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.
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?
For all the talk of the numerous biotechnology companies with mere months of cash left and the predictions of looming liquidations, mergers, and acquisitions, it is important to note that a measure of destruction can benefit industry progress.
Economy Joseph Schumpeter coined a term for industrial progress through destruction: creative destruction. In this process, growth occurs by the development of new companies, which develop new innovations and replace older companies.
Even mergers and acquisitions can drive progress, as they free seasoned executives from their former jobs. The story of Hybritech’s key role in the development of the San Diego biotechnology cluster is a case study of this kind of growth:
So, while the process of creative destruction may be painful for those who are employees or investors in the destroyed companies, it is a natural element of business cycles, and an essential part of driving progress.
The Journal of Commercial Biotechnology is looking for papers on investing strategies in the biotechnology space. The scope can include valuation models, strategies to identify under-valued companies, case studies in developing and managing a portfolio, etc.