Equipping a Startup Company

Obtaining equipment often involves many decisions. Do you buy new equipment or used equipment? Do you buy, rent, or lease equipment? There’s no single right or wrong answer. Your choices depend on your technical needs and your cash-flow priorities.

The recent telecom boom has led to many startups, including Astral Point Communications (Chelmsford, MA), ArrowPoint Communications (Westford, MA), and Omnia Communications (Marlboro, MA). (Omnia is now a division of Ciena Corp., having been acquired in 1999.) Each of these companies took a slightly different approach to obtaining test equipment. All used a combination of buying new equipment, buying used equipment, and renting, leasing, or leasing to buy.

Money Comes First
Before you can obtain equipment, you need money. Equipment vendors want to see some financial backing before they will set up a line of credit. I asked Jim Keady, vice president of sales and marketing for the test equipment division at Continental Resources (Bedford, MA) how his company works with startups. Keady says his company checks with a startup company’s bank, venture capital investors, and even individual investors to learn about a company’s financial backing. The amount of financial backing determines the amount of credit an equipment supplier will extend to a startup. If a startup has insufficient funds to establish credit, then a rental/lease company may require anywhere from one to three months’ rent up front. Manufacturers, distributors, and used-equipment dealers may require COD payments.

Equipment suppliers may also look at the product the startup is developing. Telecom equipment is hot right now, so Continental, which supplies equipment to ArrowPoint, feels that startup companies making telecom equipment are likely to be successful. Therefore, suppliers may be more accommodating to telecom equipment manufacturers than to others.

Once your company has obtained startup funds, you can begin to plan which types of equipment you’ll need, when to get equipment, and from whom. Develop an equipment plan based on your product-development timeline.

Figure 1. Use a timeline to plan equipment acquisitions.

For example, if you’re developing a telecom switch, you might need logic analyzers, oscilloscopes, protocol analyzers, and simulation equipment, but not all at once. You’ll probably need the scope and logic analyzer for initial debug, and then need a protocol analyzer for a first functional test. Later, as you gain confidence in the design, you may need equipment to emulate a network for a functional test.

The functional tests may follow initial debug by weeks or even months, so there’s no point in obtaining all the equipment at once. Your equipment plan should specify when you’ll need test equipment. Obviously, your schedule could slip and new design requirements could arise, but a timeline plan (Fig. 1) will guide you as to when to place equipment orders, especially if you’re buying or leasing new equipment, which can have lead times of weeks or months.

Your next decision concerns how you should acquire the equipment. You can buy new equipment or you can buy used equipment. You also can rent-to-buy or lease-to-buy. If you think you’ll need to keep equipment beyond the terms of the lease, you may be able to buy it from the rental company, often at a discount. Table 1 covers some of the advantages and disadvantages of buying, renting, and leasing equipment.

Renting and leasing are different. They are similar to renting or leasing a car. When you rent test equipment, you do so for periods of one week to one year. Beyond one year, you’ll probably lease equipment.

When you rent equipment, you’ll typically pay between 3% and 10% of the equipment’s purchase price per month. The equipment is often used, but the rental company assumes responsibility for its calibration and repair. According to Continental’s Keady, manystartup companies like the fact that someone else is responsible for the equipment’s maintenance. Should the equipment fail, they can often get a replacement the same day.

When you lease test equipment, however, you’re responsible for repairs and calibrations—just as you’re responsible for repairs and maintenance when you lease a car. With a lease, you can gain equity in the equipment. The longer the term of the lease, the less you’ll pay per month.

Leasing companies charge slightly more than one-twelfth of a product’s purchase price per month for a one-year lease. According to Keady, a $20,000 oscilloscope costs $1890 per month for a one-year lease with no money down. The same scope, leased for three years, costs $690 per month. Both terms are based on a one-dollar buyout where, at the end of the lease, the leasing company turns the equipment’s title over to you for $1. Other leases may require a higher payment such as fair market value or some previously negotiated price.

At Astral Point, operations manager Mike Shannon avoids buying new equipment whenever possible. He prefers either to buy used equipment or to rent or lease equipment. Shannon recommends that engineers at startup companies refrain from buying the latest model of equipment when a less-expensive model meets your needs. Shannon also emphasizes that test equipment should have multiple uses. Equipment should be useful enough so engineers can use it at several points during a product’s development.

Short or Long Term
Astral Point has to concentrate on saving money in the short term because its product is still in development; as yet, the company has no revenue. When a company has no revenue, its staff often has to make decisions based on monthly cash flow, even if those decisions cost more money in the long run.

