Session 5-2: Re-Forming the Innovator: Becoming an Entrepreneur

M. D. Anderson Cancer Center
Date: March 25, 2008
Duration: 0 / 25:25

Tom Kraft, Ph.D., Director of Client Services, Houston Technology Center.

Narrator:

All right so...this is...this was...you know one of the local resources that we have BioHouston. Now there is a second local resource that is called Houston Technology Center and we are happy to have Tom Kraft here so let's remember how much speech I have left in my brain. He just told me real quick his 'cause he's Bio, you know, about a half an hour ago so we'll test my brain. So Tom has an engineering degree from Stanford University, came down here to Houston to build the NASA command center and did another degree, mathematics engineering at Rice University working for many years with the various startups company, started up companies mainly in the device space and work as well for Cardinal Health which is a large supplier that is now forward and backward integrating into food chain to take over more and more business. And then he retired and just because probably it was so boring, he is now back and helping entrepreneurs and it's good if we have people like that who did it before and really are here as a resource. So he now works with the Houston Technology Center and he's helping entrepreneurs to get connected and all kind of things that he will tell you about. So with that I would like to welcome Tom Kraft.

[ Applause ]

[ Pause ]

Tom Kraft:
Thank you Wally.

[ Pause ]

Thank you very much Wally. And it's a pleasure to follow Jacqueline [phonetic], we share the same goals for Houston, for commercialization and trying to create jobs and wealth for entrepreneurs for their investors and for the community at large. We're very exited to be part of that and it's a pleasure to work with BioHouston in trying to encourage that image and the reality of companies moving on into commercial success. I'm part of Houston Technology Center, I'm Director of Client Services and we are...call ourselves an accelerator and we work with companies in not just life science but in aerospace and nanotechnology, information technology and in energy as well. And many of our clients and we have some 70 clients active now are or also working with BioHouston so we work together in many ways. We provide for our clients typically in five areas, five Cs we call them. One is couching where we provide business guidance and mentoring in a variety of areas through the business plan and in some cases...however they move forward in their whole business strategy. And secondly capital, we work with the client companies and determining what kind of capital needs they have, whether they're debt or venture candidates and help them prepare presentations to obtain a kind of funding that they need. A third C, community and that we have a large set of service providers that work with us that have been qualified by the Houston Technology Center who adhere to a standard practice and work with our client companies in many areas of support legal finance, et cetera. A fourth area is we helped them with costumers and that we provide sales and market training quite a bit in different ways. And in the fifth area, connections, it is very important in maintaining professional connect in these and we provide a number of networking events just as Jacqueline does and certainly this event, it's coming up Friday, the Chili Cook-off is an excellent example of one that they provide. And there is many down town that we provide too and you really should take advantage of all of this. But what I like to talk a little bit about today just very briefly in my session is share one particular perspective that might be helpful as you think about becoming an entrepreneur forming a company. And that's what's really involved in becoming an entrepreneur and this is really based on having dealt with a number of hundreds and hundreds of companies and looking at why do they fail. And sometimes it's useful to understand why startups don't make it and sometimes you can correct that process and avoid to some of the mistakes that these people make. One of the biggest reasons and of course the primary reason, is that the innovator did not become an entrepreneur. It's not dominantly that the technology was flawed, although that happens sometimes but ultimately it's the entrepreneur didn't emerge, didn't have a good plan, didn't have a good sense of cash, needs, didn't have a way to achieve a business goal that really made sense. So we're gonna address that a little bit. At HTC, we have full time staff. A question was raised at how many people we have, 14 full time staff, may be 40 or 50 volunteers in different capacities and we work and walk with these innovators who'd come to us to try to turn them into successful entrepreneurs. And sometimes this is a greater challenge than others and this is what I like to talk a little bit about today. There's basically eight steps that we have concluded are involved in reforming the innovator. Now, there was a lot of reason that businesses have problems related to the technology but let's just talk about those situations which deal with the innovator, him or herself. And these were the 8 items that we tend to work on and trying to communicate to innovators what they need to do to become successful entrepreneurs and this comes out of a lot of interviews with venture capital people and other successful businessmen who tried to help these innovators move forward and what are the struggles and what are the issues and so this are the items. Become open to new coaching, certainly you worked very hard to get to where you are in the innovation but now there is whole new genre of coaching that has to come forward and that's regarding the whole business community. Understanding your core competence, we'll explore that briefly. Learning when to step aside, very important issue that at some point in time, your business will outgrow you both in terms of skills, that's incompetence and you need to change it...change positions at that point in time and you need to have some sense of that. We'll mention that. Dashboard your cash flow. There some aspects of your business that you need to keep in front of your old times and cash is one of them and we'll go through some of those items that we are saying you need a dashboard. Keep in front of you at all times in your view. A fifth area is narration. Show your passion for business. People look to see in you that you're really excited about having a business. And having a business is tough, it's tough to meet payroll and pay taxes and pay rent and do all of these things you didn't have to do in a research environment. It's really tough and it can be a miserable. And if you don't have a passion for doing that if sometimes working 12 and 14 to 15 hour a day, things that sometimes aren't technical or fun, you gotta think about this. So you need to show this passion for business. Think and act like a business professional. This is a complicated process and certainly you're all professional in a technology sense. You know more about your area of innovation than anybody else most likely but you need to learn how think and act like a business professional which is a little different...a little different perspective. And we talk about prioritizing your values and I'll explain what that means as we go into that and developing a knowledge of exit and there was how you get out of this business at some point in time. The first what we have is I wanna talk about as being open to new coaching and all of these involves being able to listen, to understand and process things that come to