When venture capitalists say “NO”—creative financing strategies & resources, by Ron Peterson
Business strategy and a means to measure your progress
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- Navigate this page:
- Consider how your solution is going to fit into customer’s needs.
- Show sacrifices on your part.
- Simulate your business plan and test different assumptions.
- Common planning mistakes.
- Do you really even need a business plan
- Further thoughts on the marketing plan.
- Chapter 11—Biotech, A Special Case
- Biotech exhibits a range of financing problems.
- Knowledge-based industries require special business models.
- Your most valuable products may come downstream.
- Tying your relationships down.
- Help in research and in business.
Business strategy and a means to measure your progress. The strategy and implementation portions of your written document form the core of the business plan. The entrepreneur needs this to control and monitor progress of the venture and to solicit outside financing. Milestones that are specific and verifiable performance -benchmarks including completion of research, production of prototypes, tests, and first sale need to be included in your business plan. Predicating ownership on milestones makes it more likely that investment will be secured and that the entrepreneur will be able to retain significant ownership. Specifically, the ability to alter planned decisions and deal with uncertainty in response to new information, reduces the downside risk to the investor as well as the entrepreneur, while maintaining different alternatives on the upside. “If it’s neither snow nor rain nor heat nor gloom of night, what the devil is wrong with this place?” Anthony M. Frank, former head of the U.S. Postal Service, and a suggestion that if your plan isn’t working, you need a new plan. When you build in milestones you create funding options that are valuable in their own right. You give the investor the option to proceed with more money when certain parts of your growth are successful. Realistically, when new technologies are concerned, credible estimates of returns are difficult to make. By establishing milestones and framing them as options, a number of intangible benefits of technology can be spelled out and even separately valued. A survey conducted by Inc Magazine indicated that sixty percent of Inc 500 CEOs did not have a formal business plan before launching their company. The same survey showed that forty-one percent of the group started their companies with less than $10,000 (www.inc.com). Consider how your solution is going to fit into customer’s needs. Newer companies find that marketplace barriers—customers that were not receptive or ready—are primary obstacles and needs to be dealt with at the beginning of their plan. Human behavior is much slower to change than technology and considering that obstacle is critical. Harvard Business School Professor Rosabeth Moss Kanter states, “Years of research shows that the innovations most likely to take hold are those that don’t demand excessive change from the customer. Incrementalism—represented by the following eight characteristics is key: • Provable: the product can be demonstrated on a pilot basis. Customers can try it out on a smaller scale before committing to replace everything. • Divisible: it can be adopted in segments or phases. Customers can ease into it, one step at a time. They can use it in parallel with their current solutions. • Reversible: if it doesn’t work, it’s possible to return to life without it. Don’t burn down the house to demonstrate the fire extinguisher system. • Tangible: it offers results that can be seen to make a difference in something that the customer needs and values. • Fits prior investments: it is an area where there have already been actions or investments, and it builds on them. The product helps make use of “sunk costs,” rather than requiring customers to take losses. • Familiar: it feels like things that customers already understand, so it is not jarring to use (early telephone promoters had to develop the term “hello” to make it comfortable to address someone you didn’t necessarily know). It is consistent with other experiences, especially ones that have been successful in the past. • Congruent with future direction: it is in line with where the customer is heading anyway. • It doesn’t require customers to rethink their priorities. • Publicity value: it will make the customer look better to itself and others.” Show sacrifices on your part. When building your business plan, make sure that executive salaries for founders are kept as low as possible. Investors want to see sacrifices and commitment on the part of managers and would hate to think of their funds going to finance a high life-style. Ideally, management rewards should be tied as tightly as possible to the perspective of the investor, showing an identity of interest throughout the life of the investment. Simulate your business plan and test different assumptions. When developing financial projections, model these numbers in different ways including: cash flow breakeven analysis; scenario analysis; and simulation, as different means of showing outcomes. As a real exercise, try drawing up your business plan to succeed with no infusion of outside capital whatsoever. Does it break down? What’s the difference in steps that are involved? Also, when you’re detailing the competition section of your business plan, don’t comment negatively on other firms, but indicate the differences between competitors’ solutions and yours. In software there’s a unit of measurement called “Simple Matter of Programming” or SMOP. You can roughly evaluate how long a software development project is going to take by how many SMOPs are involved. A simple little thing that will take a team of four programmers six months to complete is one SMOP. Big projects are going to call for multiples of time and personnel, and compute to maybe five or ten SMOPs. If it’s not in your main area, chances are that you’ll spend your time better by trying to figure out who to partner with. “Although it is popular to think that great ideas start with individuals, most knowledge gets produced in and by communities of practice (COPS). These are teams of people that have worked together over a sufficient period of time to have evolved a deep ability to read each other, to communicate in highly condensed ways, and to know exactly when and when not to trust an opinion from one another. Within such entities, knowledge gets created, and when it does, it flows almost effortlessly.” PARC veteran John Seely Brown writing in the book, Understanding Silicon Valley. Harvard Professor Michael Porter’s emphasis on the value of clusters helped