Unless you have somehow flouted the OneStart rules, you have probably never negotiated a term sheet or had to think about building enterprise value. In fact, running a company will require competencies new to you and some of those competencies will flow directly from the funding you receive.
In my last post before the Biotech Bootcamp, I want to round things off on biotech funding by discussing some of the management issues that you will deal with during the funding process. This is not an exhaustive discussion, but I have tried to keep it relevant to the issues that you are likely to face as a new company. I don't want to put you off – far from it – but there are a host of particularly unattractive issues involved in financing and running a company that are certainly noteworthy.
If you are interested in understanding how to navigate the healthcare funding landscape, please read my earlier blog post on the OneStart website.
A Parisian café is probably the best place to discuss the answer to this existential question, but we can take a stab online.
The first lesson I learnt in finance was: it all depends on context.
"What does this mean?" you're likely asking.
It means that value cannot be defined without the economic context of supply and demand. That may strike you as obvious; however, I never cease to be amazed by companies who claim value is inherent in all they do – in this case, scientific research.
There may be an element of truth in that, at least when it comes to publicly driven scientific research, but even in that environment the value of some groundbreaking research is often tied to the potential or actual uses and demands of that research.
Yes, the rarity factor of research may drive some value, which is why Nobel Prize awards are based partly on genuine innovations. But, there is a reason why the Nobel Committee often waits years before awarding its prizes – it gives time for that research to be applied and used.
Don't think that patenting a piece of technology demonstrates value. A patent merely prevents somebody else from exploiting your invention for a period of time – making patenting a necessary, but not sufficient condition for demonstrating value. The business world is littered with great scientific ideas, but very poorly thought out business models.
What does this mean for entrepreneurs? It means divorcing economic value from pure scientific progress; performing the activities that get your next paper published aren't always the things that make somebody want to buy your product or company. Think about this carefully in your pitches – contexts are always changing which changes value.
Health purchasers, for example, are increasingly requiring companies to demonstrate not just the medical improvements new products offer, but the wider health economic benefits. Investors and the judging panel will want to see more than a business plan that achieves scientific milestones.
Too many companies think demonstrating a very high-level business case, in terms of market size or some other metric is proof that they can access that market. But, think about the demand side of the equation: what are you doing to engage with customers?
If you're pioneering a new invention, you'll likely have to create a market through education, awareness and brand building. Even for ‘me too' inventions that are innovative variations on existing products, it's not a dead certainty that doctors and hospitals will gravitate to them. Conservatism is entrenched in the biotech sector so think about how you will overcome some of these challenges.
As scientists, you will likely have been accountable to whoever is funding your research and are familiar with providing progress updates to some grant-making body or university.
Accountability in a private company, even a small one, takes on a different hue. Firstly, even some of the public money provided by private firms requires basic accounting reporting processes, such as the ability to record costs and money flow.
If you are venture capital funded, at some point, you will be expected to provide some sort of monthly update which will undoubtedly include the scientific progress you're making in the first instance.
In the end, you have a financial responsibility as well, and although your investors will help guide you in execution as much as they can it is up to you to demonstrate that you are a responsible guardian of their money. That means taking financial reporting quite seriously. Get on top of the accounts and paperwork. This isn't just a compliance point – it can actually hurt value.
Consider the idea that your most likely exit is to an acquirer. When they start to perform their due diligence, it will extend beyond the science. They will examine the effectiveness of your management infrastructure. If there are late accounts filed, incomplete board minutes or missing documents that you thought weren't important, they will use that to drive down the price of the deal – hurting both you and your investors.
I wanted to save the most obvious point for last – be honest and over communicate with your teams and, above all, your investors. Expectations management is critical when you are burning through cash to develop a new product. Your funders know that you will likely need more money so, by all means, demonstrate prudence and capital efficiency, but also be brazenly honest about what milestone you really can achieve with your funds.
Raising the second round is often very different to the first. Investor politics play a large role and there are likely to be issues of dilution arising between management and investors. The latter group will be resistant not only to following their investment, but to the price at which they do so. Expect challenges and hard conversations if progress hasn't been straightforward. Pardon my frankness, but your funders will have seen these events before and they will have done this more times than you will ever do. Therefore, they know how to take advantage of the funding process when it comes to negotiating price and ownership.
Being open and honest is more than just a moral requirement; it's a social skill that will depend on the relationship with funders. As I covered in my last post, but it's worth reiterating here, money is fungible, but people aren't – choose carefully and think about the long-term.
NH to OneStart Europe 2015 semi-finalists: I look forward to seeing you at the OneStart Entrepreneur Bootcamp on the 6th and 7th of February in London. In the meantime, best of luck with your preparations! Use your mentors and the available advisors, and remember to enjoy it.