Five years ago, when I made the transition from corporate employee to self-employed professional, I was inspired by my admiration for small entrepreneurs. Those people who one day smashed open their clay piggy bank and set up a bar or a hairdressing salon, and within a few years had provided for a family and earned the trust of a neighbourhood -without master degrees, start-up accelerators and all the jargon.
The challenge is even greater when it comes to creating a business in a technologically complex market. That is why I particularly admire scientific entrepreneurs – researchers who aim to transfer their knowledge to society by turning it into usable products or services that improve people’s lives. In Spain, their talent is desperately needed because we have excellent science but little innovative industry.
Over these years, I have supported many entrepreneurs: both people undergoing reinvention similar to my own, and scientists starting up in the innovation ecosystem. I have seen fantastic ideas, a great deal of creativity, spectacular successes and also many frustrations.
And a lot of noise.
Jargon, half-truths, posturing, distractions, idea predators, receipt sellers… It’s easy to lose sight of the signal amidst the noise. And, as Nate Silver demonstrates in The Signal and the Noise with some excellent examples, losing the signal is often the cause of making wrong predictions and poor decisions.
Let’s look at ten of the most obvious pitfalls we can fall into if the noise distracts us on the entrepreneurial journey. We will pay particular attention to those most relevant to science-based entrepreneurs.
Forgetting the essence
The ultimate outcome of the entrepreneurship effort is a company.
We can call it a venture, a startup, a knowledge transition proyect… but at the end, if we want it to survive, it needs to be a company.
Spanish business opinion leader Xavier Marcet makes an inspiring distinction between a company and business. A company is more than a business. A company is a group of people walking from a purpose to a legacy… and making profit along the way. The purpose is aspirational. The legacy is what remains after the effort: value for society, for customers or for employees. Perhaps leaving things a little better than we found them. But making profit along the way is the necessary condition to survive.
In science based entrepreneurship, this profit-making aspect of the company is sometimes diluted among concepts like transferring knowledge, making an impact, innovating. Those are great purposes, but none of that will happen if nobody buys your product.
Underestimating the commercial activity
Whenever I sit down with a founding team, I always ask what problem their product solves. It’s surprising how often there’s no answer. The first – and most common – mistake is being so in love with the solution that we haven’t thought about what problem it solves. This leads us to focus our communication on what we have, rather than on what our customers want.
Some science-based entrepreneurs underestimate the complexity of selling. They asume a good product will sell itself. Looking at the orgcharts of small start-ups, there is often no individual or team responsible for business development. If we ask who does the selling here, we’re told: ‘We all sell.’ But not everyone does research, not everyone does the accounts… Probabl too often, people still believe that selling is about having a few contacts and going with them for lunch from time to time.
Selling is a professional activity, and it is important to have a sales manager or or team to carry it out effectively. These resources can be external or internal but you need them on board early enough to drive the traction.
In the initial phase the start-up is still an experiment – an innovative idea seeking validation. But it is necessary to proactively seek out that validation. This involves defining the problem our technology solves, identifying those affected by that problem (potential customers), listening to them and understanding their needs. That process of interaction with the market is in itself a commercial activity, even before it can generate revenue.
Crossing the valley without provisions
Let’s now talk about that period when an entrepreneur has to make a living and cover their expenses without generating sufficient income. That ‘valley of death’, as it is called, is a reference to the valley in California where many pioneers died of thirst and heat in the 19th century and were buried by the dunes. The reference may seem overly dramatic, but it reminds us of one fact: not everyone makes it to the other side.
The duration of this journey varies greatly.
A start-up developing an app to provide a solution for which there is clear and established demand may start generating revenue very soon and support itself from its own sales right from the start. In start-up jargon, such a company would say it is ‘bootstrapping’.
A small family business may need premises, materials and some initial start-up time. You need to know what financial cushion you have to live on during that period.
But a deep tech organisation may require significant investment, iterative experiments to improve the product, regulatory approvals… It can take years before the first customer can be satisfied.
The development timeframe is particularly long for clinical products, due to the regulatory complexity of the pharmaceutical and diagnostics industries. This often makes it necessary to choose an alternative, interim business model to generate revenue while developing the final product.
Whether it’s a matter of weeks or several years, it’s important to estimate the length of the valley ahead of you before you step into it, so that you can have a survival strategy. This is one of the areas where you need honest advice from experienced people, as well as honesty with yourself.
Living forever on public funds
To survive in this ‘valley of death’, entrepreneurs often turn to public funding for innovation in the early stages.
Be careful not to lose sight of the ultimate goal and get comfortable in this phase. I have seen organisations set up with the intention of living on grants, stringing one grant after another together. When that source dries up, they close a company and keep playing the game with others. This is neither fair nor productive. Grants are not there to pay our salaries and expenses indefinitely; they are supposed to help us temporarily while we fine-tune a profitable business model. The aim must be to add value, generate profits, pay salaries and thus contribute to society, giving back what we have received.
In the next phase, if major funds are needed, it is necessary to go out and seek private funding. It’s time to face up to the world of finance. Family, friends and a few fools (the famous ‘three Fs’ that many young aspiring entrepreneurs dream of) don’t expect a huge return… but they can not make a huge contribution either. If you need hundreds of thousands of euros, you need professional funding. You are about to dive into the shark tank.
Ignoring the expectations of capital
The first thing is to understand what investors expect. They expect a return. Not just a modest one: they seek to multiply the value of the investment.
