Session 2-2: Business Plan I and Executive Summary - Video

M. D. Anderson Cancer Center
Date: March 2008
Duration: 0 / 56:48

Return to Inside Office of Technology Discovery

Paul Campbell, Ph.D., Director, DFJ Mercury.

Narrator:

One more message for those who have not been here before, you need to fill out this media authorization form so those who have not filled it out yet, all the others I don't have your name yet on this, I'm going to put that up here, you're going to fill that out and leave it here so I can or give it to me at the end. I need those okay, thanks.

Paul Pryzant:

It's okay, I can do it backwards

That's also a good thing.

Great. Hi! My name is Paul Campbell and just a little bit about myself, basic background stuff. I am a scientist by training, I am a graduate at the Johns School, I am an MBA student, was an MBA student. I have co-founded two companies and I'm currently President of one and Chief Science Officer of the other. This is a pretty boring way for me to tell you about my life and I recommend that when you write executive summaries and business plans you think about it, think about how the person sitting on the other side of the table or sitting at the other end of the e-mail is going to read your message and what they're going to get out of it, thank you. You know, it sounds crazy, but people like to hear stories and so anytime you can actually craft a story that explains your business to everyone else that's a really good thing to do. Stories stick in people's minds a whole lot easier than just a long list of facts that have been recited, I mean this just has something to do with the way people's brains are wired, but it works and at the end, I'm actually going to tell you a book that has done a very good job of summarizing what I've seen in my experience working in the venture capital world which is those people who come in with a really interesting story rather than a company usually end up getting a meeting with us whereas if its just a boring business plan there is a good chance I'm just not going to be interested in it... I'm not going to continue to read it and you really won't get a meeting, your business won't go anywhere. So think about it, you need to make us interested in your work and right now your job is to become a sales person and I know that's hard as a scientist to go out and sell your work rather than letting it stand on its own, but that's what you have to do so consider yourself now a communications expert and a marketer. So one of the big things that I teach, this is one of the few things from a business school marketing class that I will ever mention in public is a little statement called AIDA, it's Awareness, Interest, Desire, and Action, and this is actually how people think when you got out and buy a product and this is how people think when they are looking at business plans. The first thing is we don't know anything about your company so you make us aware of it. Hopefully, it's interesting enough that we have a desire to do something and that do something is usually call you back for a telephone call or invite you into our office for a meeting and finally that opens up a relationship where if everything works well, we end up investing in your company. So in an executive summary or in a business plan or in an elevator pitch, which I think are all topics that you're going to end up covering in the next couple of weeks. You've got to remember what the real goal is and it's literally to be remembered. I see, I don't know, how many hundreds of business plans a year. I can't remember most of them and we also go on and say oh yeah that was that guy who had this crazy idea who and it's usually the crazy people we remember it's not the ones that were just right down the middle of the road, businesses that just didn't happen to fit our business model. Also to get a meeting, that's what you want to do. Honestly, your business plan or your executive summary, if it lands on my desk it's not going to be 'Oh well this is great, I'm going to write him a check right now' and you hand it off. I'm going to invite you in if I'm interested. So remember whatever you can do to get somebody's interest to get a meeting that's your goal, but don't summarize everything when you try to give an executive summary just try to put the bits and pieces in that are really important, the parts that will stick in people's minds and that's the tough part. I think Ali's goal of trying to make an executive summary in two pages is great, but I tell people as I like to see a two-page executive summary and a 20-page business plan. Anything over 20 pages, I'm not going to read it, I mean, yeah there are some financial tables in the back, and if I'm interested, I'll flip to those, but the text if it's about 20 pages. Now that is a little different from an operational type business plan which if you're going out and really trying to start a business and trying to put thought into the business you're going to have a lot of spreadsheets with a lot of details and you're going to think about, you know, what type of lab space do I have to have to complete the work and actually bring my product, my therapeutic, or my medical devise to the market? I mean how many pens and pencils do we have to have? You know, things that are just at a certain level of detail that no one is going to be interested in reading so try to stick to the big ticket items, and I like this utter useless sound bytes, I mean it's pretty important to remember that since all I was talking about the gross domestic product. I have actually seen a business plan come in that says our market is 14% of the GDP and they said their market is healthcare, you know, they wanted it to sound really impressive that 14% of however many trillions of dollars, oh yeah it's a big market it's just not your business and so try to say things that are believable and that will actually, you know, ring true when we hear you. We have a certain level of BS filter. We try to filter out some of the stuff people say and trust me you have to have one. Finally stories are interesting and facts are boring so if you can stick to the stories. Now, the executive summary is a kind of a tricky document, you know, like I said it's two pages long, it's also in my experience, it can take you as long or longer to write the executive summary than the business plan. This is one of my favorite quotes from anybody and this from Blase Pascal. The present letter is a very long one simply because I had no leisure to make it shorter. You can write down everything, but it's in rewriting and rewriting and rewriting that you actually shrink it down to the most essential, most salient facts that you want other people to remember, and if you can hammer those facts in somebody's brain, typically they are only going to remember two or three things you tell them, whether you talk to them for five minutes or five hours so stick to the big ticket items you want people to remember and try to make it very clear what your point is so like we said two pages it's going to cover the same topics that you see in a business plan, I'll give you a little bit of a listing of that in just a second, but some of the things that I like to hear are how much capital your business is seeking and we'll get back to this in a minute, but the reason for that is that Venture Capital groups are somewhat stratified and you need to think about where your executive summary is going? Who is going to be the person reading it? And try to tailor it to that person. I worked for DFJ Mercury, we're a seed stage venture fund based here in Houston and we've done a lot of work with medical device companies that are in the UT system. One company that we worked with I can remember is here in M. D. Anderson on an oncolytic adenovirus for cancer therapeutics so we have got the cancer therapeutics market, we work with another UT Health Science professor who has done a little bit of work with M. D. Anderson as well that's on a contrast agent so there is the diagnostics and medical imaging, and we have the medical devise, minimally invasive spinal surgery, for lumbar spinal stenosis. It has reached FDA approval and it's one of these things we're always right you've got to get to the market really fast and do it very quickly and we managed to do this on a very small budget for just an amazingly small amount of capital, put together a very team that got a product into a huge market four hundred thousand people a year suffering from lumbar spinal stenosis with a minimally invasive procedure to solve the problem. A company in this space was recently sold for 675 or 875 million dollars, doesn't really matter because at that point if you're one of the people who've found it your life is made and you need to think about it as a life changing event regardless and like I said that example of the lumbar spinal stenosis minimally invasive surgical devise company there was an example of an exit strategy out there acquisition by these other companies there are 675 and 875 million dollar acquisition that is probably what's going to happen to your company too is it will be acquired, but it's good if you can provide us with examples of other companies that have followed a similar path, particularly when that company is in the same industry or the same medical specialty or the same disease as the one you are working on. From now on, what I'm going to say to a large degree has to do with both executive summaries and business plans. The high level part would be the executive summary material when you get down to the nitty gritty that will be what you might put into a business plan some of these are nice to have, some are must haves, and some is just up to you, like I Oli said be creative because honestly I haven't ever seen like a VC guideline checking on series of check boxes, 'Oh yeah, they did this, they did this, they did this' and some level if you don't put in some information that you ever really get answered that's a good place to be because if we are really interested we will come back to you with questions and we will ask you questions and then you'll have that answer sitting right there. That's a trick that I think graduate students use with their faculty members when they are going through candidacy exams, leave them easy, leave them really easy questions to ask. I'm not going to read the list. These are the basic things that you are going to have in a business plan usually. I've put stars by the ones that are most often included in an executive summary. One thing I didn't mention before is in that list of 10 or so items is the value proposition and the reason why is that's kind of your story at some part and what will be woven throughout the business plan or executive summary whenever you're talking to someone else about your business you're going to be talking about a value proposition basically and so the value proposition is: What is your technology? What is your business? What is the problem that it solves? So for the oncolytic adenovirus company that we worked with the problem is that there is no therapeutic that really works with glioblastomas. There are therapeutics out there Temodar and some others that extend patient's lives, but from 12 months to 13 months for twenty, thirty, or forty thousand dollars and a loss in really the patient life, quality of life is very low that is not a home run. So there is a market out there that really needed a new cancer therapeutic that could be life changing and it's very easy to talk about completely eradicating glioblastoma and getting people's interests and the technology is very strong and it works and we believe in it very deeply that's why we invested in it. We want to work with companies that really change the world and try to improve patient care or something comparable, really meet an unmet need that's what we want you to talk about - what is that unmet need? And the next, how do you make money? How big is that need? And how much of it do you think you can take? And our case let's say there are 7000 glioma patients a year who need therapy, you multiply that times what you think the average therapy cost would be, that's the market size it can be as simple as that. Now the background and purpose doesn't necessarily need to come up at the front of anything you do, but it usually includes a little bit of history on the company and where you are right now and what you plan on doing so when you're giving somebody an update of course you would expect your chronic conditions to be up in the front you would expect the objectives, but it's another piece of the puzzle that gets woven throughout the story. By history of the company, and in this case, I mean try to tell us a little bit about who founded the company, and if you can say, which laboratories, which universities it comes from that's really important, especially because we do deal with basically repeat customers. There is faculty members around here who get interested time and again from outside capital looking at their research and that's part of a name brand recognition in science. Current conditions may be we just recently founded the company we're asking for a million dollars to set up the facility so that we can develop a prototype for some new trocar and what you expect those goals to be in six to nine months you expect to have a working facility with three employees making trocars that could be ready to use in the OR for test patients after you go through your IRB and whatever stuffs are required to test it out. Now the next chunk has to do with the market and typically this is one of the weakest sections of all business plans, and I've written a lot of business plans and it is still the weakest section of my own, so I don't mind telling you pointblank that as much time as you can put into understanding the market, who your customer is, who buys it, who sells it, and you know, what types of changes are going on in the marketplace, the better off you'll be. Don't let it keep you from working on the other aspects of your business, the important ones that really make money, but sometimes you really do have to figure out who your customer is and who is going to buy your product. The types of information I have listed here are usually what you'll see in a business plan and/or in an executive summary, but sometimes it's pretty simple you need to say who is going to buy your product and why and just so you know the person buying your product is not always the patient and I am sure you've probably figured that out by now. Sometimes it's the physician, sometimes it's some guy in purchasing, you never really know. The usual sources for market research come from industry groups. I have used a lot of different statistical data sources that come from medical societies. Great place to get a lot of market data: How many patients have a particular illness? What's the usual cost of caring for that illness? What are the usual treatment routes? Things of that nature come from industry studies or industry groups that provide a lot of value to you as a start up company. Focus groups are usually something that might be a little more consumer oriented and I don't think we have anybody here from any of the dental schools, but that's one of the places dental and cosmetic surgery are one of the places that see a lot of focus groups. Customers and customer surveys, in this case what I mean is talk to the physicians, asking them what the pain in the market place is. Talk to them about whether or not what you're trying to do really fills that pain. This is pretty much what happened to our medical devise company where we had a couple of physicians sitting around, in fact they came from M. D. Anderson originally and they were saying, you know, we know lumbar spinal stenosis is really a big market there's a ton of patients out there just really nasty surgery, you know, they lie you down on a table, they cut off chunks of your spine and go in and try to patch your back together, you know, decrease some of the tissues impinging on your spinal cord, but that's not really an acceptable procedure for a lot of patients because these patients can be older or unhealthy, thanks to our metabolic lifestyles that makes them not very good candidates for medicine or for surgery and so this was kind of a case where minimally invasive image guided surgery was a great opportunity, but nobody was doing it, it doesn't mean nobody had thought about it, it just means nobody was doing it yet so the company moved very quickly and talked to customers and said would you work with a device like this, how can we make a device that will fit you, does it