Business Encounters: Life Scientist

Strategic Partnerships in an Ecosystem Model (Part 4 of 5)

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A collection of strategic partnerships is an excellent addition to a company and indeed essential. A standard partnership model focuses on elements of customer need directly related to your product and finding partners that enhance product benefits and address those needs. Partnerships serve to further the impression that one’s product provides benefit and successfully addresses the need you are targeting.

Example Product-Focused Strategic Partnerships
Chapter 14 of It’s a Jungle in There discusses the value of the strategic partnerships. Schussler provides an example of a “jungle” retail experience that is enhanced by partnering with company skilled in a process by which the customer (children and their parents) “produce” the product they buy – in that case, a plush dinosaur.

Collaboration with a non-profit such as with fundraising 5K and similar event can also be a valuable strategic partnership. For a health-related product, such as one focused on providing dietary advice, an active experience offers access to an energetic audience seeking a healthful lifestyle.

Need fulfillment often requires strategic partnerships. Even the behemoth Amazon has a dependency on others to fulfill a need. Until Amazon has its own delivery service for 100% of its products, it must engage shipping companies to bring the product purchased to the customer, or return it if it isn’t acceptable. The financial success of the shipping companies (UPS, FedEx, USPS, etc.) is essential to Amazon’s success.

However, this is an inadequate way of seeing the customer need. Customers have more complicated needs outside of the requirements your product addresses. Thus, your product only fulfills a small proportion of the consumer’s needs.

Meeting the Broader Needs of the Customer
In fact, the need associated with your product is a subset of related demands to accomplish a customer’s larger goal. An alternative strategy requires a broader investigation of one’s product as a component of a more extensive customer experience.

For example, you need to keep your home clean. This makes the logic of Amazon’s Prime Pantry, and it’s push for users to have scheduled and automatic deliveries, more clear. All those items in the Prime Pantry are solving the more substantial need to keep your home clean by making sure you list everything you might need and Amazon provides it; potentially without you asking for it. The Amazon approach to meeting broader needs is to expand and consume other companies related to that need. As an example, Amazon created AWS (its own cloud-based IT system) and is developing its private distribution network with individual drivers and airplanes. They also recently purchased Whole Foods after buying a slew of other online providers.

Amazon’s strategy isn’t always possible. As an example, you don’t “need” a video from Netflix. You need entertainment for a few hours on Saturday night. A chain of elements, including an Internet service provider and a seller of a TV, are essential to your being able to watch a movie. Netflix must consider those aspects if it is going to succeed, and it cannot incorporate those elements into its product. So, for Netflix, involving other organizations is critical.

A strategy must then identify an entire chain of needs and efforts/purchases that the customer deploys to accomplish the greater need. And then form relationships as a part of a broader ecosystem of customers and providers, including values outside of one’s immediate product value. For the company, the main difference, as compared to strategic partnerships, is that the overall goal is to ensure that the chain of needs is met.

The Ecosystem Also Affects Your Success

Companies are used to battling competitors who aim to steal their market by offering more value or a lower cost or both. But, in a broader chain, your competitive disadvantage may not be due to your competitor. If, in the case of Netflix, the need to “find a movie I want to see” may be determined by some other participant in the ecosystem. There is a chance that the customer identifies a movie that isn’t available on Netflix, but is available at a nearby Redbox. The ecosystem has just redirected the “get a movie” need away from Netflix. Netflix lost a customer to Redbox because of someone’s else’s search engine. This lost sale potential explains why a recommendation engine is vital to Netflix; it ensures that the movie the customer decides to watch is determined by Netflix, not by someone else in the ecosystem.

The success of the company thus depends on:

  • awareness of the complete customer experience including broader needs related to the specific product needs
  • the ability of the provider elements to meet the overall requirement of the customers
  • your utility to satisfy a particular component need versus someone else in the ecosystem
  • attention to the broader ecosystem, so you reinforce the value of their product to meet a specific requirement in the chain

 Final Thought: Who to Engage?

An ecosystem model also provides guidance regarding the need for and extent of strategic partners. The chain of providers must have enough alliances to meet the overall demand, yet partnerships outside of that greater need are potentially unnecessary and a distraction. With each coalition, you may be enhancing profitability, but you may also be providing a competitor with the information they need to undermine your product. The strategy of identifying the broader need helps you optimize strategic partnerships to achieve the highest benefit regarding cost reduction and improved pricing.

Further Reading

Photo Credit: Twisted link chain.jpg. Author KDS444. 20 June 2012. This file is licensed under the Creative Commons Attribution-Share Alike 3.0 Unported license.

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: Supporting (Part 6 of 7)

As a life scientist-entrepreneur, you are well aware of the value of mentors. In the process of education and early training, a life scientist engages with the number of mentors who provide support from the emotional to coaching to specific skills development.

