Sunday, October 1, 2017

Investor Dilemmas of the Life Scientist (600-6)

So where are you going to get the money to start up?

For the life scientist, this is a relatively straightforward question. The life science startup requires enormous capital. And the process of approving a device or a pharmaceutical is a long and torturous one. The company will inevitably need venture capital and lots of it. Patent law and the ease of creating "me-too" solutions that don't infringe on your IP will demand speed on your part. If you are trying to launch a tech company your prospect of slow growth is equally dim. In today' hyper-connected, competitive world ideas need to be quickly transformed from "innovative" to "done".

To achieve VC funding, SBIR or angel funding is most likely the first step unless you already have made substantial progress and can capture the enthusiasm of venture capital. When you find an angel they will probably self-select for your field. Even so, money from someone who lacks expertise in the life sciences has less value due to limited social connections and the quality of their guidance. You don't need the angel to understand your technology, but you will likely need their help to fill officer positions. So make sure that they understand and have expertise in a life science organization.

Funding issues also impact the makeup of the board. When you obtain VC funds, the VC will want a board filled with the representatives of the investors, not dominated by the founders. The venture capitalists will likely replace the representation of angels on the board. And some of the founders will go too. This is an outcome which should be not rejected but embraced. The skills to sell the company are going to be paramount going forward, and it is unlikely that the life science founders have the connections or skills to exit the business via a sale.

I say "sell the company" because the economics of device and pharmaceuticals is such that it is incredibly unlikely that a small start-up can grow to compete against huge established pharmaceutical companies or device manufacturers. Nor is it likely that the startup will have access to the marketing budgets required to bring a new product to market. Public market funding (IPO) is rare, so you are left with a sale. Not only is the need for money predetermined, but the likely exit plan is set as well.

These limitations are actually helpful. In other startup models, at the earliest stage many founders extract funds from family and friends. Although such money is easier to come by (for some), such money can lead to subsequent problems when the company runs into trouble. It's hard to walk away from a parent, family member and friend with a quick "it didn't work out, sorry." Self-funding too has issues. Self-funding similarly tends to receive less scrutiny than investor finding due to entrepreneur enthusiasm and subsequently lead to a greater chance of failure. With failure comes family stress, blaming, and self-regret. It's better that a failed startup wasted some of your time and energy than it puts your home at risk. Lastly the need for cash and the typical lack of personal capital limits debt financing, including SBA financing. That's probably just as well because that debt too will likely be backed up by your own holdings, again putting your home at risk.

So the life science entrepreneurship can actually welcome the limitations on funding in their enterprise. The limitation is an opportunity to focus on other details. There are plenty of other challenges facing the entrepreneur and demanding attention. In fact, the need for VC will lead to a more complete and thoughtful investigation of the idea and careful tracking of progress made. Such diligence is key to success. But don't get caught up too much in the details, the clock is ticking!

Reference:
  1. Wasserman Noam. The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup. Princeton University Press. March 25, 2012, ch 9
Photo Credit: Many dollar banknotes. Date 19 February 2009. Author Jericho. This file is licensed under the Creative Commons Attribution 3.0 Unported license.

8 comments:

  1. Thank you for providing the example of the life scientist, it's good to know how it is similar and different from running other startup businesses. There are advantages to knowing your industry and seeing which funding path entrepreneurs before you utilized and what worked best to get it started up.

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    1. Yes this is a topic that is rarely discussed as far as I can tell. It seems like the first question the entrepreneur should ask is what business Market do I want to get into and what are the barriers for market do I want to get into and what are the barriers for that kind of company?
      -- Brad

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  2. Hi Brad! I enjoy reading your blog. I like how you tilted the angle towards the life scientist startup, showing the speed and breadth of such a startup, as well as the imperative need of venture capitalists. I also like how you urge these startups to embrace the control the VCs will require over the board and overall launching of the products. When I interviewed Ruth Harris of Boeing, she mentioned several times that some of the scientists who created the patents Boeing owned were often not the best fit for CEO of the spin off companies they were creating from those patents. In fact, some of them would go out with the spin off company to launch the product and then return to work with Boeing. It goes back to knowing what you are best fitted to do in your company, and allowing the best fit for each element involved with creating a successful business.
    Good food for thought in this post!

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    1. I think folks need to be honest with themselves from the beginning. There is no way a life scientist is going to be a Bill Gates and own everything. It strikes me that this one of those "that was then, this is now" kind of situations.

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  3. Thanks for the post Brad! You taught me a lot in a short read about life scientist and some of the unique dilemmas they may face as entrepreneurs. It seems as though there may be an even stronger emphasis on the VC component. They have to bring more to the table than just capital in order for the company or idea to be successful.

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    1. With VC cash going after bigger and bigger opportunities, I think the life science approach is becoming more the norm. So folks might as well dream big and have huge ambition. It's really all that most VCs are interested in anymore.

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  4. I enjoyed reading about this topic from this angle Brad. I found it interesting to read about the challenges and limitations that a life scientist faces in regards to funding. I found your point about how receiving funding from someone who does not have social capital creates no value very interesting and it certainly makes sense in any industry to get funding from someone who can provide both financial and social capital, all of a sudden I am thinking about the show "Shark Tank"

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    1. The more successful folks I see the more I hear that they chose the money not the VC. Sure, maybe they are stars. But maybe that's why they are stars. If you take money from the wrong person, at the most all you got was money. At the worst you just invited a cat into the birdcage.

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