In a recent GEN article (May 1, 2012, “Step Up for Biotechnology”), Ron Cohen, M.D., president, CEO and founder of Acorda Therapeutics, proposes changes in five government policy areas “that would go a long way in fostering biomedical innovation in the U.S.” I agree with him. Dr. Cohen considered the macro environment, so I would like to discuss how changes in the micro environment could also foster innovation.
Specifically, I am focusing on small companies, including startups, that possess highly innovative technology and have excellent growth potential except for counterproductive biases of the founding entrepreneurs, which thwart the success of the enterprise. Unfortunately, one can have the best technology platform and go under from mistakes that are really easy to correct.
The purpose of this article is to share my experiences concerning the most frequent, readily correctable problems that CEOs from small companies face. The problems and the fixes I am discussing here are ones that are quite obvious, but it seems in some cases the entrepreneur CEO would rather shoot himself than take the appropriate action. Failure to correct the situation or undue delay in doing so has prevented both startups and ongoing enterprises from raising capital and, in some cases, has led to dissolution of the company.
The examples provided are from companies that I have encountered in my consulting practice. For the past 19 years I have advised CEOs, primarily from small to mid-size companies, regarding strategy and operations. Sixty-nine of these companies range from startups to enterprises with fewer than 50 employees and revenues under $5 million. These companies span a wide variety of industries, although 33 of them are from the biotechnology sector. Moreover, in each of the problem categories discussed below, around half of the examples involve biotechnology companies.
Problem 1—The Piggy Factor
More than 10% of the companies in the 69-company sample did not raise the funds they desired because their CEOs were overly concerned about dilution. Two of these companies, both with ongoing operations and possessing excellent technology, turned down multimillion-dollar financings and went bankrupt. In both cases the CEO owned over 50% of the company and refused to be diluted below 50%.
In two other cases, involving startups, the owners never received any outside financing because of the piggy factor, and as a result never got their businesses off the ground. Both startups had attracted angel investors who would have invested in them if the owners had been comfortable with dilution. Other companies in the sample never lived up to their potential simply because the CEOs were unwilling to accept the requisite dilution and refused investment capital. As a result, these companies just stopped growing.
Problem 2—The Business Plan Will Have to Wait
This problem is about as common as the piggy factor. I can recall several startups with exciting technology, where the CEO was overly focused on bringing in business before securing investors and therefore spent little or no effort on completing a business plan. As could be expected, these startups folded due to lack of financing.
This problem, though, is not limited to startups. I have dealt with CEOs of ongoing enterprises that are also too focused on the demands of their current operations to take the time to complete a business plan. As a result, their businesses have stagnated due to lack of capital.
Problem 3—The Irreplaceable Employee
I have worked with at least a half dozen companies where a key employee is more of a problem creator than a problem solver but is considered by the CEO to be irreplaceable. The so-called irreplaceable employee may be very knowledgeable and/or highly creative, but the offsetting cost is a company morale problem and excessive time demands upon upper management.
In every case I have witnessed, the irreplaceable employee shares little key information with other employees who would benefit from such sharing, apparently because that makes him indispensable. In all but one of these companies, where the key employee still remains, once the key employee left, not only did the morale problem and management time demands vanish, but the job that the irreplaceable employee had filled was now accomplished better than it had been before.
Problem 4—Loss of Focus
It is commonly accepted not to put all your eggs in one basket, but taken too literally has hurt another half-dozen companies that I know of. One company acquired technology that had nothing to do with the company’s own proprietary technology. Outside investors were not interested in investing in a small company with two completely different technologies. Commercializing both technologies simultaneously drained the company’s funds, particularly because of the learning curve required to profit from the acquired technology. Eventually, the acquired technology was abandoned.
Two other companies were each trying to commercialize at least three different technologies and ultimately had to settle for just one. Then there were three startups whose business plans anticipated commercialization of multiple unrelated technologies. Needless to say, all three startups had to focus on a single technology before obtaining investment capital.
Factors key to success of startup businesses include sound business planning, sufficient investment capital, strong management skills, creative talent, and, ultimately, products and/or services that satisfy unmet or underserved needs. The problem areas described above deal with deficiencies in business planning, obtaining investment capital, and/or management skills. The deficiencies were really simple to fix.
With respect to the piggy factor, all the CEOs of the underfunded companies had to do was to accept dilution, which in my opinion was not excessive. With respect to the business plan put on hold, again all the CEOs had to do was make business planning a high priority. Regarding the irreplaceable employee, it is simply better to proceed sooner than later to replace that employee. In every case organizational performance improved once the problem employee left the company. Finally, regarding loss of focus, it wastes investment capital, so one should think carefully before branching out in unrelated directions.
All of these fixes are simple, yet resisted mightily by entrepreneur CEOs. Moreover, close to 40% of the 69 small companies with which I have worked have suffered because they did not make the necessary fixes in a timely manner. In summary, while much can be done at the macro level regarding changes in government policy to foster innovation, as Dr. Cohen has proposed, much can be done at the micro level by the entrepreneur CEO to jump-start innovation.