Business Encounters: Life Scientist

Role Dilemmas and Recognizing Skills

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The best way to found a company is to start with a group of people who work in a shared-decision model. Early emphasis on control and power is likely to choose the wrong leader and to disempower the other members of the team, such that this becomes a weak company lacking in sufficient resources to grow.

From the outset, the founders must decide how to transition from a collaborative-decision company to a more hierarchical company. The collaborative decision model will eventually fall apart because of various power struggles if it is delayed for too long. Plus, it is unlikely that outside funding is going to be interested in a non-hierarchical organization. The reality is that there are not a lot of examples of successful companies that work in a collaborative-decision model. A while ago RIM (Blackberry) was the poster child of this kind of collaborative team; we all know how that ended up.

Set up a transition date and ensure there is a mechanism in place to transition from collaborative-decision to hierarchical structure. Make sure the initial collaborative team is in agreement that someone will be in charge of the CEO position. Other founders will have domains in which they can exercise control. However, their control will not be in the role of the decision-maker for the startup.

There is a good reason why business folks emphasize sports teams. What better example is there of a team of individuals with different skills who work in a hierarchical structure to accomplish a goal?

Who should take on the various roles of this corporation? Don’t assume that the “idea person” should be the CEO. The CEO must be a leader. The CEO must speak for and present the company to others. When the pitch is made, it won’t be the CTO standing in front of the venture capitalists.

Similarly, match the other roles to the skills of the person.

  • CTO – Does the person have the technical expertise to advance your technology?
  • COO – Should be an organized person who gets things done on time and on budget. How are they with details?
  • CFO – If no founder is very good with money then perhaps you need to look outside for a CFO.
  • CMO – Filling the CMO is tricky. You need to have a marketing plan and then find the person who can implement that plan. So perhaps you need a marketing advisor to help develop the plan. And that advisor is not necessarily going to be hired to lead the marketing effort. In the digital era, marketing is changing rapidly, don’t get too focused on past success. Look for vision and passion in marketing products.
  • Sales Lead – Find someone who loves to sell things. The first thing they should be able to sell is themselves. Let them sell you that they are the perfect person for the job. If their personal sales job is weak, keep looking.
  • CIO – Crucial role in the age of cybersecurity and privacy. Solid system admin skills and awareness of the need for tight security and adherence to standards are essential. Here, a little paranoia isn’t such a bad thing.
  • HR – If you have a Chief Human Resources Officer or just the head of HR, this is a critical position and tricky to fill. You need experience, but you need someone who understands today’s young workers. They enjoy the experience, they want to feel wanted, they want to be appreciated. Your company (and thus the person) must reflect a corporate culture that entices them to join you and convinces them they made the right decision.

Once you have a team in place, be flexible. Perhaps your technological needs change, and your CTO no longer has the experience to handle the new requirements. Can you actually wait for that person take a course or slog through endless tutorials on Google? Some things can be taught, but most cannot be learned quickly. Make the change now before you embark on development that takes you the wrong direction. Who is going to do that? The CEO. That is why you chose a hierarchical model.

Further Reading

  1. Wasserman Noam. The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup. Princeton University Press. March 25, 2012, ch 5.
  2. Herrenkohl Eric. How to Hire A-Players: Finding the Top People for Your Team- Even If You Don’t Have a Recruiting Department. Vol 1 edition. Hoboken, N.J: Wiley. April 12, 2010, ch 6.

Photo Credits: Wikipedia user Vectortoons under Creative Commons Attribution-Share Alike 4.0 International license and Airman 1st Class Curt Beach 160414-F-IP109-036.JPG US Military.

About Health Impact Studio

We are a dedicated team of developers and researchers with the mission to improve the health of individuals through novel technology including games, virtual reality, and role-playing simulations. We welcome input from the full range of stakeholders to create a customer experience with the broadest applicability to improving health outcomes.

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Angel Funding: Valuing (Part 3 of 7)

Angels investing in your life science startup will want figures for the value of the startup at the beginning, as well as at a future time to calculate their expected return. Angels obviously do not expect that all investments will succeed. Thus, they will want to know that your future value represents a significant multiple of the present value or a high internal rate of return.

In comparison to other startups, a life science product will likely require approval by multiple regulatory bodies. Complicated and expensive empirical clinical studies will be required to achieve a minimal value product worthy of acquisition. The value will be measured not on regarding clinical benefits or diagnostic utility, but also cost-savings.

