Alain Martin sits there wincing. A very professional looking, well tailored venture capitalist is listing her conditions. Her company starts with a seat on the board, capital is dribbled out at their discretion. They insist on frequent prototype and product inspections by their marketing and finance advisors. You will bow to their suggestions. They will begin with one third ownership of the business, with various options for more board members and larger percentages. Finally, as a coup de gras, this venture capitalist wants to see a sell-off date in your business plan and an estimated price, to be adjusted by their fiat.
“No way,” thinks Martin, squirming. “These are not conditions - these are ransom demands, and I refuse to pay.” If anyone knows a better way, it is Martin. He has developed billion-dollar deals for the pharmaceutical giant, Warner Lambert, and holds 24 patents, such as Lubriderm, each of which he has engineered into multi-million-dollar money makers.
Currently, Martin has launched EmphyCorp, Inc. to market his latest invention: N115, a therapy which reduces inflamation and enables lungs and bronchial passages to heal themselves with minimal side effects. With positive results in the Phase 6 Phase I/II human clinical trials, N115 shows great potential for alleviating a range of pulmonary problems from asthma to cystic fibrosis. It can also be combined with antivirals and antibacterials to treat infectious diseases in the lungs. Equally encouraging, strong initial interest has been shown by a long list government agencies, medical treatment centers, and pharmaceutical companies.
EmphyCorp requires more capital to fund its further testing, before launching production and bringing N115 into commercial use. For most companies, this marks that financing plateau after the family, fools, and friends have all been tapped, and before they resignedly put out feelers to voracious venturists. But Martin is making no such approaches. Instead, he has set EmphyCorp on a strategy of low cost development, with a steady, somewhat slower cash accumulation rate that will keep the company successful, and in his hands.
* Launch protection. Rather than conjuring an idea and rushing to hawk it, Martin suggests completing the full product development initially. “Take your concept far enough along to where it becomes a patentable invention,” he says. The very act of obtaining a patent holds the invention up to a scrutiny that gives it viability. It also defines the competitors and hones one’s market niche. Further, holding that registration number from the patent company guards against encroachment attempts when the entrepreneur begins to deal with manufacturers and larger partners.
Concurrent with gaining patents and copyrights, the entrepreneur needs slip on the armor of incorporation. Even if you operate in several states, Martin sees that “inc.” as an inexpensive way to separate liable assets, provide a vehicle for raising needed capital, and establishing a repository for equity and investments.
* Drafting the Team. Once the patented product and incorporation have set the entrepreneur up as a gong concern, he can begin to attract a dedicated team with strong resources and product interest. For EmphyCorp, this included a patent attorney, a veteran FDA submitter, a pharmaceutical contact who knew both the firms and their management, a manufacturing firm liaison, and the company head - in this case Martin, the inventor himself.
Note what is missing from this team roster. There is no CFO, because cash transactions remain minimal. There are not necessarily well known, impressive advisors placed to attract investors, since EmphyCorp is not offering major players large pieces of itself.
Every new startup will require its own special team, of course, but Martin's initial crew must meet a list of somewhat atypical standards. First, every team member must have his own job and income stream that will keep him from being dependent on EmphyCorp for his livelihood. They must have network ability. These networks may be in the form of a strong potential client list, a list of possible investors, or ties to services the company will need e.g. market researchers or manufacturers.
Team members also must have the inventor’s own strong passion for the product. They are going to be devoting their weekends and long nights to this item. They had better believe in it strongly. Lastly, Martin wants to see some investment capability in all his team members. Granted, it is not always possible to get the absolute top person to contribute sweat equity and then invite him to pony up cash for the privilege. But keeping an eye on your team’s portfolio potential is a good idea. * Keeping it Cheap. “The goal here is to set up a company with zero-burn rate,” says Martin. “Venture capitalists give you huge sums upfront, and invariably, owners burn through that cash and end up asking for more.” The first rule is to pay wages with percentages. By selecting a deliberately small and dedicated team, the owner can dole out five to 10 percent shares in the firm while still maintaining his very vital, controlling 50 percent. Such equity is best worked out privately, on an individual level.
Today’s laboratory testing and manufacturing processes need not be a reinvention for each startup. Inexpensive labs and production companies abound throughout the globe. Most have the capacity to ship rapidly and many are very hungry. A little hunting will allow you to find ones that can provide exact quantities on demand, without costly overages.
All the while the team should be hustling up investors in small amounts. “Keep the investments under $100,000 no matter what the project,” says Martin. “This way no one gets a large enough piece of the company that can lead to control.” Some of this funding may be gleaned from pitching to potential customers, who seek to hasten commercial development. Martin also suggests scouring the large-company competition and negotiating partnerships. This works particularly well for production and distribution.
Dr. Martin’s whole entrepreneurial key is time, not money. “Forge the product ahead as fast as you can, with the money you’ve got. Then when you run out, give it a rest. Return to your jobs, keep hunting to find funds. Then when you get more cash, start up again.” After all, if it is a good product, headed for a good niche, a little wait will not spoil it.
Martin’s pay-as-you-go method may seem a little cavalier, particularly when so much emotional investment is likely to have the team chomping at the bit. Yet the rush to finance typically chains the entrepreneur to some harsh taskmasters who happily burden him with high rates, while extracting control. If you, as the entrepreneur and the startup team, can maintain a little restraint, the odds are excellent that you will maintain a good hold on your company, and glean a hefty profit from your considerable sweat equity. B4
Dr. Alain Martin is the man to thank if you have ever cured a rash with Lubriderm, disinfected a wound with Neosporin, or kept your breath kissing sweet with Cool Mint Listerine. Raised in Danbury, Connecticut, Martin earned his Ph.D. from Yale University and then launched into a thirty-year career in biotechnology. He has specialized in both inventing and commercializing an array of new products, and is currently the holder of 24 patents. Martin received the President’s Award for the creation of innovative new technologies. He was also the recipient of the American Surgeon Gold Medal Award for the creation of new wound healing technologies.
As senior manager for Warner Lambert’s Consumer Product Division, Martin handled several multi-billion dollar product developments, taking them profitably to commercialization. Since 2005, Martin has served as president of North Cell Pharmaceutical, a firm he founded to test and market several medical technologies, including a SRF - Skin Resuscitation Factor for wound healing. His EmphyCorp, Inc. which he founded is in the final stages of developing N115, a therapy for pulmonary diseases.