Business Encounters: Life Scientist

Team Building and the Benefits/Risks of Homogeneous Teams

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Let’s first discard the notion that this company is yours. It isn’t and won’t be. Every enterprise is more than one person. So, from the beginning, this company is dependent on others. It is not an extension of you. And you are not going to be the master of all domains. In fact, you might not even be the CEO if the typical CEO skills don’t match your best qualities. So, from the beginning, this company is a team

Many founder teams are friends and already have a close relationship. They may even have marital or blood relations. Enthusiasm and excitement eventually run straight into the issue of equity. How will this group of enthusiastic folks divide up the equity?

The above background can impede the necessary discussion. Often an egalitarian focus drives a plan for an equal split of ownership. If there are 3 founders, a 1/3 split is chosen as the solution to least likely ruffle feathers; but may lead to problems down the road

  • What happens if one person loses interest and fades away?
  • Do they still get 1/3 of a company that they aren’t contributing to?
  • What if the founders disagree? Does every decision require that two folks agree? How will that impact the third person?

A fair distribution among friends can be problematic. Other questions challenge a team of “equals.” For example, will the stake of the CEO be the same as the person who is in charge of sales? In the beginning, the sales position may be pretty easy, and the CEO is pushing hard. An equal split is inevitably going to frustrate the eventual CEO. If the CEO’s role is demanding and stressful shouldn’t that person get a larger equity stake?

When you play out these and many other scenarios it is clear that an equal division is a foolish idea. But that often doesn’t overcome the fear of breaking up the team or that facade that “money doesn’t matter.” So, what can the team do?

The best strategy is to agree to divide up equity later once roles and responsibilities are defined. And that retention of equity must depend on a long-term commitment. You can keep the “we’re all in this together” vibe and at the same time establish a plan that will serve your needs going forward.

The second issue is one of the skills and relates to the initial concern. If everyone is a friend, do they have complementary skills to launch a startup? Assuming the choice of founders was based on friendships or familial relationships, probably not. Perhaps you have a team of MBA students. Or everyone is 25. Maybe no one has ever been interested in sales or finances. In the worst case scenario, everyone is a “leader.” If so, you can assume that eventually there will be a fight to see who is going to be king of the hill and grab the top CEO position.

Look at the skills and talents and find the holes. You’ll need to fill those holes quickly. Be ready for the reality that the people you choose are going to want equity or a decent salary. It’s unlikely you have a salary that can compete with real-world jobs with competitive wages, offices, and fringe benefits. Be ready to give up equity.

In sum, it’s okay to start with a homogenous group. But eventually, you need a heterogeneous team of people who get along. With such a team, when the times get tough you’ll have the comradery AND the skills you need to weather a financial storm and succeed going forward.

Further Reading

Photo Credits: CC BY-SA 3.0 Nick Youngson and Milbank_Diversity_Committee.jpg ‎(497 × 311 pixels, file size: 57 KB, MIME type: image/jpeg) Licensing: This work is licensed under the Creative Commons Attribution 2.5 License. The image was created by Milbank, Tweed, Hadley & McCloy LLP, who also holds the copyright. The image is available upon request from the firm.

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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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

Role Dilemmas and Recognizing Skills

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.

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.
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