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Product managers know that making a strong business case for funding their new product is critical.  But how does the person on the receiving end of that case think about it?  In a recent Product Strategy Network Talkcast, Evan Facher of the Corporate Development unit of Medrad, a division of Bayer HealthCare, and Kevin Mendelsohn, Venture Partner with JumpStart, responded to questions submitted by participants and moderated by PSN President Jim Berardone.  Both Facher and Mendelsohn have reviewed hundreds of business cases for new products and business ventures during their careers and know exactly what they're looking for.  

Q: How do you as a reviewer know a business case is credible?

EVAN FACHER: Early in the process, we typically bring on our key opinion leaders – folks that are out in the field as practitioners or other experts to give us a sense of the opportunity or if this is even a valid way of addressing the market need.  We also have in-house technology folks that can help us assess, from a purely technology perspective, if these things make sense.  And we also bring internal and external folks that are expert on the market side to pressure test some of the assumptions around growth rates and unmet needs.

KEVIN MENDELSOHN: We realize that we’re not experts in everything.  We rely on opinion leaders and subject matter experts to help us evaluate business cases.  Even if we’ve made a few investments in cardiovascular, there’s just so many opportunities in that space, so we are going to go to those specific thought and opinion leaders to have them help us evaluate the opportunities, and we try our best to educate ourselves on the unmet need and pain points that these products or technologies are solving. 

EVAN FACHER: We didn’t specifically touch on the intellectual property.  We rely on internal counsel and external counsel to help us through the IP maze for any specific opportunity to see if there’s freedom to operate, if there is protectable value assocaited with the invention.

Q: What do you see as the most common weaknesses with a business case, and how can they be addressed? 

KEVIN MENDELSOHN: Many times we get a plan that’s heavily focused on the technology, but there’s not a lot of discussion on the unmet need in the market place which the product addresses.  We find that it’s difficult for folks to quantify what it means in the marketplace.  Every market is specialized, and products typically address a unique challenge in the marketplace.  We really need to understand what that unique challenge is, and really understand the number of customers and products that can be sold.

The more detail you can get into about who your customers are and how they make their purchasing decision, the better.  Understand who you’re selling that product to and how it’s going to be used to save organizations money. 

EVAN FACHER: Another common problem is having market definitions which are overly broad, which leads to overly optimistic financial projections.  Get very specific about the problem this is addressing.  The more specifically you can define your market, the better your understanding of the customer needs and how this opportunity addresses those needs.  What problem is being solved?  The other weakness is not spending enough time developing around how the opportunity provides a strong, differentiated leadership position.  How is this going to be a good opportunity for a long time to come?  The better plans tell a good story from start to finish.  It has to tie together.

Q: What do you look for to determine the sustainability of the opportunity? 

EVAN FACHER:  It’s an understanding of the competitive landscape, of what competitors are likely to do once this product or technology hits the market.  It’s also an understanding of why the IP landscape is favorable and how the opportunity fits within that landscape.

Q: How do you measure your success rate in evaluating business cases? 

KEVIN MENDELSOHN: From the venture capital perspective, the primary measurement is economic return.  What return can the venture capitalist provide to their limited partners?  Out of ten opportunities, three or four completely fail.  You might have a few that double.  And then you’re really relying on a few others to be your home runs.  Investors can’t afford to have a company that is successful in terms of exiting, but because of valuation, they won’t get a suitable return.  They measure their success by what returns can they provide to their limited partners.

EVAN FACHER: When we do a transaction, we create internal milestones that are both qualitative and quantitative.  We track the opportunity against these assumptions to understand how close we came to what we wanted to do.  Just like folks are trying to sell the opportunity to us, we have to sell that opportunity internally, so we’re going through a similar kind of exercise of checks and balances.

Q: How do you define ‘being close’ to your original milestones and projections?

EVAN FACHER: When we do an acquisition deal, we have a very specific, very detailed business case that talks about what we are going to save from cost synergies, what are the additional revenue opportunities we have.  We get down to specific numbers we have to get measured on.

Q: Do you use a defined approach to evaluate your business cases?  
KEVIN MENDELSOHN: As we conduct due diligence, we spend a lot of time working with each investment opportunity to understand the key milestones and value drivers for each business; then we invest based on successfully accomplishment of milestones.  If something isn’t working, it’s a way for us to mitigate the risk we take in such early companies. 

EVAN FACHER: Everything we do has processes involved.  We have various processes and pipelines we use to advance deals.  Different kinds of transactions have different kinds of criteria.  We use a host of different methods that depend on the opportunity.  The first major gate is how does it fit our strategic plan.  So once an opportunity comes in, it may be a good opportunity, but maybe it’s not aligning with an area we’re interested from a strategic perspective. 

If it makes it through the process, we look at other kinds of criteria, mainly focused on adjacencies. There’s also some financial metrics we use.  It is a defined process that has different criteria which allow it through the gates.  A lot of them are subjective.  We’re not looking for something to get a score of a ten versus an eight; we try to look at high-level criteria and make assessments that way.

Q: What is your biggest challenge as a reviewer of business cases, and how do you manage that challenge?

KEVIN MENDELSOHN:  It’s sometimes hard not to get caught up in the excitement of a potential market or a product.  We’ve looked at plans that may have been profitable businesses, but didn’t fit into the metrics we look for.  So as an investor, understanding the investment criteria you have, and staying true to them, is sometimes difficult when you see things across other sectors.  But do the homework, be thorough about your due diligence, and stick to it to understand which opportunities fit and which ones don’t.

EVAN FACHER: Just because a sexy opportunity comes out of left field doesn’t mean  you have to spend time evaluating it, you have to stay true to what you’re trying to do as a business, and must be comfortable with saying “no” so you do not  use valuable resources to look at things outside the predefined path.  You need flexibility, but also need to be able to focus on this disciplined approach.  The other area that takes a good amount of time is trying to become an expert on a different area.  As part of a larger organization, if we have an opportunity that we need the parent company’s approval for, there’s another whole set of hurdles depending on the size of the opportunity.  So there are opportunities we can do internally, and there are others that have a more detailed process that involves our parent company.

Q: Considering a second or follow-on round of funding for a project, how do you keep yourself from becoming emotionally attached to sunken costs?  How do you know when to kill the project?

EVAN FACHER: It’s a struggle.  One of the ways is that we’ll look at a Net Present Value analysis with and without the sunk costs to see whether it makes sense.  When you do the NPV analysis for right now, you’ve already put in a huge amount of these sunken costs into a project, so the NPV looks a lot more favorable than if you had done this two years ago.  But there’s no cut and dry answer.  If you have other things in the portfolio, it’s important to weigh the opportunity against everything else you have going on a

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