TechTalk: RFID Due Diligence –

Sometimes investment ideas can be found by simply driving through a tollbooth, searching for a lost dog, or weighing tomatoes at the supermarket. They don’t all reveal themselves this easily, but in the field of RFID (short for radio frequency identification) such niche applications often stare us in the face. They are literally billion-dollar market opportunities waiting for RFID applications to come knocking on their door.

This might be a new concept for venture capitalists. Too often, technology startups find themselves turned upside down and inside out-having developed innovations and high-tech solutions so elegant and far reaching that entrepreneurs must go in search of problems to solve. Such is not the case here. Ask homeland security experts, retail theft specialists, warehouse managers and supermarket executives if they could use the benefits of good, cheap, real-time data collection and data tracking that RFID technologies might provide and the answer is unequivocal: They needed them yesterday.

Why, then, have so few RFID companies been formed and even fewer funded? The answers lay scattered in parts rather than in trying to understand the RFID sector as a whole. “If you look at different areas-medicine, defense, retail-those industries are all feeling some type of pain, yet it’s a pain that doesn’t cause them to knock on Silicon Valley’s door,” says Sunit Saxena, CEO and Founder of Altierre, one of the few comprehensive RFID startups in Silicon Valley. “Retailers say RFID is a great science project but the costs need to come down and the technology’s capabilities-things such as the range of wireless and energy requirements for powering chips-require vast improvements before they will take a look. Partly they’re right and partly we’re getting closer than they realize.”

Yet even VCs familiar with the space are confused as to which companies they should fund. Or even which category RFID falls within. Is it supply chain management? Security? Wireless? Software and services? The answer is yes to all, and it’s time we as investors take on the learning curve.

Three Pieces

To break it down, RFID has essentially three components: (1) tags that can store data about anything, as well as transmit and receive that data over low or high frequencies, (2) an infrastructure platform that creates a wireless network through which data can be transmitted and received, and (3) a software solutions component that can then manipulate and analyze that data, store it and share it with existing software systems.

For investors unfamiliar with RFID technology, an RFID tag contains a tiny chip (often smaller than a grain of rice or potentially not much thicker than a product label) that comes attached with an antenna. Unlike bar codes on existing products that must be scanned manually and read individually, RFID tags don’t require line-of-sight reading. Consequently, a single RFID scanner can read hundreds of tags per second. Stimulated by a radio signal, the chip then transmits a unique code to identify the product the tag is fixed to. The code includes not only the product’s universal product code, as bar codes currently do, but also gives the particular item its own unique tag. Thus, retailers will have the ability to track and transmit pricing information, track supply/demand trends (and react to them!) and monitor possible in-store theft, as well as better manage recall and defect information.

It’s a complete system for interacting not only with products, but, ultimately, with consumers themselves. And it’s this concept that has gotten not only entrepreneurs and potential RFID customers excited, but should be knocking investors off their feet. For example, if a store suddenly finds the market is experiencing a shortage of bananas, or milk, or whatever, it can increase supply or raise prices accordingly and in real time (across an entire chain). The impact of RFID goes beyond time and cost savings and into the realm of top line expansion and bottom line growth opportunities. If store managers can see, through data obtained in real time, that Coke is outselling Pepsi 2 to 1, they can capitalize on that trend, in real time. Suddenly the razor thin profit margins most retailers suffer under can be increased as product supply/demand trends will be capitalized upon almost minute by minute. In other words, real time profitability!

Ich Liebe RFID

A recent experiment in Rheinberg, Germany, a medium-sized city north of Dusseldorf, proves the real world value of RFID. (The experiment is detailed in the April 2004 issue of IEEE Spectrum magazine.) Metro AG, one of Europe’s largest retailers, created a “store of the future,” testing technologies that would help streamline the way shoppers select and pay for retail items.

Rather than the traditional method of putting products in a shopping cart, loading them on a checkout counter and having a cashier scan each item, the Metro future store stocked its shelves with products embedded with wireless ready tags and outfitted consumers with specialized shopping carts that included computerized RFID scanners and displays. Further, the store’s shelves were updated with smart tags that could notify staff when items needed restocking or when prices needed changing. The system also allowed managers to wirelessly change prices and store specials from a centralized location.

Along with 40 other hardware and software partners, including Cisco, IBM, Intel and Microsoft, the whole store was covered by a wireless local-area network, based on the 802.11b Wi-Fi standard. The network linked all mobile devices, such as the computers placed in each shopping cart and many stationary devices, including electronic shelf labels, checkout points and flat-screen displays used for product promotion. But it was the RFID tracking of products that was the real technology victory within the future store. It showcased the technology’s ability to not only trace items for inventory management and restocking, but also to scan a cart, tally up prices and allow customers to simply pay by giving their cart identification number and credit card.

Though the costs of deploying RFID on a broad scale across supermarkets in Europe, Asia and the United States remain prohibitively high-perhaps $1 million or more per store, on average -the costs of RFID chips are gradually coming down, as are the costs of setting up entire RFID network platforms and software solutions. If entrepreneurs can prove that the ROI of installing RFID solutions can soon save enough on labor costs to make bottom line improvements attractive enough for retail chains, investors will soon see an inflection point in customer demand for RFID.

Real World Apps

VCs who doubt the size or significance of this market should take a look at some numbers. According to Saxena, whose company, Altierre, will offer customers a full RFID solution to control and automate retailers’ labor and paper-based information flow, the $2.3 trillion retail industry now spends billions on such labor and paper-based processes. Any RFID technology company that can make even a modest dent in those costs is on a path to riches.

Further, current sale data gleaned from such stores takes weeks to analyze and respond to reflect customer-buying trends. According to Saxena, such optimization through RFID could take minutes-optimization that has proven to improve the bottom line for retailers by as much as 7 percent! As a result, the opportunity for RFID technology to be sold just to U.S. retailers represents a mega billion-dollar market opportunity. And for retailers, any opportunity to not only cut costs but to improve margins means far greater multiples in their publicly traded market valuations. Suddenly, what have traditionally been “soft ROI” software solutions that technology firms have sold to customers in retail industries could quite literally become compelling “hard ROI” reasons to invest in new technologies.

Add in such nifty features as mobile applications for warehouse and distribution centers and suddenly the opportunities seem endless. Like medicines with patient information embedded on the labels, or luggage tags guarantying that items have security clearance for transportation.

Some of these ideas are already being developed. For example, the U.S. military recently recommended that its suppliers apply RFID technology to military supply packaging within two years. And, and Mexico just initiated project in which RFID tags can be used to monitor against lost or kidnapped children (or even diplomats!).

Entrepreneurs and VCs have the chance to do something unique and important here. Something profitable and game changing. Something rarely found within technology these days: the ability to solve real-world problems in industries that are still under-served by the gifts that technologies and innovations can provide. Though funding opportunities may still be rare, they will indeed grow as VCs do their due diligence and as entrepreneurs target their offerings to specific industries where they can indeed prove that RFID can save money and expand margins and bottom lines.

Ravi Chiruvolu is a general partner of Charter Ventures, an early stage venture firm based in Palo Alto, Calif. He specializes in enterprise software, software infrastructure, e-business and wireless. He sits on the boards of Ellie Mae, ManageStar, Talaris, Verano Winery Exchange andXavient Technologies.