Astral Point’s vice president of engineering, Bruce Miller, faced that decision when he needed a $200,000 piece of equipment. Miller’s primary concern was to minimize his monthly cash outflow. He could have rented the equipment for $100,000 over six months—a cost of more than $16,000 per month. But by using the company’s bank line of credit, Miller was able to buy the equipment on a 48-month payment schedule and reduce his payments to less than $5000 per month. Although he ends up paying more for the equipment in the long run—a total of $230,000 as compared to $100,000—it will take Miller 21 months to pay as much as he would have paid in six months of renting.

Miller needs to minimize his cash outflow while the company runs on venture capital. He expects the company will have revenue long before the equipment is paid for, and he points out that, presumably, a company’s value increases as it gets close to delivering its first product. As the value increases, the number of shares that a company must relinquish to obtain a given amount of venture capital decreases, meaning the cost of capital itself decreases over time. Thus, as time goes on, Astral Point will be paying for the equipment with less expensive money.

ArrowPoint took a different approach to obtaining test equipment. Design engineer Rob Hickey says his company usually rents or leases equipment only if the equipment costs more than $15,000 to buy. Hickey often needs the fastest oscilloscope available for troubleshooting the company’s product. If he were to buy an oscilloscope, he would be stuck with a model that won’t be fast enough for his needs next year.

Hickey also recommends renting equipment when you’ll need it for just a short time. You’ll minimize total cost. Hickey rents spectrum analyzers monthly for measuring spectral components of signals like clock jitter, but he doesn’t use a spectrum analyzer every day, so purchasing one doesn’t make sense.

Ciena’s test engineer Dennis Ciociolo also rents most of the “big-ticket” test equipment such as scopes, logic analyzers, and protocol analyzers used in engineering evaluations. The company buys small items such as meters. Ciociolo makes one “big-ticket” exception: temperature chambers. He recommends you buy new temperature chambers rather than buy used ones. Ciena uses the chambers for hardware verification testing and preproduction burn-in, and Ciociolo claims that reliability problems in used chambers don’t make up for the lower cost.

Finding a Supplier
Once you decide what equipment you need and you decide to buy, rent, or lease the equipment, you need to find a supplier. What becomes important in selecting equipment suppliers? ArrowPoint’s Hickey prefers to work with as few suppliers as possible. One reason Hickey chose a particular rental company is because the company supplies both test equipment and networking equipment. Hickey and other ArrowPoint engineers needed the networking equipment to conduct interoperability tests on the company’s Web switches.

Finding equipment manufacturers is easy. You probably already know them, and if you don’t, you can easily find them on the Web. But finding rental/lease companies may prove more difficult. The best way to find these companies, according to the engineers mentioned in this article, is through word-of-mouth. In fact, these engineers rely on each other to find reliable equipment suppliers. According to Astral Point’s Shannon, his best sources of information are his present and former colleagues—Hickey and Ciociolo. He relies on this informal network to find out which equipment suppliers deliver the best service. The three engineers can freely converse with each other because their companies aren’t competitors.

The engineers typically recommend those equipment suppliers—manufacturers, distributors, or rental companies—who do more than just provide equipment. Suppliers may also provide training and other consulting services. The engineers recommend you select suppliers who will work with you to solve your problems. A good equipment supplier should also help you by pointing to suppliers of equipment it doesn’t carry. Price counts, but so does service. The suppliers who are willing to work with you at the very beginning should earn your long-term business.

Because they rely on equipment suppliers for service, the engineers at all three companies stress that your company should pay its bills on time. That may seem obvious, but some finance people try to juggle money to squeeze out every last cent of interest. In doing so, they jeopardize the service that engineers need while developing products.

If your company is sometimes slow at paying its bills, make sure your suppliers know up front. Don’t surprise them, or you might find you start getting less service than you need. You may not get equipment as rapidly as you need it, or repairs and calibrations might take a little longer.

You may find that at a startup company, you get better service from an equipment supplier than you did at an established company. Equipment suppliers are often eager to work with startup companies because startups often make decisions faster than do established companies. Engineers at startups often have more authority to purchase the equipment than they did at their jobs with large companies. And sales reps see not only a chance to make a quicker sale, but also an opportunity to develop a long-term customer.

Some rental and leasing companies, however, are reluctant to agree to long-term (four to five year) leases with startup companies, says Keady. He explains that some rental companies like to keep leasing contracts to no more than one or two years until they are convinced that the startup company will be in business long enough to honor the lease.

Once your product is ready for production, you’ll probably use a contract manufacturer until you can justify the cost of setting up your own assembly line. Ciena’s Ciociolo warns that once you get to manufacturing, obtaining equipment becomes a different ball game; you’ll probably want to buy production test equipment. “We prefer to buy test equipment used in manufacturing,” he says. “It gets used often enough to justify the cost.” T&MW

You can reach Martin Rowe at m.rowe@tmworld.com.