form the impetus for the British government’s guidance to regional planning commissions for land use and the necessity to promote these regions as a source of competitive strength. The amount of services and support for entrepreneurs in places such as Silicon Valley dwarf efforts found elsewhere, but you have resources nearby as well and may have either a fully developed or nascent cluster of your own. “The automotive cluster centered on Detroit, Michigan began in earnest when Ransom E. Olds began mass producing the Oldsmobile in 1901. After a fire destroyed his factory, Old put all his resources into producing the ‘Curved Dash Olds’ (the only vehicle saved from the fire). The cluster grew around a number of entrepreneurial firms, including Olds, Dodge, Cadillac, Ford and Chrysler, that quickly developed over the next several years. For example, before building its own model, Dodge built transmissions for Olds and engines and axles for Ford. Likewise, the original Cadillac was produced by Henry Ford’s former partners using an engine design that Olds had rejected. As the industry matured and consolidated with the formation of General Motors in 1908, expertise in automotive engineering and manufacturing concentrated in the region.” From a Governor’s Guide to Cluster-Based Economic Development, www.nga.gov. Valuing a company. No one knows exactly how to put a price tag on a company but when you’re out looking for money you must value it somehow. A number of books have been published on making these projections and values but none is less than an inch and a half thick, attesting to how many different ways you can do it. Instead of stamping a particular value on the firm, you’re better off to forecast your sales and earnings out a few years and give your potential investors a chance to input their own ideas about value. Valuation, like beauty, is in the eyes of the beholder. www.houlihan.com has a number of articles that speak to valuation and the firm itself, Houlihan Valuation Advisors, has a long history of making these complex determinations. Attorney Mark Gross has an article that is relevant to this kind of exercise, “How to Value Your Startup for Venture Capital” at www.gigalaw.com. M-CAM is a company that uses special software as a base to start a complex valuation methodology. M-CAM started off by asking the questions: “Do you own an asset? Does Anybody care?” Inc Magazine provided a set of formulas for valuation in their January 2007 edition, although high-tech and pre-revenue firms defy conventional approaches. Common planning mistakes. The typical entrepreneur underestimates the need for capital by a factor of three, as evidenced by several studies. Also consider that the typical firm that receives venture capital financing accumulates an average level of investment of $16 million over a number of years before they ever do an IPO, become acquired or are merged. With this kind of scenario possibly ahead for you, don’t give away the family farm since you may easily need more equity rounds than you think. Make sure you’re fair to people, but since you can’t grow a company to its full potential if you’ve sacrificed too much equity early-on. If you treat your shareholders fairly, they’ll be there for you in the future to help you grow your company and perhaps your next one as well. Do you really even need a business plan? While we believe the process has inherent value and most investors want something to study and feel comfortable with, focus on the plan is probably way overblown—except for the marketing plan portion of the document. The author of two widely read books on business plans, David Gumpert, dramatically altered his thinking based upon his own experience looking for money. His latest book is Burn Your Business Plan! What Investors Really Want from Entrepreneurs (www.lausonpub.com). Gumpert’s new emphasis is upon making sales, obtaining publicity, keeping finances under control and creating a website that communicates the business model (see his How to Really Create a Successful Marketing Plan). Further thoughts on the marketing plan. If you have sales on the books and show reasonable steps to obtain a lot more, you’re well on the way to having a powerful marketing plan. This step is often overlooked or given short shrift in the fervor to craft a business plan and to make forecasts of revenues and profits. If your business doesn’t have a proven sales formula you need to put together a knock-your-socks off type of marketing plan. Show investors that you’ve really thought through all the important steps that are involved in growing your company. Marketing expert John Ver Steeg suggests that marketing considerations should really help dictate the design of your business plan. His steps are: (1) begin by stating the market problem to be solved; (2) identify the customers, by name and number; (3) determine how much a customer is likely to spend each year; (4) reason out price changes over time; (5) figure out what sales methods are going to work best for your type of customer and your type of product; and (6) determine what marketing methods work for your market. A marketing plan should be a mini-business plan and have the following general outline: • An executive summary that indicates both your most powerful avenue to generate revenues and a concise indication of how that fits with the remainder of the plan. • A current or state of the market section to indicate what similar companies are doing to generate sales and the strategies of the most imaginative and successful ones. You should give some idea of costs, competitors and the general environment for introducing your product or service. Within this section make sure you illustrate who your competitors are and how you distinguish and differentiate yourself. • Your niche needs to be reasoned out and aligned with the opportunity to make sales. What are the obstacles as well as the things you need to build upon to make a successful business? • Develop milestones in terms of sales, market share, etc., all numeric measures, so an investor is able to track your progress. • Illustrate the marketing approach that you have opted for and what you have considered and what you have rejected. State what you expect to do if (or when) some of your marketing assumptions don’t work out. • Delineate the steps that you’re going to take to achieve your marketing goals. Show who is going to do what and how much it will cost. • Put together a revenue and cost projection that ties back into any of the other forecasts that are made elsewhere in the plan. • Show the controls and management structure that you’re going to put in place to monitor this plan and just who is going to be responsible for supervision and reporting.
