By Suzanne Elvidge
The life sciences and biopharma industries can be high risk and high reward. Every year new companies are founded, and every year some fail, losing money for founders and investors while potentially destroying the chances of important therapeutics and technologies from reaching the market. With more than 25 years experience working at board level in and with the life sciences and biopharma industries, Ian Shott of Shott Consulting has learned what makes companies tick (and what doesn’t).
Shott works with companies of all shapes and sizes, both struggling and successful, to help them reshape themselves for the future. He recognizes three key mistakes that companies often make. “These come up time after time — companies focus too much on technology and internal development, they don’t get the right team, and they don’t spend enough time on sales or the marketplace. When we work with a company to tackle these mistakes, we break things down into five main areas: people, business models, cash flow, intellectual property, and financing,” says Shott.
An example of Shott’s work is Excelsyn, a fine chemicals company in Wales (UK). The business was losing £500,000 a year, it had issues with environmental contamination, and its customers were walking away. “We saw that this business needed a lot of things — funding, new blood, a new identity, a new business model, and above all renewed customer and market confidence — and decided to take the challenge.”
Many companies grow out of a single discovery of a potential therapeutic, diagnostic, or discovery platform, and the academic behind the discovery is encouraged to spin it out as a company. When new companies are run by the inventor, they, naturally, will be very focused on further development work and sometimes not focused enough on engaging customers and seeing what they want.
“Scientists are usually specialists and can look too much at the detail. This approach can be intellectually satisfying, but not necessarily commercially productive,” says Shott. “The solution is to involve people with extensive real-world market experience and put them in business roles such as nonexecutive director, sales director, CEO, or chair. The scientific founder is still crucial to the company, and I would usually suggest that they move to a role like chief scientific officer. This works in more than 80% of cases.”
Getting the right people is really important. There are a number of routes for finding the right team, explains Shott, including using a consulting company such as his own, working with headhunters, or exploring personal contact networks or websites such as LinkedIn. This changeover period does need to be handled carefully, and there must be an engagement process with the existing members of staff, particularly the management team.
“If the company is keeping its CEO, then they can convene a meeting of the team, using external facilitation, to discuss what the company is doing and whether the vision works,” says Shott. “Otherwise, my colleagues and/or I will work with them to create a new team and to support the vision, strategy, and business model.”
In the case of Excelsyn, the key first step was recruiting the right people, though sometimes even experienced consultants make mistakes. Shott admitted his company made some errors in retention and hiring and then was too slow to correct them. “To retain and develop people, we created a sound personal development, performance management, and appraisal process, and we were active in coaching people and giving them face-to-face feedback,” says Shott.
The business model should be central to a growing business, but Shott describes many companies as “self-centered,” focusing too much on their widget or their technology, with a bespoke offering at a high price. However, sometimes the business model has to change, especially if the market changes and the company begins to struggle.
“A lot of companies make ‘X’ and won’t stop, and when the work dries up, they go bust,” says Shott. “As an example of a changed business model, we worked with a company that had been very successful over 10 to 15 years, with around £25 million in sales per year. It made high-end equipment for pharmaceutical research, selling for up to £2 million a time. But, then the downturn came, and as the global pharmaceutical research industry restructured, the sales stopped. Instead of saying, ‘We make these, and we can’t do anything else,’ the company adapted its technology to manufacture equipment selling for around £100,000 or £200,000 a time, as well as moving into adding value through consulting services. It still uses similar skill sets, many of the same people and the same location, but it has changed its business model. Sales are lower, at £15M per year, but its profit margins are better.”
But, how does a business change? Shott sits down with a company and helps them create a new vision and business model, based on the knowledge that is vital to growing a business — sales, understanding the business, positioning the product, finding the unmet needs, differentiating the product in the market, and adding value. Shott works with companies of all sizes, from large, listed companies to university spinouts. He says that whatever the size of the company, the principles are usually the same. Even for large and successful companies, there are always opportunities to improve and expand more quickly.
“When I meet with a company, we often end with ‘and the homework is ….’ This could be as simple as creating a two-page document out of presentations or breaking down a company’s statement that its ‘technology is unique.’”
In the case of Excelsyn, Shott and the company gathered information about the marketplace, finding areas of unmet need, and chose a niche to minimize competition. They also created opportunities for feedback from customers and used this to adjust the approach.
Companies can’t exist without cash to cover day-to-day costs, and it is important for founders to be prepared to back their newly revised business plans with their own money. “Putting your own money into a venture will validate it, and seeing that you have backed your own business will give others confidence in it. You can’t expect people to invest in something that you are not prepared to invest in yourself,” says Shott.
When he worked with Excelsyn, Shott coordinated deals with suppliers and customers, unlocking more than £1M from working capital, and ensured that everyone across the company was focused on cash and cash flow. It’s not just something for accountants to worry about, he added.
Every company is based on intellectual property or competitive “know-how,” but not every company exploits it fully. This can be done by creating collaborations with other companies, particularly in areas outside the core area (which can also create an additional revenue stream), or by setting up research agreements with academic groups.
Shott helped Excelsyn to exploit its transaminase technology for the production of unnatural amino acids through a collaboration with Bangor University. The research teams managed to simplify the process and improve the yield, saving the company 30% in production costs. “Overall, good IP management, innovation, and development generated seven-figure sales for Excelsyn in three years,” says Shott.
Companies need financing, but in the current financial climate this is often difficult. VC is the traditional route and the most abundant source of financing, but it isn’t an easy path.
“VCs don’t particularly like technology start-ups, and biotech isn’t very popular at the moment either. It doesn’t help that start-ups often don’t know how to talk to VCs. It should be like talking to customers, but with a focus on the stability of the financial model. Companies need to be rigorous in presenting finance and build in a safety net, both financially and for time, too. When we sought VC money for Excelsyn, it took 18 months to sign up the right investor, and it cost over £1 million on legal and financial support and specialists’ due diligence studies and reports, during a time when our working capital shrank when the global banking system went into meltdown, and our bank went bust,” says Shott.
Because of the hard work put in by Shott and the Excelsyn team, the company has grown from sales of £4 million in 2004 to £12million in 2009 with profits of almost £2 million, and projected sales of £20 million in 2014. In February 2010, Albany Molecular Research Inc (AMRI) acquired Excelsyn for $19 million (US), a greater than 100% return on equity.
Finding And Accepting Help
Companies need help, advice, and leadership, but some find it hard to accept this. In a Royal Society of Chemistry consulting project, Shott identified 900 SMEs (small and medium enterprises) and interviewed 150-200 of them. At an average age of 40 years, many were static, and around 80% didn’t ever ask for advice from external experts on strategy, technology, markets, or sales.
“Maybe that’s why they weren’t growing — in my experience, the companies that do the best are led by people who are self-deprecating, humble, and enquiring and assume that they don’t know everything. They are constantly looking for new information and question themselves, and ask questions of people on their team and outside,” says Shott. “In some ways, the situations where we can be the most helpful are when a company is at the point where it will do anything to survive — a ‘burning platform situation.’ That really gets their attention. If a company doesn’t believe that it is at that point, what we can do is crystallize the issues by demonstrating possible scenarios and show them what needs to be done and what money is available. Another route we take is to highlight the issues and downside risks systematically, creating a positive kind of dissatisfaction.”
Companies can apply Shott’s techniques on their own, but what is known as the “soft stuff,” such as emotional intelligence and team interaction, is often the hard stuff. “It really is better to bring in experienced experts to provide a dispassionate perspective,” concludes Shott. “And I have to admit that I really do enjoy it. I get a buzz out of helping the learning process and from turning a mess into a ‘something of great value.’”