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venture capital

The Association of University Technology Managers (AUTM) 2012 Venture Pitch Competition is calling for finalists to present to a venture capital judging panel at the AUTM Annual Meeting (which will be held in Anaheim from March 14-17, 2012).

The competition is open to all disciplines this year. So whether your company is considered life science, software, engineering-focused or even a game-based technology, all are welcome to submit.
Final presenters will all receive a $1,000 travel stipend and free registration to the AUTM Annual Meeting. The winner will still receive a $10,000 prize.

The deadline for submission is Monday, November 21, 2011. You can apply here: http://autmventure2012.istart.org/.

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?

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:

Creative Destruction: Hybritech's role in building the San Diego Biotechnology Cluster

Creative Destruction: Hybritech's role in building the San Diego Biotechnology Cluster

Source: Building Biotechnology

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.

On returning from a meeting with a small biotechnology firm in which I serve on the advisory board, I was reminded of a novel strategy for attracting venture capital.

One of the challenges is attracting investment is finding an investor aligned with your company’s future directions. Venture capitalists may be interested only in large companies, in small companies, in diagnostic firms, in drug development, etc. One of the challenges, and opportunities, for small firms, is that their future is very uncertain. This makes it difficult to decide how to pitch the company to potential investors, but it also makes it possible to pitch more than one version of the company.

Using a shotgun approach, it is possible to craft several business plans built a common set of resources, each aimed at a different kind of investor, and simultaneously pitch these different plans to appropriate VCs. The reality is that most investors will realize that there is a great deal of flexibility in the business plan, because there are so many unknown elements in a young company, and pitching more investors increases the likelihood of attracting an investment.

At a recent event was recently asked about investment outcomes for venture capitalists. I didn’t have any recent data, so I said that VCs generally expect that 1/3 of their investments will see great returns, 1/3 will see modest or no returns, and 1/3 will not be profitable.

VC Fred Wilson as Union Square Ventures recently analyzed his career in venture capital and posted his results. He’s got an enviable record of only 20% of deals failing to deliver, and more than 1/3 delivering a greater than 5x return.

Fred’s not into biotech, so I’d be hesitant about applying these numbers to biotechnology investing, and I’d be interested to see what the trends are in biotech VC.