Host: Mignon Fogarty
Transcript: This episode originally aired March 1, 2006
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INTRODUCTION
Mignon: My co-host Adam Lowe has had the flu for weeks now, and as I was sitting at the dinner table wondering what topic I was going to cover, I looked at my husband Patrick and thought, “You! You're interesting!”
Now before you think I've gone off the nepotism deep end, let me tell you about Patrick. While he was just a post-doc at Stanford, he made some exciting discoveries in both the gene therapy and cancer areas, and decided he could start a biotech company. So in 1999, with bravado that can only be summoned by someone who's never started a company before, he founded a company called Tosk, in our garage no less, and went through the whole process of raising money, juggling being the CEO and Chief Scientist, moving into real lab space when the neighbors reported us to the police because they thought we were running a drug lab, hiring staff, handing management over to other people, and eventually transitioning out of the day-to-day operations and into a consulting role. So he has a lot of wisdom to share about biotechnology in general, and specifically about starting a company.
So Patrick is here with me today and in a minute we're going to talk about the first steps in starting a biotech company.
But first, I wanted to let you know although we try to get transcripts of our shows up at welltopia.com, it does usually take some time, so I've also created a science blog at the site where I'm putting up links that relate to each of the shows. You can think of them as quick, fast liner notes for when you want more information about something we've talked about.
Also, we have a new section for science blogs that we really, really like. I'm a member of the National Association of Science Writers, and all of these blogs are either written or recommended by members of this group. And it's great to see the stories that some of the best science writes in the U.S. Choose to highlight, and what their opinions are. So I hope you enjoy this new section of welltopia.com.
[Absolute Science Bumper from Evolution 101]
Interview with Dr. Patrick Fogarty
Mignon: So how hard is it to actually start a biotech company. You know, you were a postdoc at Stanford and you decided you were going to start a company. What did it take to get that going?
Patrick: So, what does it take to start a biotech company? Well, it's kind of like starting any company, the first thing you need to do is have an idea, and it has to be a very good idea. And what you need to do is sculpt that idea into a business plan. So understanding what a business plan is is the first key element that anyone who wants to start a biotech company needs to do.
Mignon: So, there's about 1000 books on how to do that, you can buy a program to make one for you. What really goes into a business plan? Did you find those resources helpful when you were doing it?
Patrick: There are tons of resources out there, and I think all of them add some jewels of wisdom, and some pieces of information that you might want to just discard, because really it needs to be short and concise, and if you go and add everything that everyone wants from every place, it's going to be very long, and it's not going to be to the point where the investors or the team members that you want to recruit really are looking for. And if they don't get that information up front, you're not going to make a sale, whether it's attracting key personnel to help get the venture going, or to attract money to finance a venture. So with that said, what do you do?
It really stems from the idea, and that is where every idea is slightly unique. What goes into a business plan for a manufacturing based company, versus and R&D, versus a service industry type of business plan are going to be slightly different. But you have to remember there are key elements, that the investor will want to see. That is the end goal that you need, because without capital you're not going to get your business going.
Mignon: Would you say that the most important thing to get across in the business plan is how the company is going to make money?
Patrick: Yes, and no. That's a very key goal, to attract capital, but it also has to be how soon it will make money, how much it will make money, what are the risk factor that are involved in making any money, and how well is the core idea protected from either competition, theft, or just in the sense of being able to resell it to another company. What is the exit strategy for making that money? In protecting the idea, is it something that another company would want to buy, or is it such a grandiose idea that .you could actually make a company that could do an initial public offering and allow an exit through that market.
Mignon: So what about all those companies that we hear of that get started and they don't ever have a business plan. It's on the back of a napkin, and suddenly they're in a garage programming or they have customers or investors. Do you think that's rare or common? How much time would you invest in a business plan, versus just jumping in and getting started (cheap oem software).
Patrick: I would invest as much time as it takes, because you're going to hone your ideas. You're going to discover what potential road blocks occur at all the different stages of the development of a company. So to be specific, in a biotech company, if you're going to make hopefully a drug that helps cancer, there are so many aspects that you have to envision. It's not just going out and finding the right drug that's going to help the specific kind of cancer that you're looking for, but then it's going to be, is that drug manufacturable, and if it is manufacturable, is it able to be scaled up and sold to all the people around the world who have cancer? How stable is that drug, can you actually deliver it, and get it into the hands of the hospitals and patients that are going to use it?
