Glory: Entrepreneurs in the 1990s

Raising capital is tougher than ever, but analysts voice optimism for scientist-business people with viable products In mid-1989, George Rathmann decided to leave his post as chairman of Amgen Inc. of Thousand Oaks, Calif., a biotechnology company he cofounded in 1980, to embark on another biotech venture. He joined Bob Nowinski (founder of Genetic Systems Corp. in Seattle) and Chris Henney (founder of Immunex Corp. also of Seattle) to form ICOS Corp., which was incorporated in late 1989. The partners then set out on their quest to raise $25 million. By June 1990 they had raised $33 million. Over the summer, while Henney completed recruitment of the first round of employees, they subleased: and renovated laboratory space: And . on Sept. 20,1990, 65 people moved in and went to work on deciphering the inflammation process and designing a molecule to stem it. ICOS was in business. Would-be entrepreneurs may not believe such a smooth startup scenario, and even Rathmann sounds a little stunned at the Proof that "a strategy that did everything concurrently worked." To be sure, few first-time scientist entrepreneurs could have pulled off such a coup. But at a time when headlines emphasize impending economic despair -- bank closings, layoffs, and business failures-- the ICOS story does offer hope to science entrepreneurs that the coming decade, recession or no recession, will be a fruitful one. "On the leading edge of technology there is always opportunity for new ventures, new companies, and newcomers," says Rathmann (see interview, page 13). Indeed, pundits prophesy that the 1990s will be a decade of change and opportunity in the world of high-tech startups. New scientific fields will be ready for commercialization, new funding sources will, of necessity, come to light, and new geographic foci -- fertile alternatives to the Northeast and southern California -- may well develop. But the sages also warn that the rules for building a successful technology-based business remain constant: A company must have a product, and, above all, the aspiring entrepreneur must be a businessperson, not just a scientist. While some external parameters-the economy, sources of seed financing, geographic foci of technology-based companies-may be shifting and somewhat unknown, analysis, financiers, and experienced businesspeople voice a clear and unanimous message to aspiring entrepreneurs hoping to start a company in the 1990s: Stick to the basics. A company with a promising product, a solid management team, and a sound business plan may not always hit the Fortune 500, but without these fundamental building blocks. it will never get off the ground, they say. Professional entrepreneur Michael Wall, who has made a career of building high-tech startups-over the last 36 years he has founded or helped to direct 19 new ventures-says that the most common mistake he sees is an entrepreneur trying to build a company around technology, not a product. "A technology company per se is not valuable because you are just making technology available to other people who will capitalize on it," he warns. "What you have to do is forward-integrate your technology into a product." At Malvern, Pa.-based Centocor Inc., Wall and others did this by successfully building a line of diagnostics, and later therapeutics, based on monoclonal antibody technology. More recently, Wall founded Alkermes Inc. of Cambridge, Mass., in 1989 to figure out a way to deliver drugs across the blood-brain barrier. This was at a time when several people were starting neuroscience companies, but Alkermes has emerged as one of the most promising (its first product will enter clinical trials this summer,(primarily because of the product-oriented focus Wall infused from the start. A second error that may entrepreneurs make is failing to create a strong management team. Paul Johnson, national director of the MIT Enterprise Forum Inc., encourages the roughly 300 entrepreneurs he works with each year to be self-critical when planning a new venture: "You need to do a personal self-analysis of your strengths and weaknesses, identify where you need help, and assemble a team accordingly." Having financial management, marketing, and sales expertise close to hand, for instance, is crucial when writing the most important document for your new company-the business plan. Venture capitalists across the country cite weak management and an unfocused business plan as the most frequent reason for not investing in a new company. And finally, George Rathmann encourages the would-be entrepreneur to communicate carefully and honestly when representing his or her company. "The entrepreneur who thinks that all he has to do is attract money is on the short track," he says. "It sounds like a paradox, but promoting your company and attracting financing you also have to control expectations." Specifically, he recommends avoiding projections of dates for approvals of products, profits, or sales as much as possible. "It's not easy," Rathmann says, "but it is doable, and that's how you develop creditability." --Susan L-J Dickinson Paul Johnson, national director of the MIT Enterprise Forum Inc., a nonprofit body that advises aspiring entrepreneurs, says that though the U.S. economy is in disarray, the number of people wanting to start new businesses