|
Q: What do you see as the must-have elements of the business case?
EVAN FACHER: There are 2 parts of a business case: Characteristics and Elements. From the characteristics perspective, a good business case is clear, well structured and consistent. It has to be relatively objective and create a straightforward story, so the reader understands what it is you’re trying to provide and how it all fits together.
On the elements side, there’s communicating the customer value associated with that opportunity, the feasibility, the resources needed and all the other specifics of a typical business plan. It has to have a good description of the market and the innovative nature of the opportunity as well as information on the profitability and overall financials.
KEVIN MENDELSOHN: A well-written plan is concise. It is important to articulate the opportunity clearly; the best entrepreneurs can do this in three to five pages. I want to understand the unmet need in the marketplace, the pain point for the customer. And then quantify the value of this product to your customer. Is it tens of millions? Hundreds of millions? Billions? What makes this opportunity unique? And how is there going to be an exit to generate value for the investor?
Q: How do business cases and valuations differ between new ventures and new products?
KEVIN MENDELSOHN: For early stage opportunities, there’s no history of proven financials. So the multiples that may be used for later stage investments and deals aren’t really applicable. We’re looking to understand the exit opportunities by looking at comparable deals in comparable fields so we can map a financial plan that demonstrate a value creating exit. Investors are looking to validate an exit value consistent with the level of risk they are taking on. Obviously, as you move through later stages, the level of risk goes down, and so do the returns on investment. It just has to do with when exits are likely to occur and the value those exits will generate for the investor.
EVAN FACHER: When we’re looking at business cases, we are looking at things with much of the risk squeezed out, so that we see a pretty near-term path to profitability. Some of the things Kevin is looking at have a longer horizon to profitability.
KEVIN MENDELSOHN: When we’re looking at an opportunity, we want to understand how the acquiring company is going to evaluate the plan. We need to identify key milestones that the company must accomplish to position it for that exit. The exit scenario and milestones are really critical for entrepreneurs and businesses to understand as they position their development plans to present to potential investors.
Q: Do you see the use of multiples in a corporate setting?
EVAN FACHER: A little. Our main approach is to create a business case and use a discounted cash flow to get to valuation. Once we’ve put a value on what we think it is, we use multiples for triangulation to help set a price and check that our value makes sense. But at the end of the day, we’re relying on traditional risk-adjusted analysis and discounted cash flow to calculate a value for the opportunity.
Products are a bit easier to value because they can be more straightforward. Broader technologies are interesting if they’re platform-based. But those kinds of opportunities require a different investment level and require you to use that technology to develop something that eventually may become products. So a drug product or a device product that can address a current need are easier to evaluate than a platform technology that may help you create a product. There’s a quicker time to revenue from things that are further down the development path, like a product versus a technology.
Q: Who do you submit your business case to? And how do you know when to do that?
EVAN FACHER: Most companies have a business development function whose job is to take opportunities and make sure they get seen by the right people in the organization. So it helps if you make sure opportunities start out at the business or corporate development function. If it gets submitted to a specific business, it may or may not go through the right channels. The most important part however, is to make a connection to the person you’re submitting it to, make sure that all the effort you spent and the time you used in creating the information around the opportunity actually gets evaluated and that starts with it going to the right group. If you can get it to a person rather than just to an e-mail account, that’s important.
KEVIN MENDELSOHN: Each company has its own priorities and areas of focus. Before you go to a strategic partner, do your homework and understand what each company’s areas of focus are and how your product or technology fits into their strategy. Really understanding your need for capital is critical in identifying the best partner for you – be it an investor or corporate partner.
Q: Do you have any suggestions regarding outside resources that can help you create a business case?
EVAN FACHER: There’s free help available through many of the local economic development offices, and I know many of the local business schools have either small offices within them that help this specifically or they have access to folks that may be helpful.
KEVIN MENDELSOHN: Typically our experience is getting early stage businesses to a stage where an investor or strategic partner may be willing to look at them. Locally in Cleveland we have a couple business school program that assist entrepreneurs in writing business plans. It’s always good practice for folks in business programs to help write plans. The key is really understanding that unmet need you’re addressing, the pain point of your customer, and then looking to get some market data. Luckily, with the internet, there’s a lot of information out there. Sometimes the trouble is determining what’s most accurate, but there’s a lot of stuff out there and there’s a lot of people in industry who are always willing to help and to provide data points to start building that case as to the scope of this opportunity.
Q: How do you define and create the key elements of a business case when you don’t have an MBA? What are the key resources that assist in building the case, and what considerations do you need to make?
EVAN FACHER: Start building from third-party data around things that are going on in the marketplace. For instance, if you are looking at an opportunity in the cardiovascular landscape, what specific focus area within that landscape are you looking at? How many procedures are done per year in that area? How many of these procedures do you think you can attach this opportunity to? Many of these details are available to anyone, if you can locate a market study. You don’t need a graduate degree or any kind of detailed experience to create the core elements of a business case.
You may want help with expenses from folks on the accounting side. But what is the real market opportunity? To sell this to someone on the investment side, you have to have a good fundamental sense of what that market opportunity is, and you need to really start developing that by yourself using external information where it’s available. You have to be the expert on the opportunity.
Q: When do you review and analyze the cost of goods estimates?
EVAN FACHER: One of the first things we look at is does this fit strategically with the areas we’re interested in right now? The financial projections are the second thing we look at after we’ve determined whether this is an area of strategic interest to us. We start getting a sense of what the P&L statement looks like, not just the Cost Of Goods line, but all of the other expenses as well.
KEVIN MENDELSOHN: As an investor, I want to understand how much people are willing to pay for a product or technology. And then, moving backwards, if I need a certain profit margin, the product or technology has to have a cost of goods within a certain range. No matter how great the technology or product, if we can’t get it to a viable profit range, we really don’t have an opportunity. Ask: What is the market willing to bear? What are your customers willing to pay? And what does your manufacturing scale-up or plan look like? At production volume, where are you going to be from a profitability standpoint?
EVAN FACHER: Also make sure, if it’s something in the life sciences industry, to understand what the reimbursement rates are for similar products and to make sure that your pricing is in line with potential reimbursements. Because if it’s going to cost the hospital or the physician or whomever a lot of money, it’s going to be hard to get adoption if they have to pay out of pocket.
KEVIN MENDELSOHN: As we evaluate healthcare opportunities, I spend time looking at the regulatory and reimbursement issues even before I spend a lot of time looking at the IP Landscape because if I can’t understand who’s going to pay for it and how’s it going to be reimbursed, it’s difficult to justify spending a lot more time looking at intellectual property.
Q: How do you validate your cost of goods sold estimates?
EVAN FACHER: We put together our own assessment of how much it’s going to cost to make by using our internal folks and getting feedback from folks on the outside who are potentially involved with producing pieces and parts of the opportunity. We may actually get our own bill of materials from a third party if we were to make this ourselves.
KEVIN MENDELSOHN: We rely on subject matter experts. We have folks in our network that have manufacturing and product development expertise. We’ll try to get a better understanding of what the components are and what range of cost can we expect for this product? And then at volume, how much of that cost can we save?
Articles in this series include the following:
 Creating the Business Case: Part I
Creating the Business Case: Part II
|
Join Today.
Login.
Feature 
Share on LinkedIn
Digg This
Email Page
Print Page