fit your hands, you know, talk to the surgeons and see how they'll use it. They came back saying, 'Oh this is great in fact these devices you've made we can probably use in other places too let's talk about that'. Seeing that you have a lot of really good feedback on your business ideas, talking to individuals who would be using whatever medical device or therapeutic that you're providing that being said think about the confidentiality issues and the intellectual property issues here, don't just go talking to everybody, try to make sure you're first protected by intellectual property and then second you talk to people you trust so that's a good idea. And at the note, I did make a... at the bottom I did make a note, I've seen a lot of people who use market data, but our venture finalist also looks at lot of software stuffs and when you see market data that comes from the internet bubble period with these just obscene evaluations people talk about all the time. I still get people telling us that's how we should be evaluating their companies and that's not really a relevant statistic from the current market place, it's like homes, when you go out to buy a house, you look at the data, the recent data for the market where you're buying the house. Some of the statistics are pretty easy, it's just overall market size, the usual things that are pretty easy to calculate, growth projections and industry reports are a great source for this same data again. We tend to look for, the VCs, the guys on the other side of the table, we tend to look for things that are pretty detailed. We want to know not just that you're going after oncology, but you are going after the 50% of patients who have this particular illness who show a particular characteristic that you can treat and that's the level of detail that's really good to have. It's nice though if you can say those are the patients we're going after, but oh by the way, we think we can treat all solid tumors or something of that nature, so you give us an idea of the very specific problem you're solving upfront, but tell us what the big potential opportunity is, the big pie in the sky dream, if this really works you're going to be able to take on the world. How big is that world? Usual competitive factors, I'm not going to go into these in too much details, but these are things that if you read them here, you pretty much get an idea of what to dig into. The one at the bottom is kind of interesting - substitute products and services. A lot of times people don't really think what that means. I've had a lot of people come up to me and say, we don't have any competition, we're, you know, there's no one else out there doing what we are doing, we can, we can take on this entire market. Well that's not really true, because sometimes your competition's do nothing, and in the case of lumbar spinal stenosis, that was the competition a lot of cases patients did nothing because there was no suitable activity and you have to then convince those same patients who've been told that all these different technologies are a risk that your technology isn't. So you have educational hurdles to overcome. And I talked about other market influences here for you guys probably the most relevant one is what the government is doing and that can range from anything from changes in FDA regulations, changes in intellectual property loss to how are Medicare Medicaid system reimburses different treatments. So there's a lot of factors to keep on top of, but as a Venture Capitalist we try to think of not just the technology, but the business as a whole and we encourage you to think that way as well and think about the problems that are out there things that might be a problem. Talk about them and say what you can do to mitigate those risks, seasonal fluctuations. Here is an account if you come up with a really good sunscreen or something like that, but it happens. Marketing strategy is a big issue and how you try to sell your products. Whom do you like to hear about this? One of the simple things you can talk about is, you know, you plan on partnering with a big company who already has a sales and distribution service, realizing how much of your margins you are going to give up to them, but how much money you're going to avoid having to spend by developing your own sales force for a product. How do you attract customers? Is it just by having really good thought provoking or thought leaders in a particular industry? Going to different presentations? Sorry to give different presentations in your industry groups? Or is it by marketing on the television? We typically do ask for forecasts of either sales or for the industry or for your company, but we also tend to ask, you know, what do you think is going to happen to the patient population that you're working with as well. Obesity. It's probably going to grow. There are other illnesses where we hope that is decreasing over time those are the types of issues we would like hear about. Now product development is a kind of tough one and since I really am serious about the company right now the R&D and product development time lines, man, those are tough to nail down because you know a lot of times, especially in therapeutics it can be a pretty cyclical process. You make a small change to your protocol, and repeat the process and then you find out that oh I need to make another small change and you repeat it and then you try to explain this to the non-science business guys, and you're like, but and you tell me you're going to have this done in a month, oh there's a lot of risks that we just can't quantify before we start. You set up a good product development time line and you try to stick to it and hopefully you can. But it is a hard thing to do what we like to hear about is where you are right now? What can you do right now? Reproducibly in a lab. We would like to where you're going to go in the future, and if you think after you get this first product out in the market, are there other things you can do with the same technology that will be attacking your markets, tell us about them. You don't have to have everything nailed out, nailed down in that forward looking process, but it would be nice if you just give us an idea because maybe we'll say, 'Wow! That really is a huge market out there' and new products and development falls in the same category - 'Wow! There's really huge new opportunities tied up in this company not just that first product coming to market.' I'm going to leave intellectual property to the professionals, but there is a couple of things I want to say and the first is we'd like to know, especially for me, I would really like to know not just the half patents, but feel free to give me the numbers of issued patents or published applications, let me know what they are, let me know what the priority dates are, just be upfront about it, I'm going to find out later and sometimes I get a really good idea of what you're technology is and what the competitive line base is by just going over to the PTO website and plugging in the information and pulling it off the internet. I learn a lot really fast that way. We would like to hear if you've licensed any technologies, what the terms might be that are technologies you license into your application or your technology. A lot of times you use some genetic tool that's got a... you have to get a license from another university to use it, we just need to know that upfront. It's not a problem, it just needs to be disclosed. Now, I put this bottom line on here for a pretty good reason and I know Vioxx has been pulled off the market, but the Vioxx, Celebrex dichotomy works pretty well here, and if, and that's what I usually use in more polite society, but the Viagra and Cialis trick holds the same the same. Vioxx came to market thinking it had just an iron clad pattern portfolio and, you know, nobody came out with exactly the same molecule, but it didn't mean that no one could come out and treat the exact same problem and not violate your patents and you need to be aware of that and you need to think about that. Are there other ways to do the exact same thing you want to do, think about it and start talking to your IP attorneys and lay down strategies to get around that. The same thing happened with Viagra and Cialis, you think you got this huge