Working for Scale

I recently finished reading a book by Paul Polak and Mal Warwick called “The Business Solution to Poverty:  Designing Products and Services for Three Billion New Customers,” a call to arms in which the authors outline a rationale and strategy for businesses aimed at delivering products and services to the lowest income people ($2 or less per day).  Both have decades of experience in international development through enterprise, believe the traditional charity-oriented approach has failed, and advocate that companies find and sell the right product at the right price (using “zero-based design” and the “ruthless pursuit of affordability”) to grow into high-volume, low-margin, but profitable businesses while improving the lives of the impoverished.  The book is well-laid out and an easy read with several examples of business opportunities drawn from Paul’s experience as founder and director of International Development Enterprises (IDE), a non-profit development group.  Paul is also an enthusiastic and well-traveled speaker (as I learned at a conference I attended recently, see below); one can find out more about him, the book, and his ideas at Paulpolak.com.

A major problem with the book though is it is more vision than substance.  Although the authors are clearly familiar with how business operates, they fail to quantify their examples with the basic data that one needs to understand them, e.g., initial capital needs, costs, and sources; product design and development timeframes and costs; operating costs for personnel, manufacturing, distribution, and customer acquisition; revenues, margins, and return-on-investment.  Without these numbers, even if approximate and hypothetical, I was left with a smoke-and-mirrors impression of rather than a viable business model.  The book’s most detailed example is Spring Health, a company that Paul and colleagues started in 2011 (?) to sell chlorinated water in Indian villages.  A table projecting the company’s 2013-17 growth is given, but it lacks basic cost/price data.  I played with the numbers and got a price of $.003 per liter (but had heard in Paul’s talk it was $.08 per liter) and a per family consumption of 123 liters/year that seems way too low to me.  As for cost, data are not in the table, but in the text I noted, while the on-going costs of making the chlorination chemical is low, there is a 25% commission to a shop-owner where the water is stored, an unspecified commission to the delivery people, local marketing and service staff (42 per village), storage tank construction costs, and a central, management staff (I think Paul said there were currently 130).  Projected 2013 revenues are given as $284K, but in the talk Paul said the company is now selling 3.5 m liters per month, which by my calculation is $280K in revenues per month, so either the projection was way off or I misheard, but without the details I don’t know and the discrepancies are disconcerting.

Also in the book, the authors note that the social venture movement (composed of not-for-profits set up to address social ills and their funders) has had exponential growth over ten years but the “collective impact on the incidence of global poverty has been minimal” and that the problem is one of scale.  These enterprises do not plan to work, or do not work, on a large scale that the authors state should be 100 million customers in ten years and revenues of $10 billion.  While I agree with Paul about social venturing’s limitations (and have written about the movement’s lack of business orientation; see my ten or so postings tagged “social venturing”), I think revenues of $10 billion in ten years is an unrealistic (impossible) and artificial goal; if I had a profitable company that improved the lives of only 1 million people I’d be happy.  I also noted the authors ignore the many successful businesses that are selling products to the vast middle (but relative to US standards, low) income group.  I’d like to know why these businesses succeed and what limits their wider success, but the authors dismiss them as models.

Overall, I thought the book is inspirational and is more practically-oriented than many books on solutions to poverty.  Some of the useful advice for starting a mission-driven company is:

  • Base the business on helping poor people earn more money not making their lives better;
  • Have a product/service that is culturally independent;
  • Conduct extensive market research to test the business model; and
  • Expect to hire good employees at competitive salaries.

But starting a business requires a detailed plan (with lots of numbers), even though that plan will be/should be modified extensively based on the founders’ learning and experience, and I found the book short on planning.

As I noted above, Paul was the keynote speaker at a conference I attended hosted by MIT’s D-Lab called Scaling Development Ventures.  It was a good talkfest but, as with Paul’s and Mal’s book, lacking in specifics.  The more than 15 speakers and panelists were drawn from a government agency (USAID), a foundation (Grameen), social ventures, and social responsibility departments of major companies.  Here are three items I thought interesting.