While a focus on solving problems in one area is the best way to concentrate a potential investor’s attention, there is no guarantee that the target market is going to work out once you find funding. Consider showing a number of other ways that your core technology can be applied and other solutions and markets that can be derived from it. An article by Jennifer Gilbert in Business 2.0 on February 6, 2001, illustrated a number of cheaper ways to market a company. Gilbert notes how Bag Media places messages on paper bags from doughnut and other shops and another firm, Eisnor, created a contest to promote a New York City guide by the New York Times. Resources her article referenced include: www.autowraps.com, www.bagmedia.com, www.innovyx.com, www.eisnor.com, www.javajacket.com and www.tbsmmm.com. Chapter 11—Biotech, A Special Case Craig Venter left NIH in 1992 to pursue his own approach to gene sequencing. He formed a collaboration with Harvard professor, Bill Haseltine, who moved from academia to head the startup firm, Human Genome Sciences. A notable coup for this company, negotiated less than a year after Haseltine’s arrival, was a $125 million partnership agreement with SmithKline Beecham. This agreement has been described as “the genomics era’s big bang,” signaling the recognition by big pharmaceutical companies of the contribution which the new genomics firms could make to the future of medicine. Biotech exhibits a range of financing problems. The principle problems in funding technology are the long lead-times, uncertainties, and the size of the expense associated with bringing a product to market. The biotechnology industry is a case in point where the decade-long lead-time and multi hundreds of millions of dollars involved in drug development prove daunting. The job of the entrepreneur is to alter these dimensions by creative thinking and planning. The first task is to segment the development chain and throw major hurdles onto other organizations—perhaps government, university, and corporate labs that are able to finance the work. Another is to segment the chain further by specializing in a sector of the corporate activity such as project management, consulting, manufacturing or marketing. Arranging partnership relationships and creating true virtual organizations are also ways to reduce the efforts to more manageable tasks and should become more important all the time. “Whereas in the 1970s and 1980s, 80 to 90 percent of all health care-relevant discoveries were made in pharmaceutical companies, in the 1990s and after the year 2000, 75 percent of all relevant scientific discoveries in health care would be made in academic institutions, government institutions and private or biotechnology companies.” Wallace Steinberg, founder of HealthCare Investment Corp. Since the degree of difficulty in raising capital often rests upon the cyclical strength of the economy and the phase of the stock market, companies with long research lead times that require added funding along the way are playing Russian roulette with their early shareholders. Companies with technological breakthroughs are often the ones that prove most susceptible to the downside of these long lead times, since many steps before marketability may be required to make their technologies usable. VCs have been deserting the early-stage sector in favor of developed firms. Far more angels are funding biotech startups today than venture capitalists. CellGate Inc., in Sunnyvale, Ca received $5 million in early-stage funding from an angel group headed by a cardiac surgeon who had started and sold a company for several billion dollars. Many of these angels are motivated by a desire to see promising technologies successfully introduced in order to enhance public health, just as much as they are to make money. Knowledge-based industries require special business models. The financial profile of knowledge-based industries such as biotechnology is quite different from asset-intensive businesses, like chemicals and autos. Knowledge-based firms tend to have high price-earnings (PE) ratios, low dividend payout ratios, low debt/capital ratios and varying levels of profitability. Asset-based firms are just the opposite. To build value, many traditional businesses today are seeking related knowledge-based services to extend their business model. IBM formed a research division called On Demand Innovation Services as a focus on consulting and support for traditional software and hardware -development, a changed emphasis for the big company. IBM also bought PWC Consulting as a further move into higher margin business areas. Chemical companies and chemical-based and consumer-based pharmaceuticals have been moving into biotechnology as a means of looking for better profit margins as well. A large, old German lathe maker began to offer a range of services and applications following competitive pressures on hardware prices, and now derives over 60% of their total profits from the services. Should you give away automobiles and live on their service? Your most valuable products may come downstream. Especially in biotechnology, but in numerous other fields as well, the technology that you start out with is not necessarily the technology you end up