multibillion-dollar market locked up for I don't know how long and all of a sudden whoops! Half of its gone. There are some companies out there that really miss that revenue. Production requirement here is something that you will see more likely a couple of paragraphs written in a business plan not in an executive summary, but if there is something like really rare, really weird you need or really common and really cheap you're using it's kind of interesting to stick that in. I don't know, maybe you're working on a therapeutic that uses some bizarre chemical compound extracted from a plant that's only grown above ten thousand feet in the Andes. Well, let me know that means it's going to be really hard product resource, but at the same time the contrast agent company we are working with is reformulating an existing off-patent contrast agent that is readily available and very inexpensive and we can buy at a USP grade, change the formulation and sell it, now that's interesting. Financial data is one of the places that people tend to spend either not enough time or way too much time. They either give you tons and tons of data or not enough. What we like to see in general is 6 to 12 months of budgeted expenses and I'm going to stick to budgeted expenses pretty clearly because that's really the only thing that's in your control, and if you are a start up company, that's probably the only thing you are going to have for years hopefully not too many years because as a Venture Capitalist I would like to see a profit, money coming in the door is good, but 6 to 12 months that's all you really know about and you should think about that as the rest of your life at least in the startup world. Overall, you might have a two or three year budgeted, budget projections of some sort and that might include, you know, just basic ballpark idea numbers for legal expenses, rents, salaries, having consultants help you prepare documents for the FDA, and thing is like that, but think of the next 6 to 12 months, really know what those numbers are because venture capitalist are usually going to fund you for 12 to 24 months and they need to know what they need to shell out at the beginning and what goals do you think you can meet in that time line. Typically, this data is provided in P&L or profit and loss statements, balance sheets, cash flow statements, things of that nature and I know it sounds strange, but we do like to see something called a break even analysis and that's something that's probably a bit beyond this for this short discussion right now, but a break even analysis tells you pretty much how much you have to sell before your company breaks even and quits losing money and while that might not be until some time in the future, you kind of need to know what the volume will be; otherwise, you don't really know if you should be in business because sometimes you need to sell something to everybody in the world before your company can make a profit that's not a good idea. Organization and management is kind of another iffy area and you don't have to go into too much detail in an executive summary, but small companies sometimes don't have much of an organizational structure. For a long time in the company that I have been working with Glycosperse Technologies there were two of us and then there were two of us and one scientist and the two of us were only, you know, getting paid part, you know, as consultants part time, whatever you want to call it. The scientist was the full-time employee working his fingers to the bone in the lab somewhere around here. So there wasn't a lot to talk about, but that doesn't mean you shouldn't list your qualifications and why you're the one doing the job right now and then after that list the type of people you're looking for to round all your team, you know. I'm not a CEO. I have been told I don't have enough gray hair, but it's just because I'm kind of blondish and it hides, but you know what type of a CEO are you looking for, for your company? What stage is your company and does it match the people that you have? A lot of times really young companies won't have a scientific advisory board, but as you start to grow it's a good thing to have because it'll help you make not only just strategic decisions on the scientific side, but they act as your marketing group to some level because they go out to conferences and talk and they are nice people to have giving you good PR out in the world. Usually there are some brief bios, but one of the things that we really hone in on from the other side of the table is what's going to happen in the near term and in the long term? Who are the key people you need to hire both on the business and the science side? How much is it going to cost to get them? How hard are they to find? And if don't find them, what's going to happen to your business? Because if you're looking for really key special personnel that is required, absolutely required to move your business forward, but they are hard to find, then that's going to be a key investment criteria that that person has been identified and is willing to come on board once the venture capitalist hands over the check. Now this is the part that I think someone's going to be talking about more in the future, but it's one that I can give you the 30-second venture capitalist reasoning behind everything. There is a couple of different legal structures for a company. In Texas, a lot of companies are limited liability companies LLCs and then you can also be an S corporation or a C corporation. We typically like to see C corporations and C is just a legal definition that you can find out somewhere in the tax code, I believe, out there somewhere, but also the state of incorporation is important. The reason why is a lot of times small companies get investors from all over the US and we need to agree on a common law for all the documents that go into forming the structure of the company. If you're a Texas company, Texas law is pretty good, and if you're just looking for Texas investors and you'll never seek anybody outside of Texas, you can be a Texas LLC and not really raise too much of an eyebrow, but if you want big venture capital money from one of the coasts California or out in New York they don't know anything about Texas law and they don't have attorneys who know anything about Texas law. Delaware by default has kind of become the Switzerland of the legal industry and so most companies of Delaware were C-Corps. If you have an attorney who is helping you set up you company, if they don't suggest you're Delaware C-Corp you might want to ask why or find a new attorney, and if they tell you, you want to be a Delaware C-Corp and you say 'No, no I don't want to do that,' you should listen to the attorney. One of the other things that we will want to know at some point and it may not always be disclosed in your business plan, but it is we want to know who the current owners are and something called the Cap Table, the capitalization table. Who owns how much of the company? How much did they invest or own in that part of the company? And how much money has been raised to date? And that's summarized in the capitalization table and that will be included in your legal documents upon funding, but the most major thing we want to know is how much money do you really need, not just how much money are you asking for, but to get to those next key milestones, you know, right now you've got let's say really good data from some chemical you've made in the lab and you have tested it out in cell culture and you see really cool results back from the system you're testing. Next step to commercialization is probably a mouse model and some toxicity data. Well, how much is it going to cost to get that data done? Give me an idea, not just how many mice do you have to treat or, you know, how much is it going to cost to treat the mice? How do you scale up and how much is it going to cost to scale up manufacturing that chemical. Let us know what those milestones are and how much it's going to cost to head each one, and sometimes, we'll help you come up with cheaper ideas too. One of the ideas is kind of yeah, it's, it's usually not listed in a lot of business plans is critical risks and my question is: Are you trying to hide that from the investor or are you trying to hide that from