Business Encounters: Life Scientist

Should Entrepreneurial Finance Calculations Include Non-Monetary Impact?

|

We all have assumptions that we don’t question. In the venture capital world the assumption is that most new startups will fail, a few will have middling performance which basically returns the initial investment, and a few will be “superstars”. The latter will return the bulk of the capital that’s invested by the venture capitalist. This expectation assumes an emphasis on capital appreciation is the only goal of funding. That is, the goal is to extract capital from the very few “winners” and to discard the “loser” companies.

Alternatively, it is possible that discarded companies failed because the venture capitalists in their focus on capital potentially destroyed what was unique in the company through their manipulation and overemphasis on money. Had they showed more respect for the company’s desire for social responsibility and corporate culture, the start up would have retained its value and grown. Perhaps not as quickly, but potentially in a long-term way.

Admittedly, such an emphasis may mean that the bright stars of their funding do not burn so brightly. So they end up earning less of return on their investment. And potentially VCs have already done this calculation and made the decision to stay with the status quo.

However, change tends to happen whether you accept it or not, and eventually this model may fail. How could that happen? The goal of capital appreciation assumes that it is aligned with the goals of others. If staff and officers develop other priorities (e.g., B Corporations) then the model that emphasizes accumulating cash-based wealth will be too simplistic and miss other means to obtain value. The venture capitalist will need to adapt to a model that values more than just capital appreciation and return on investment.

That may sound fanciful (or naive), but we already see in the sharing economy that people need less. For many the phone is the only device they need and will soon be the only computer. The foldable screen will even remove the tablet. Ride-sharing is eliminating cars and autonomous cars will further that. Even housing is migrating to less expensive model requiring fewer “things.” Just-in-time delivery of things is reducing the need for personal inventory and VR allows one to explore and connect at lower cost. So, needs are changing and capital is just one of many needs.

Today’s business plan is full of money in, money out, buyers, sellers, income, and expenses. Tomorrows business plan will likely also include non-monetary value in/out. It will also identify externalities; that is, negative impacts on society that won’t show up on the balance sheet, but will be a cost to society. And investors will shy away from business plans that suck in value, but provide little non-monetary value in return. Companies that create enormous value by passing on the negative value to society will fail to get funding.

Photo Credit: Author: Greenberg, Arthur, Environmental Protection Agency. (12/02/1970 – ) Title: HUGH STRIP MINING MACHINERY IN OPERATION NEAR DUNFERMLINE IN FULTON COUNTY. FULTON COUNTY HAS BEEN, AND IS, A CENTER FOR STRIP MINING IN THE STATE, April 1973, This media is available in the holdings of the National Archives and Records Administration, cataloged under the National Archives Identifier (NAID) 552417.

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.

Keep Reading

Maintaining Control Versus Maximizing Wealth

It’s your idea and your company, right? You instinctively hold onto your creation. Like a little kid holding onto a toy, you won’t let anyone play with it. Unfortunately, stubbornness and entitlement is not exactly a recipe for entrepreneurial success.

You have a lot of competition, and they have teams of smart, dedicated people working in tandem toward a common goal. By the time you let someone else play with your toy, the market may have moved on to something else. As you probably learned a long time ago, you are going to have to share. And sharing means sharing ownership of your idea.

You might say, “Fine, but I’m in charge.” Does that mean you are in charge of the development process, the employees, the marketing plan, the sales effort, and the oversight of the finances? Leaving aside the issue of who would want to work with someone who is such a control freak, do you really think that your skills in all these domains are better than every other person out there?

You are going to have to give up some control as well. The individuals who work for you will need to feel like they have some control. More importantly, your company cannot grow if every single component requires your input, vision, and guidance. The question then becomes how much power to give up.

Let’s say you are a person with excellent leadership skills and the CEO task is what you are best suited for. Perhaps you have a technical background, but others have more technical expertise than you have. You hire a CTO.

You don’t have to give complete control over the technology to the future CTO. Maybe the CTO is a “pie in the sky” early adopter of the latest technology. They might choose the most expensive, cutting-edge technology, with the most exciting and trendy features. Is that the best way to deliver a viable product that meets customer needs on time and on a budget?

Probably not. So you still need to have some control over technical development and set the overall goal and limiting parameters. But recognize that there is an end to your power. Eventually, you have to let your CTO make some specific decisions based on their expertise. And some decisions may be a mistake. That’s the risk you take. But the danger of disempowering people is higher. You don’t want to be the only one who cares about your toy and kid that no one plays with.

Further Reading

Photo Credits: Max Pixel (CC0 Public Domain) and Donnie Ray Jones on Flickr (CC BY 2.0)

Angel Funding: Negotiating (Part 5 of 7)

For the budding life science entrepreneur, you want to establish an agreement with the investor that works in the long term. Negotiation of an agreement cannot be avoided, but need not be onerous. As discussed earlier in Part Four of the series, there are several different structure strategies which can be deployed. The actual structure depends on the results of the negotiation. Similarly, Valuing Your Life Science Startup is a component of the negotiation.

Negotiation is not uniquely different for the life scientist in a business framework versus in any other aspect of life. Components to consider include the following:

Power Differential – Who Has The Power?

  • Are you desperate for money and can’t proceed without the investor?
  • Are you unable to run the company without input from the investor?
  • Are you hoping that the investor will help you establish a qualified board?
  • Are you hoping the investor will help recommend key team members?
  • Alternatively, is everything in place and your project is so compelling that you need little from the investor some cash?

Similar Or Conflicting Personalities

Are you an introvert who does not enjoy playing games with other people and who repels from any aspect of manipulation? In this case, be upfront and tell the investor that the deal is the deal and you’re not interested in wasting a lot of time going back and forth. Highlight to the investor that this deal is not capricious but has been well thought-out, and it is fair in your mind and is a win-win solution for both parties.

If you are more extroverted and enjoy the experience of working with a car salesman to purchase the car at the lowest price, then you have an entirely different strategy. In a sense, you find the negotiation to be the fun part and will feel cheated if you don’t get the best deal. Understand that if your investor is also of a similar bent, this will be a long protracted experience which potentially both of you will enjoy. It could also turn really nasty. If the investor is more introverted, you may have just lost that investor as a partner.

We All Want To Win

With the exception of the above car salesman analogy, almost every negotiation is best done with the assumption that both parties win. Funding a startup is not a zero-sum game. You need adequate monetary support, guidance, autonomy, and motivation in the form of company ownership to successfully launch your business. Your investor needs a certain return on investment, risk profile, and a sense that your startup will add value according to their belief system. In your negotiation, make it clear that you want both the investor and yourself to win. A good investor will understand a win-win scenario. An investor who disagrees should be told to look elsewhere.

Be Aware Of Triangles

Negotiation is almost impossible if it involves more than two people. With every additional person, you increase the number of pairs of negotiation several-fold. With three people there are three times as many negotiation requirements. That includes the entrepreneur negotiating with two investors and the two investors negotiating between themselves. This makes the process substantially more complicated and should be avoided at all costs. Get the investors to agree to have a lead and accept their terms. And only negotiate with the lead. If a non-lead won’t buy into that, dump them before you waste a lot of time.

Final Advice

Negotiation is not something new to you. You have been negotiating for things your entire life and have strategies that work and strategies that do not work. As opposed to the earlier topics, this is familiar territory. Do not change how you negotiate at this critical moment of your life. Choose a strategy that works for you, has a high comfort level, and typically achieves the outcomes you want. If you hate buying from car salespeople, now is not the time to decide you want to become a high-pressure negotiator.

Picture Credit: CC BY-SA 3.0 Nick Youngson

Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments