Business Encounters: Life Scientist

Startup Scaling Issues

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The founder might ask “am I a Bill Gates or a Mark Zuckerberg?”. In other words, “Will I be the leader of my company many years from now? Will I retain the powerful position of CEO forever?”

Leaving aside the unique talents and skills of those two individuals, carefully look at their businesses. Microsoft entered the software business for PCs when it didn’t exist. Its major potential competitor, IBM, became its supplier of business. IBM did not see the value in software and allowed Microsoft to control that market. This unique situation will never happen again. IBM’s foolish mistake is a lesson for the history books. Further, in a connected world, there will never be an opportunity for a company which can grow in isolation for so long and allow an individual to develop the necessary CEO skills at a slow and methodological pace, such as Bill Gates was able to. Look at the autonomous car market. Can you imagine a few companies that are make cars and one recently created company writing the software to drive them?

Regarding Facebook, there were multiple other social media platforms before Facebook, so time was moving more rapidly then it did for Bill Gates. Still, Mark Zukerberg was able to grow his idea slowly, incrementally, and reach a very specific audience with a successful product. But this all happened before Facebook was created. In today’s highly-connected world a new idea with potential would become immediately available, probably via Facebook. If the CEO does not grow the idea rapidly it will be easily copied – likely by Facebook, Google, Apple, or Amazon. Look at what happened with Snapchat and Instagram’s rapid copying of its core features. There is simply no room for growing slowly in today’s startup culture.

Founder CEOs must assume from the beginning that they will likely not be able to adapt or acquire the skills required to grow the company at the incredibly rapid pace required in today’s business climate. As a visual analogy, the season change too quickly now. for a tree to adapt and survive.

The question then becomes how can the CEO founder prepare for the inevitable?

As always, burying your head in the sand is probably not the right strategy. Proactive Founder CEOs will seek out feedback on their performance from the board and self assess their skills and talents on a regular basis. Are they accomplishing their goals? Do they perceive that a new challenge is coming which will be outside the skills they need? If so, the Founder CEO must be proactive and initiate the search for a new CEO since finding the right CEO is not necessarily an easy or rapid process.

By initiating the change in CEO, the Founder CEO actually increases the likelihood of continued involvement in the company at a management or board level. In resisting the change they guarantee that eventually they will be pushed out and there will be an unpleasant transition. In the worst case scenario, that transition tanks the company and the Founder CEO has lost everything they hoped to gain in terms of both financial wealth as well as the ego support for the creation of their company.

As the startup grows, this is a significant problem for other founders as well. It is unlikely that they are still the best person for the job they were given and the titles they received. They, too, must self-assess and be ready to yield to a person who has more talent to handle either the existing challenges or the coming challenges of a rapidly growing company. If they don’t see it, then making them see it is the job of the CEO. And a Founder CEO struggling with this decision proves yet again to the board that the Founder CEO isn’t the right person for the job.

Similarly, there are likely to be non-founder initial hires who’ve been elevated to higher positions than their skills justify. They may also be paid more than should be based on their skills and talents. The founder and supervisors of such staff must be able to accept the potential replacement of such individuals even if they are family members. Resisting that replacement merely delays the day of their replacement. This again proves that there are leadership problems at a higher level. The positions of the initial hires are not guaranteed. New leadership will inevitably proceed with staff changes that are required based on company growth.

The message above is not one of hopelessness, but the need to acknowledge that the company is growing and in today’s business market change will come quickly. With growth comes change and every founder in every position should recognize the high likelihood that over time a more qualified person should take over their position.

Further Reading

Photo Credits: Wikipedia user Akash996 under Creative Commons Attribution-Share Alike 4.0 International license and Four Seasons – Longbridge Road. joiseyshowaa Attribution-ShareAlike 2.0 Generic (CC BY-SA 2.0). See a blog about this tree.

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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Why Should I Leave Medicine or Science for Business?

As they say in philosophy classes. Why not?

Let’s assume the business that you are moving toward is a life science business. The first important consideration is to ask yourself “What were my goals when I decided to enter medicine or a life science field?” Presumably, the goal was to have some impact, either regarding patient health or the underlying basis of knowledge related to health or wellness.