yourself? I really suggest you at least sit down and think about it, and be willing to talk to people very openly what the risks are in your business, but they can range from anything from science risks to the point that you have been working in a lab and you know you have got this really cool scientific finding, but you don't know how to make it reproducible yet or it could be engineering issues how do you do design a system that remains sterile during transportation and then you know lots of different ideas. Market adoption is a big one. Never underestimate people's willingness to buy the wrong thing or not buy your thing. People bought tons of Betrox and nobody bought Betamax, which was supposed to be a better system than VHS for videotapes. So market adoption is a real risk and you should think about that - what are the competitive products out there and how have they handled that risk? Consumer education is a big one and as Ali pointed out a lot of people do look at websites. They go out and read the literature now, the primary literature and try to educate themselves. Well, you need to think about that and your whole roll out strategy when you're developing your technology, they may go back and look at your early papers and that might help you educate them, but then you may also need to educate them in a different way because that data may not be suitable for your average consumer to read and you need to think about how to reinterpret that data so that the average consumer can understand what's going on. Regulatory issues are always a risk. The FDA is always there. Talk about it, but don't sweat it, we know that one's coming. So these are some pretty simple do's and don’ts. I won't go into them too much, but the main thing I like and it's hard to do when I'm trying to tell you how to write a business plan or an executive summary, but it's to create a story and that's what people are going to remember. If you focus on a key idea and you've put that idea into a story, people will be able to remember what you're doing and hopefully don't want to talk to you more about your technology. Now I do say understand who your audience is and that's pretty critical too. I've met a lot of different venture capitalists across the US, and you have some who are physicians with a lot training in medicine, you have some who are like me I'm a plant molecular biologist by training and I can understand a good chunk of the medical world, but sometimes I have to think a little harder and then sometimes you get guys who come straight out of investment banking who have a purely financial background and if you start talking about molecular interactions in Kn's and numbers like that they are going to have no clue what you're talking about so try to think about who the audience is that you are going to send an executive summary to or send a business plan to and tailor to their needs the level of information you think will fit pretty well and that makes it tough on you because you know it's sometimes you're sitting down and you spend an hour rewriting your executive summary once every two or three days because you're sending it out to another person, but you need to be able to communicate your ideas to a wide variety of people and this is where you start learning how to communicate those ideas. This next one arrives via referral. Well, that really helps I don't know how many of you know it, but once you have a website up you're in international business and that works for the venture capital industry too. DFJ Mercury we tend to invest regionally, a lot in the Texas area; over half the companies we have invested in are in the Texas area and then in a key couple of areas across the US where we have a lot of good strong partners who can help co-invest with us so they help provide part of the money, but they can also help provide oversight and help management tackle issues head on a daily basis. Arriving from a referral from your accountant or your lawyer or your attorney someone who has a good contact inside the venture capital community is a great way to get your business plan introduced and receive a warm reception. We get a lot of stuff via e-mail from who knows where. We've had a couple from Guam, and I'm not sure what's going on in Guam, but we had a couple of emails from Guam, but if somebody like Ali or an attorney sends me a business plan, I almost always read it and get back to them with input and I might say, you know, this is not the deal for me, but they need to think about rewriting or telling us more about a particular section of their business plan and by the way this might be more appropriate for some other guy, and I will introduce you to him and it helps things move much more quickly. Competition exists so please talk about it, don't shy away from that issue and, and make sure you know who the competition really is. Finally, the last one is probably the most important one don't obsess about valuations, you are a start up company and you hear all these great stories about venture capitalists funding somebody's company and it becomes the next Google word, you know, next 200, 300, 400 million dollar company or billion dollar company that might happen that doesn't mean your company is worth that much right now there's a lot of value creation that's going to go on in the future. You've got a great idea and you should be willing to understand that there is a lot of risk left in bringing your idea to market and we are here to help share that risk with you. We will provide you money to get the milestones done, to get the research done so that you can bring a product to market, but you have to understand that we are trying to mitigate our risk by getting a fair valuation. In our case, we're small or a smaller fund with a certain size constraint on the investments we make and, you know, typically we might invest, and you know, just picking it right out of the air and say if we usually invest five hundred thousand dollars in a company we might think we need to own one third of the company that's typically what a venture capital around gets somewhere between 30 and 40% of the company so if that round comes in and you need five hundred thousand dollars to reach your next milestone well that means your company is worth a million dollars somebody is going to give you five hundred thousand dollars and once they sign that check your company is now worth one and a half, that's you know the fact of life, but you might go on you need two million dollars to reach this next milestones, your valuation may change and we try, we the venture capitalist tries to work with you the founders of this company so that you remain highly motivated to make the company work, in other words, we both recognize that there is a risk involved and part of the risk is you've bet your reputation and your livelihood on this company and we want to help you make a successful venture out of it and to do that you need to be motivated to work so we don't want to punish you so after I spent a long time talking about valuation, I'll go back and say don't stress about it. Next time we're going to talk about elevator pitches. I'll probably talk more about do you really need a business plan and some resources, but one of the books I wanted to recommend was 'Made to Stick' and the nice thing is it's the website, there's actually two brothers, sorry I can only remember one of them as Chip Heath right now, but I think it is one of the better books I have ever read that it's meant for a business market, it's, you know, it's one that people in marketing and the venture capital world read a lot about, but at the same time it's the first business book I've ever read that I would actually sit down and recommend to a non-business person, a scientist because your job is to communicate your business or your research or your diagnosis to a patient or another faculty member or someone else this helps you... this book gives you some ideas and some strategies on how to craft a story that gets your idea a point and makes people remember what you do and helps think about your ideas being really valuable and it works for grant applications too not just the venture capital world, so you'll get a lot of mileage out of it. That being said, if you guys have any questions, I'd be willing to answer them, sure punch the button.