A life science startup likely has some previous work with which to demonstrate clinical or diagnostic utility. The high failure rate due to regulatory approval and the need for successful clinical trials will hinder enthusiasm for the startup.

Calculating the future value, of course, is partially a guess. The business plan will provide proformance estimates of future sales, reasonable expenses, and potential earnings based on the product, market size, market penetration, and competitive price. Your business plan’s financials, however, are not the sole guide to valuation. The figures should provide some guidance, but investors understand that these numbers are not something upon which they can rely. In the life sciences (and elsewhere), a discounted cash flow valuation is recommended.

Potentially, such figures have little to do with the value placed on your life science startup. The initial valuation may be the starting point. Of course, the initial valuation is inexact for an early start up because there likely is no product or even a minimal value product upon which to judge value.

For this reason, some investors apply a dollar value to assets and ideas. For example, they may see an energetic, thoughtful, and motivated entrepreneur as providing $1M worth of value. A sound idea for a value proposition, a high-quality management team, and a well-qualified board may also be worth a million dollars. Having a prototype or potential drug will add value. However, this again would be based on conjecture as at this time the prototype or compound does not have a specific or guaranteed revenue generation capability. Together all of these elements will be a means by which an angel investor will determine the value of a company. This strategy is referred to as the Berkus Method. A more complicated but similar approach includes more variables alongside weights and percent contribution but the effect is the same: the rubric is based on existing data rather than figures. There are even online tools for a quick and easy estimate.

There are other strategies to value a company at its outset. Some will have a ceiling which they will not go beyond such as $5M. Others will assume that founders and management have two-thirds of the value and the investor is contributing one third. And others will value the firm at the beginning based on what they expect the future value will be and then adjust that value for their expected multiplier. An investor seeking a multiplier of ten times the money they put in the startup will be interested in investing a million dollars if they believe that the value of their investment three years later would be worth ten million dollars.

Other investors seek an internal rate of return. For example, if they expect to gain a 30% return each year and the investment is over three years they will expect that the initial investment will grow 30% each year and will yield the value that they perceive the company will have at a future time, say three years. Thus if they assume the company will be worth $10M they calculate that the current value must be $4.5M to achieve an IRR of 30% over a three year period.

Further Reading:

  • Hogue Joseph. Investing in the Next Big Thing: How to Invest in Startups and Equity Crowdfunding like an Angel Investor. January 28, 2017.
  • Harju-Jeanty Robert. Venture capital valuation of small life science companies. Spring 2014.
  • Amis David, Stevenson Howard. Winning Angels: The 7 Fundamentals of Early Stage Investing. Vol 1 edition. London: FT Press. March 15, 2001.
  • Rossiter Matthew S, Kramer Barry J, April 11 Michael J Patrick •, 2013. Life Science Financing Survey 2012.
  • Styhre Alexander. Valuing and Investing in Life Science Companies. In: Financing Life Science Innovation. Vol Palgrave Macmillan UK; 2015:107-136. doi:10.1057/9781137392480_5.
  • Allen Kathleen R. Launching New Ventures: An Entrepreneurial Approach. Vol 7 edition. Boston, MA: South-Western College Pub. January 16, 2015.
  • Ewing Marion Kauffman Foundation. Valuing Pre-revenue Companies. In: Kauffman eVenturing : The Entrepreneur’s Trusted Guide to High Growth. Vol Kauffman eVenturing. ; 2007.

Let Good Times Destruct the Status Quo (Part 2 of 3)

Last week we described a theory that creative destruction happens because of downturns that spur new solutions, and the lack of a downturn in the health economy is why medical education is stagnant.

An alternative model found that in fact creative destruction happens during periods of growth not recession. Think of the dot com bubble that spawned Google. Facebook also launched in a time of plenty. Uber arrived after the crisis of 2008 was over and has been on a tear ever since; they’re now the leader in driver-less cars and trucks. So, an abundant IPO and M&A environment that is full of resources spawns even more opportunities for creative destruction.

Certainly health care has done nothing but grow and in several markets (e.g. Pittsburgh and UPMC) consolidation and integration and rapid growth are pretty obvious. With all that money sloshing around it should have led to enormous opportunities for creative destruction. Sure medical schools have replaced dark, depressing lecture halls with windowed learning environments full of round tables and projectors, and others have built huge simulation centers with mannequins and rooms for standardized patients. But if one contrasts that with the growth of Apple and the impact of the iPhone or Google and search, it’s clear that the enormous riches of healthcare (17% of GNP and growing) haven’t translated to enormous change.

