Posted by Richard Gabriel on Thursday, July 29, 2010 @ 12:00PM
By Richard Gabriel
I live in Massachusetts and let’s face it; we live in what is perceived to be a high tax state. Whether this belief is true or not we share that belief of high taxes with California, New York, New Jersey and Michigan. On the other hand Florida, Texas and North Carolina, among others share a different belief and it is reflected in each states approach to funding of Life Science companies. And each of those states would kill for the concentration of Life Science, technology and educational institution that we enjoy with California and the other so called high tax states.
Sure, taxes in Massachusetts and the overall business environment for start up companies are less than ideal. There is frankly, no comparison between the incentives being offered in Florida and Texas for start up companies to move to those states and start their businesses. Some entrepreneurs have moved to these states and have taken advantage of the help, financing and favorable state environments. Each time a technology leaves Massachusetts heading for more fertile pastures, we lose jobs, tax revenues and population, which in turn decreases our real estate values, creates more stress on our commonwealth to raise taxes even more, it’s a vicious cycle and yet we sit on one of the greatest natural intellectual resources in the world and have yet to figure out how to fully mine its fountain of bubbling opportunities.
However, in my last blog, we talked about a new funding model for biotech and the life sciences industry and we received hefty responses from VC’s that were interested in exploring a new way of funding. Some ideas that we kicked around included a new ‘fund’ that would have a longer time horizon, attract a more patient and less capricious group of investment partners that weren’t demanding a 5 year exit with double digit returns per annum, but rather a combination of long term debt, mixed with long term equity investment.
How would such a fund work? Well a possible appropriate debt to equity ratio should be 1 to 4. Every dollar in long term debt at a reasonable interest rate is backed by 4 dollars in equity. This ratio, provides the limited debt partner with the interest only coverage for the life of the debt, which in Life Sciences, should be no less than 10 years. Additionally, expecting a short term double digit return on a Life Science equity investment is, frankly, ridiculous. Not only does it place an unfair burden on the entity that is being formed and its management, it is an unfair hurdle and it’s artificial to the practical operations of starting and running this type of business.
Well then, what about the risk? How is a venture fund ever to make any money? All these choices have their pluses and minuses and are self evident. For the entrepreneur, think, Steven Jobs, Michael Dell, Bill Gates and not a veteran of multiple start up companies, all of whom have, by now, failed, been swallowed or otherwise disappeared and, if alive, are headquartered in another part of the country. Perhaps the alternative though of invest big, hold, pay dividends and interest or buy back the shares at an appreciated rate that reflects the true value of the business that was built has some merit today? Take a look at the valuation gaps between a pre-clinical candidate and the sums of money paid by Pharma for Phase 2 & 3 compounds, the gap is astronomical and it is that gap that tells us or should tell us that the current model is wrong
We should be looking more carefully at the broken institution of funding our start ups in our state and instead of letting Texas, Florida, North Carolina and California pirate our technologies and people away, find a way to fund them and keep them here. Build businesses and jobs and people will start coming back to Massachusetts or perhaps they won’t even leave after they graduate! Got any ideas? Write us. We’d love to hear from you.
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Richard Gabriel is head of the Life Science practice at Sema4 Inc., dba Semaphore (www.sema4usa.com), a leading global professional services provider of Private Equity funds-under-management and technology diligence services. Semaphore currently holds fiduciary obligations as General Partner for six Private Equity and Venture Capital funds and advises General and Limited Partners as well as Corporations around the world. Semaphore’s corporate offices are in Boston with principal offices in New York and London.
Posted by Jon Klein of The Topline Strategy Group on Thursday, July 14, 2010 @ 2:15PM
Blog series 4 of 4
Conducting Pipeline Interviews
There are two keys to conducting Pipeline Interviews. First, make sure to interview accounts at a variety of stages in the pipeline. The reasons why prospects don’t progress past the first meeting usually concern the fundamental fit of the product while prospects that drop out later in the pipeline typically don’t close due to issues related to value proposition. You have to conduct interviews with accounts at different stages to get the whole picture.
