Landmines for Entrepreneurs with Olivier Wenker, MD, MBA, DEAA

Landmines For Entrepreneurs

Olivier Wenker, MD, MBA, DEAADirector of Technology Discovery

Professor of AnesthesiologyMD Anderson Cancer Center

So, You Want To Start A Company

And That Will Be You, Right?

But This Is Your Near Future

Founders/CEOs

• Think hard before you jump into the “cold water”

• Agree with your spouse/partner

• Talk to experienced entrepreneurs

• Find mentors: entrepreneurs, accountants, lawyers,…

• When you jump…jump all the way!

Jump Baby Jump

How do Founders Stumble?1

• Believing they can do everything

• Not sharing ownership in an equitable way

• Naïveté or lack of market knowledge

• Hiring mediocre people

• Stubbornness; not a good team player

• Domineering personality or style

Most Important Things Techies Should Do:

1• Hire strong, experienced people

• Operate to schedules and milestones

• Control expenses and cash burn

• Establish lean, mean, hungry, focused, team-oriented company culture

• Bring in best possible CEO with sales and marketing track record

Do “Academic” Founders Have It?

2o Mostly R/D techies

o Science, engineering background

o Often lack business skills, management experience

o Most never exposed to salesor marketing

o Don’t have MBAs

o Undeveloped right brain skills

Founders

Founders’

limitations

Skill Set

Left:

• exact calculation

• scientific understanding

• spreadsheets

• CFO, CSO

Right:

• estimation

• creative

• flexible/chaotic

• CMO

Both but maybe R > L: CEO

What is a CEO?

• Chief Executive Officer• The Boss (buck stops here!)• Sets and cultivates the company culture• Selected by and reports to the board of

directors• Responsible and accountable for all

management and operations• Leader and motivator

5

How to Find a CEO

• Contacts of founders, VCs, Angels, etc.

• Executive search firms

• Critical skills– Matching chemistry to founders

– Take-charge leadership skills

– Wearing multiple hats

– Relevant sales, marketing, industry background

– Leader, motivator, team-builder

– Must be able to attract investors

5

Burning Through CEOs

• Startup CEO (#1)– Raising money, starting company

• CEO # 2– Growing company, raising more money

• CEO # 3– Stabilizing company, running company

• CEO # 4– Running large company (public or private)– Exit (IPO, M&A, closing company,…)

Ownership

Be the owner of

100 % Of Nothing

2% of

$ 1 Billion

Some Observations

• Most deals are undercapitalized

• Management and founders will spend far more time than they think to get financing

• VCs rarely say no! But they think…no way!

• You should learn the decision dynamics of each VC firm

• Never run out of cash

• Don’t over-value the startup

8

How To Value?

Valuation• Valuation depends on:

– Revenues (typically 2 to 4 times revenue)– Other recent deals in the market– Stage of development (important in drug

development)– Potential future revenues– Previous $$ investments and your time

invested is typically not valued much…but it will get you equity

Valuation• Over-valuing your company will do the

following:– Make you look stupid– Scare away savvy investors– Result in a future down-round (devaluation)– Prevent professional VCs from coming on

board with major money later on– It might kill the company before it even had a

chance to survive

Asking $ And Financial Projections

• A frequent mistake:– Asking for lets say $ 6 million– Preparing financial projections for 5 years– In the very best case scenario the revenues in “Year

5” is $ 6 million– Why would anyone give you $ 6 million?

• You will never see the best case happening• You have to calculate profit (not just revenue)• A professional investor would not make a profit unless your

market is very large and it is accepted that development takes more than 5 years (i.e. drugs)

Startup Financing

• Founder team usually focused solely on current round needs

• Need clear milestones and schedules

• If met, constitutes a step-down in risk and a perceivable step-up in value

• Important to plan ahead, design a capitalization scheme, i.e. next round

3

But Be Prepared For This

…. And This

Over-estimating Markets• Market might be large but very segmented

– Difficult to capture multiple segments

• Market windows might be very short-lived

– Fast moving technology

• Economic forces such as down-markets can significantly interfere with buyer behavior

• You might not have enough money or staying power to win against inferior product adapted by many users

Over-estimating Markets

• Market might be large but buying cycles might be very long– For example hospital information system

• Great product … no buyers– No paying customers– No letters of intent (LOI)– Building it does not mean that they will come

automatically

Under-estimating Competition

• At any given time there are at least half a dozen working on the same great idea

• “Google” at least your idea to see if something very similar already exists

• Investors have typically heard the same story from different inventors

• If your successful idea is easy to copy (lack of IP protection or low barrier of entry) your competition will quickly follow

Focus

• Too many opportunities– For example startup biotech with 10 new

drugs but no money to develop even 1 of them

– Prioritize on 1 new drug and show others in potential pipeline

• Too many features– Get a first functional prototype and add

“whistles and bells” later

Timing

Marketing Materials

• Have them ready

• Update them regularly

• Synchronize them

• Use different messages for different audiences

• Keep them clean and short

Marketing Materials

• From restaurant napkin to bound book

• Best plan is 15-20 pages, succinct, complete

• 2-3 page executive summary

• 12-15 page PowerPoint presentation

– Mission, milestones, product, market, financing, human resources, value proposition

