Some time ago I was approached by a start-up to assist the company bringing their innovative product to the market. A very interesting concept from the first looks of it. One founder, a practicing cardiologist (impressive CV with many publications, articles and books to his name) had appointed himself as the CEO, and the other founder, an ex-Army buddy (engineer with 3 PhD’s, working for a major Hi-Tech company) the CTO. They had developed a new technology that would resolve several problems in interventional cardiology. A creation out of practical experience. They were housed in a small, but well-equipped and furnished office. Angel investors, family and friends put up $3 million to build a prototype, apply for a patent, do tests and trials, hire business advice and obtain market feedback.
The CEO and CTO did R&D in their “spare time.” Production was outsourced to another ex-Army buddy running a production plant in China. Two young family members, fresh from university with a few stints as interns, were hired as VP Business Development and VP Marketing & Sales. A total of $120,000 was spent on off-the-shelf market research reports, and the 2 VPs started working on a Business Plan, using a cheap $19.99 template from the Internet. A neighbor’s kid put an investor PowerPoint presentation together. The two VPs and CEO explored the world, visiting medical conferences and academics (acquaintances of the CEO), who were asked for their opinions and advice about the new product. Some Profs were signed on the Board of Advisors (with nice perks), and a few other friends on the Board of Directors. China was visited twice “to look at the facilities.” An odd 20 VCs were approached, without much response.
During the first months well over $1 million was spent, and the company’s burning rate when I was approached stood at $110,000 per month. Salaries, cars, travels, office, supplies, inventory, and outside patent attorneys and an accountant. A quick clinical trial was done by one of the CEO’s university mates, and a case study, authored by his friend, the CEO and CTO, was published in a medical journal. For the angels and uncles it had been 3-4 years, and they started to demand revenues (sales!), clearly a sign they had no clue what they had gotten themselves into. The start-up needed help. And more money. Badly. And fast.
I was given a presentation about the greatness of the company, its team and the product, plus messy, complex spreadsheets with huge revenue figures, profits and market shares. Features and claims, but no benefits and no substantiation. No plans, no strategies. Only a goal to attain a “conservative and realistic” 5% market share of a $13 billion global market in 5 years. No facts, no tactics. The Business Plan was overly generic without any real content. Clearly a waste and embarrassment.
They asked me to:
I ignored their unrealistic expectations, and prepared a detailed proposal, formulating what this company needs to do in order to become attractive for an investor and successful as a profitable company. Of course, as any professional and sane thinking businessmen, we quoted our price: a complete project price payable in monthly installments + a percentage of funds from investors introduced by us. Their reaction was a (feigned) shock. “Why ask for money? Can’t you do it for free? We will give you an attractive profit share from our sales to distributors.” — When? Three, maybe five years down the road? Who guarantees any sale will be made? If ever. And how manipulative is a “profit share”, especially if there’s no control over any bookkeeping? My answer was, of course: “No. I will not. Only slaves work for free, because they have no choice.” I quoted Oscar Wilde “Experience is one thing you cannot get for nothing.” Which upset the CEO. I thought, to make it even clearer, I quoted Confucius “A fool despises good counsel, but a wise man takes it to heart.” This was not the first time I encountered this kind of unprofessionalism. I had enough of being taken for a ride. “There is no such thing as a free lunch,” said Milton Friedman.
I heard through the grapevine that this start-up did find a few machers who claimed to know the world and would work for free, demanding 10% of sales to any distributor they would recommend. The company ended up with long lists of names, copied from the Yellow Pages and Chambers of Commerce, plus a stranglehold contract enforcing this 10% commission if any of these companies would enter into a business deal. Nothing else. No work. No evaluations. No recommendations. Nothing. Back to Start. I met the CEO recently at a meeting. Friendly, but his body language clearly showed a defeatist state of mind. Last month the start-up went belly up and the founders sold their IP for $100,000 to a German VC.
This is just one example.
Some inventors think so highly of themselves and their innovation, but have no idea how to introduce a new product and to set up and run a business. They refuse to “let go” of their ownership in their company and rather have 50% of nothing than 5% of real worth. They waste money on themselves, family and friends, and expect client-users to buy blindly, based on the color of their eyes and their perceived stature. They think distributors would drop all and everything so they can devote their staff, time and money on an unknown, unproven new product. And, last but not least, they refuse to pay for honest work by experienced business consultants they need.
Is it because they feel embarrassed they can’t do the job themselves? Is it that they don’t want to pay outside consultants (though they pay for attorneys and accountants)? Or does arrogance play a role? I discovered that oftentimes it’s a combination of all three. I have encountered plenty more disasters. Luckily enough there are also success stories.