Wendy Taylor, founder and director of USAID’s Center for Accelerating Innovation, gave a brief update of the agency’s Development Innovation Ventures (DIV) program.  She reported that DIV has “invested” (via no-return-expected grants) $50 million over past five years into about 60 ventures of which ten are making the “transition to scale” and has engaged the National Collegiate Inventors and Innovators Alliance to run a business accelerator program.  Unfortunately, she did not provide details (her allotted time was short), but because I have looked into the DIV as a source of funding previously, I plan to follow up on its progress.

Clive Alison, Global Director of Open Innovation for the consumer products giant, Unilever, made several points.  He noted that companies often face the challenge of changing potential customer behavior and to address it need to focus on a perceived value of the products they are selling.  He provided the example of Clean Team, which is a early-stage company that is offering a personal sanitation system in the second largest city in Ghana and was started with help from Unilever.  The Clean Team provides portable toilets that it empties 2-3 times a week, and, since one of the competing and less-costly alternatives is chamber pots with the contents disposed wherever, it emphasizes the reliability of its service and the friendliness of its staff.

The conference included a poster session for local students who are working on social enterprises of various sorts and stages.  One caught my attention, Pan Diagnostics by Vivek Sivathanu, evidently a wearable device for non-invasive monitoring of chronic diseases intended to address the global problem of many more people living longer and having chronic disease.  Unfortunately, I was not there when Vivek was but subsequently learned he is a doctoral candidate in MIT’s mechanical engineering department and a fellow at MIT’s Legatum Center and was on a MIT $100K business plan competition team for a diagnostic system called PeePod.  I‘d like to know more about both.

Although I found the presenters thoughtful and inspiring, I winced at the lack of specifics and quantification that I think are needed for the conference to successfully address its theme of scaling ventures also known as growing businesses.  Perhaps next year, the organizers could include a session called Business 101 for Development Ventures.

Getting Crowded

While I am still skeptical about the idea of researchers using crowd-funding to fund their projects (which typically need more than tens of thousand of dollars over at least a year to get results), I am very pleased to report that the project I wrote about last month was fully funded by its deadline.  As I wrote in “Shameless Plug”, Dr. Michael Polastri, associate professor of chemistry at Northeastern University, is starting a web-based portal for sharing data and ideas among medicinal chemists to accelerate the discovery of new drug candidates for treating the neglected diseases/diseases of poverty.  Through a website specifically for crowd-funding science projects called Microryza (Mike’s page is at Collaboration for NTD), he raised a seed fund of $25K- congrats, Mike, and thanks to all who contributed!

Given the popular crowd-funding buzz, I wondered what is its potential for entrepreneurs starting life science product development companies, especially those developing products for global health?   In my experience, such start-ups need a minimum of a couple hundred thousand dollars for the essentials:  completing convincing proof-of-concept studies to leverage into a real fund-raising round and paying the living expenses of the founder or founders, at least one of whom needs to put full time into the venture.  While it helps to have a fully-employed spouse, generous and supportive friends and family, and access to grants, loans, and free advising, the founding team has the major task of finding and convincing knowledgeable investors that it has a viable plan to make and sell a product and to create a successful business that will repay investors in excess of competing opportunities.  Of course, global health-oriented companies have the added challenge of educating potential investors on their value, not easy since investors prefer business models that have worked for them before.  Call me old-fashioned, but I think the best (only) way to tackle this task is in person and not through the ether.

