A VC in Vacationland

I recently attended and spoke at the Dow Jones VentureOne Summit 2006 in San Francisco.  Dow Jones has hosted this summit for nine years and it is a quick way to get a look at 100 or so up and coming companies in a variety of industries and technologies.  I was on the RFID panel with two old friends–Jon Stine of Intel and Alan Koenning of the UPS Strategic Enterprise Fund.

Companies presenting in the RFID space included Intelleflex, SupplyScape and TrueDemand (one of my investments). I also had a chance to check out a few companies in the emerging "motes" space, including Arch Rock and Moteiv while I was in the Bay Area.

The following three blogs summarize my current assessment of this space from an venture investor perspective. My assessment of investing opportunities is going to focus primarily on early stage companies, not established RFID industry veterans such as Savi, Alien and Symbol, which are publicly traded and have analysts following their activities. I will also not say anything further on motes. While very interesting as an emerging technology, they are not ready for prime time.

In this blog, I will discuss some of myths and realities surrounding the RFID world which, in my mind,  make investing problematic except in limited circumstances.

First, is the 5 cent tag the missing ingredient for successful RFID business cases? To hear a number of presenters at the conference and many voices in the press, tag cost reduction is the Holy Grail of RFID acceptance.  I have looked at a number of early-stage tag technology companies over the past year and have difficulty picking a winner among the numerous options.  They all claim to have solved the multi-platform communications issues, the difficulties with reading on metal or through liquids and the inadequate read ranges that plagued earlier tags.  Who knows for sure, as many of these tags have not had sufficient stress tests in the real world. Cost reduction in tags is clearly important, but RFID providers need to demonstrate clear business value before companies are going to invest millions in these technologies.  I feel like Diogenes with his lantern looking for some case studies that show true ROI creation from RFID investments.  Oh sure, there are plenty of examples where RFID is being deployed in limited and focused applications, but no wide scale implementations exist (except perhaps in the U.S. Military) where providers have demonstrated payoff from the technology.  The true test will be when a game-changing competitor in some industry (like Dell did with direct-to-customer supply chains in the personal computer industry), builds their business model on RFID enabled technologies and proves that such a model is significantly cheaper than existing competitors.

Second, is the Generation 2 RFID Standard critical to success?  Like the 5 cent tag, the Gen 2 standard is another necessary, but not sufficient, condition for EPC and RFID to be widely adopted and deployed by global businesses. EPCglobal’s ratification of the Gen 2 standard came later than expected. Many suppliers were reluctant to implement the earlier Gen 1 read only and one time read/write technology.  Well, the floodgates have opened and EPC/RFID Gen 2 chips, tags, readers, printers and software are coming to market at a rapid pace. What remains to be seen is if the additional ROI from these improved solutions is sufficient to get past CFO investment screens and whether these solutions will rise up the list of new technologies to be funded by corporations. We may have to wait for Gen 3 or 4 technology before widespread adoption occurs.

Finally, why are Wal-Mart and the DoD the primary drivers behind RFID acceptance?  Vendor compliance, pushed by Wal-Mart, the Department of Defense and other leading retailers/manufacturers, is producing RFID enabled shipments. But many vendors are adopting a "slap and ship" mentality, whereby they put an RFID enabled label on the Wal-Mart shipment to conform and do not use the technology with other companies or the data to enhance their supply chain operations.  The nasty little secret is that RFID produces cost savings for Wal-Mart and the DoD, but not necessarily for the upstream suppliers. The lack of applications to exploit RFID created data is the major hindrance to wider adoption. Furthermore, the emergence of process-centric solutions in non-supply chain areas, such as promotion execution and in-store customer services, is critical to the eventual, corporate-wide acceptance of RFID solutions.

So much of the hype remains and RFID is still in search of ROI producing solutions to match up with the numerous technologies on the market.  In future blogs, I will explore promising applications for RFID, what we can learn from the successes and failures of earlier start ups, and where the interesting investments are in RFID.