Mignon: Right. And that's been a problem with drugs that I've learned about in the past. There were some radioactive drugs that were very difficult to store and transport, and their more easily transportable and storable competitors did better. It also brought to mind personalized cancer vaccines that were based in tumors that they took out of people's bodies and developed individual vaccines to those. They worked very well, but you could never mass produce them, so those are good points.
Patrick: Those are the kinds of things. Identifying a road block, and overcoming it, especially when you're talking to investors. You're going to have multiple types of investors potentially. You can go out and try to raise money from people who don't really understand, and just get them excited about cancer, and hopefully they will invest in our company. Versus investors that are more traditional angels and venture capitalists that are going to be more sophisticated and understand at least in general what the competition is in the area you are going into, as well as how well the intellectual property is being able to be protected, all the way to what are they key questions to ask in order to get a company like that in your specific space either sold in a liquidity event so that they get their money back, or to an IPO.
Mignon: Would you say the purpose of the business plan is also to inspire people? Do you use that also to hire your first employees?
Patrick: Actually, that's a good question, and I would say no. The business plan is really the roadmap of the company, and that is going to be for investors. To inspire people there is what is called the executive summary that is a page, maybe two pages, right at the beginning of your business plan that summarizes at a high level the business plan. That''s going to be the key thing that is going to get people excited about being involved in your company. And then, if that gets them excited, then you'll get to talk to them. And then it is your enthusiasm and their interest in your enthusiasm and your idea that's going to get them to want to be involved.
Mignon: So how long was it from when you started writing your business plan until you were actually doing something?
Patrick: It was probably six to nine months until I really started doing something. And that's really going through probably a half a dozen drafts of just and executive summary, and another trhree or four drafts of complete rewrites of the entire business plan, not just minor edits of the document.
Mignon: And at what point did you leave your full-time job?
Patrick: Really, once investors were starting to get interested, and ready to back the venture with some capital.
Mignon: So was it before they wrote checks, or was it not? I can't remember.
Patrick: It was actually before there were checks written.
Mignon: And looking back do you think that was a good choice? Would you have left your job sooner to pursue it, or would you have waited a little bit longer, or was that just about right?
Patrick: It's really going to be different for everyone, and that really comes down to what the entrepreneur, and the team members, they types of people that you're going to get as investors. You have to understand what the risk tolerance for all of those individuals are. Yourself first and foremost.
Mignon: Because if you're panicking, you're not going to be able to execute?
Patrick: You're not going to be able to execute correctly, and it will just unravel and go up in flames at that point.
Mignon: So I know we said earlier there were about 1000 different sources for how to write a business plan, but what are your thoughts on what the key elements are to include in a business plan.
Patrick: That's a good question, because the thing that I want to emphasize is that of all the sources that I looked at, none of them fit. There was not one good source, or two good sources that would help me craft my business plan to make it a success. And that's one thing that I think it really lacking, especially in the biotech field.
So just briefly, you need to just come out and get people excited. Tell them what the business is doing. What it's going to do. In other words, answer the question up front, “Why? Why should I look at this? Why is it exciting? Why it relevant?”
Mignon: I've seen business plans where they don't get to that until the fifth page. You've got to get to that right away.
Patrick: Yeah. That's really critical, because if somebody is not interested, they're going to stop reading. Because investors, if they have a lot of money, time is their most precious commodity. With that in mind you need to be really concise, and really up front, especially with the executive summary, because that page is like the holy grail of a business plan, and most investors won't read all of that if the beginning doesn't draw them in.
Mignon: So, since the executive summary is so important, let's talk more about what goes into that.
Patrick: In a good executive summary, you need to get your idea across, and your enthusiasm about what the idea is, and the potential. It's not just about curing cancer or making a new widget. You need to then back up why it is special. What is the “wow feature?” Especially if there are competitors, and if there are competitors you are going to want to mention those, and distinguish yourself from them, because of your “wow feature,” whatever that is. And you're going to want to be able to show that your idea is protectable, whether it is through intellectual property, through a specific sort of agreement with a company or university.
Mignon: Like an exclusive license, or something like that?
