Where the dollars are
Sometimes venture capital isn't the answer for a start-up
By Phyllis Hanlon
Consider entrepreneurship as a serious version of "The Price is Right."
One spin of the wheel and a budding company hits pay dirt. In another spin, the bottom falls out of the business. The funding mechanism an entrepreneur chooses could mean the difference between Fortune 500 membership and unemployment.
Personal bootstrapping
"I'm pleasantly surprised we've achieved what we have. I didn't go in thinking I'd fail. My business plan was solid. The biggest affirmation is that we continue to have referrals from clients. With minimal marketing, we are fairly successful," Carmody said.
She admits that early on she spent a few nerve-wracking days wondering how she'd survive. "In the beginning, some days I was down to my last thousand dollars. I hoped a check would come in so I could make payroll."
Carmody's strong belief in "controlled growth" keeps her afloat. She said, "I wait until I have the money before hiring, buying instrumentation, etcetera."
If she had it to do all over again, Carmody would travel the same financial road. "Your business will dictate the route for financing. I find myself in an advantageous spot that I only had to impress a banker," she said.
Grants as supplements
Mark A. Tepper, president and founder, Worcester-based CytRx Labs, swears by the power of the grant. Unsuccessful in his first attempt to secure an SBIR (Small Business Innovation Research) grant, he used the effort as a learning experience. The second time around, he provided more detailed information based on feedback from the grant reviewers and emerged successful. "It was a positive experience when we followed the process and learned from it," he said.
Although the company received a one-year Phase I grant of $225,000 and a Phase II $750,000 grant for two years, Tepper points out some challenges in operating solely on grant funding. "It's hard to run biotech fully on just grants," he said. "Associated costs are quite high. Also, the grant cycle makes it difficult to succeed." The standard time between submission and award is approximately nine months.
Typically, grants don't allow for company growth, but they do add prestige to a company. "Receiving a grant makes you look good to potential investors. It's non-diluted money in the company and says someone else valued your work enough to provide funding," said Tepper. "Grants give you the ability to ordain and extend the vision of your value proposition. In our area, grant money can advance on the idea, but to advance a company is difficult."
CytRx chose SBIR funding for one project and relied on investors for its other projects.
Locally growing biotech market
According to a 2005 study conducted by students at Worcester Polytechnic Institute, more than 110 documented biomedical companies existed in Worcester at that time. Kevin O'Sullivan, president and CEO of Massachusetts Biomedical Initiatives (MBI), said, "These companies provide 8,000 jobs and $1 billion in revenue."
This growth comes in what has been a tight economy. "Seed money now is non-existent from venture capitalists or angels. Seven or eight years ago, you could write a business plan on the back of an envelope and get funding," O'Sullivan said.
The tide seems to be turning somewhat as the MoneyTree Report for the fourth quarter of 2006 states that companies in New England received $695 million, $190 million of which went to biotechnology businesses. The report, which is sponsored by PricewaterhouseCoopers, Thomson Financial and the National Venture Capital Association (NVCA), notes that 423 biotechnology businesses closed deals nationwide.
However, O'Sullivan strongly advises early stage companies to "steer clear of VCs," with a caveat. He said, "Venture capitalists take a great part of ownership. If they [entrepreneurs] want to get in on the ground floor, it's okay to make a deal then. But high-risk, high-reward is the name of the VC game."
According to O'Sullivan, the recent media attention on UMass Medical School and Dr. Craig Mello, winner of the 2006 Noble Prize in Physiology or Medicine, bodes well for the state. "I predict that there will be more and more opportunities and investigation," he said, noting that geographic differences work in Worcester's favor. "In Boston, small companies compete for funding. Here VCs could have the pick of the litter. I would like to sense that things are moving this way."
O'Sullivan offers another funding option for startups: contract research with pharmaceutical companies. "Pfizer, Genzyme, Novartis and Abbott use small boutique biotechnology companies because it's faster and often better quality," he said. "The old style of new large research and development facilities is a dinosaur. Little companies are doing much more." He cites Worcester-based companies such as Avatar, Blue Sky Biotech and GlycoSolutions as prime examples of small companies that successfully collaborate with larger, well-established pharmaceutical firms.
Angel group plans first investment for June |
When Mitch Sanders founded Worcester-based ECI Biotech in 1998, he depended initially on funding from friends and family.
Now that the company is well established, Sanders believes it is time to help other area entrepreneurs build a successful business. To solve the challenge of finding appropriate local funding sources, Sanders founded the Boynton Angels.
Named for John Boynton, considered Worcester's first entrepreneur and founder of WPI, the group is the first of its kind to set up shop in the city.
While forming the investment group, Sanders consulted with James Geshwiler, managing director of CommonAngels, for guidance. He helped Sanders concentrate on details such as group size, dynamics, sector focus, strategy and marketing decisions and applauds the decision to create the angel group. "This [group] will give more attention to entrepreneurs. There is a lot of innovation in Worcester," Geshwiler said.
Sanders explained that each member of the Boynton Angels will invest its own money. "We are not raising capital," he said. "There will be a modest annual fee for members, but we'll invest as individuals." He intends to keep the group at a maximum of 40 members.
The group has been actively seeking qualified investors and has had numerous meetings at Clark University, the University of Massachusetts and WPI. There are currently 20 members and two local schools have verbally offered to become members, according to Sanders.
The process for finding investments is under way with the Boynton Angels hearing entrepreneur marketing pitches and screening executive summaries and business plans. The group expects to make its first investment some time in June.
Unlike some angel groups, the Boynton Angels will maintain a broad focus. "We're not just looking at life sciences," Sanders said. "We will be investing also in computers, software, real estate and finance."
According to Sanders, the group aims to offer entrepreneurs an opportunity to realize a better quality deal, while it earns a good return on investment and gives back to Worcester. But, he asserts, angels offer more than just an influx of cash. "Angels allow expertise as well as capital. They also ensure that the company makes no rookie mistakes," he said.
- P.H
Careful consideration
James Geshwiler, managing director of CommonAngels, advises entrepreneurs to plot their capital tactic as well as their overall business strategy from the very beginning. "I encourage entrepreneurs to think carefully through their business plan/model," he said. Those seeking research grants should devise a solid plan and identify goals, while those in search of angel or VC funding should consider the economy, capital needs, the value the company is creating, organizational growth and how to nurture the company appropriately. "In biotech drug discovery you might need $20 to $30 million to find out if your idea works. You might have to start with federal research grants or VC funding," said Geshwiler.
Whichever road an entrepreneur decides to take, Geshwiler advises them to consider carefully before making any final decisions. "Once you accept money, you set the company down a path that is difficult to change. You'll be living with the consequences forever," he said.
Phyllis Hanlon is a freelance writer. She can be reached at PolishPen@mac.com.
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