But, as it is said, there may be an app for that.  As I learned last May from a FierceBiotechIT article and a Wall Street Journal blog post, there are now two sites set up to sell shares in life sciences start-up companies to qualified investors.  Since the SEC rules allowing the sale of equity in companies via internet “portals” are still pending (the SEC draft rules were released last October), these sites are not really crowd-funding but require potential investors to register and assert they are “accredited investors” under the existing SEC rules for stock offers.  The one is Healthfundr, which “makes it easy to discover, screen, and invest in the most promising health companies.”  I could not find any information on how successful this group been in raising money for itself or others, but in a December blog post one of its founders stated that they have now figured out their business model they are starting to execute (Schantzen post), not a reassuring comment.  More promising effort seems to be VentureHealth since the founders are successful investors who will be evidently also co-investing.  The company’s launch press release indicated that it is aimed at angel investors and companies seeking an alternative to VC funding.  It also noted the successful raising of $875,000 for multi-million Series B round for Channel Medsystems, a California medtech company, which is nice, if unfulfilling.  The WJS article also mentioned a third site, Medstartr (I guess dropping the “e” is required for crowd-funding sites).  As far as I could tell, the site has almost only projects (companies?) developing health care IT products, seeking small amounts (under $10K), and offering a nice “thank you,” not equity, as a return for “investors.”  Medstartr states it provides its users “events, mentors, experts, challenges, partners, packaging, promotion, and optimization services to create a model that maximizes the chances of success for ideas in healthcare” and claims to have raised $250K “online” (less Medstartr’s 5-8% take) and $8 million “offline,” whatever that means.

So it looks to me that for now that crowd-funding offers only small amounts of short-term funding to global-health start-ups, but, when the SEC rules are final and if a investment portal can wrangle angel investors with a philanthropic streak, equity-based crowd-funding may be possible.  But then again, I may be wrong.  Last month I noted that an organization called the Immunity Project started a donation-type crowd-funding campaign to raise $1 million to advance a vaccine for HIV.  Since its founding in 2010, the California-based Project, which describes itself as a “non-profit initiative” (I guess the founders thought “company” has a negative connotation), has identified HIV epitopes used by the rare humans able to control HIV infection (FierceVaccines article), got a $1 million grant from Microsoft, and conducted animal studies (sparse details are at Immunity Project).  The Project director, Reid Rubsamen who is also CEO of a medical device company, told the San Francisco Business Times that the goal is to complete the funding this coming summer and have an inhaleable candidate vaccine to test in humans in 2015, while continuing to raise the $25 million he estimates is needed to complete testing and registration (SFBT article).  As for manufacturing and distribution, he was quoted:  “You pretty much need to be thinking about free distribution because the commercial reality is it’s a multibillion-dollar industry.  For HIV, the Mount Everest is if we see some really good results, we can rally people around this to do large-scale manufacturing and distribution.”  So crowd-funded manufacturing and distribution, too?

I wish him well, but I’m not sure if $25 million more will be enough.  HIV is a challenging vaccine target (see a HealthLine article) and the trials expensive.  I saw one estimate of the costs of a Phase III trial as $70 million (another FierceVaccines article).  I respectfully suggest the Project’s management raise whatever money is needed to generate proof-of-concept data, develop a rationale for why the Project’s vaccine will succeed where others have failed, and use old-fashioned person-to-person salesmanship to find a corporate partner with the expertise and money to test, register, and sell an affordable vaccine.  Crowd-funding may be one way to generate seed money but it may also divert and dilute the founders’ efforts to find people and resources needed for the long-term.

Off on the Right Foot

In one of my funner activities, I offer my two cents of advice to start-ups coming out of MIT as a volunteer mentor in its Venture Mentoring Service.  For ventures just getting started, a common topic of discussion is what legal identity the venture will adopt.  This is an important step since it indicates the seriousness of the founder(s) and her/his/their commitment to the enterprise, establishes credibility, and is a signal of how the business will operate.  Most founding teams will opt for one of the traditional forms for a corporation (see below), but occasionally a team will be interested in forming a non-profit organization.  The reasons are usually because it equates the non-profit label with a mission to do social good and/or intends to fund the company with personal gifts or grants from foundations which typically have policies of giving money only to non-profits.  In response, I point out that a for-profit can have a social mission (it just puts it some or all of its revenues above expenses back into its mission as opposed distributing it to shareholders) and that an organization’s incorporation should reflect the best way to accomplish its mission as opposed to how it expects to be funded.  I also point out that most start-ups operate without profits and sometimes revenue for several years (or longer if the venture is developing a technology-based product), so practically, the for-profit/non-profit dichotomy is a false one.  I also note that nonprofits tend not to have a clear understanding of whom they intend to help or how and often make the grantors their customers, neither of which lead to a viable enterprise.

