Nancy Fogg-Johnson, PhD and Alex Merolli09.09.10
Having an idea for a product or business that will fill a market gap is an exhilarating experience. Creating the commercial entity that will translate that idea into a revenue-generating corporation can be an even more thrilling prospect. But the journey from idea to market is always challenging.
Putting thoughts into action requires discipline, money and some good fortune. We have had the unique experience of being there at the beginning and seeing the process through to conclusion. As with any adventure, there were many lessons along the way, including what to do and what to avoid. In a series of articles, we share some of those lessons as guideposts for anyone contemplating the road from the idea stage to viable corporation.
In the Beginning…
After consulting with corporations and venture capital firms, we realized that there were significant gaps in the broad space of non-prescription health and wellness ingredients, otherwise known as bioactives or phytonutrients. Those gaps included discovery and validation processes, business models and pathways to market. Thus was born “the idea” and the business concept for creation and commercialization of non-prescription health and wellness ingredients that would be attractive to the food ingredients and consumer food products industries.
The non-confidential lessons we offer are based on our experiences and observations along the road from creation of the idea for the company, through incubation, funding, staffing, operating and growing a new company, from the ground up. Many of the lessons offer cautionary tales of entrepreneurship. Many of the lessons offer 20:20 vision, in hindsight. Or, paraphrasing the old adage, “we wish we knew then what we know now.”
Lesson 1: Have a Business Plan, Have a Financial Model and Get Capital—Enough Capital.
Having a business plan may seem obvious. But you need to sit down and decide what the business will be, along with the financial model and sources and amounts of funding. The business plan should also state clearly exactly what the market need is and how this business will meet that need. Ultimately you need to answer the question: How will the business become profitable? Here you need to consider the capital requirements—or the amount of money that needs to be raised.
The Business Plan. Stating the mission, vision, market targets and goals of the company is a good place to start. The means by which this company will meet those goals and become profitable define the unique business proposition being created. An initial “test” of potential viability is how often the mission, vision, market targets and goals change and how significantly they change. If change is frequent and large for any of those parameters, this is something to note, as the concept for the company may not be sufficiently rigorous. Go back to the drawing board until a sturdier business plan results.
The Financial Model. This is not simply a profit and loss statement. The financial model represents the engine of the business. A model should include, at a minimum, costs of operation [staffing, physical plant, technical functions, procurement, processing, sales, marketing etc.] and projected revenues. The structure of the financial model should flow logically from the business plan. Some key considerations in evaluating the financial model include “pressure testing” the model. Identify key expense and revenue driving assumptions, such as cost of goods sold, cost to create/license intellectual property, clinical and regulatory requirements, etc. What happens to financial viability of the company if cost or timing of any of these deviate significantly from assumptions and projections? What happens if expenses occur sooner and income later? Could the company survive? What remedial actions would resolve the deviation?
Going through scenarios—optimistic, realistic and pessimistic—and being able to explain contingencies, implications and solutions to potential investors is essential. Which brings us to securing funding to start the company.
Capital Requirements. In our April 2007 article, “Venture Capital Investment Drives Health & Wellness Innovation: Everything Entrepreneurs Need To Know About How Investors Approach The Health And Wellness Space,” (http://www.nutraceuticalsworld.com/contents/view/13725) we shared our experiences with investment needed to create health and wellness startup companies. We discussed “burn rate,” or the rate at which the company will use funds to pursue implementation of the business plan.
Our rule of thumb is to double or triple the projected amount needed to operate the company under the worst-case scenario projected from the business plan and the financial model. Projected capital needs under that scenario serve as another “pressure test” for the company, at a very early stage. Does the “idea” for the company merit the anticipated amount of investment needed to survive the worst-case scenario? If there appears to be a major disparity between the perceived “value” of the idea for the company and projections of required funding needed, take a step back and reconsider the business idea, the financial model and modifications that might be prudent. Maybe the worst-case scenario will not happen. If it doesn’t, the company has a comfortable cushion of funding for ongoing operations. If the worst-case scenario does happen, having anticipated it as well as solutions to deal with it will make survival of the company more likely.
Potential investors often have suggestions, or even requirements, for changes to the business plan and financial model as a prerequisite for access to their financial support. Do any required changes affect your “passion” for the company? Are you allowing yourself to be “bullied” by potential investors with their own agenda and interests, which might be inconsistent with your own? If changes are made: does the business plan still make sense, does the financial model still work smoothly, does the revenue flow, are there consequences for the “burn rate,” and do the requested changes make current staff, usually founders at this point, more or less relevant to the future of the company. Our lesson: think long and hard, analyze effects of those changes on the viability of the financial model, and even the concept for the company, and if needed RESIST, recognizing that you might not get the funding from the source of the changes.
Lesson 2: Take Actions Consistent with the Business Plan—It’s a Building Process
After “pressure testing” the business plan and the financial model, and securing funding, it’s time to begin assembling the resources to operate the company. Those resources include staffing, intellectual property that may be licensed in, physical location, equipment and more funding. In reality, fundraising will likely be an ongoing activity for a considerable portion of the early existence of a company.
One person or a few people can create a business plan and financial model. However, more than likely, additional staff will be required to turn those plans into a reality. Staffing a startup requires consideration of skills beyond the obvious specializations, such as scientific, finance, regulatory and manufacturing, to name a few. The working environment of a startup can differ significantly from that of an established company or academic center. One of the major lessons in hiring is to look for staff that can function effectively and efficiently with less of an administrative framework while still delivering the expertise needed for development and growth of your company. Most likely the initial rounds of investment will not accommodate a fully staffed environment. Can you operate in such a company?
Staff may need to change, or be changed, depending on the growth stage of the company. Early in the company lifecycle, structuring and negotiating deals for licensing in and/or out and forming partnerships with smaller and/or larger companies or institutions may be paramount. Those skills may not be the ones required to operate or run the company once the deals are done. A key lesson is that employment contracts need to be structured to allow for amicable staff transition consistent with changing needs in developing and running the company. Often times, “Deal Doers” do deals but have less than ideal operational skill sets just when the company needs to move from “dealing” to “doing.” A well-structured Board of Directors can help plan for such transitions and can ensure that the transitions happen with minimal disruption.
So, how does one structure a Board of Directors to ensure this? More on that and other operational considerations in a future article, “Becoming a Going Concern.”
About the authors: Nancy Fogg-Johnson and Alex Merolli are co-founders of and principals with Nutri+Food Business Consultants, www.nfbconsultants.com. Ms. Fogg-Johnson can be reached at 610-527-9425 and Mr. Merolli can be reached at 925-462-7428.
