by Craig Shimasaki
What do you do First?
Most would-be entrepreneurs know they will eventually start a company, however they usually do not know how? Beginning a company cannot be haphazard. Starting a company requires significant planning and many events must simultaneously converge in order to be successful. Some describe this successful convergence as “serendipity” others call it “chance” or “luck”. Whatever you call it, heed the words of Louis Pasteur who said, “chance only favors the prepared mind”. Knowing what to do first can be the most challenging aspect since there are so many things that need to be accomplished. Here is a checklist of 7 items that are essential for starting a biotechnology company.
1. Make absolutely sure the idea has a true market need
Good ideas are just that…good ideas, however, not all good ideas yield needed products. Recognize that there are many exciting technologies that are still in search of a market need. Be absolutely sure that there is a real market need for this future product (see BioBlog “The Deception of Marketing a High Tech Product 9/30/09 post). Also, be sure that the technology of interest is protected by intellectual property (IP). Next, secure the assets, IP rights and commitments from the inventors and key personnel (if you are not one) who have the know-how required to make the technology successful.
2. Identify Founders and Key Personnel
Good people are critical to any company’s success. Carefully identify these individuals and understand their interest and commitment to a future organization. Not all individuals with interest at this stage will be founders of the company; nor should all founders be equally compensated with identical amounts of stock unless all intend to work full-time in the organization once it is funded. Determining percentage ownership is a difficult issue. However, you do not want one founder receiving identical equity ownership who will not be working with the new organization yet keeps a secure position receiving a good paycheck and rides on the coat-tail of other founders.
3. Find a Good Attorney
This individual will be a key partner. Your attorney will be the individual you go to for advice, guidance, counsel, and of course, legal answers. They will help you navigate through the corporate and business issues during all stages of establishing and growing your company. Within the first week of starting your company, you will have this person’s phone number committed to memory. Therefore, they need to be someone you trust and someone with whom you work well, and above all, a professional with many years of experience advising start-up biotechnology companies.
4. Incorporate your company as a C Corporation
Your next objective will be to raise money and/or secure federal SBIR (Small Business Innovative Research) grants. Without an incorporated company you won’t be able to do either. There are many reasons to incorporate early, one reason is that you can then issue founders stock without having to pay exorbitant amounts of money for shares (or have large tax consequences) since the valuation of the company at this stage is extremely small. The majority of all biotech companies should be C Corporations rather than an S Corporation or an LLC. Serious investors know this difference and may decline to invest because they do not want to go through the trouble to change an incorrect business structure.
5. Conceive a well-planned marketing and business strategy
It is impossible to raise money without a well-written plan that clearly describes the market problem and need, how your product will solve it, how much money your product will generate, what you intend to do with the cash, what the return and exit is for the investor, and who the key personnel are within the company. Write the business plan with the guidance of your attorney. He/She will help convert this into a fundraising document (private placement memorandum). You will then seek audience with the appropriate investor groups for your stage and sector of business.
6. Operate as a virtual company
Keep your day job! Build the company carefully while minimizing your risk. At this early stage, brick and mortar is not necessary when you possess a computer, a cell phone and have an internet connection. However, be sure to have access to a conference room or meeting room but don’t spend money on rent at this stage. As you work on your new enterprise, be careful about performing any work for the new enterprise while remaining at your current place of employment. There can be legal issues with ownership if you use company time and/or facilities while starting your new business venture. Be sure to discuss these issues with your attorney.
7. After raising seed capital, advance the technology consistently through successive product development milestones
Be sure to outline key value-increasing product development milestones throughout the entire product development pathway. Then demonstrate consistent progress by meeting the projections for the first few of these milestones. New investors like to hear about companies making steady progress along a planned development pathway. By timely meeting key milestones, you increase the value of your company and decrease the investment risk. Consistency in meeting planned milestones increases the likelihood of securing subsequent funding.
The Takeaway Tidbit
These 7 steps are important basics for the biotech entrepreneur. The time it may take to complete these steps can be anywhere from two months to two years. There are many more steps to starting a biotechnology company than presented here, and this brevity is not meant to trivialize the process but rather to clarify what is involved in reaching this goal.
by Craig Shimasaki
Most technically-oriented individuals believe that once their beloved product, (which is of great technical value) reaches commercialization, multitudes will clamor to buy their product or service. This nearsighted condition is termed “entrepreneurial myopia”. It is an ocular disease notorious for destroying promising enterprises. Entrepreneurial myopia is highly contagious, and the individuals most susceptible to this debilitating condition are typically those employed within the same organization. Rest assured, all others are immune to this disease, most notably those that hold the investment capital you seek; also, potential customers with cash in their wallet. These groups are immune because their eyesight and peripheral vision is unimpeded by bias and they clearly see what those with this disease cannot.
No organization can thrive — even with commercialized products — without understanding and correctly applying the fundamental tools of effective marketing. To prevent this potentially fatal entrepreneurial myopia it is important to understand the following four aspects when marketing your product or service.
1. Your Market is Not as Homogeneous as You Think
Individuals with similar demographic characteristics (e.g. age, gender, locale, etc) do not have the same needs, wants and desires. For instance, all 55-year-old males residing in California do not desire the same type of car, nor enjoy similar hobbies, nor suffer from identical medical conditions. Marketing a product simply using demographic characteristics is neither efficient nor effective. Companies rapidly burn through enormous amounts of capital when marketing to “potential” customers based upon demographics alone. Successful enterprises know that their true market are individuals with similar unmet needs, wants, and desires that their product or service fulfills. They characterize their target market by identifying combinations of narrowing demographic characteristics, which only serve as a surrogate for the real metric. Once they identify this group, they can target them effectively. Biomedical products are unique in that their usage decisions are collectively made by three separate entities: the Patient, Physician, and Payor — each of these are intersecting customers. For biomedical products, marketing success is found in understanding the needs of all three customers.
