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

Angel Funding: Evaluating Your Life Science Venture (Part 2 of 7)

From the last blog, you figured out how to get the attention of angels (or a group of angels) for your life science venture. The next goal is to receive a favorable evaluation.

An angel group noted that 86% don’t get the chance to make a pitch1. Venture capital funding is probably worse. You have your work cut out if you want your life science venture to get funded. Keep in mind that there are many funding sources, so the numbers aren’t as bleak as that figure would imply.

So how do you increase your chances of funding from a specific angel?

At the early stage, angels are looking for evidence of:

  1. a value proposition for a life science problem
  2. validity regarding potential clinical impact
  3. use of appropriate technology in the implementation

Those criteria are probably not a surprise to you.

Is this a hot topic?

Since the focus is the life sciences, consider how hot your topic is. Medicine is not neutral in its attention to a disease. And what is “hot” is not based on scientific fact (e.g., years of life lost, incidence, lifelong prevalence, cost to treat, etc.). If “impact” determined funding then almost all funding would go to prevention and basic science breakthroughs. In comparison, the National Cancer Institute receives more than any other institute at the National Institute of Health, over $2B. Cancer wins the prize probably because it is scary. If you want to get funded, the topic must be one that an Angel sees as critical. Thankfully, Bill Gates has shown light on health issues of developing countries, and hopefully such neglected topics will soon be seen as worthy of investment.

So what is hot right now? Orphan diseases? Biologics? Topics related to the opioid or obesity epidemic? Zika virus? Make sure your topic is hot and that you highlight this. And, of course, hot topics come and go. Yesterday’s “bioterrorism” issue is cold until it becomes hot again, when (god forbid) evidence of the use of a biological weapon is demonstrated.

Next consideration is the team.

Since we are talking life science, the team has to be more than a competent bunch of folks who can launch a business. You need to have a team that also has mastery over the topic and the competition that is also addressing that problem. If FDA approval is required, you need folks skilled in that labyrinthine process in addition to lawyers. But don’t go too crazy with details, since it is possible that your venture will be purchased early in the process. It is unlikely that an Angel has no life science expertise.

It’s about health – and honesty.

Outline the upside in both the financial return on investment AND the impact on health. The Angel wants you to achieve positive health outcomes. Finally, the problems of Theranos are fresh on everyone’s mind. Be scrupulous in your development and presentation of the product. Any hint of deception and your venture will be in the 86% that go nowhere.

Where will more money come from?

Finally, an Angel understands how complicated a life science venture can be and you will most likely need additional funding. The Angel needs to know that you intend to eventually access additional funding2.

Hopefully, with the above, your new venture is on its way to a successful evaluation.

Citations:

1. Clark Paul, Banks Charlie, Dunbar Matt, Lackey Mac. Perfecting Your Pitch: VentureSouth’s 101 Tips for Pitching to Angel Investors. April 23, 2017

2. 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.

For Further Reading:

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

So Where is the Creative Destruction? (Part 1 of 3)

Assuming the existing paradigm of medical school education is tired and in need of replacement, the next question is why hasn’t it happened? Technology change is all around us. Students have replaced memorization and note cards with the EHRs, phones, laptops, and Google. Yet the system is relatively unchanged. How come?

A review of creative destruction is helpful. The original theory of creative destruction (replacement of old with new) was that downturns in the economy spurred such destruction. This “liquidation model” proposed that when things go bad people revisit resource allocation and come up with novel solutions. The application of this model to medicine would infer that the unending growth and riches of healthcare is the problem. Additionally, the ability to dump more and more debt onto medical students (thus forcing students to choose high paid specialties focusing on procedures) has further enhanced the riches of the industry. The end result of all this largesse is that the healthcare aspect of the economy has been protected from from the risks (and destructive value) of recession. Without downturn there is complacency and thus stagnation.

So for us to move out the current “Normal Science” and shift the paradigm, we would then need something bad to happen in terms of health care. Now, since health care is 17% of GDP, you can argue either way.

  • Option #1: No way can that happen, as it will cause our entire economy will crash.
  • Option #2: It is inevitable. How much longer can the US remain competitive when it spends twice what any other country spends and still does not provide health care to everyone?

We do not have the magic ball to predict which one will win. Sadly, based on the above theory, we lose either way. If everything stays rosy then medical student changes. If health care in the US crashes, then medical student training changes but the system is in chaos.

Picture Credit: The Opte Project under CC BY 2.5

Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments