Of course, competitors can be a big threat to your business and can frustrate your efforts to grow. But competition offer investors validation that a market for your product actually exists. If the market is still in its infancy, then the presence of competitors demonstrates market potential. In a mature market, competitors’ sales and earnings provide a reliable measure of market value. Competitors may also represent potential partners and acquirers for your business.

Experienced investors want know as much as they can about the competition. In fact, before investing any money into your business, they will almost certainly do their own competitive due diligence. So do not try down-play the competition; you run the risk of losing credibility. The business plan should provide an honest and comprehensive appraisal of the competition you will likely encounter.

Who are your competitors? Think of competitors as anybody else that solves the same problem as your technology. It might be a low tech alternative or something more advanced one.  There are often a few direct competitors and many indirect competitors. Be sure that you get to know them all.

The business plan should describe not only who they are, their products and services and their customers. Instead the plan should focus on their strengths and weaknesses and how they differentiate themselves in the market. What features and benefits does the product(s) deliver to customers? What is their level of market visibility? How well are they serving customers? Are they well-funded? Sources for this kind of information can include company web sites, online searches for articles, patent filings, competitors’ presentations. Arguably, the best information comes from direct conversations with competitors, their suppliers and customers, and with industry experts.

Investors will want to know where your competition is strong and how you will avoid going head-to-head against them. At the same time, you can also identify opportunities for collaboration and partnerships. For instance, one of the competitors you identify might have a large base of loyal customers and may be willing to provide your business with access in exchange for rights to your technology.

Investors, of course, also want to know where the competition is weak. Your business plan should highlight where the openings or competitive “soft spots”, whether it relates to technology or ways of doing business. The openings might be clear – competitors selling last-generation technology or ineffective medical treatments. Other openings might be less evident. Competitors might suffer from poor quality or customer service might be slipping.

The business plan, finally, needs to demonstrate how you stand apart in the market and, more importantly, why this difference will prompt customers to buy your product. Having assessed the competition, what is your competitive advantage? Does that advantage lead to purchases? Too many companies get tripped-up by thinking that a clever technology – one that gets the R&D team excited – necessarily excites customers. Investors want to see strong evidence that the company’s competitive edge will translate into real sales

The science and business of biotechnology is complex and uncertain, and trying to figure out biotech companies’ prospects for success no easy task.Putting numbers on a biotech firm – while not entirely impossible – can be awfully tricky. So, when sizing up a biotech company’s strategic and financial health, analysis often relies heavily on qualitative analysis rather than quantitative, financial methods of valuation.  Here are a few non-numerical items to consider when analyzing biotech companies.  Read more here, at Investopedia:  Analyzing Biotech Companies

Get Your IP Investor-Ready

Using Discounted Cash Flow to Value Biotech Companies

Bay of Thermi director, Ben McClure, looks at what prompts venture capital investors to open their cheque books for early stage companies. Read the article here at Investopedia.com

Investors look for ideas that solve real, burning problems. So, your business plan should start off with a clear explanation of the problem that your business will solve for customers.

For a new idea to be commercially viable, someone in the market must have a serious problem for which the idea offers a compelling solution. “Serious” means that it is a problem that is not currently being solved; or if it is being solved, it’s not being solved effectively. Business problems are exciting for investors when they come attached with pain – real pain. Conveying the pain value of the problem grabs investors attention and prompts them to learn more about your idea.

Real Problem

Real problems are ones that customers are constantly struggling with, or problems that customers anticipate will become real in the future. Importantly, they are not what you assume will be problems; the business plan must demonstrate with certainty that you are creating a solution for a problem that really does exist.

The best type of problem is one that keeps customers up at night – that real burning problem. In your business plan you want to use describe the issues and challenges that customers face using sharp, visual,  cutting words. The goal is to put investors in the customers’ shoes. There is no room in the business plan for the soft, subtle approach.

It’s easy to confuse a real business problem with an opportunity. The words are often used interchangeably, but don’t. Focus first on problems. (I will look at how to spell out opportunity in a later blog) Describe the issues and challenges the customer faces in a typical day. Whether your customer is a hospital, a corporation or an organisation looking to license your idea, it is critical that you understand the problem from  the customer’s perspective.

Most smart investors will tell you that a problem only becomes real when the customer:

Recognises it as real: The customer must feel the urgency to solve the problem. This doesn’t necessarily mean the customer will make a purchase any time soon, but rather that the customer recognises that a problem exists and feels discomfort living with it. If your idea or innovation is a breakthrough or revolutionary, you will need to think carefully about when the customer will be ready to adopt your idea to resolve the pain.

Reckons it’s a viable solution: The idea you are proposing must fit into the customer’s existing systems and processes. Don’t expect the customer to make big changes to their infrastructure or processes to accommodate your idea. To be viable, your idea must fit in with the customer’s ways of doing things.

Has money (or budget control) to solve the problem: Without this, your target customer isn’t really a customer. The customer must be – and have the power – to spend money to solve the problem.

Remember, getting investors attention may require some shock value. You need to grab their attention, while ensuring that your statements are grounded in facts. This is the pain statement and you want to attach your idea to one. Pain statements have an element of hurt, are expressed directly and usually have some statistics to back them up.

To see what I mean by shock value, have a look this pain statement from Cytos Biotechnology, which is investigating a new class of medicines that hold promise for the treatment both of the risk factors and of their associated chronic diseases.

The population of the world is ageing. According to a United Nations report, there are 600 million individuals worldwide aged 60 years and over at the beginning of the 21^st century. This number is predicted to increase more than threefold over the next 50 years. The increase in age presents society with a new global challenge, namely epidemics caused by non-communicable, chronic diseases like cardiovascular and respiratory diseases, diabetes, and cancer. The World Health Organization estimates that these chronic disorders now account for an estimated 35 million or 60% of all deaths annually and contribute to almost half of the global burden of illness.

As I run into more pain statements, I will post them for you to look at.

Valuing IP  Module_4D_1val_EN (3)

Financing IP Module_4D_2fin_EN (2)

Read the full February 2011 IP Magazine article here:

IP Monthly – VC Investment & Biotech Funding

The simple answer: as little as possible.

But, seriously, determining the value of a technology startup is not simple. For mature businesses, with steady revenues and earnings, normally it’s just a matter of valuing them as a multiple of their earnings, say ten times. But it’s a lot harder to value an early-stage venture that may be years away from bringing in revenues. Often, start-ups are little more than a business plan and their founders’ hopes and dreams.

As a consequence, nothing creates a bigger gulf between founders and investors than the startup’s valuation. The two parties may agree on every other point but will have disparate views on what the business is worth and how much equity the investor should get in return for his money.

A Bay of Thermi client, who originally raised £2 million for his drug development startup at a £7 million valuation, told me that an angel investor offered to put money in at a £5 million valuation. If my client were to agree to the investment, it would represent a painful reduction in business value for him and his original investors. Moreover, it would mean accepting a hefty dilution in their equity.

In the past, I would have told the client to walk away and wait for a better offer to come along. After all, since raising its first round of financing, the company was meeting milestones and early stage trials of its drug treatment were proving successful – suggesting that a value north of £7 million might be justified.

However, in today’s capital environment, the wait for generous investors can be a long one. To put it bluntly, there is less early stage investment capital around these days, and what is available comes from increasingly tight-fisted angel and VC investors. So, the job of startups is to stay at the negotiating table and come up with creative ways of shaping deals that are acceptable to both sides.

Here are some ways to get things moving at the negotiating table:

Build a Defensible Valuation

Valuation, at the end of the day, is a matter of negotiation.  Successful negotiation requires work to support a convincing case.  The startup’s valuation – and the financial projections upon which it is built – should be based on hard facts that investors can believe in.  It is awfully hard to sell your valuation to an investor who finds obvious “holes” in your plan and numbers.

It’s critical that startups build a realistic, defensible set of projections. Most importantly, if they want to get the valuation they are seeking they must have a well thought out and consistent story about why their plan will succeed

Clients have told me that the strength of the valuation model was the critical factor in their securing investment, and that the model, clearly presented, gave investors greater insights and visibility about the business opportunity, and greater confidence in its value. If you are looking for help with your valuation, do not hesitate to contact me.

Debt – Not Always To Be Feared

One way of bypassing the problem of valuation altogether is to borrow money from investors.  Yes, borrow. After all, selling equity shares is not the only way to raise capital. Startups can think about debt – either straight debt or convertible debt. Most angel and VC investors are accustomed to putting money into startups through debt, so long as the startup is comfortable paying a hefty interest rate that reflects early-stage investment risk (anywhere from 7-20%) and holds the promise of producing positive cash flow in the not-too-distant future.

Making the debt “convertible” to equity gives the investors a share of the upside if the business gets acquired or goes public, and protects them from downside if the startup can’t generate enough cash flow to service its interest payment. Best of all, if the startup chooses to raise money later by by selling shares to VCs or other investors, more than likely, it will able to do so at a higher valuation than before.

CASH IS KING! Produce Some Revenue

Of course, the best way to gain strength in negotiations to is to show that your startup can make money. Nothing makes early stage investors happier than seeing signs of revenues coming in the door. Just the whiff of sales – be it in the form of a pilot deal or a trial contract – can give valuation a hefty boost.

Sign up clients as soon as you can to show prospective investors that they’ve got more than just a business plan and a dream.