Many biotechnology entrepreneurs favorably look back at times when financing and regulatory approval were easier to obtain. While future periods of investor exuberance may return, it is better to see these as market aberrations.
In periods of investor exuberance companies have been pushed to focus on low-probability, high-return, objectives such as approval and successful marketing of novel drugs for large markets. When this strategy works it is very profitable, but the more likely outcome is failure and destruction of wealth. A favorable strategy is to build a slower, stronger, company than can withstand developmental setbacks.
In a recent issue of the Journal of Commercial Biotechnology I expanded on this concept, providing examples from computer software and bioinformatics where initial products were outside of the company’s target market. This strategy can differentiate a company from competitors, provide evidence of ability to successfully execute on plans, and even provide revenues. For more, see the freely-available editorial on the JCB’s website.
Do you agree? Disagree? Sound-off in the comments below.
With two life science IPOs earlier this month, and seemingly fewer stories of biotechnology firm liquidations, it seems that the tides are turning — ever so slightly — in the favor of biotechnology.
A recent UMD study has found that VCs pay little attention ot the content of business plans.This is not much of a surprise. I’m generally bearish on business plans, but I do recognize their important role.
Having written several business plans and having successfully competed in business plan competitions, I’ve recognized that many of the highly structured elements of business plans are simply inappropriate for biotechnology firms. Elements such as five-year financials will almost certainly change, but what is important — and which has not been ruled out by the UMD study — is that the thought processes behind the business plan are important indicators of investment.
One of the things I look for in reviewing business plans (and in reading papers for the Journal of Commercial Biotechnology) is evidence of higher-level thinking. Is the entrepreneur just filling out the sections of a business plan with crude numbers (i.e. the market size is $x and we intend to acquire y% of that market) or have they thought about the numbers and identified the factors contributing to the market size and the steps which will be necessary to acquire any portion of market share?
Despite the recent claims that VCs don’t read business plans, I suspect that they will continue to request them — if only to see if the entrepreneur can define the business proposition. Rather than seeing business plan writing (which, incidentally is not the same as business planning) as a rote exercise, one should look at it as an opportunity to demonstrate advanced understanding of the commercial opportunity and the steps required to realize it.
In a previous post I introduced a slideshow – Beyond the Business plan — which is a companion lecture to my textbook, Building Biotechnology. The focus of this talk is on addressing the elements beyond a traditional business plan — when conditions change (and they will), what will you do?
I’ll be giving a talk at the Johns Hopkins Carey Business School Entrepreneurship Conference on March 21st titled “Entrepreneurship: What Not to Do.” The talk will cover cases in failed entrepreneurship in biotechnology, elucidating some of the forseeable and unforseeable factors which can lead to failure.
Hope to see some readers there. If you can’t make it, you may want to check out “Beyond the Business Plan” or Building Biotechnology, on which this latest talk is based.
Guest content from Sandy Graham, managing partner at Sequoyah Associates:
A Business Plan is the single most important document you will develop in establishing and growing your business. How your business plan is developed is certainly up to you. Either you can take the time to develop your plan, or you can work with one of many professionals and organizations that provide business plan services from development to review. What is important for you to understand is that a business plan is required by commercial lenders, venture capitalists, individual investors, franchisors, and the Small Business Administration (SBA). So, not only do you need a business plan to map out the roadmap for business success, it is a major requirement for obtaining a business loan.
The SBA reports that:
50 percent of all small business fail after their first year, 33 percent fail after two years, and nearly 60 percent fail after four years.
Reasons for failure cited by the SBA include: over expansion, poor capital structure, over spending, lack of reserve funds or too little free cash flow, failure to adjust to market changes, underestimating competition, poor business execution, poor business location, and an Inadequate business plan.
Fundamentally a business plan should:
- Define your opportunity, product/service including keys to success and risks
- Provide an analysis of your market
- Detail your competition
- Lay out your marketing plan and strategy for acquiring customers/clients
- Identify key management, and what their roles will be
- Provide important financial information
A general outline you can follow in developing a business plan follows. While there may be many versions of this outline, if you are seeking or interested in an SBA loan, this is the outline they prefer.
I. Executive Summary
II. The Opportunity
b. The Product
c. Keys to Success
III. Market Analysis
a. The Market
b. Market Differentiation
IV. Competitive Analysis
V. Marketing Plan
VI. Management Team
a. Business Objective and Funding Needs
b. Source and Use of Funds
c. How Loan Is To Be Repaid
d. Financial Assumptions
e. Estimated Financial Statements
1. Income Statement
2. Cash Flow Statement
3. Balance Sheet
4. Key Financial Ratios
i. Current ratio
ii. Total debt ratio
iii. Profit margin
Sandy Graham is Managing Partner at Sequoyah Associates, with over 20 years of progressive senior level experience with some of our Nation’s leading organizations and Fortune 50 companies, as well as new ventures and small business enterprises. His experience includes business strategy, planning and development; new business solution development and delivery; client services delivery; and engagement management. Sandy’s academic credentials include an MBA and an MS in Economics, and is a recipient of the Ewing Marion Kauffman Foundation Internship in Entrepreneurship. In addition, he is a contributing author on Free Cash Flow. Since 2005, Sandy has been driving winning business strategies that have met client needs using consultative, coaching and advising skills to deliver the right business solutions for the small business firm and new venture enterprise.
Here’s a slideshow of a talk I recently gave at the Johns Hopkins biotechnology MS/MBA program. The purpose is to illustrate the elements which are important to consider after penning your business plan, and to help position oneself to be prepared for unexpected risks.
The material is largely drawn from my book, Building Biotechnology. Go ahead and post any questions you may have in the comments.