you about businesses that succeed. A lot of people have said if you wanna really learn how to succeed, look at successful companies. See how they do things, try to understand how they do things and process what you see. Sometimes you're gonna have to rethink and modify the paradigms you've been dealing with that have governed your life, what time you get up, what time you go to bed, how you spend your week, how you spend your weekends. All of these are governed by paradigms. How you think about money? How you think about other people? How you think about suppliers? You have some set of paradigms that governs that. You need to rethink those very often and be able to modify your own behavior and be willing to do that when it's appropriate. So the paradigms that serve you well in a research mode or a development mode may not serve you well in business and you need to be open to change. Part of that is practicing and learning how to communicate, what's you do and what's your need and what's you all about easily and well in all levels. Could be...if people talk about elevator pitches but there's two aspects to that. There's people, on one side of the door that you're talking to that have no idea about anything that you're dealing with and then there is fellow technologist who may. So your skills in becoming able to communicate well means you have to be able to explain what's you're all about to people who have no idea whatsoever or what's your about and that's a real challenge, that's very tough. So we talk about an elevator pitch, it's called the elevator open who's ever there, whatever mixture of people being able to communicate simply and easily what it is are all about. And if you have trouble doing it, you're gonna have trouble all the way through your business career and...I end this with understanding the dialogue process. When you get into various aspects of growing your business, you're gonna need to understand the whole idea of dialogue. You can't go at many of these meetings with while the whole world is pretty much screwed up and my job is to convert them so they all think like I do. Just doesn't work that way and it never well and so learning to dialogue, having a sense of dialogue is certainly going to pay off for you in the long run. Understanding core competence, this is really very important, very difficult to do. All of you come from some area of significant core competence typically dealing with the innovation that you're making. There's other kinds of core competence that are very important to the success of a business. There's the core competence in the area where the pain is felt that your technology addresses. For example if you're dealing with the particular kind of a solution for a cancer treatment or a particular clinical laboratory product, if you dealt or worked in clinic laboratories and you have the problem that you're addressing for clinical laboratories, then you have some core competence in that particular area. So there is competence in the area of the pain and that's very important. You need to have someone in there. We get a lot of people who have great ideas and we say, "Why have you...who do you talk to?" It's in that area and has the pain. We'll I haven't talk to anybody yet but I know there's a lot of people out there with that pain. This just doesn't resonate through. You need to understand that there is core competence out there and if you don't have it, you need to find to a way to get it. Buying alternatives and competition, that whole area is another area core competence. Particularly in the medical area and the health care, how things are paid for, how they're budgeted, how they're bought is very complicated and that deals with both distribution marketing sales and what drives these things. We have a lot of people that wanna sell something, that's 50,000 dollars and you say you're dealing with people who have no capital budgets. You have to rethink what you're gonna do and say they have operating budget, so how do you want to build your business model? You're gonna have to provide something which may be you bill people on a per patient basis or may be you bill per month but it has to tie in with how they do their budgeting and how they do their own financing or you're gonna be a failure in your particular entrepreneurial effort. So that's important to know. Also in hospitals, so much is driven by GenBo [phonetic] Purchasing Organizations. You have to know how was your product, how will it be paid for and bought in a particular medical facility. Sometimes if what your product deals with is risk based, may be the sale is through the administration, may be it's through the supply organizations. So you need to understand that there are core competences in there that's important. Second to the last one, product assembly test, validation and verification. All of these items are important in the core competences that you need to access one or the other if you don't have them. How you're product is validated, how's performance verified, very important and production and assembly techniques also. Service and support or other areas which are very important. So many products really die in the service area. People fail to realize that your product has to be available to the people that buy it or use them all the time which means how do you service and how do you support it? How do you make sure that that happens? And sometimes those cost are significant and you need to build that into your business model, may need to build it in your pricing model but it certainly it is an element of cost and all of these things go into your thinking as to what are the kinds of core competences. One of the things you might learn to realize with the medical device that you may put 20% of your investment back in every year in redeveloping new replacement product for that. So these are things to be sensitive to. Learning when to step aside, you need to know what skills are missing, what you don't have, you need to know how such skills might be acquired and how you compensate for them. Some people will say well I need a CEO at some point in time but I don't need one now and you say, what do you think that's gonna cost you and they say, "Oh well, may be $90,000 with a little bonus and maybe 1% of the company" and we say, "How about 250,000 and 10% of the company and they say, "Oh no, I'd never do it." So the point is you need t think about what skills you don't have. How will you get them, what will it take you to compensate them to become part of your entrepreneurial effort. You need to be sensitive that those are problems and you cannot do everything yourself for the entire period of your entrepreneurial venture. I think that one of the things that people look for in you is will you be content not to be in charge of everything. Very difficult assessment to make but it's done generally quickly and the people are saying, "If you're not...they're not calling all the shots, are you okay? Are you gonna be happy with that? Where is your satisfaction achieved? Are you able to do that? And are your personal needs still able to be fulfilled and say your chief technical officer or you place someone other than CEO. So it's important to be aware of that. These are some of the items that we say you need the dash board with the cash flow information. These are things you need to constantly be sensitive not necessarily constantly study them but watch for changes in them. You need to have standards, you need to have some goals and when they start to change you need to have something that tells you that these things are not right. Price and cost pressures. If something happens, it's