I'm still a little unclear on how to weave a story from a bunch of bullet points in a business plan. Can you give us a really brief example?

Sure, Ali said I should probably mention something about some of my own companies since I've got a couple of. One of the companies is called Astrobio. When I was a graduate student, all right in the Johns School an MBA student, I met up with a guy who used to work for a company called Novozymes Biologicals or InterBio, InterBio was here in Houston, it was bought out by Novozymes. What they did is they sold bacteria to the Bioremediation and waste water treatment market and I do mean bacteria hundreds and hundreds of pounds you throw it in your waste water treatment system it gets rid of some nasty chemical and the EPA is very happy. One of the ways that I have been selling on of the... We are actually looking at raising money in the near term and we want to raise money for a very specific market and so when I talk to people usually what I start at telling them is I don't know if you've eaten catfish lately, but most of the catfish in the world now is farm raised and a lot of it tastes like garbage and if it wasn't deep fried so you can't taste anything you probably wouldn't want to eat it. One of the reasons there is that problem or that off flavor in the catfish is because of the bunch of blue-green algae in the water. The blue-green algae actually lowers the value of the fish and it's a big problem for the farmers and so anything I can do to get rid of that blue-green algae has a huge value to both the catfish farmer and the end consumer and it gets a better tasting product. We actually have a bacterial strain; this is nonpathogenic to humans and plants that you can add to a catfish pond and it will kill the blue-green algae. Then the catfish will purge these bad flavored toxins out of their body and the catfish tastes better. Farmers get a better product so do the customers and everybody is much happier. That can be the story, you just say the problem is you know experiencing, you know, it's one of those things where it's a case by case basis, how do you find it, yeah so probably one of the best ways is you end up telling your story to different people at a bar three or four times and by about the fifth time you've got a story down, and that's, I mean honestly that's pretty much how it happens. There is nothing wrong with adding beer into the mix. Sure.