has never been higher. Indeed, he says, it is during a down economy that the risk of founding a startup is lowest. "If you are facing the pink slip tomorrow," Johnson says, "then you figure it's time to take the chance." And in the coming decade more technologies than ever will be ripe for commercialization. Within the biotechnology field, industry analysts predict, the advances in such areas as gene mapping, neuroscience, and biochemistry will lead to commercial opportunities relating to cancer; inflammation; and genetic, psychiatric, and cardiovascular diseases. Each represents a multihundred-million-dollar market as yet unfulfilled. But whereas the 1980s was known in the business world as the decade of biotechs, today other fields, such as computers, communications, materials technology, and environmental sciences, are also witnessing sufficient advances to support commercially viable ventures, leaders in the biotech industry say. Though financial analysts disagree over whether an economic recession will result in less money available for investment in startup companies, there is no dispute over the fact that competition for those investment dollars will become more fierce. Because more technologies are nearing commercial viability, the sheer number of potential projects will grow tremendously over the coming decade, Johnson says. Also, the growing number of entrepreneurs with some startup experience under their belts -- like Rathmann, Nowinski, and Henney -- have a significant edge in starting anew over those scientists without a track record in business. $100 Million To Market Parag Saxena, managing director of the New York investment firm Chancellor Capital Management, oversees the investment of about $100 million per year in seed and first-round financing, only 15 percent of which goes to a first-time entrepreneur. The competition for that portion of the fund is intense. "Chancellor finances one out of every 25 or 30 requests we get from an unknown entrepreneur," he says. Saxena also points to the vested interest many institutional investors have in the previous generation of startups, now established biotech companies, which may be financially sound but are still unable to bear alone the cost of getting a new pharmaceutical to market. "The average drug takes $100 million to get to market," he says. 'There are 20 companies in the central nervous area alone, each one working on four or five promising projects." On top of this, many institutional investors have become too big to be interested in small investments. " 'Big' used to be a $50 million to $100 million fund," says William Wetzell, director of the Center for Venture Research at the University of New Hampshire, Durham. "Now there are several over the $1 billion range." Indeed, Dave Dutile, president of the Manchester, N.H.-based startup DGH Corp., says that when he was looking for $100,000 in seed capital, one institutional investor responded that it considered only investments of $3 million or more. Nevertheless, money is out there for the entrepreneur who is sufficiently resourceful, determined, and prepared. And an increasing number of these people, like Dutile, are getting seed financing from a relatively invisible sector of the financing market: private individuals, or "angels." When DGH got the brush-off from institutional investors, Dutile registered his company with the Venture Capital Network Inc. (VCN), started by Wetzell at the University of New Hampshire in 1984 to help entrepreneurs and private investors find each other. "Through our research we identified a lot of high-net-worth individuals looking for investments in early-stage companies," says Wetzell. "But it was a very inefficient market in terms of entrepreneurs and angels finding each other. It was usually a very time-consuming, random process through acquaintances -- and was most often unsuccessful." The problem was exacerbated by the fact that the investors wanted to remain anonymous to the community at large. And the entrepreneurs needed a cost effective way to get their ideas to a wider variety of potential investors. So Wetzell founded his "computer dating service" for startups. Matchmakers Needy entrepreneurs fill out a registration form indicating business type, location, age of company, amount of money sought, and an executive summary of the business plan. For a registration fee of $250 this profile will be held active in VCN's computer for six months. When Dutile registered DGH, he couldn't believe how fast he got a response. "Within two months, VCN had put us in touch with our major investor, James Mann," recalls Dutile. "He visited our company, liked what he saw, and left us to talk it over with his partner. The next thing I knew, our bank account was getting a wire from Switzerland for $100,000." In the seven years VCN has been in business, it has provided some 3,500 introductions, which have resulted in at least 29 deals he knows of, raising a total of about $11 million from some 50 investors. And the idea has worked so well that a number of affiliate networks have sprung up across the U.S. (see list on page 7). "Angels typically like to invest in a venture no more than 50 to 100 miles from home," says Wetzell. So the network of services should be able to help entrepreneurs located outside of New England. For Autogen Instruments