While I’m clearly not an expert in incorporation, I thought it would be worthwhile to write on what I did know and posit what mode a venture that is developing products for global health may consider.

Starting with nonprofits, a nonprofit is usually required to register as charity at the state level, can solicit donations and grants, and avoid paying taxes by receiving a 501(c) designation from the Internal Revenue Service.  The application process costs several thousands of dollars in fees and legal assistance and takes several years or longer, since the IRS has a large back load and unclear criteria for eligibility that it applies unevenly.  Again, I think there are alternative sources of start-up funding other than gifts and, to many people, nonprofit is equated with non-revenue which makes long term viability problematic.

A for-profit is registered at the state level in the states in which it does business (for most start-ups this is the state where the founders live).  It can raise pre-revenue funds through friends/family, foundations (rarely), governmental grants, and investors who expect (hope) to get their money plus a profit back at some time; however, most start-ups are a long way from being attractive to investors.  For-profit companies typically incorporate as either “C” or “S” corporations, although there other structures such as partnerships, used for short-term business efforts, and limited liability companies (LLCs), used for service businesses.  The latter have various tax and liability advantages that are too deep for me but I found useful explanations and comparisons at Incorporate.com.  Incorporation is done with a home state government or in Delaware due to its business-friendly courts by filing an incorporation document and by-laws and paying a fee.

As I understand it, the C (or general) corporation has the advantages of limiting the liability for directors, officers, shareholders, and employees and the ability to sell stock with no limit on the number of shareholders, although it is required to register with the SEC when it reaches $10 million in assets or 500 shareholders.  The profits of a C corp are taxed as corporate income and as dividend income of its shareholders.  An S corp is a C corp that has elected with the IRS to have its profits and losses “passed through” to the owners/shareholders apportioned by ownership, theoretically reducing the total tax paid.  Also, the owners/shareholders report the profits and losses on their personal income taxes, simplifying the company’s paperwork.  S Corporations have a number of restrictions, e.g., it may be owned only U.S. citizens or permanent residents, may not have more than 100 shareholders, and can issue only one form of stock.  This last point makes the structure unappealing for companies seeking venture capital since early investors want “preferred” stock with its benefits.  So for a global health start-up, incorporation as a C corporation makes sense.

In a previous post, “More Fun and Profit”,” I noted a new structure, the “B” or benefit corporation, that is available in six states including California and New York.  This structure allows the company to make decisions needed to meet a social mission, like improving he environment or global health, rather than on profit maximization for shareholders.  A B corp has the structure and requirements of a C/S corporation, but assures that the owners, managers, and shareholders accept the primacy of the mission over profits.  For a discussion of the B corp for life sciences companies, see a recent Bioworld article, and for a whole lot more on the B-corp movement see B Lab.

This is obviously a very broad-brush summary of incorporation options, but it seems to me that the C corp, with the B modification, if available, is the route for global health start-ups.  But I’m happy to be enlightened by those with more experience.

 

More Not Less

Last week, multiple sources reported that Bob More, an experienced health care venture capitalist, started this month as the senior advisor for venture investing at the Bill & Melinda Gates Foundation.  Bob (he seems like the kind of guy you’d address by his first name) was  general partner at Frazier Healthcare Partners starting in 2008 following 12 years at Domain Associates, also as a general partner, as noted in the San Francisco Business Times and elsewhere (SFBT article).  As reported by Luke Timmerman, the Seattle-based national biotech editor for Xconomy who follows the Gates Foundation (Xconomy article), Bob had the following to say to his colleagues on his new role:

“My role will be focused on developing and executing a venture-capital initiative to support the goals of the Foundation, focused primarily on diseases that affect the poorest people in the world. … We want to encourage and support entrepreneurs to pursue ideas that will solve these problems. And we want our partners to flourish as businesses. … Entrepreneurs create markets where none existed before. The challenge we face is the ability of many people to pay for products and services. But that is often a challenge for which we are willing to bear responsibility for finding solutions. … And I am here because I believe that entrepreneurs can solve these challenges. My task, simply, is to focus the efforts of great entrepreneurs to achieve these goals.”