with. For Genentech, the real drug moneymakers were not even envisioned when the company first secured funding. Having a number of opportunities early in the game seems to be a wise strategy, although funding will probably rest upon how convincing you are in one major arena. Many of the biotechnology products that are obtaining FDA approval now had their origins in the 1980s and 1990s, so don’t kid yourself on how fast you can get something new to market. The process can’t be truncated dramatically, particularly the clinical development and the information you have to provide to convince regulators of safety and efficacy. Your life cycle is also going to change. You begin with a research group but then grow into a successive development, manufacturing and marketing group in phases. Medimmune began with an HIV focus that mostly did not pan out but the company developed a drug designed to protect premature infants from a dangerous respiratory virus and that product proved successful. “We should all know the cycle by now: You discover monoclonal antibodies in 1975 and announce that they will be the cure-all for everything. By the mid 1980s, you launch the first ones, but your first real surge of product doesn’t come out until after 2000. Genomics will be on a similar cycle. We have to go through the maturation period. People tend to be good at anticipation long before things are realities, but there is no doubt it [genomics] will be a huge contribution to the field.” George Rathman, founder of Amgen, interviewed in Bio-IT World. Tying your relationships down. In biotechnology, to a greater extent than even in electronics, commercial success depends on an intimate and continuing -relationship between company-based researchers and academic scientists. Biotechnology’s close linkage with the pharmaceutical industry provides a scenario for growth and profitability that isn’t wasted on far-sighted entrepreneurs. Big pharma is both a natural customer and a partner for the outputs of biotechnology companies. “The FDA SBIR funding has given us credibility with the pharmaceutical industry and resulted in a productive working relationship between a regulatory agency, big pharma, and a small business.” Jim Veale, Lighthouse Instruments. Because of the long lead-time to market it’s critical to link management and staff to the long-run success of the organization. Although this is done primarily through stock options, competitive cash compensation is also necessary since the time to potentially cash-in the stock is so distant. It’s difficult to engage in cash for equity tradeoffs like those used in other technology sectors, because of these time horizons. Amylin Pharmaceuticals of San Diego, CA lost 80 percent of its employees and nearly closed its doors following problems with its first drug. Four years later it licensed the rights to a second drug for diabetes to Eli Lilly & Company in an arrangement that could net Amylin up to $325 million. Help in research and in business. Calgene modeled itself on Genentech with the vision of taking genomics into the agricultural sciences. Armed with $500,000 of his own money, Norm Goldfarb persuaded Allied Chemical to put up $1 million and a local venture capitalist put up another $3.5 million. What made this easier to piece together was the memory of the highly successful IPO of Genentech a year earlier and the market’s sudden receptivity to concept companies that didn’t have a history of sales growth and earnings. Goldfarb had no credentials in the biotechnology industry but he made a telephone call and persuaded an eminent scientist in the field, Dan Cohen of the University of California at Davis, to join and give him the scientific standing he needed to make the company viable. Gunnar Weikert of the Swiss-based life sciences venture capital fund, Inventages, suggests that public institutions should perform basic technology development and that investors should only come into the act when the business model is ready for commercialization. He thinks that genomic companies should play an intermediate role in drug development by providing model compounds to large pharmaceutical firms, and stay away from becoming integrated drug companies. Under his scenario, biotechnology groups would become more akin to parts manufacturers for automobiles—part of the supply chain. Lynn Barr conceived the business plan for microsyringe company EndoBionics while guest teaching a biotechnology class at Miramonte High School in Orinda, CA. Students identified problems existing in two common treatments for heart disease that the microsyringe might alleviate. The high schoolers also helped identify possible customers for the product, including Medtronic. Subsequently, Medtronic made an investment in EndoBionics and formed a strategic partnership with the company to develop the technology and the market. Directory: documents documents -> Concept stage documents -> Concept stage documents -> The great global switch-off documents -> Nonprofit grant application documents -> The Truth about the Rwandan Genocide documents -> Annual InStructional unit plan documents -> Chaos equipment included Download 1.2 Mb. Share with your friends:
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