Why not?

Perhaps paranoia and fear of a recession is really the key. A history of a growth period following a recession would include a sense of anxiety (i.e. “we’ve got to be ready!”) about the potential for another recession. Without a past recession (such as we had in 2008 for real estate especially and other markets but not health care) there is no anxiety going forward. So, easy or constrained flow of money is not the key to creative destruction. Money just enables such destruction when combined with anxiety about being ready to weather the next storm. And thus with medical schools and their hospitals as the top revenue generation for universities, and hospital CEOs and VPs among the highest paid executives in universities, there is little need for the health care industry to worry that the days of growth are coming to an end.

Picture Credit: Medical Office Careers

Education and Research in Entrepreneurship (Part 3 of 5)

Chapter 10 of It’s a Jungle in There stresses the value of research and development in entrepreneurial pursuits.

The first rule of research is garbage in, garbage out. That is, if the question you’re trying to ask is poorly-constructed and has no meaning, then you won’t find anything significant. The second rule of the research is that you must not bias your research toward your preconceived notion of what the correct answer is. That is, you must be open to the possibility that your research will find a solution which is against what your expectations are. The book describes using research tools to refine and improve a restaurant implementation. The possibility that the entrepreneur should not actually have such a restaurant was never an option. This is more accurately iterative product development with input from the target audience. Valuable, yes. Research, no.

The author highlights the need to obtain adequate knowledge to ask essential questions and accomplish research. In one section the author quotes the benefit of putting in a sand pit.

The book says, “For example, when we were designing our T-Rex restaurant, we brought in groups of youngsters to test the viability of our retail offerings and the ‘fossil dig’ (a special archaeological sand pit in one area of the restaurant) where kids could use shovels to unearth dinosaur bones and other prehistoric treasures.”

Many folks do not see the importance of archaeology versus paleontology as a big issue. To them, the confusion may be irrelevant. However, to the many scientists who get PhDs in either field the confusion over the difference is disturbing. Just to be clear, archaeology is focused on human behavior and is a component of anthropology and the study of cultures. Further, both fields are frustrated by the attitude of “get digging.” For an excavation to be of any value, much work must be done before and while digging a site, as well as analyzing the results afterwards.

The amazing Cliff Palace in Mesa Verde National Park is an archaeological treasure. The story of Anasazi is fascinating and inspiring. But, alas, there were no dinosaurs then.

Paleontology is associated with research which goes further back in time and is related to things such as dinosaurs. Someone who is building something that shows the value of jungle habitats and includes dinosaurs should understand this difference or, even better, ponder how the “learning experience” of this restaurant can educate the audience about this crucial distinction.

The point is that education is fantastic, but self-education can trick us into believing that we understand something that we don’t truly understand. That’s the reason why we have structured training with professors and universities. We can’t trust ourselves to self-assess our own understanding of an unfamiliar topic. Would you want to see a doctor who was “self-taught”? We need others to help us understand if we have achieved mastery or if there remain holes in our understanding which still need to be filled. I believe that every student is indeed responsible for their own education (“the harder I work the smarter I get”), but that doesn’t mean that a student should be solely self-taught.

The book chapter also highlights the value of focus groups. Focus groups provide a plethora of input regarding usability and satisfaction. That information can be collected both qualitatively and quantitatively through, respectively, interviews and more structured instruments. There are many different ways to implement focus groups and all require some kind of analysis of the results. Focus groups are an excellent topic to aid people in product design.

The point of bringing this up is to ensure that readers are not left with the false impression that one can “do a focus a group.” A focus group must be carefully constructed, implemented, and analyzed with assistance from individuals skilled in performing focus groups.

Every entrepreneur should implement research and development in the process. But, make sure you’re starting that process without unwarranted assumptions, and with adequate understanding which has been vetted by others or achieved such that it represents an accurate understanding of the topic at hand. Have the tools in place to analyze the results and then use these results to guide your research, be they related to the market and the customer or the more specific details of product development. And be willing to listen to the results, even if the answer isn’t what you wanted to hear.

Further Reading

Photo Credit: Mesa Verde National Park Cliff Palace Right Part 2006 09 12.jpg. 12 September 2006. Andreas F. Borchert. This file is licensed under the Creative CommonsAttribution-Share Alike 3.0 Germany license.

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