● Use less techno-jargon
● The two best words are “for example”
● Smile, use first names, talk about happy things
● Email their PR people
● Email one of their VCs
● Try to Shopify it -- sell prototypes (FCC/UL though)
● Don’t use gimmicks! E.g., don’t use Re: unless it really is
● Go to the account’s office and show up day after day, because
that’s not creepy or anything, but I hear it works
● On landing SBIRs

Advice
for
optics,
imaging
● Takes a lot of money and time for prototyping
● Our best computer graphics people were
mathematicians
● ITAR/DFARs/customs
● Investor contracts are (for better or for worse) not
etched in stone. Later-stage investors often require
amendments to early-stage investment contracts, e.g.,
“Hey, you can have 100% of a $0 company, or 2% of a
potentially $100M company, take your pick.”
● Government money and audits
● The creative process
● Components are not solutions

Try to sell
systems
instead of
components !=

What
Went
Right
● Went for it! Low-risk at first
● Extraordinary luck at hiring engineering team
● Incredible IP portfolio - so good, we sold it twice!
● Broke four world records in display technology
● In early years, publicity from CNN to Wired
● Numerous Product of the Year awards
● Supported 23 people and their families for over a
decade
● Acquired and now happily working for acquiring
company

@underscorevcConfidential & Proprietary
Contact me
anytime
Gregg Favalora, Principal
Optics for Hire
Arlington, MA
gregg@opticsforhire.com

Startup Secrets Case Study: Actuality Systems

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