Follow up on Mistake #5

I'd like to add one more comment to my post on the Fifth Mistake...Not Seeking Professional Help. My comment was (is) focused on the business plan and the presentation. The thought here is that professionals know what VCs will want (and not want) to see. And so bringing pros into the process helps incorporate this knowledge into the process.

But there is a second reason as well. Before one even begins to write a plan, there are a multitude of strategic issues that should be discussed and debated before writing the plan.

Let me provide a brief example. One of my clients is a drug discovery start up company. The company has a process whereby they can discover novel targets and, in turn, novel drugs for those targets. So, what is the business model? It this company a licensing machine, cranking out targets and agreements with pharma and biotech? Or, are they internally focused, keeping all of their discoveries for development and commercialization themselves? Are they both?

Many VCs (but certainly not all) would prefer a hybrid model. Having a company sign development agreements would not only provide some incremental cash, but it would also validate the company's fundamental technologies and processes. So this then raises a number of other questions:

Who is the best partner(s)? Should we go for a J&J company or a Pfizer? Would a smaller company make more sense?

What therapeutic areas should we "give away"?

Which ones do we retain?

Should we focus on one indication? Multiple?

Exclusive versus non-exclusive rights? Which path to follow?

The more this is spelled out in the business plan, to the extent that it can, the clearer the picture that is presented to prospective investors. I concede that much of this will be speculative. After all, the business plan might say that the company will pursue an agreement with company X . But that fact is that the agreement may not be in place at the time the plan is distributed. So, some VCs will not invest until that agreement is in place! Others, who see a clear road map in the plan with multiple options (e.g., if Company X declines, we will reach out to company Z), and who see that value is being created concurrently (through internal research), will be interested in a model like this. Indeed, this is where having a strong Board will make a tremendous difference. The good VCs understand that there will be ups and downs as the company evolves.

In hindsight, one of the mistakes some of the genomics companies made during the bubble was their attempt to position themselves as licensing machines. That is, companies who would reap millions in licensing fees for genes, targets, and the like. When the model flopped, they all of a sudden became internally-focused drug discovery and development companies! Many of these companies flopped, were recapitalized at heavy discounts, or were otherwise folded into other companies.

So, having a strategically sound plan is important. No business plan template is going to help you work through these issues. So, hire a professional!

Comments

[Don Bell]

There is a business plan template that will help (on my site) with these kinds of issues, but I agree, it takes discussion and action of the key people in the company (which inludes the Board) to make it work correctly.

I do agree with "hire a professional" to help! But the key here is hire this person up front and pay them up front. Do not work on success fees. I know that is a hard bullet to swallow for many, but unless your pro is also a licensed stock broker/dealer, you can be opening yourself to many legal issues.

Don