• Need crisp elevator pitch

• Trifold brochure… “always selling”

6

Intellectual Property Issues

• Patents, disclosures

• Licenses, terms

• IP ownership:– Prior employer issue?– Co-inventors?– Overlapping claims with other IP– Similar technology, same claims

• Trade secrets, know-how

7

Conflict Of Interest


• If you work for an employer at the time you are starting or are working with an outside company you will have to disclose financial, ownership, and other interests

• Most academic institutions have a Conflict-Of-Interest (COI) policy

• Entrepreneurs who are still employed will have to play by the sometimes crippling rules


• Every faculty member at MDACC has to submit a yearly Conflict-Of-Interest disclosure

• Full financial disclosure required to COIC; includes family (spouse, dependent children, family trusts or corporation and other known relationships)

• Full financial disclosure in publications or oral presentations


• You cannot serve as member of Board of Directors or officer (such as CEO) of for-profit company or competitor of UTMDACC

• You can obtain temporary permission to serve as CEO

• No sponsored research is permitted at MDACC in which payment depends on a specific outcome


• State resources such as MDACC property cannot be used for consultancy or employment with an entity other than MDACC

• The same is true of the MDACC name

• Consultant fee limits:– 50% of base salary in 12 months from all sources

– 25% of base salary in 12 months from one source


• Company ownership rules: you cannot own more than:

– 50% interest in privately-held company (that includes ownership by your family!)

– 5% interest in publicly-traded company

– 20% in private company at time of IPO

• Faculty cannot be principal investigator of or primary physician for a patient on a trial if he/she has equity in sponsor company or receives cash > $10,000 per year

Common Board Problems

• CEO loads board with cronies

• Divided camps of interest

• Big names are good…but they need to contribute

• Inadequate agenda for board meetings

• “Once-over lightly” financial scrutiny

• Board member or CEO micromanagement

• Clash of egomanias

9

Common Pitching Mistakes

• Being caught short… no elevator pitch

• Poor competitive assessments

• Inadequate IP

– Minimal proprietary uniqueness

– Overlapping competitive patents

– Stating “we have patents” when patients were filed but not yet issued

10


• Sloppy bios

• Poor references

• Inconsistent format of presentation materials

• Serial pursuit of prospective investors

• Egomania, naïveté, stubbornness

• Failure to show entrepreneurial zeal

10


• Unprepared, half-baked presentations

• Presentation too long and too technical

• No passion, no story that sticks

• Reading the slides with too much stuff on it

• You are not applying for a NIH grant and you are not defending a thesis … you are trying to capture the interest of a potential investor

10


• Don’t become too “sticky” with potential investor

• Remember, first contact is not intended for a 2 hours presentation

• Give him/her some privacy in the rest room

• If investors calls the police and has restraining order issued .. You probably over-did it

10

Top Ten Mistakes Made by Entrepreneurs (and Investors)

• Mistake No. 10: Failing to form an entity early enough

• Mistake No. 9: Issuing founder shares without vesting

• Mistake No. 8: Failing to: – Understand the tax effect of issuing stock or options– Make a timely Section 83 (b) election

by Paul Pryzant, Burleson LLP


• Mistake No. 7: Negotiating venture capital or angel financing based solely on valuation

• Mistake No. 6:– Failing to do due diligence on your investors– Taking money from the “toxic” shareholder

• Mistake No. 5:– Promising more in the business plan than can be

delivered– Failing to comply with state and federal

securities lawsby Paul Pryzant, Burleson LLP


• Mistake No. 4: Failing to:– Have an intellectual property strategy to understand

what IP the Company has and how you need to protect it

– Waiting too long to implement your IP strategy

• Mistake No. 3: Disclosing inventions without a nondisclosure agreement, or before the patent application is filed.



• Mistake No. 2: – Starting a business while employed by a potential

competitor– Hiring employees without first checking their

agreements with the current employer and their knowledge of trade secrets

• Mistake No. 1:– Thinking any legal problems can be solved later– Hiring a lawyer not experienced in dealing with

entrepreneurs and venture capitalists


Think Twice Before You Say This


• We have first-mover advantage:

– Is this advantage or disadvantage?

• Our projections are conservative:

– Be realistic

– Startups should not be conservative; they are usually aggressive (but stay within the truth)


• We have no competition

– Yeah, right; are you kidding me?

– At least do a Google search

• We are truly disruptive

– Investors look for disruptive technology

– But can take long time to develop


• We only need 1% of the market:

– Well, that first 1% is the most difficult to get; why stop when you finally got it?

– What investor wants only 1% of the market?

– Overall, market sizes and sales projections are usually over-estimated (might be OK for an aggressive startup if not grossly over-stated)


• We have a great CEO lined up and he will join as soon we raise the money:

– What do you need this guy for? His job is to raise money!