Luke also provided a list of the companies the Gates has invested in (the Gates does not):

Company Total Invested Date(s) of Investment
Atreca $6 million 2012
Genocea Biosciences Part of $30 million 2012
Liquidia Technologies $10 million 2011
Visterra Part of $13 million 2012

As some readers may remember, I have been posting on the Gates Foundation’s potential to make investments (rather than grants) in companies developing products with global health applications and criticizing the few investments that it has made.  Actually it looks like I’ve posted once each year since 2010, starting with “PRIs for Global Health”,” followed by “BMGF Ventures LLP”, “A Toe in the Water”, and “Nothing Ventured” in 2011, 2012, and 2013, respectively.  My general criticisms included:

  • being a participating co-investor rather than leading the charge as a led investor;
  • investing minor amounts of money (as little as one-fifth of what the other investors bring to the table) resulting in little influence;
  • not taking a board of directors seat resulting in very little influence;
  • not vetting the technology for its application to global health nor publicizing the company’s commercialization plan for a global health product;
  • not having an announced investment strategy; and
  • not having a transparent process for submitting business plans relying instead on the Gates old-boy network.

My amateur’s advice to the Gates investment team on stuff they need to do was:

  • do thorough technical, competitive, and risk assessments (to be sure the Foundation is not being scammed);
  • figure out how to work with the other investors with whom it will not be in complete alignment (the Foundation will measure its return on investment in both monetary and non-monetary terms);
  • learn how to influence the company as a later-round (less leverage) and physically distant (less communication) investor;
  • have its board of directors representative understand start-up companies and the biotech/pharma industry;
  • have a clear understanding of how the product will be commercialized and made accessible in both major and rest-of-world markets;
  • have an exit plan if the company or product is acquired;
  • figure out how to track and respond to the progress (or lack of) by the company toward its global health-related objectives; and
  • assure the IRS that its investment is aligned with its charitable mission.

A bit disconcerting was that the Foundation apparently did not feel that Bob More’s appointment was worthy of a press release and that I could not find any information on the Foundation’s “program related investing” on its website as I had before.  So the bottom line is that Bob has his work cut out for him but seems to be up to the challenge.

 

Reality Check

[4/16/13:  I have revised last week’s post to reflect its review by my interviewee, Manish Bhardwaj whose notes appear in brackets below.]

I had a reality check last week when I had a Starbucks’ sit-down with Manish Bhardwaj, PhD, founder and current CEO of Innovators in Health (IIH).  Mannish came to my attention in February 2010 when I noted he was giving a talk at MIT entitled “Technology X will save the world and other myths of social entrepreneurship,” which, according to the description, was about the need for tech/social entrepreneurs to understand the market place and the customer/client as a critical element for success.  I missed the talk but contacted him recently (three years later) and asked for some of his time.  When we met and after giving him my brief bio, I listened for the next hour plus as he shared his experience in tech-based social entrepreneurship, his heart-felt passion for improving lives of the less fortunate, and his “grand unified theory” for reconciling the inequities of the world.

His credentials as a technology entrepreneur are solid, having earned a bachelor’s degree at the Nanyang Technological University, Singapore, and master’s and doctoral degrees in electrical engineering/computer science at MIT and then co-founding a wireless chip design firm, Engim, whose IP was acquired by a Canadian company around about 2005 (IIH People).  While working on his doctorate, he apparently got the technology-X-will-save-the-world bug and, in 2007,  initiated or joined a team, IIH, formed to enter MIT’s 100K Entrepreneurship Competition with the aim of developing technologies to improve the delivery and use of the standard drug therapy for tuberculosis.  IIH won a prize for their pitch (and also that year a grant from a national innovation association and an international development award at MIT), but more importantly gained enough backing and momentum to prototype and pilot study in India several parts of an integrated TB drug delivery program (for details, see IIH Solutions).