Patrick: Yeah, or something like that. Because that also gives them a warm fuzzy, and reduces risk that Joe down the street isn't going to do this.
Mignon: Or Pfizer.
Patrick: ...or more importantly Pfizer. And if they do do that, then they are infringing on you, and you can make money that way. Basically they want to know what the market is for your product. OK, say you're successful. What is the market?
And be realistic. Don't go out and say you're going to cure cancer. I've been in the cancer research field for a long time, and I can pretty much guarantee that there's not going to be a drug that cures all cancer. Its just not going to happen. Anybody that thinks so, we can talk about it. Send me an email here and I”ll tell you why. I don't want to get on that topic.
But just to stay focused on the executive summary, that's what it's all about: focus. Hitting it with as few sentences and few words. It's going to take you the longest time to write the executive summary because it has to be short and concise. So, what is the market opportunity, who is going to be your client, how are you going to get the product to them. How much money are you going to take, and when and how long is it going to take to get you to different milestones.
One of the biggest and best milestones is break even. When are you going to be able to support yourself? When are you going to make as much money coming in as going out so that these poor investors don't need to keep writing checks. That's a huge milestone that you need to have in there up front. The time for all these things to occur, especially when is an investor going to get their money back, and more. Is it going to be double in three months? Quadruple in two years? What is the time horizon and what is the return on investment.
Mignon: One objection I've heard to business plans a lot is that entrepreneurs will name a large market. They'll say, “The breast cancer market is huge, and if we get just 1% of that we'll make $500 million dollars,” and there's never a justification for that 1% of the market. That's a very common mistake that new entrepreneurs make. Assuming they will get a small but certain percent of a market, but providing no justification for why they would get that much.
Patrick: Yes, everything needs to be documented. This is a person who is going to write a check...you need to be truthful with them. You need to be credible that you can do what you say. It's better to under promise and over deliver.
Now having said that if your market is too small, you're not going to get money. That goes back to analyzing the idea. Is this an idea that can work?
Mignon: And for biotech it's usually pretty easy to figure out your market size.
Patrick: Yeah, that's true. The key is that you need to document what type of market you are going to get, and as you say, what percentage, not just pulling some number out of the air, but really understanding the intricacies of market analysis for your industry or your segment of the industry, and how you are going to capture that. Why is that number reasonable. And in the drug industry that is pretty easy to do, because you can go back if you're going to make a cancer drug for X, Y or Z cancer type, there have been a lot of drugs made for those. You can go back and look at the market data as to what percentage of the market a new drug captures over what type of sales and time frame. That's the market analysis you need to do for any business, and that' the kind of sophistication you should really have to give investors the credibility to trust you and believe in you.
SUMMARY
Mignon: Let's summarize what they key components are, just to sum up.
Patrick: Just to sum up, it needs to be short and concise, and it needs to get across your excitement, and tell up front what it's doing and why they should invest in it. And why they should invest in it is because of who's doing it. What credentials do you have, what do you bring to the table, what types of people you need to go and find, and where you are going to find those people.
So the key points are: Tell them what the company does, how it is going to do it, how it's going to meet those objectives, when it's going to meet those objectives, how much money you need, and when the investors are going to get their money back, and how much. And if you can tell that story you've don't a good, successful job. And if the investor is interested in your opportunity, he's going to want to go the next step and hear more.
Mignon: Great. Well, now we've talked about what goes into a business plan, so next time we'll talk about what happens after you have your business plan.
[Transition music]
CLOSING
Mignon: I know this business topic was a diversion from the straight science that we usually cover, and I'm curious what you thought. We can do more on the business of science, mixing it in with our regular stuff, bringing Patrick back and other guests as well, or we can just stick to the straight science. I've made it really easy for you to tell us what you think by putting a poll up at welltopia.com. If you go there, you can voice your opinion with just one click. And while you're there, if you feel like filling out our listener survey, or visiting one of our sponsors, that would be great too. And if you have feedback, you can always write to us at absolutescience@welltopia.com
Here's to hoping that Adam feels better soon, and until next week, live well.
Note: Patrick Fogarty currently runs the Armchair President website and podcast. He also publishes information on a blog at myspace, a blog at libsyn, a blog at podcast pickle, and more extensive information than these at political dispatch.