Marketing principles and tools are universal to all products. So what distinguishes successful marketing strategies from ineffective ones? It is the correct application and usage of marketing tools when developing a marketing strategy. For example, one can use a crescent wrench to drive nails into a wood frame when building a house. Although this works, a carpenter will have better results when using a hammer. The best marketing strategies correctly apply the proper marketing tools to identify a target market and then position the product properly to meet the target market’s unfulfilled needs. To learn more about how to develop a marketing strategy, the book, The Business of Bioscience, describes this in more detail, taking the reader through a stepwise process using two biotechnology product examples.
2. Successful Products Satisfy Significant Needs that are Unmet for a Core Group of People
Since your product will be marketed to a particular group based upon their unfulfilled needs, wants and desires, the better that your product fulfills these unmet needs, wants or desires, the better your product will be accepted by this target market. When developing any product, always conceive and develop products that fulfill and satisfy truly unmet needs of a core group of individuals. You cannot know the nuances of customer needs if you never leave your garage, office or laboratory. The only way you will really understand these needs is by constant customer interaction. Any systematic learning from potential customers is termed primary market research. Secondary market research consists of studies and results produced by others about your customers. Good market research is a vital part of developing any successful marketing strategy.
Many organizations claim to be either market-driven or technology-driven. I liken this comment to a Socrates quote, “Thou shouldst eat to live; not live to eat”. Clearly, there is a finer point to this saying, but that aside, if you don’t eat – you won’t live. Conversely, if you are not alive – you won’t be eating. Living and eating are not mutually exclusive activities. Successful companies are inherently technology and market driven. Nevertheless, do not forget that no matter how technically innovative a product, its value proposition is not the technology but rather the unmet need that your product fills in spite of competition (see 9/18/09 post "Selling Science: Where's the Value Proposition?).
3. You Must First Reach and Own Your Niche
Most enterprises want to reach the masses with their product. This is an wonderful goal, but do not begin by marketing your product to the masses — reach the early adopters first. Early adopters are individuals who love your product and enjoy using it because of its profound benefits, and require very little effort to get them to purchase. They quickly adopt your product without much effort because they were awaiting its commercialization. After you own this niche, then you can more effectively reach the early majority. Nike began by owning the long-distance running shoe market, then expanded to all types of athletic shoes, then moved to other athletic gear. They became successful by owning their niche first. For those that want to understand more about the characteristics of the technology adoption curve, read Geoffrey Moore’s book “Crossing the Chasm”.
4. Marketing is Not Selling
Marketing is not the same as selling. Selling is a natural result of effective marketing. As companies grow in size, they typically separate Sales departments from Marketing departments. Functional separation for management and accounting purposes is reasonable, but when these groups become semi-independent vs. interdependent, revenues suffer. Sales and marketing both require specialized efforts. Though they are not the same, they are a continuum of the same activity. Successful marketing is not a form of manipulation or coercion for customers to like, use or buy your product. Successful marketing is simply finding the most effective path to your target market customers with a product that is valuable and effective for their specific needs.
The Takeaway Tidbit: What is the Treatment for Entrepreneurial Myopia?
Administer a heavy dose of marketing strategy, coupled with a sustained course of customer interaction, followed by multiple doses of primary and secondary market research. This prescription works best as a prophylactic (before reaching commercialization), but it does cure the acute condition – only if the patient (organization) does not run out of cash before the course of treatment is completed.
by Craig Shimasaki
What is a Value Proposition? It is NOT how the science or technology works. Moreover, it is NOT the neat things the science or technology can do. It is how your product fulfills the acute needs of the customer; it is the way your product solves a problem for its customers--the more acute the customer’s need, the greater the market will be for your product. Believe it or not, there are great innovative product ideas that have no customers! Take for instance the 8-track tape player, which is still an innovative idea--it provides the ability to select and play 8 different tracks with just the push of a button. Today, these relics are merely collectors items because the “need” of today’s listeners is instant access to any song, virtually thousands, while on an airplane, jogging, or at work (vis-à-vis the iPod) with little or no encumbrances. Listening to a mere 8 tracks of 1 recording artist only in your car or home while lugging bulky equipment and bulky tapes is not a solution to today’s music listener’s “problems”. The science and technology of your product may be innovative, but how compelling is its solution to a problem? Does your future product fulfill a real market need or is it irrelevant because it solves a problem that is not important to any group of future customers?
The Takeaway Tidbit
A Product's Value Proposition is One of the Most Critical Elements Any Entrepreneur Should Know!!
Successful entrepreneurs clearly understand the market need for their product. They have a compelling value proposition that attracts investors and assures that once the product reaches commercialization there will be customers wanting to buy it. Make sure your product idea has a compelling value proposition and emphasize this in your business plan. Entrepreneurs often become myopic and fall in love with their technology but fail to pay enough attention to their product market. Remember, you are not selling science; you are selling an innovative product that uniquely meets a set of customer needs. Yes, the technology and science are critical but without a market need for a product and a compelling value proposition, no enterprise will be successful.