So since there are a lot of fancy business plan so when you reveal a business plan do you give more weight to one over another one always and the reason I'm asking is that some discovery maybe is not medically, it is not really a matter of I am at a need or something like that like the language I'm talking from last time is about vitamin water so it means it just uses this kinds of idea but the way you read out the first part of the paragraph one the significance is not that of great when you think irrationally but it succeeds.

So sometimes you could ask is it a technology business plan or is it a marketing business plan so vitamin water is consumer marketing plan and doesn't mean there is not any money there, there is a lot of money there, but you know we are technology fund, we look at the technology pretty much first. I'll go through, and honestly, in all honesty it doesn't matter what order you put these things in the business plan I usually put there in due head a couple of key subjects first. I want to know what your technology is and I am the type of person who if you list the patent numbers, and I really want to know what the technology is, I'll go look up your papers or I'll look up your patents and figure out what it is. The next is, I want to know is your market big enough and by that I mean if you're going after a 100 million dollar market, you think if you sold to every patient in an industry, you know, every year you might sell a 100 million dollars of revenue that's going to cost 50 million dollars to bring your product to market, I'm not going to be very interested that is one of the things I'll look at so we like to look at billion dollar industries and so marketing is a big area, intellectual property. Those are usually the three main areas I look at first and then the rest rounds it up. Oh and yeah, one of the other things I'll look at a lot if it's listed I'll flip through to the financials and I'll look at their salaries and if they list by line item the salaries for executives and it's a brand new start up and the executive is making to 250, 300, 400 thousand dollars a year, I'm going to have heartburn with that because that means I'm just paying somebody to kind of not move the company forward it doesn't mean that I want to be unfair and give somebody, you know, an unreasonably low forty thousand dollars a year salary, but we want the money to go to work where it is going to create value the fastest and a raw young startup really that doesn't make sense so that's, those are the areas I look at the most.

As we heard today that biotech is losing four billion per year actually, so who pays the checks you write actually?

I'm guessing if biotech is losing that much money a lot of it is being sucked up by the publicly traded stock market. Those are the numbers you're seeing. In the young companies, they get bought out, one or two things happens from a venture perspective. It's usually either written down as a zero, you'll lose your money, and if you get back twice the money you put in, it's still kind of like losing your money or it's a really big return and we are happy and the company merges with another company, we get stock or we get cash back in the merger and so you know usually we either lose our money upfront or we come out whole so the numbers you're seeing I think mostly reflect the publicly traded market.

If you have two scenarios now at technology, which has a potentially small market, but it is very advanced versus a technology, which has a huge market, but it is not that advanced so as a venture capitalist what would be the preference to fund the first or the second one?

The one that makes the most money. Honestly, you know we really are in the business to do good as much as make money, but we are not going to do something that will lose money and where we do have investors who have given us their money and we have a fiduciary responsibility to try to return to them as much money as we possibly can.

But, you know the other part of the question was that its not that advanced so there is a more risk involved even though there is a huge market.

Oh if there's more risk, but it's a huge market, well you have to do a risk adjusted analysis and, you know, sometimes we swing for the fences and we'll take on that risk if we think that there is a lot of technology behind it. In our own investment portfolio there are somethings that are more risky than others, but when we do the more risky ventures, we tend to put less money at risk and find ways of spreading and sharing that risk with others. We ask others to co-invest with us so as long as the overall markets are probably pretty comparable, you know, there is ways of handling the risk. Then the other part is that we tend to invest in things that really interest us personally and where the people on the other side of the table we like them and we can get along with them and we can continue to work with them and don't underestimate that because most businesses fail because of people issues, not technologies, I mean the FDA may kill their business, but the business usually, if it gets that far then it's surprising.

So of all the let's say serious proposals that come to you how many of those do you eventually take on because you think they are worthwhile and then of those how many actually are really giving you a nice return on your investment?

Our fund, our fund we started investing in 2005, we've got 14 investments.

How many applications have you gotten?

Several thousands, that will tell you the hit rate, it's pretty low.

And were those serious or were a lot of them just throwaway like clearly these people are just clueless?

They may have been clueless, but they were serious.

[ Laughter ]

But most of them, no sorry, most of them, most of them honestly are well thought out business plans, I mean there are people who have real ideas and whether or not I agree with them that is a good idea that's what makes a market. You've got to have different opinions. I have a feeling, alright, you need a couple of more minutes, sure.

[Pause]

>> Okay, thank you very much. Applause for Paul.
[ Applause ]

One interesting thing about talking to your lawyer about what company you want to open so you know now that you should open a C-Corporation in Delaware. I just opened a company its an LOC in Texas and the lawyer told me not to do so and I did it anyway and so he invited me for lunch so I got even lunch out of this, but there are other reasons than what we just talked about we are going to have a whole session on why you would open what kind of company, okay there were very specific reasons why open an LOC and why I did that in Texas and so there are sometimes some very legitimate reasons to do so and we are going to go over those. The other thing about business plan, executive summary, as I said, I just opened a company I just raised half a million dollars I just formed an LOC in Texas. When I start writing an exec summary, that's typically, I still don't have an exec summary for my company, believe it or not. I raised my money in 24 hours. I never got to the point where I needed to write an exec summary. I just told two people about it and the money was here and now I have venture capital inviting me to come and I said well I don't need money so they want me anyway there because they want to see what I have. When you write a business plan, my first business plan for this company took me three months and it ended up being about 80 pages that's now my operations plan. I am still working on getting the operations plan to a business plan, which should be about 20 pages, I'm somewhere around 35 pages at this point. It takes a lot of work to know which one you can cut out or not. Once I have a business plan of 20 pages, then I typically create the exec summary, you know, so I go backwards. In this case, we are going to make you go around the other way you know, because you never did it so having an exec summary first is maybe a smart thing because it is going to give five bullet points to work after, it's like, you know, like a little menu what we want you to have and you saw that menu today more or less. So you can be creative with this exec summary. We just reviewed the rice business plan competition, exec summaries, and business plans, I reviewed about 70 of those last week. I told you be creative m I'll just give you a few hints from my point of view as a reviewer okay. So I got some business plans that are written like a grant, they start about tens of an inch with a left margin, right margin, upper margin, lower margin, and its all font 2, okay and narrow, and there is everything written out, there is no line in between, it's all one text. I cannot read that stuff, okay, it's just too wild. For me, it's no good. I have plenty of business plans I have seen last week that don't have a title of what your company is named so here I have a bunch of pieces of paper on my desk and I don't even remember who they are when I judge them, somehow just make sure that when I see your stuff sitting there on my desk, and my desk is chaos, that I right away know it's yours. However you want to do that is your thing okay that's how much I want to say about exec summaries just a little hint. I liked this. Make sure that everybody has signed in that is here because again I'm going to look at the sign ins maybe for a certificate, make sure those who have not signed into a group are now group five the sign is over there and make sure that all who have not yet signed an authorization form sign this one and leave me that. When you do your elevator speeches, and again Paul will tell you how to do an elevator speech and there are different ways to do them. I will talk a little bit about that he is going to teach you how to do that. When you do the elevator's pitch, when you do the company presentation, which you will do with about five to, yeah probably five to six slides okay. The person who will give the presentation will have to sign another form that we as speakers sign here. So you're going to have to think about in your group who is going to be the person who does the elevator speech and if it's the same person or a different person who does the company presentation.

You're going to have to sign that you're allowed to be filmed and to be broadcasted. So I just checked the broadcast it looks pretty cool online. So we are going to send that out that you were out pretty soon, I am still checking. We are going to add some captions probably for those who have no sound, but soon you're going to get, within a week or so you're going to get a link and for those who are not in the room today watch us on IPTV or others that had no chance at all, they can go to that link and watch it and then later on you get the iPod that's the thing okay. So that's all we have for you today, next week we're going to talk about intellectual property, how to drive from idea to technology transfer, conflict of interest rules things, like that okay. So go home, have fun, and yeah questions come now to me directly because we're going to close down the video. Thank you very much.

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