Second, never interview live prospects. Since they haven’t yet fallen out of the pipeline, you don’t know for sure that they aren’t going to buy. Therefore, they aren’t reliable data points as to why prospects don’t buy. In addition, the last thing you want to do is interfere with a sales opportunity.
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This article was contributed by Jon Klein. Jon is the founder and general partner of The Topline Strategy Group, a strategy consulting and market research firm specializing in emerging technologies. Jon brings a unique blend of strategy consulting and hands on operating experience to The Topline Strategy Group and works closely with Semaphore on a variety of engagements.
To read the full White Paper, please go to Semaphore News and click on the May 3, 2010 link titled - White Paper – Market Due Diligence
Posted by Jon Klein of The Topline Strategy Group on Thursday, June 17, 2010 @ 10:00AM
Blog Series 3 of 4
Pipeline Interviews: The Missing Piece
At this point, you may be thinking, "The analysis addressed the overall market size, the potential penetration of the market, and the company's likely share. Shouldn't that be enough?" Actually, it isn't. The typical due diligence process is based on the critical assumption that the accounts that have purchased a solution from the company or its competitors are fundamentally the same as accounts that have not yet purchased. Given enough time, the non-buyers will eventually buy a solution if it has a strong value proposition.
But what if that assumption is wrong? What if the accounts who haven't bought are somehow fundamentally different than the ones that already have purchased in a way that isn't obvious from segmentation factors like size or industry? If that is the case, then ‘I haven't purchased yet' becomes ‘I'm never going to purchase' and the market is far smaller than calculated. And, if the market is smaller than you calculated, the company may never reach its revenue projections.
Pipeline Interviews: Interviews with Accounts that Fell Out of the Pipeline without Making any Purchase
So how do you sort out whether or not you have an ‘I'm never going to purchase' problem? The answer is through Pipeline Interviews. Only prospects that have had sales interaction with the company but decided not to purchase anything can answer this question. They know whether their decision not to buy is primarily a timing issue or is due to something more fundamental.
Continuing with the CRM for Law Firms example, it turns out that approximately 30% of law firms with over 100 people have a fundamentally different selling model than one that is supported by a CRM. Examples include firms who primarily serve consumers and those that focus on a very narrow subspecialty and act as a subcontractor to general practices. These types of firms will never buy a CRM system since it doesn't fit their business.
In this case, the market turns out to be about 70% as large as calculated using traditional methods. We have conducted numerous due diligence projects over the years where the market turned out to be a fraction of the size originally believed, including:
- A company providing translation management software where the real market turned out to be only 10% of the original target: $1B+ companies with 25% or more of their sales overseas. Many industries, such as aviation, do business solely in English everywhere, regardless of local language and do not need translation. Others, such as packaged goods companies, develop custom materials in each market and do not need translation either.
- A company providing software simulations for training repair technicians on maintaining products found that the real market was only 25% of the original target: $500M+ companies that provide low and medium tech equipment such as lawn mowers, pumps, and oil field equipment. Because the process of repairing each product is unique, a separate simulation is required for each product. For the cost of a simulation to outweigh its benefits, the product either has to have very large sales (over $100M/year) or a very long lifecycle (10+ years). The Pipeline Interviews revealed that most companies did not have a single product with sufficient sales (they had a wide range of smaller products) or a long enough lifecycle to make a simulation economical.
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This article was contributed by Jon Klein. Jon is the founder and general partner of The Topline Strategy Group, a strategy consulting and market research firm specializing in emerging technologies. Jon brings a unique blend of strategy consulting and hands on operating experience to The Topline Strategy Group and works closely with Semaphore on a variety of engagements.
To read the full White Paper, please go to Semaphore News and click on the May 3, 2010 link titled - White Paper - Market Due Diligence
Posted by Richard Gabriel on Friday, Feb. 12, 2010 @ 8:15AM
By Richard Gabriel
The Valley of Death for a Life Sciences company is that space, as coined by the NCI's Director of Small Business Innovation Research Programs Michael Weingarten, between a Phase 2 SBIR grant and the commercial success of the technology that is being funded and developed.
