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Thursday, March 8, 2012

We Are Not in Kansas Anymore


History has always had a major impact on the future and the same is true for the future of startups and entrepreneurs.  Past successes and failures will always be part of the guiding principles for every entrepreneur.  Entrepreneurs review history of businesses and use that information to try to gain advantages in their new company.  There is nothing wrong with using the history to guide your new business ventures, but there is sometimes a complication.  The ability to translate the history to the present and future is not linear.

Over the last 20 years, I have seen countless companies developing a new product line anticipated to be a major improvement on what is currently in development or on the market. The companies go out to raise capital but to the surprise of management, the investor-meetings are few or the investors do not show interest.  One of the underlying issues is that even though the newest and greatest technology is the focus of the NewCo, prior companies with related technologies have burned investors in the area.

I often joke that my scientific career has included research on disease targets that have killed more investors than patients.  Look at a few areas when you get time:  septic shock, blood substitutes, antibiotic peptides are just a few examples.  While the cancer immunology market place is emerging, the score is 950 failures in the clinic with only one approval.  A recent review by a respected group suggests there will be more than 4 approvals of products in the space by 2015.  However, the landscape is filled with investors that have lost funds on technologies in this space. Even the one drug approval that Dendreon (DNDN) achieved has caused disappointments recently due to failure to meet earnings expectations. Similar disappointments occur in most other technology areas; this is not just a biotechnology issue.

In the early 1980s, startups were met with significantly greater funding opportunities.  Why not, it was the new thing and prospects seemed great.  The 1990s drove the technology companies to great valuations and IPOs in this sector were amazing.  2000 showed a downturn that caused many to lose more than 70% of their net worth if they had heavy investments in technology.  The time from 2001-2006 was described by one friend as the nuclear winter of financing; trying to raise capital was horrible!  Many of the venture funds had lost money for their investors.  In one discussion with a major financier of venture funds, I learned they had decided to limit investments.  The changes in investing patterns of this group and many others caused many of the venture groups to rethink their goals; some folded. 

The economy is picking up, but investors are only getting back to their levels of 2007.  Some will never return to their levels of 2000 before the start of the downturn.  So what does this mean for you and your startup? 

·        History is great but make sure you also use your interpretive skills to predict the present and future in a realistic manner.  Otherwise, you may head down a more difficult path than you need to tread!

·        When looking at your product or technology area, keep it simple.  New and improved is great, but if all the prior companies in your space lost funds for investors, you will have a major problem convincing the investor community you will be successful.  Remember, they lost money in this sector.  Your NewCo will have “guilt by association”.

·        Seek great technology, management, and be able to stand-alone.  The more you can separate your business from the crowd and the more exciting & realistic the technology looks, the better your NewCo may look to investors.  Investors love sizzle and excitement in the technology, but they also have become more savvy and discriminating when it comes to making their investments. You may be a serial entrepreneur, but they may view you as a serial killer depending on your prior ventures.

·        Drop the HYPE and SELL REALITY.  They will figure the truth about the business anyway.  Why not show them how they will make money and how you can manage.  Sizzle is important, but investors do not like so much SPIN that they view is as lie; the truth will set you free.  Your image will follow you to each venture beyond the one you are pitching now.

·        When reviewing the history, above all remember:  We Are Not in Kansas Anymore” so make sure you adjust your strategy accordingly.