gonna change how you price it. You need to be aware of that very quickly so you can take some appropriate action. Direct and indirect cost, obviously looking at your margins, very very difficult. You may think it cost you $500 to build something and you say, "Well so for a thousand and life will be good", and everybody will look at you and say, "You oughta started three times that", and then you see what you gonna need. You gonna cover this... and this...and this. So be sensitive to what are the margin requirements that you really have and are these being squeezed by bonuses, sales commissions, et cetera, kickbacks. When you sell into drug stores and all of these things, you find your covering fees that you never imagined you would have to cover in your business plan. You need to be sensitive to sole source issues. Whatever things you need to buy to build your product whether its chemicals or products, it's be...having sole source suppliers can kill you at a moment's notice and all of the sudden somebody says, "We'll we're not making that anymore", and you say, "What?" And then you're on your frantic pace to find where you can get the rest of those in the planet so you can stay in business and this go on and you can see these things. Supply demand questions, cash flow. Watch your cash flow all the time and understanding the need to reinvest to constantly support your product. You can't say if you have a problem, "I'll address it someday but I just can't afford to do it right now." Understanding too and how long it takes to raise money, so if you're gonna need money in June when should you just start worrying about it? Well, you're almost passed a window. You need to understand how long it takes to get bank loans, how long it takes to do the ETF process that Jacqueline mentioned, how long it takes to typical venture process? These things take far longer than you are aware. So when you're looking at...when you're gonna need money and when you need to start the whole cash flow process or raising money process. And the last item on the dashboard look is that you have to keep a balance between long-term vision in which pace everybody is looking to have one but you need a short-term goal. That long-term vision doesn't drive you hour by hour but the short-term goal may. A short-term goal should be some way you can be producing some revenue as quickly as possible and that goal may be an application outside the healthcare area or outside the medical profession but still an application of your technology. That's a great short-term goal but you need to maintain this vision, global vision that you have but don't lose sight of your short term goal. If you give up and have no short-term goals, it's gonna be a lot tougher to succeed. Nourish your passion for business. You keep...have to ask yourself, "Why am I doing this? You know I should have married rich and given up this effort to build a business. What will you consider a success if you say, "Well if everybody loves me and they love using my product and I'll be really happy", and you say, "But what if you're not making any money?" Well I don't know you need to think about what is success for further business that you're in and you need to not confuse that. People are gonna wonder if they're gonna invest in you? What you consider a success or what you consider failure is very important. If you want a nice happy lifestyle business, you wanna run a restaurant, have everybody love you, you like the hospitality and you make a little bit of money and you're paying the bills, that's fine. But that's not an investable entity and it's not gonna get you very far on the long run which may be fine, that's not a value judgment. It's just a different kind of entrepreneurial play. You have to ask yourself how hard are you willing to work? How long can you go without support or pay? And this is a struggle. You need to understand what's your limits are, when you need absolutely have some support so that you can plan ahead in time to do that. This pretty obvious thing can act like success. We had a meeting at another place Debra [phonetic] and I and talked to group of innovators and they said, "Well, what do you mean like that? You mean you have to dress like success", and we said, "Well yes", and they said, "Why", and I said, "Well, look at you, you have a t-shirt with a hole in it and your pants are kinda rugged and you want $500,000 why do I think you would treat my$500,000 dollars any better than your clothes?" And they didn't think of a good answer for that question but think and act like business profession and certainly you are professional in what you do but you're not yet professional in the business sense. So you're responsible for acting and behaving in that way creating your own image and acting with the confidence and sense of self that make people want to invest in you and say, "You are a winner. You are a jockey who's gonna win." May be the horse needs changing, may need a hand and be in a different race but you're a winner and that's important that you develop that sense. Prioritizing your values, just ties a little bit to what I said what would you consider success. Would you consider a success of everybody absolutely love your product but you weren't making money or any particular profit for your investors. And you gotta think about that. So when people are investing in you, they're looking at these very same quality, value, profit, happiness, growth, legacy. Are you creating a legacy about yourself? You want personal validation. How would they say that they think you prioritize these values and so they look for that in you. You need to create your own metrics of how you're doing and what you value and how you spend your time, and then you need to look at that relative until you determine all the values of these prioritized goals. Then you need to be able to measure and modify your plans accordingly so you're not spending a lot of your time on things and really don't matter and are not highly prioritized among your goals. And this particular item is the one that's very difficult for a lot of people in that some sense or knowledge of exit. To be investable which means you have to have an exit strategy. People who invest in you were gonna make money because there will be at some point, a liquidity event or an exit strategy that they can get their money out. So they expect you to have some sense of what the options may be...what's you're reaction to that would be and are you okay with that. There's all kinds, there's collaborations, there's mergers, acquisitions, sale or IPO and the most common one is a sale or a merger of two entities that happens on the clients that we see. But you have to have some sense of which of those are okay with you, when you think they could happen and you need to discuss that with the people you're asking for ventures support or financial support. So that they appreciate that you understand that at some point, you have a way to get out and they have a way to get out or nobody is gonna make any money on it. So these are the 8 steps I think that are important to think about from time to time about how you're being measure not just your idea and of...failures in these areas can compromise your whole endeavor over and above what your particular technology may be. So we just want to encourage you to work hard, have fun, drive for success but keep in mind you are the one that can make something succeed. The product is not a field of dreams where if you build it, they'll just come. You have to make all these things happen and you have to form yourself and sometimes reform yourself. Okay that's all! Thank you very much.