I've been there as an entrepreneur. I've been there as an advisor who helps reorganize and counsel companies. Bottom line is if management decides to follow the money and revitalize the business, the company and its shareholders will survive. I've built businesses from nothing more than purchase orders, down payments on contracts and a check book for financing. With a smart financial manager, playing the debits and credits and working the receivables and payables, a business can survive those tough economic times. Guess what; those tough times are here again! And want to know something else? Here's a surprise...your government is listening!
Here are some facts for you to chew on:
Life Science, medical device and services companies that have products for the Life Sciences Industry have a great opportunity with the National Cancer Institute's aggressive programs for Small Businesses under the STTR and SBIR programs. Just recently, I attended a conference in Boston hosted by the NCI's Michael Weingarten the Director of NCI SBIR Development Center; along with N. Stephen Ober, M.D. BU's Technology Development Executive Director, New Ventures. What was most striking about this half day of talks by companies that were hand picked to present by the NCI team and who were award winners of both Phase 1 and Phase 2 grants was the broad scope of the technologies and applications of those technologies. The Life Science technologies represented at the meeting were diagnostics, devices and drugs or as we like to say in the trade ‘D cubed'.
For those of you that don't know about these programs, STTR stands for Small Business Technology Transfer and is done with an institution, a not for profit, a university or medical center. 75% of the fund proceeds are given directly to the institution and the company is allowed to use 25% of the funds. The major focus of an STTR is to transfer important and meaningful technology from an institution into the marketplace through the participating company. The SBIR is known as a Small Business Innovation Research and a majority of these funds are available to the company. Collaboration with an institution is not mandatory.
SBIR phase 1 is up to $200,000 for a period of 6 months. Phase 2 SBIR's are for a period of 2 years and are upwards of $1.5 MM or about $750,000 per year. Most start up companies will be interested in the SBIR program as it helps fund research. If your company is lucky enough to win a Phase 1 SBIR and also a Phase 2 SBIR then your company is automatically eligible for the Bridge Award which is up to $3.0 MM over three years. These funds must include an equal amount of investment capital that will help the company through the ‘Valley of Death' where many companies have perished even though they have had successful Phase 2 programs and have been, for whatever reason, unable to secure additional funding. The NCI has obviously analyzed its own program and the success and failures of its grantees and saw this valley of death and decided to do something about it!
For all the facts go to sbir.cancer.gov and you can find out everything you ever wanted to know about the NCI and their outstanding SBIR/STTR programs.
If your business is in trouble, call someone that has been through it because your best chance for getting through the Valley of Death is to have someone who has been there and come out the other side - more than once. Getting grants, finding new capital sources that you probably haven't thought about, reorganizing your business and focusing on revenues are some of the things an entrepreneur or funding group that holds a position in an ever downward spiraling investment can do.
You can't always sell equity or take on more debt to get your business and your shareholders out of hot water. Sometimes it takes drastic measures - often painful. But if a product line survives or a revenue stream is identified, sometimes that's all you need to re-trench and re-start a fundamentally strong business. With good technology, smart road maps and proper execution you too can navigate the Valley of Death. My biggest problem as an advisor in a tough situation is "will anyone listen?" and "will the management team take action?" In these cases you need a partner that is more than just a review and a proposal; you need a team that is all about fixing problems and initiating action. One of the good things about surviving the Valley of Death is that you come out smarter, leaner, and more focused, with more promise and more certainty of success... almost worth taking the journey.
Send me an email and let me know your experience and challenges...rgabriel@sema4usa.com.
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Richard Gabriel is head of the Life Science practice at Sema4 Inc., dba Semaphore (http://www.sema4usa.com/), a leading global professional services provider of Private Equity funds-under-management and technology diligence services. Semaphore currently holds fiduciary obligations as General Partner for six Private Equity and Venture Capital funds and advises General and Limited Partners as well as Corporations around the world. Semaphore's corporate offices are in Boston with principal offices in New York and London.