Inc. of Beverly, Mass., VCN found an angel willing to invest not only money, but also time and experience. Harry Petschek, an engineer and physicist by training, had been president of Avco Everett Research Laboratories Inc. in Everett, Mass., and founded, built, and eventually sold his own startup -- OMNI-Flow Inc. -- to Abbott Laboratories in North Chicago, 111. When he registered with VCN in 1987 he was looking for a company that needed his expertise as well as his money. It took two years, but when the computer paired him with Autogen in late 1989, Petschek knew he had found what he was looking for. Autogen was working on a machine that would mechanize nucleic acid preparation, a time-consuming process used in molecular biology labs. Petschek knew he had a match. "Instrumentation was close to my expertise," he recalls. "They had a growing technology with a major social impact, and a good market niche." Petschek had lunch with Autogen's founders in December of 1989; on January 10 they decided that Petschek would invest $1 million and become the company's fulltime president; and on February 14 the deal was signed. Today, the company has six of its Autogen 340 Nucleic Acid Preparation Systems in the field, and it is shipping more. Norm Mysler, the financial expert of the company, says they should reach the break-even point in September of this year. "We have moved incredibly swiftly," he says. "We could never have done so with an institutional investor." It's a scenario that Wetzell and other analysts say will recur over the coming decade -- and one that aspiring entrepreneurs should try to emulate. "These successful entrepreneurs of the previous generation can help startups avoid the pitfalls that new ventures typically encounter," observes Wetzell. But no one source can meet everyone's requirements, which emphasizes the need to be flexible and tenacious when looking for financing. When mechanical engineer Lloyd Weaver lost his job four years ago, he decided to develop his idea for a new composting technology into a business. He tried to raise seed capital from both institutional and individual investors. "But back then," Weaver recalls, "real estate was the rage, and we were considered very high risk." Not yet ready to give up on his dream, he started calling a number of state and regional information resources. A Help Network With the help of a woman at the Maine Economic Development Group, he reached Central Maine Power Co., which was interested in the conservation aspect of his technology. The company provided Weaver with a $50,000 loan under generous terms and put him in touch with the Portland Water District, E which provided all of the labor and Materials for the testing of the new composting method solely in return for the data. Today, Weaver has a patent pending on his invention -- a wedge that undercuts and pumps air into the composting tank to keep the decomposition aerobic (which prevents the production of methane). He has completed testing of the technology and, armed with a business plan, is now looking for a second round of capitalization to finance the production phase and trials in full-scale industrial systems. He's willing to talk, to any interested investor -- banks, individuals, or venture capitalists -- but is primarily relying on the network he has already developed. "We have a fairly large help network of seven or eight organizations," Weaver says. Geographically as well as financially, entrepreneurs will have new areas of opportunity over the coming decade. Advancing computer and communication technologies are already making it possible to run a technology-based business from areas other than the traditional sites for new startups. "The Midwest, for instance [is a viable alternative site]," says MlT's Paul Johnson, "where you can afford a nicer house and a nicer place to raise the kids." The cost of starting a new business is lower in such places, and the economic and social benefits may make it easier to recruit employees away from academia and more established companies. Chancellor 's Saxena says he used to let geographic location influence his analysis of a startup, but not since making what he considers one of his most promising investments, in Cleveland-based Gliatech Inc. This biotech company, founded in 1988, is working on the regeneration and joining of nerve cells. Saxena was impressed by Gliatech's progress on the long-term problem -- they have been able to grow longer nerve ends than anyone -- and by the fact that they are working on a viable product for the short-term, as well: a material that simulates a scab by stopping bleeding but not preventing nerves from rejoining (this could be especially important in brain lesions). If the science is sound, he says, and location doesn't limit product potential, what does it matter what the company's address is? So for scientists wanting to start their own ventures in the next decade, technology experts say the field is ripe. It may take more work to find financing, they say, but -- technologically and geographically -- more options are available than ever before. And it may be illuminating to know that even someone with Rathmann's track record hinds "the burden of launching a new company huge -- and scary."

Glory: Entrepreneurs in the 1990s

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