[ Applause ]

Questions?

I do have a question. You spent two [unintelligible] that emphasize in we need to step aside or try to find exit strategy, so just curious...

A little louder please.

Who will be in charge of the company that we found or we startup?

And...who will be...I'm sorry.

So we spent so much time, energy, and money to start up a company and you emphasized at some point we have to get out or step aside. So who would be in charge at that stage [unintelligible].

At some point in time, you have to address what I guess investors would typically call the great disconnect in that, where you are now, you think the innovation is 90% of the value of this whole entrepreneurial thinking and turning it into a business is 10%. Well the venture people are gonna say, innovation is 10%, turning it into business is 90%. So you say, you know, "When do you have to do that." When you need someone to help make that business a reality, a business strategy, a business plan, execution of the plan, what kind of business model make sense and you may not be the right person. I would say a small % of you will be but not a big %. May be 10 or 15% of you would be the kind you can take it to pretty high level. But typically that's not true, that's not how you can trained, that's not how you can cultured and nourished, innovation has been your forefront. We find lots of people who like to move to chief technology officer in a very happy handling innovation in that sense. And bring in somebody who is a professional business person who knows how to create a business model that they can implement and make success. And they'll...they won't be enamored with the technology like you are and that's good because they have to balance all of the factors.

[ Pause ]

Okay. Thank you.

[ Applause ]