Posted by Mark DiSalvo on Thursday, Jan. 21, 2010 @ 3:15PM
By Mark S. DiSalvo
It seems my industry colleagues have been wrongly optimistic and also hyper cynical. At least that is the bottom line of the read I get in comparing the analysis of the 2nd annual Semaphore Confidence Survey with last year's results. And some people have very threatening ways.
Let's start with pay. At the start of last year 51% of the nearly 500 respondents to the 2009 Confidence Survey believed they would earn more money than the prior year. The truth was that only 11% of this year's respondents reported they did in fact earn more than the prior year and nearly 67% earned less than the prior year. But hope springs eternal, just like every investor is certain that they will score a tens strike on the next investment, 78% of this year's respondents believe they will earn more money than last year. Let's check back a year from now and see whether BMW dealers will be smiling.
My peers demonstrated their optimism with their pocketbooks too (well, their LP's dollars anyway). In the beginning of 2009 8% expected not to do any deals and fully 74% thought they would make up to six investments. The year proofed strong with no respondents reporting the intent to do no deals and nearly 98% doing up to six deals with 73% closing 1-3 deals. Further, those deals were larger than expected with 62% self reporting their deals were in excess of $25 Million in each discrete investment when they anticipated less than 17% believed their deals would be above $25 Million in size at the time of last year's survey. As one respondent commented "I smell irrational exuberance".
And in what are we investing? We may be either fickle or very nimble as a business class. This year's expected top three industries were not in the top three last year. Health Care, Enterprise Technology and Financial Services were win, place and show as compared to Digital Media, Sustainable Energy/Cleantech and Infrastructure at 1, 2 and 3 last year. Health Care moved up from 4th last year. People are apparently smelling money and opportunity in Obama-care. As one person noted, "...when you mess with 16% of the economy something's got to break our way."
The just under 400 who did reply this year were similar to last year's mix of VC and Buy-out pros, with a decidedly higher representation of operating executives responding. This year's mix of survey takers were very high on themselves believing that 63% were confident in their business and 77% confident in the person they see in the mirror. Both marked increases to last year's numbers. They even had more confidence in their bosses with 50% expressing that view - nearly double last year.
This confidence however does not extend itself to America's political leaders. Respondents were downright, well...down on President Obama and his economic team. Only 11% expressed any confidence in the president with 55% damning his economic team (compared to 37% disapproval for Obama). The cynicism is markedly clear when literally no one - not a single person - expressed any confidence in Congress with 65% stating no confidence in the folks under the Capital dome. Even state governments and state legislatures earned 12% confidence. This is what happens when you threaten to screw with capital gains taxes, I guess. Interestingly, the survey closed on election eve of the Massachusetts vote to replace Ted Kennedy in the US Senate. I think we know how the Bay State respondents voted!
Click the link to see the highlights of the results of the this year's Semaphore Confidence Survey results. If you want to do your own comparison, click the link to see last year's Semaphore Confidence Survey results.
While some might think the survey results rather depressing in either fact or faultily hopeful there was more than a bit of entertainment. Several wondered after the wag who famously noted in the survey comment section last year that, "PE is dead and I wish my boss were too." Commenter's this year frequently asked after that quote master, speculating if he or she were "on the lam", noting that "if he did murder his boss it would be justifiable homicide". Our infamous predictor never surfaced - neither admitting to the crime or the prediction. However, a new would-be industry murderer surfaced stating with equal certainty, "‘PE Killer' was wrong. It is VC that is dead. And my boss is comatose..." I doubt that either PE or VC conclusion reflects the true state of our industry. That said, apparently at least two of our colleagues have either a morose sense of humor or deserve to be patted down before they go to an industry conference. Maybe we should post a reward to uncover their identity. Wanna contribute? I'll put up the first half a buck.
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Mark S. DiSalvo is the President and CEO of Sema4 Inc., dba Semaphore (http://www.sema4usa.com/), a leading global professional services provider of Private Equity funds-under-management and technology diligence services. Semaphore currently holds fiduciary obligations as General Partner for six Private Equity and Venture Capital funds and advises General and Limited Partners as well as corporations around the world. Semaphore's corporate offices are in Boston with principal offices in New York and London.