Ola Barcelona! Summerschool at IESE Business School

Summer school at IESE Business School in Barcelona is both fun and challenging. I teamed up with the brightest young professionals in the world to crack case studies, have a few tapas, and catch some rays during the weekend.

  • I discuss one team case study on biotechnology. Maybe more later on.
  • My main take-aways will be mentioned after the discussion.
  • It is important to take a helicopter view, i.e. continuously ask yourself what the essential problems are and not bother about details.

Centagenetix (A): Building a Business Model for Genetic Longevity

Harvard Business School, Frank Angella and Henry Chesbrough

Brief summary according to HBR:

“Describes a start-up company seeking to exploit population genetic data from long-lived, healthy people. The company must address legal, financial, ethical, and personal issues among its team to launch the company.”

Open questions:

  1. Which activities would you choose, develop and focus on?
  2. How would you design the activities (inside and outside company) to maximize value?
  3. Would you consider alliances? If so, with which pharmaceutical companies would you partner?
  4. How much you think you are worth? Provide a proper company valuation.

Brief discussion and outline of the case:

Find my pitch here.

Age-related diseases are mainly caused by nucleotide changes in genes. The start-up Centagenetix wants to unravel the mysteries of aging and disease, and commercialize the findings.

There are a number of directions the company can take. We lined up the main points:

Financial: the start-up is more in need of capital than of credibility. The researchers have stellar academic credentials from Harvard Medical School and are heading in the right direction. The next step is funding.

Two possibilities exist, either self-fund the research and then sell the findings on a non-exclusive basis or try to seek upfront funding from pharmaceutical partners in exchange for exclusive rights. The trick here is to find a balance between the amount of funding and freedom or control over operations (see also legal below).

After running a few scenarios we decided that venture capital (VC) was the way to go. All other options as pharmaceutical companies, government and academic institutions would limit us to some degree. Teaming up with a VC as MPM Capital, a top-tier biotech VC firm, would not only add dollars to the start-up, but also heaps of experience and network.

Additional investments from high-net-worth individuals (HNWI, individuals with at least US$1 million in financial assets) would be a possibility also. Why get HNWIs involved? The rationale here is: you can buy your mansion on The Hamptons, your flat in Tokio and pied-à-terre in Paris. Next, you can fill up the garages with a fleet of shiny cars, have your own air strip and Airbus A380, acquire an artificial island and book your journey into space with Virgin Galactic or Bloon (this was actually a case study during the summer school in July so it was nice to link back). But you can’t buy time. And that’s exactly why these HNWIs could be interested.

Legal: we agreed that the start-up and its founders should leave Academia. The researchers would be limited if the operations were kept at Harvard Medical School since they couldn’t take direct equity in Centagenetix and potentially lose a significant amount of income (65% of amounts received on the first US$50k and 75% above US$50k would go to the University).

For the research we’d closely partner with hospitals to gather the necessary samples of centenarians. Again, we’d prefer to be entirely independent of private R&D institutions or pharmaceutical companies.

People: we have a dream team, the technology is in place and the whole human population is our target group. But the potential investors want to be sure that the key people stay on board.

Time: they have to move fast since there is some competition involved in similar studies.

Commercialization strategy: how can we capitalize on the research? We decided to focus on gene discovery services and the development of a genetic database.

  1. Search for the location, sequence and function of positive and negative longevity genes. These genes respectively influence lifespan in a positive and negative way, and their position can be patented and sold to pharmaceutical clients. This research is done by haplotyping, i.e. comparing a control population to centenarians (persons who live to or beyond the age of 100 years).
  2. The genetic database in turn will provide the biotechnology industry with a mean to compare their data with our genetic database by paying a subscription.

The valuation with multiples or DCF model proved to be extremely hard. It is not only difficult to estimate future cash flows, it is also impossible to find an existing company to compare. Remember that the market is virtually everyone on this planet and the final products are literally life-changing. Crunching the numbers kept us busy at night and we knew this was going to be the Achilles’ heel in our pitch.

Pitch to investors:

During a presentation you only have one moment that the entire audience is focused on you and that’s the start. Next, you gradually lose ‘ears’.

I started with an open question: “Who doesn’t have a person in his circles who suffered from a disease as cancer?” Clearly no one raised his hand. So the audience is 100% with you. Mind that you can pose questions in two ways, affirmative or negative. In the case that you expect most of the audience to agree (always try to know the audience beforehand), the question “Who doesn’t agree with this?” asked to the audience will yield no raised hands because most people are chickens and don’t want to stand out and be stared at. If you would have asked “Who agrees?”, most people would have raised their hands but not all. Simply because (a) not everyone agrees, (b) some feel uncomfortable raising their hand, and (c) they are not interested, sleeping or disabled.

We continued by sparking interest with a clear topic sentence: “Today we think we can tackle these diseases”. Next, outlined the problem, our research and next steps.

Follow-up questions:

VC: “OK, we invest but want a larger stake”. How do you react?

  • Generally, teams were giving a very large stake at a very early stage. The investor should ideally take an initial 20 to 30% stake and later go to 30 – 45%. Never more than 50%.

What’s your plan B? What if your investor drops out?

  • Never rely on only 1 investor. This is also valid for customer, supplier etc.

How price your product? What is the value of life?

  • Generally, teams valued life too low. The article Economic Value of Disease Reduction by Age for Men reveals that US men value one year around $250k at their peak of earnings ability. The study was focused on cancer and heart problems and I don’t know if there’s a difference with women.

What really happened with Centagenetix:

Centagenetix merged with (bought by) Elixir Pharmaceuticals, Inc. for an undisclosed sum of money. Mind that the research was not yet completed and it is still unclear if the researchers can really come up with marketable findings. Actually, the scientists got fed up with these financial games, left Centagenetix and are working back in Academia.

Main take-aways:

What does a VC look for when investing in a start-up? You can score some solid funding if you can cover the following points:

  1. Technology (How difficult? What are the barriers to entry?)
  2. Growth possibilities (Is there a market? Are you solving a problem? Do I create value?)
  3. Team (Is it a complementary team? Will the key people stay on board?)
  4. How much funding and how will the start-up allocate these funds?

Linking with the case ‘Jerry Sanders’ on the medical device industry and case ‘Note on Attracting Stakeholders’:

  1. Get VCs in that add value beyond their money. Specialized VCs understand the industry, know the problems and are highly interested in a saleable solution.
  2. Attract bell cows as stakeholders. These are experienced and respected industry experts and form the crucial ‘reality check’ for the start-up. Moreover, they can facilitate the participation of other stakeholders. In our case these could be physicians and scientists, and well-known private and institutional investors. Mark Zuckerberg’s crush on Spotify and Facebook status message “Spotify is so good” are unmeasurable in terms of marketing dollars.
  3. Direct your research in the direction that the investors want. What the corporate buyer (eg. pharmaceutical company or medical device industry) looks for is different from the investor.
  4. When in selling-mode, maintain at least two potential buyers to create the appearance of a bidding war. It’s all about negotiation power.

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