IIH has local community partners in the two places it is testing its solutions in India (Bihar state and the city of Delhi), and Manish is a primary connector, facilitator, and promoter of the myriad relationships needed.  [Note from Manish: The Delhi deployment is mostly the work of Microsoft Research, where my close friend and IIH co-founder, Bill Thies, went to work. The only credit we can take is to have gotten that project off the start and then handed over to Microsoft Research.]  He spent months talking and living with many of the principals from the TB patients and their families to government TB program administrators to community health workers to representatives of foundations and private aid organizations.  And while IIH’s technological solution improved the care of about 400 patients over the past three years, his experience in trying to implement this approach changed him and the direction of IIH.  [Note from Manish: We did not deploy any technology in our treatment program in Bihar (we briefly tested it in 2008 to study viability.) So the 400 patients have gotten better due to our investments in training people, not any technology.]

He learned first hand of the pernicious connection between poverty and  health where the cost of accessing care is too high because a patient cannot earn that day’s subsistence income while traveling to a clinic, illiteracy and lack of trust in public hospitals need to be overcome, and malnourished patients have the adverse side effects from the drugs they are given.  And, moreover, how intractable to remedy is this poverty/health connection.  So he is now focused on improving what he has concluded is a critical part of the health care delivery system, the community health care workers, who are primarily women who travel to villages and through slums to find and refer patients to clinics and sometimes monitor their treatment.  He and his partner organizations are working to improve the training, pay, and status of the workers with the goal of serving a “catchment” population of hundreds of thousands and treating 10,000 in the next two years.  [Note from Manish: We started in 2010 with the goal of treating 10,000 patients in two years, which I abandoned pretty swiftly after learning of the challenges. We did just 400 in 3 years!]

I also learned Manish is interested in and working on other three other aspects of his unified theory of how to make the world better by addressing:

  • the failure of social entrepreneurs and NGOs (nongovernmental organizations) in general to appreciate and attend to the need and difficulty of scaling their particular solutions to the point of making a difference;
  • the failure of governments and their bureaucrats to be motivated and guided by ethics, knowing and doing the right thing; and similarly
  • the reliance of entrepreneurs of the developed world on technological solutions and failure to be guided by aspirations.

[Note from Manish: I think as far as my “unified theory” of making the world better, I think institutions universally have failed us in instilling a sense of civic virtue, in training us to deal with the ethical dimensions of large problems like poverty, climate change, etc., and guiding young people in not just how to do things but also what is worth doing.]

Hence, in addition to doing for-profit work so he can pay his bills and support IIH and Indian projects, Manish is a fellow at the Dalai Lama Center for Ethics and Transformative Values at MIT (Technology Review article).

I appreciated the opportunity to meet Manish and get a reality check on my aspirations in global health.  My work is far removed from people living in and dealing with poverty, and it is good for me to get a first-hand account of the hard work that is needed, to put the role of technology in perspective, and to meet someone so clearly dedicated to making a difference.

Nuts and Bolts Lite

As I’ve noted in previous postings, metro Boston offers a wealth of resources for the budding entrepreneur, for example:

  • business plan contests like MIT’s 100K and Harvard’s New Venture Competition;
  • incubators like Healthbox, Venture Development Center, and Mass Challenge (see my post, “Accelo-rama”);
  • social networking sites like Greenhorn Connect;
  • mentoring and advising groups like BU’s Kindle and MIT’s Venture Mentoring Service (VMS); and
  • angel investment groups like Launchpad and Mass Medical Angels to get board members and test a pitch.

But where does the start-up wannabe find a digestible resource, one that provides the basic nuts and bolts of venture formation and is accessible and user-friendly?  I am not a particularly good source, not having been an entrepreneur myself, and don’t recommend the slow route I took, picking up the basics through association and osmosis from my fellow mentors in the VMS.  But if someone wanted a crash course into the mechanics, pitfalls, and fun of starting a company, where would I send her/him?