In the life of the company, there are multiple areas that require ongoing support. For example:

  • determining a valuation of the enterprise
  • developing a marketing strategy
  • determining when to seek out guidance and from experts such as accountants and lawyers

At crucial points in career development, scientists receive key input. One framework when evaluating the need for entrepreneurial support is to consider the concept of a value event. In scientific training, one can imagine such an event would be an adviser who recommended classes to take as an undergraduate or a Ph.D. program or MD program which would meet professional and personal needs. In career development of the life scientist, a large number of individuals have guided the life scientist regarding scientific research at various key points. In fact, the decision to pursue an entrepreneurial path is such an event.

The concept of a value event applies equally well to the life scientist embarking on a business career. In business, there are similar milestones including:

  • determination of a need for additional funding and the amount of funding to request
  • the timing of various funding rounds and the type of investor to seek
  • reassessment of team members and the need to alter or enhance the team to meet business goals

Life scientists additionally have value events related to the production of a pharmaceutical or device. These are clearly marked through various stages of clinical trials. The success or failure at these stages will dramatically affect the potential value of the startup venture. It is essential that the investor also understands the implications of such value events. A medical product with negative impact or no demonstrated value cannot ethically be sold. Investors must realize that one cannot market such products even if it is in high demand.

In the life sciences, because of the need for vast capital and marketing expertise, a startup venture will rarely succeed as an independent body. Identify individuals who can assist with the most important event to investors, the sale of the company when the proper time comes. No doubt, the investors will be very interested in participating at this point. However, the entrepreneur must look out for both personal and business interest since the sale of the company may require ongoing effort as an employee or removal from the enterprise altogether. These are dramatic changes that will impact the scientific career of the life scientist-entrepreneur. Picking up a new biomedical path is not the same of as creating a new piece of software.

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.

Funding Advice from a Recent Conference in Raleigh

Recently, we attended the CED Tech Venture Conference in Raleigh. There were an excellent set of presentations, many relevant to the future life science entrepreneur. The most notable comment came from Silicon Valley Venture Capitalist John Doerr of Kleiner Perkins. He was intimately involved in support of Amazon, Google, and Apple. He is an icon in the VC field.

The co-presenter asked him what he felt was the most potentially lucrative area for investment going forward. His answer was to ask the presenter how much money is spent on Google and Facebook versus how much of the money is spent on healthcare. With healthcare spending at over 17% of GDP in 2015, the winner is far away healthcare; more than 50 times as much. So his enthusiasm regarding entrepreneurship was in the life sciences. One of the most influential financiers believes that now is the time for an entrepreneur with life science background to pursue a business in order to address a health-related issue.

The conference had some unique Investor Reverse Pitches. It was clear that venture capitalists have particular interests they will fund. For example, the Stanley Tools folks are interested in material science and batteries (no surprise). But others started out saying they are interested in life sciences and then clarified that only a tiny portion of life science interested them.Assume that someone seeking funding would only be able to identify perhaps 2 out of 20 VC firms that would fund a startup with overlapping interests. Also, VCs are primarily interested in later stage companies and large amounts of capital. So, for the early stage entrepreneur, VC holds little potential. Apparently, the days when John Doerr gave money to Google’s founders (even though they didn’t seem to like business) and money to Jeff Bezos (even though he didn’t have a business plan) are very much over.

The presentations by many companies at the conference were excellent. They did a nice job of conveying a simple pitch, outlining their unique value proposition, and providing some financial data to back it up. All of the CEO presenters at this conference were well-funded. The companies that presented were looking for funds to expand globally and already had substantial success. They echoed the above finding. VC is for companies in later stages and a proven business model.

Finally, we were inspired by the Entrepreneur Workshop + Lunch with Scot Wingo by Robbie Allen, Founder & Executive Chairman, Automated Insights. He spoke on “Building a Startup Culture that Scales.” Mr. Allen explained the secret of success for his small business; the low-key atmosphere of the company was the driving force. He knew his employees would work hard and they needed to have a comfortable environment which supported energy and enthusiasm. And to that end he included a ping pong table, which was apparently well-used.

He worried at first that this would make his company look childish, but he found the employees were quite enthusiastic, and in fact it didn’t harm productivity at all. More importantly, he found that when his investors visited the office, they viewed the ping pong table in a positive light. They felt the ping pong table showed that his company was a dynamic and fun place to work. They noted that his space would be attractive to current and future employees. In fact, his employee retention was phenomenal.

Even as the company proliferated and at times was overly crowded, given limited office space, the team morale remained high. His message: Be yourself. If you are someone who enjoys a playful atmosphere, then create a corporate culture that works for you. And you’ll be surrounded by people who share you vision of a comfortable work environment.

Photo Credits: WikiBasti – Own work, Public Domain, Link

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