– Why does he not join you now? Does he not believe in you and your business?


• We have strong interest from major customers:

– Wishful thinking???

– Show me the money (LOI, order,…)

– Get a letter of intent

– Have paying customers is usually much better than having “strong interest”


• Several VC’s are very interested and will get back to me:

– Why did they not get back to you if they are so hot on your idea?

– Were they just friendly?

– Were you invited to present to them directly?

– Wishful thinking?

Do This

• Know your pitch

• Know your target audience

• Know your market

• Know your projections

• Know your competition

• Be prepared to support your statements

• Know what you are asking for (value proposition)

Watch And Learn• Learn from others

Watch some episodes on www.abc.go.com/shows/shark-tank/

The Problem

• You have an idea and need $$$$

• How do you go about raising money

• What things do you need to have ready to go

• Remember: Success comes when opportunity meets preparedness

What is your primary goal?

To raise positive awareness and money

What is your goal?

To get a meeting

To be remembered

To raise interest

What is NOT your goal?

To summarize your entire business plan

To look like you don’t know what you are doing

To be remembered for the wrong reasons

Stories are interesting.

Scientific facts are mostly boring.

Unless you are applying for a scientific grant.

Stories That Stick

• Friday the 13th is an unlucky day! This is a story that sticks!

Friday The 13th

• Movies have been created around this topic

• Many, many, many people around the world believe in this

• Is it just an Urban Legends that sticks or is there more to it?

Friday The 13th

• It is the most widespread superstition in the United States today.

• Some people refuse to go to work on Friday the 13th

• Some won't eat in restaurants

• Many wouldn't think of setting a wedding on the date

• Many will not travel that day

Friday The 13th

• A medical study published in one of the most prestigious medical journals (British Journal of Medicine) investigated the relation between health, behavior, and superstition surrounding Friday 13th in the UK

• The investigators collected data on:– Numbers of drivers on the streets– Number of shoppers in malls– Number of admissions in hospitals

Friday The 13th

• The results of the study:– Significantly and consistently less vehicles on

the street – No difference in shoppers– Significant increase in hospital admissions

(risk of admission increased by 52%)

• Recommendation: Staying home on Friday 13th is recommended

Friday The 13th

The real reason behind it:

The Knights Templar

Friday, October 13, 1307

Friday The 13th

• Self-fulfilling prophecy

• At least 21 million Americans believe this bad-luck fact and change their lives around to avoid certain activities around that day

• Almost no one knows really where the story came from but it certainly “sticks”

• A “sticky idea” is understood, its remembered, and it changes something

Suggested Reading

• Hardcover: 291 pages • Publisher: Random House;

1 edition (January 2, 2007) • Language: English • ISBN-10: 1400064287 • ISBN-13: 978-1400064281 • Price: US $ 15.26

http://heathbrothers.com/madetostick/

Messages To Your Audience

• Investors like to hear:– You have a great story to tell

– You have something novel (disruptive)

– You can deliver the technology/product

– You have a large market

– There is a great need for your technology


• Investors like to hear:– There are barrier to entry for competitors– Customers are willing to pay for your

technology/product– You are credible and believable– You can also listen– You have thought about reasonable

financials


• Investors do NOT like to hear:– There is no product yet but you think the

company is worth tens of millions

– You are willing to give away 10% of your company for $ 5 million (remember all those unreal business propositions on TV “Shark Tank”)

– There is no competition (there is usually is)

– You know it all (the investors and others may also know some things)

What’s on your tombstone?

• How do you want to be remembered?– “Oh, yeah. He’s that guy with the…?”

A. Delaware C-Corp…

B. 62 really impressive scientific advisory board members that I’ve never heard of…

C. A cool way of making sure that lung cancer patients survive.. (the story that sticks)

Paul Campbell: Ideas On Fire Series by O. Wenker

Real Showstoppers

• Incompetent CEO

• Excess product development risks

• Troubling intellectual property issues

• Inattention to cash management

• Inadequate capitalization plans

• Unrealistic valuations

• Poor market understanding

10

Real Showstoppers

• Lack of focus

• Overly optimistic sales forecasts

• Underestimation of competition

• Don’t know what you don’t know (how do you know that they will buy it …I just know)

• Unable to describe business or opportunity in 30 seconds

10

Conclusions

• Success comes when preparedness meets opportunity

Be prepared:

• Elevator pitch

• Executive summary

• Business plan

• Slide presentation

Wait for the opportunity:

• Business plan competition

• Venture meeting

• Introduction to investor

• Any other opportunity

Success

From This …..

….To This

Good Luck

What Now?

• If you want to learn more about entrepreneurship and about how to start your company

• Take for free 17 online modules at the Entrepreneur’s Academy

• Go to: http://loyacenter.utep.edu/ut-transform/entrepreneurs_academy.php

Documents

Landmines for Entrepreneurs with Olivier Wenker, MD, MBA, DEAA