Fortunately, there is a well-thought-out and thorough introduction in the form of a short course given at MIT each year during its January intersession (Independent Activities Period).  Called “Nuts and Bolts of New Ventures,” it is conducted by Joe Hadzima (founder of IPVision, VMS mentor, and Sloan School lecturer, [JH Bio]) who started it in 1990, has been improved each year, is attended by about 250 students, and, in keeping with MIT’s tradition of trying to educate everyone who wants to be educated, has a lot of useful material online (IAP site and Open Courseware site).  While not the same as participating in the class, reading the online materials and checking out the resources are a good start for anyone thinking about starting-up (non-MIT people can participate as non-credit “listeners” by signing up online if there is space after MIT students have been accommodated).

The course is taught in six sessions, and here is sketch of each to provide an idea of content and value:

1) Introduction to business plan writing, marketing, and sales:  while the connection of planning and sales may seem abrupt to some, a primary theme of the course is “if you don’t have a paying customers, you don’t have a company.”  This session uses the 1997 business plan for the start-up, the Virtual Ink Corporation whose lead product was a whiteboard transcription capture system. The company was acquired by Newell Rubbermaid in 2006 and is the basis for their Mimio division.

2) Business models and financial projections:  this section covers the broad categories of ways in which a company creates and delivers value to generates sustainable revenue and how to quantify (or attempt to quantify) it; there are also a set of templates for the projections.

3) Negotiation skills, people, and organization:  as noted by the course organizers, “most ventures which fail do so because of people issues, not technology, market, or funding issues.”  For example, the associated presentation (given Joost Bonsen) notes these Team Challenges and Failure Modes:

• Agreeing on how to disagree

• Founders percentage stakes

• Unrealistic expectations

• Assessing talent from other domains of expertise

• Character surprises.

And for those of you who may be starting no/low profit ventures and questioning the course’s applicability to your interests, I note that Joost is the instructor for an MIT seminar called Development Ventures which covers “founding, financing, and building entrepreneurial ventures targeting developing countries, emerging markets, and underserved consumers everywhere” (Media Lab venture classes).

4) Refining, presenting, and funding your venture idea:  entrepreneurs are always in sell mode whether to prospective employees, customers, investors, or to a skeptical spouse so how to present her/his venture is critical.  Following the “How to Make a Pitch” presentation is difficult without hearing the narration, but the presenter, local IT entrepreneur and investor, Stephen Pearse, includes several good and bad examples.  I noted that this year’s course’s funding panel included the usual suspects (angels and VCs) and also an entrepreneur who raised $3 million on Kickstarter for a 3-D printer company (Formlabs project).  While the resources appended to this section get into the weeds of venture funding and quickly become overwhelming, they can be skimmed and yield benefit, if only to provide the lesson that money comes at a cost and the terms are as important as amount.

5) Legal issues:  I like the lead-ins for this session:  “how to avoid going to jail without passing Go” and “what you always wanted to know about the law but were afraid to ask/pay for.”   This session is given by Joe and is a course in itself.  His presentation is organized chronologically (what knowledge is needed when founding versus later when funding) and includes a wealth of information on patents which may be less relevant to no/low profit ventures which are oriented more toward attracting other companies into a product or geographical area rather than excluding them as competitors.  Also not addressed is the maze of legal challenges faced by companies aiming to operate overseas, a few of which I’ve seen during mentoring and for which I am looking for a resource.

6) Pitfalls and plan execution:  the speaker for this session is Yonald Chery, and, from what I can tell from his presentation, he focuses on his experience as one of the founders of Virtual Ink.  While the Virtual Ink story is representative of success in launching an engineering-based company, I think it is less relevant to the many ways start-ups can fail or succeed in other product or service models.

So for entrepreneurs starting technology-based companies aiming at products or services for global health, especially in under-served areas, the course offers a solid introduction to the basics of starting-up.  Some of my caveats are that it tends to emphasize patents and professional (VC) funding and lacks information on entering foreign markets.  Maybe I can persuade Joe to add a session on social venturing with an emphasis on global health next year.