Start-up projects are high-risk. It is estimated that 80 per cent of start-ups fail. (This statistic varies depending on sector, time and country.) If four out of every five projects fail, the venture capital firm investing in multiple companies expects that the one company that succeeds will compensate for the other four. A great deal of commercial traction is needed to multiply a company’s value by significant factors.
The investor knows their statistics. A significant failure risk is part of the game. They’ll tell you: ‘Failure is good; it’s part of the process, and it should be celebrated.’ Let’s put this into perspective. For an investor involved in many projects, failure isn’t a problem… as long as there’s one major success to offset four failures. But you don’t have five projects; you have one. Your business idea may be the result of decades of research, many sleepless nights, and all your capacity for dreaming and self-motivation. Yes, for you, failure does matter. Understanding this is important for the entrepreneur’s emotional well-being. Learn to pick yourself up and be resilient, but don’t believe the myth that entrepreneurs don’t cry.
Discovering the destination too late
Investors who come on board cause as dilution. Ownership and control are diluted. If the company is no longer entirely yours, neither are the decisions. You need to understand the investor’s expectations regarding their ability to exercise control, and weigh these against your own. The result of bringing in capital may be that the founder is not necessarily the person who will run the company in the future. Is this what you want?
In addition to private investors (called angels) and venture capital funds, an increasingly important player in the ecosystem is large corporations through their open innovation programmes. These are created to oursource innovation. The large company gains access to a start-up’s innovative talent, and in return the start-up receives funding and market access infrastructure. If the collaboration is successful, it usually ends with the start-up being acquired by the company. It is a potentially effective symbiosis, but it forces you to prepare for a new scenario. Your start-up might become a department and you might endup being a corporate employee… or a retired entrepreneur with money in your pocket. Not a CEO or business owner.
Once again: is this what you want?
If you’re going to put an enormous amount of effort into an adventure, it’s worth knowing from the start where you want to go.
Failing to communicate effectively
How can an investor be sure they will get the high return they are hoping for?
They can’t.
There is no such thing as certainty; the investor knows this, and assesses their risks using data, intuition and trust. What you can convey about your project is key to determining whether it’s worth taking a risk with you. It often all starts with a brief pitch deck. Entrepreneurship courses usually teach you how to prepare one… but you need strong communication skills to deliver your message.
The most important learnings from a communication skills training program can be distilled in a few challenges: be clear, stick to the time limit, and give them something they’ll remember. And talk about the team. Investors want to know who they’re doing business with.
Later on, when your audience is customers, the same skills will still apply, with a particular emphasis on the most business-oriented one: listening.
Celebrating funding rounds as an end in themselves
In the quest for funding, it’s easy to lose sight of the bigger picture. I constantly see celebrations of the funding raised in investment rounds. Start-up of the year awards and media press releases like to celebrate fund raising as if it was an end in itself. It isn’t. It is a memorable milestone, but make no mistake. Raising a round is not what success looks like: it simply means you’ve created an expectation. Now you have to deliver to it. Celebrate it if you like, but it’s better to save the good champagne for when you land your first client contract. That is your real goal: to sell.
Lacking a strategy map for the journey
There is a specific challenge for science-based companies in highly regulated and complex sectors such as the biopharmaceutical industry. The regulatory and clinical trial process leading up to bringing a drug to market can take more than a decade. No business can navigate that ‘valley of death’ on its own.
Although patient capital—specialising in very long-term investment—does exist, companies in these sectors need a strategy to create income in the first years. Successful biotech companies often launch one or more alternative, interim products that generate the cash flow needed while working on the target product.
This adds complexity to strategic management. Resources must be allocated between development for the future and production for the present; it may be necessary to pivot between several short-term products; and one must know how to take detours without losing sight of the ultimate goal – as long as it makes sense to do so. The CEO of a biotech start-up faces the strategic challenge of managing this trajectory and explaining it to their board of directors. This requires a level of managerial maturity that not all founders of spin-offs and start-ups can provide.
Euphoria and Complaint
I’ve saved for last another noisy conversation, very trendy on social media. A dialogue between two opposing and exaggerated theories.
The first says, ‘Follow your dreams; you weren’t born to be an employee’. It’s practically as if, if you don’t start your own business, you’re nobody; working for someone else is a thing of the past. Beware of the trap. In capitalism, every player has their own responsibility: the company takes risks; the employee puts in the work. Trying to transform the labour market into an ecosystem of micro-enterprises is an excellent idea… for large corporations. Not necessarily for those who would end up asuming all the risks. We do need entrepreneurs, but we also need corporations with a high risk-taking capacity and employees working for others. All the roles are worthy and necessary. Start your own business if you want to, but don’t let anyone push you into it.
At the other extreme, you’re told that “it’s impossible to start a business in this country” because of the tax, regulatory and bureaucratic burdens. Impossible is a big word, as proved by the fact that in Spain 16 per cent of the working population is self employed, compared with a European average of 13–14 per cent. As a self employed person myself, I am in favour of measures that reduce bueaucracy and facilitate entrepreneurship, but I don’t identify with that constant complaint. I believe it stems from a lack of understanding of the tax reality faced by employees. The model of state we have chosen for Europe is demanding for everyone.
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All these risks that could derail an exciting project have something in common. They come from outside. They are mistakes caused by listening to those who talk too much, those who use jargon, those who want to advise you without knowing where you want to go… Noise.
The signal lies in the needs of your potential customers, the state of the market, what the figures tell us… and your decision on where you want to go.