Business Articles

From Principal Investigator to CEO
By Catherine Shaffer
Source: BioPerform.com - August 18, 2006

Very frequently, the first thing that happens when venture capitalists become involved with a startup company is that they replace the founding scientist or scientists as head of operations with a business professional. If your goal as an entrepreneur was a quick exit, and a return to your research studies, this is fine. But if you dreamt of building your company from the ground up into a global empire, this is bound to be a disappointment. It's not easy to shift gears from succeeding in research to succeeding in the business world, but a few simple strategies will increase your odds of holding onto the bucking bronco that your startup is about to become.

Set Realistic Goals
The first secret of business success is to lay out your goals at the very beginning. This stage begins not when you walk into a boardroom to pitch your idea to investors, or even when you're talking the idea up to your wealthy uncle. It begins in the daydream stage. Ask yourself, what do I really want to do with this company? Some scientists want to build a small company and keep it small, a so-called "lifestyle company" that will bring in one to ten million dollars a year, and keep you both busy and comfortable. Others aspire to building a company up to the point that it can be acquired by a larger company, and jumping out with a "golden parachute". Most venture capitalists are looking for a company that already has $20 to $50 million in working capital and the potential to grow. If you find yourself receiving money from the VC community (and thereby handing over a significant part of your control), and you don't have the same goals, they will quickly find someone who does. If you want to keep your company small, and run it your own way, the simplest solution is to seek nondilutive funding sources such as loans and grants, or to fund the company out of your own pocket.

Understand the Process
Once you've decided that the path to venture investment and large-scale growth is the one you want to take, make sure you understand what that path entails. Kevin Scanlon, founder and CEO of International Biosciences and a member of the Executive Committee for Tech Coast Angels (TCA), Los Angeles, Calif., works with many new entrepreneurs, providing mentorship and investment opportunities through the angel network. According to Scanlon, many entrepreneurs approach TCA lacking an understanding of the process of commercializing their ideas, and the basic skill set to make it happen.

"The key is to understand the process," Scanlon explains. "The scientists know how to publish a paper and how to get a government grant. There's a process from concept to papers to grant to having it revised to getting the money. The process of commercializing your technology is a similar process. You need validation of your concept. What we call 'friends, families, and fools' fund that...it's all about managing the risk. The more validation you can get, the easier it is to get funded. The easier it is to start and run a company. If you get SBIR government-funded grants to support your concept, that makes it easier. Then you need to go before the angel community, which funds from $250,000 to $2 million dollars. What they usually do is mentor you and help build a management team around you with their angel network. TCA have about 270 members from Santa Barbara to San Diego with expertise in most domains. And then the angels hopefully reduce the risk more so the venture capital people will come in and fund as low as $5 million dollars to validate it and take it forward. Then you either get an exit with a merger or an IPO."

When angel investors are evaluating a business idea, they are asking three important questions:

1. Is the technology novel and unique and patented?
2. Does the scientist listen and take advice well?
3. Is there a customer and market that will give a good return on investment?

Success in science and success in business require two very different skill sets. The successful scientist has a very powerful, very narrow focus, nearly to the point of obsession, within his area of research. A business person needs to take a broader view and look at the science from a practical point of view, sometimes ruthlessly. He or she can't afford to fall in love with a line of scientific inquiry that is not directly relevant to the clinical development and approval process for a novel therapeutic.

"Most investors don't believe that one person can take it from a concept through validation through scaleup and into a startup company. The skill sets are so diverse...the venture capital will come in and usually require a new CEO or management team that's skilled in marketing," says Scanlon. As an example, Scanlon describes an encounter with a scientist seeking funding for his company from the Tech Coast Angels. "At one of my first meetings with the TCA, a scientist was unexpectedly invited to present. He was not prepared. You have fifteen minutes to answer ten basic questions. He proceeded to give a thirty minute scientific lecture on why he should get five million dollars from the angels. He was completely uncoached...I had to meet with him two weeks later. I spent about an hour with him discussing the process, what he needed to know, what he needed to do. At the end of the hour, he turned to me and said 'Are the angels going to give me money or not?'" The answer was not.

Be Humble
This gets to the heart of the most common error made by scientist entrepreneurs, the error of hubris—of believing that brilliance in science automatically qualifies one to succeed in business. This is a point that John Dick of Pittsburgh's GSP Consulting addresses, "The entrepreneur needs to be humble and realize that while they might be experts in science, health care, or medicine, most likely they are not experts in human resources and finance and accounting. They need to either take steps to learn those fields through courses that are available for entrepreneurs, nonprofit programs, or alternatively surround themselves with staff that can provide those main areas of expertise...a guy that can split a gene, transplant someone's liver, that person thinks they can do anything. 'Well, gosh, if I can map this DNA, I can certainly run a company.' They are wildly different areas of strength. What you find is that by the time an entrepreneur is required to bring investors or a board of directors to a company, he has made too many mistakes relative to the operations of the business. The board's first reaction is to replace that person with someone who can do the nontechnical side."

One example of a mistake that would spell doom for one's continued existence as CEO is to hire the wrong people. The temptation is strong to hire people you already know, who may be trusted friends, or recommended by friends, when really you should do a national or international search to find someone with the best qualifications. Another mistake is jumping in without having a real business plan. "You need to have not just an elevator pitch. You need to have thought through your business mode," says Dick. "You might get away with approaching friends and family on one level, but it's not going to work in front of a sophisticated investor."

In spite of the poor prospects for making a successful jump from being an Albert Einstein to being a Donald Trump, people are doing it every day. The biotech world includes many CEO's who started from roots in academia, had a great idea, and built a company and a new career out of that idea. By being flexible, humble, and willing to change, many scientists have held onto their companies through the early funding rounds and out to the IPO or merger and acquisition stage and beyond. Geoffrey Yarranton, PhD, is a scientist-turned businessman who is now CEO of KaloBios. For Yarranton, experience in industry educated him on business, "A lot of times people try to start companies with limited experience. I had twenty years experience in industry before I looked at starting a company...who runs the company is not as important as 'do you have an experienced team?' You need to have a good and experienced team. You can only be as good as the weakest link. Having a strong team will make the difference between failure and success."

Taking simple steps like having clear and realistic goals, making a business plan, understanding the process of starting a biotech company, and finding the help you need can make the difference between keeping and losing control of your company. Additionally, there business incubators, consulting firms, and government funded programs that can help make this transition as smooth and painless as possible. Instead of running up your own credit card on an idea that is only half realized, spend a few thousand dollars getting a solid grounding in the business world and making the connections you need to lay the groundwork for later success.