Many folks get hung up on the “money” focus of businesses. It’s true that the first goal of any company is to be viable and have sufficient cash flow (revenue and limited expense) that it can stay in existence and complete its mission.

But for the physician and others in the field of providing health care, that reality is just as valid for medical practices and hospitals, too. Healthcare businesses just happen to be in a market where it is essentially impossible to lose money or go bankrupt. Your customers will get sick and need your services. Healthcare training is a HUGE barrier to entry. Recessions, hurricanes, aging, and a whole host of other challenges to business won’t affect your sales. In the end, health is a (BIG) business – 17.14% of GDP in 2014 and 18.4% in 2017 and still climbing (yes, the EU average was only 10.04 in 2014 but let’s not go there).

Life science research is the opposite. There is $33.1 billion invested in health science research by the NIH1 and $26.5 billion2 spent by non-business organizations. But all that support from the perspective of the younger life science researcher is less inspiring; the competitiveness of this market is all too familiar.

WIth NIH and biomedical funding and total awards showing minimal growth1 and the number of newly minted (e.g., <35 years old) life science PhDs growing3, getting your academic “business” off the ground using R01 (or other) funding is a struggle. A future research career is uncertain, and indeed many life scientists pursue careers other scientific research4, including entrepreneurship. In fact, life scientists establish most biomedical startups5.

The point is, you are already in business – some easy and some hard.

A business, be it a medical practice or bench life science work, must have:

  • a mission
  • an overriding principle
  • a goal
  • a reason for generating revenue
  • a method for achieving cash flow
  • a way to stay solvent

If you pursue a life science company, the core goal is likely to be categorically the same – to impact the health of a population. In essence, there is no change. If one were to rephrase the question posed in this blog post to be “Why should I stop wanting to affect the health of the population?” the answer would be “Who said you are stopping?” Yes, you would be abandoning practice or laboratory science, but you retain your original (broader) vision.

In fact, migrating to a business direction gives you a vast range of possible impact. Perhaps you could join the digital therapeutic revolution, advance mobile health, and produce information technology directed toward either providers or patients. Or you could assist in the discovery new devices and pharmaceuticals. Or, potentially, you could foster new models of care via real-time or non-real-time patient communication with a broad set of potential providers. You could do anything.

A life switch from medicine or science practice to business is not for everyone. As with any significant change the decision should be pursued with both meaning/relevance or “gist” based decision-making processes as well as a factual or verbatim based decision-making processes6. Trust your intuition7, but get your facts in order. If you can define an interest in entrepreneurship, then the next step is to more thoroughly investigate entrepreneurial intent.

References

  1. Office of Budget (OB) Assistant Secretary for Financial Resources (ASFR). FY 2017 Budget in Brief – NIH. HHS.gov. February 16, 2016.
  2. Eisenstein Michael. Assessment: Academic return. Nature. May 5, 2016;533(7601):S20-S21. doi:10.1038/533S20a.
  3. Sciences National Research Council (US) Committee on Bridges to Independence: Identifying Opportunities for and Challenges to Fostering the Independence of Young Investigators in the Life. Where Are We Now?. National Academies Press (US). 2005.
  4. Sauermann Henry, Roach Michael. Science PhD Career Preferences: Levels, Changes, and Advisor Encouragement. PLOS ONE. May 2, 2012;7(5):e36307.doi:10.1371/journal.pone.0036307.
  5. Mehta Shreefal. Paths to Entrepreneurship in the Life Sciences. Nat Biotechnol. December 2004;22(12):1609-1612. doi:doi:10.1038/bioent831.
  6. Blalock Susan J, Reyna Valerie F. Using Fuzzy-Trace Theory to Understand and Improve Health Judgments, Decisions, and Behaviors: A Literature Review. Health Psychol Off J Div Health Psychol Am Psychol Assoc. August 2016;35(8):781-792. doi:10.1037/hea0000384.
  7. Reyna Valerie F. A new intuitionism: Meaning, memory, and development in Fuzzy-Trace Theory. Judgm Decis Mak. May 2012;7(3):332-359.

Photo Credits: MaxPixel and Sally Rockey, NIH Extramural News: Rock Talk. Age Distribution of NIH Principal Investigators and Medical School Faculty. February 13, 2012.

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.

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)

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