More Fun and Profit

In my post last week (“For Fun and Profit”), I chided the author and editors of a report recently published by the Results for Development Institute (R4D) on “global health social enterprises” in part because they made what I thought was an arbitrary distinction between social and non-social (for-profit?) enterprises.  The report defined the former as a company with an explicit statement of a mission of providing a social benefit (i.e., making a product to improve global health) and implied that a for-profit without such a statement but one that invents, develops, and/or a distributes an affordable global health product was not providing a social benefit.  I think a better approach for R4D and similar contract global health consultants, or really the entire “not-for-profit” global health community, is to analyze, publicize, and support all companies developing therapeutic products for global health (GHTP), regardless of their mission statement.  I think it makes more sense to categorize biotech companies by their business models (essentially their plans for making enough money to meet their payrolls for the foreseeable future) and include one category for companies developing products that have high technical risk (as do all biotech products) and potential huge but low margin markets.  The labels I have seen for this category are “dual market,” which isn’t accurate because it excludes companies developing products specifically for diseases and environments outside the major markets, and “double bottom line,” which implies to me use of suspect accounting methods.  My preferred label is simply “global market” since a company intends its GHTP will used by and benefit people globally without regard to a person’s ability to pay individually for it.

So how many biotech companies fit this global market model?  The main organization for this industry segment is BIO Ventures for Global Health (BVGH).  Last spring, BVGH issued a relevant report, “Developing New Drugs and Vaccine for Neglected Diseases of the Poor:  The Product Developer Landscape” (BVGH report ).  In my review (“BD Needy”), I noted several of the report’s findings:

  • only a few percent of all biotech companies are involved in global health product development (3% or 104 out of 3853);
  • the GH products are still candidate products with most projects in the preclinical stage;
  • about 40% of the projects are without partners, that is, are self-funded rather that through a co-development with another company, non-profit research organization, university, or government; and
  • the level of funding of global health projects is modest, only about $600K per company per year.

The BVGH number is small, it is larger than the number of companies identified as social enterprises in the R4D report (11 are listed in the appendix), and it does not include companies that are developing GHTP for the non-neglected diseases (like cancer and diabetes) of the poor (or all those uninsured) in markets outside the major market countries of the US and the EU.  The small number of companies and their level of spending on GHTP clearly indicates that this route is not a popular business model.  Unfortunately, BVGH did not look at these companies’ longevity, fund-raising, or overall deal-making as measures the model’s viability, and, as far as I know, none have got a GHTP to market.

So where does the my global market model fit within the biotech industry?  As many know, like the pharmaceutical industry, the biotech industry has been struggling to fine-tune its business models for at least 10 years.  Bruce Booth, a principal at Atlas Ventures who writes a readable biotech column for Forbes.com, recently summarized two emerging variants on the basic models which are either drug discovery via a novel platform or the development of one or more products with similar chemical or biochemical characteristics (Booth alternative structures):

  • the “LLC Holding Company” model in which the candidate products of a common drug discovery platforms are developed in separate C-corporations which, if successful, are more attractive for acquisition; and
  • the “Single Asset Project Financings with Structured Buyouts” model in which a product candidate is out-licensed by a big pharma to new entity with the pharma having a buy-back option.

Neither of these models preclude application to GH products, but, while they reduce risk, they do not help with the problem of the relatively low ROI and untested exit/acquisition posed GH products.  Interestingly in another column, Mr. Booth advocated investors start or support biotechs that pursue “contrarian” products, those largely abandoned by big pharma and VCs but potentially profitable (Booth contrarian products).  He cited anti-bacterial, neuroscience, heart failure, obesity, and RNA-based therapeutics, but didn’t mention the potential profitability of GHTP, likely because he assumes it insignificant.

As was described in the R4D report, there are two new legal corporate structures under which my global market biotech company may fit:  the benefit corporation and the flexible purpose corporation.  Both allow the founders, managers, investors, and employees to agree and understand that the company’s goal is to stay in business and provide a social benefit.  Will these new structures help biotechs?  Trista Morrison, an editor of the newsletter, BioWorld, wrote “maybe” in a recent article (BioWorld article).  Possible benefits are the flexibility to price products based on affordability rather than maximum profit, increased attractiveness to investors like foundations and philanthropic individuals, and maintenance of the social benefit purpose as the company matures (if it survives).  I’d like to see the global market biotech model gain credibility and adherents but also recognize in the business world nothing succeeds like success.