Platt Perspective on Business and Technology

Pure research, applied research and development, and business models 11

Posted in strategy and planning by Timothy Platt on March 12, 2018

This is my 11th installment to a series in which I discuss contexts and circumstances – and business models and their execution, where it would be cost-effective and prudent for a business to actively participate in applied and even pure research, as a means of creating its own next-step future (see Business Strategy and Operations – 4, postings 664 and loosely following for Parts 1-10.)

I have been discussing exit strategies in this series, and particularly ones that might arise as a new business exits its earliest stages of development and enters its first real growth stage as it becomes reliably profitable (see Part 8 and following.) And I began to explicitly discuss five such scenarios in Part 10 as they would specifically apply to the development of a new business that seeks to offer research as a marketable product:

1. A default, organic growth scenario,
2. A venture capital-backed one,
3. An angel investor-backed one,
4. A crowd source-backed one, and
5. A friends and family-backed one (elements of which might also apply to the basic default model scenario as discussed in this series.)

All of these scenarios are organized around how a business’ founders and owners would manage their finances, and more particularly on how they would or would not bring in outside capital development funding to jumpstart their venture. And they can all best be explained and understood, at least for purposes of this series and its type of discussion, from the perspective of the consequences arising from that.

To be more precise and explicit as to how I have set up and pursued this narrative up to here, I offered this list of possible next step Scenarios with a basic default possibility as its Option 1, because I wanted to hold that out for at least tacit comparison from the beginning, and certainly for any reader with any direct familiarity in building a startup. It does in fact represent a simplest business development possibility here. But I began considering this set of possibilities in more detail in Part 10 by addressing Scenario 2 of that list first. And I will continue on from there in this posting where I will consider Scenario 3, and then I will move on from there in subsequent discussion to address Scenarios 4 and 5. I will actually address the default Scenario 1 of that set last, and from the perspective of the other four outside-funded options as already discussed. More specifically, I will discuss the default option here from the perspective of founders who know of and who have considered those other possibilities, and in terms of their reasoning as to why they would or would not want to pursue one of them.

With that noted in anticipation of further installments to come here, let’s consider Scenario 3: angel investor participation. As already noted in earlier installments to this series, angel investors tend to gravitate towards business ventures that offer and would hold to missions and visions that mean something to them personally. Venture capitalists invest more money than they do, and certainly on a per-investment opportunity basis. And they do so with a focus on returns on investment and on risk management analysis and more strictly adhered to due diligence vetting processes, when seeking out and selecting their investment opportunities. Angel investors tend more to seek out investment opportunities that move them for their perceived importance and value.

Let’s consider this and its implications from the perspective of the founders of a research as product, oriented new business venture. And let’s assume that they would seek out a measure of outside sourced capital development funds, but that they are leery of seeking out venture capital support for this. That might be because of their concern that the types of venture capitalists who they could consider, that they might find acceptable to work with for their deals offered, would not be interested in as speculative a venture as their type of business would seem to be. Or this might be because they were concerned that venture capitalists would in fact seek out new businesses such as theirs to back – but at an unacceptable cost for the terms and conditions that they would impose when offering their backing, and for the level and type of voice that they would insist on having in the building and running of the business, in order to protect their investments. The why of this does not matter here – only the fact that these new business founders would accept smaller investors who did not place as many restrictions or conditions on the businesses that they invest in, as a trade-off to their only making smaller investments in them. How would these founders market their new business to these preferred investors?

• In general terms, they would seek market themselves and their new venture with what amounts to a lock and key precision that is centered around explaining and marketing their mission and vision for their new enterprise.
• So if their area of research focus is to be biomedical in nature, and if their plan is to (among other things) manage the clinical trials side to new drug testing, helping smaller specialty drug development companies to better and more effectively navigate hospital systems with their requirements (e.g. their institutional review boards and other healthcare system due diligence requirements), they would seek out angel investors who have been affected by diseases of types that their efforts would help address, from their speeding up and enabling the critical testing needed to get relevant new drugs approved and to market and into clinical use.
• And if they want to focus on clean energy-related research (such as materials testing for building sturdier but less expensive frames for solar panels, or for building solar panels that would be less polluting to produce), they would seek to identify and market themselves to angel investors who have track records of established interest and concern in that arena: in supporting new ventures that would support and promote sustainable environmentalism goals.

These same founders would seek to pursue a lock and key fit approach to finding and securing the right venture capital support and under the most favorable terms possible for themselves if they were to pursue a Scenario 2 approach instead, but they would lead with their business fundamentals, and with their emerging strategic and operational systems, instead of with their mission and vision goals. They would focus on the viability and on the likely profitability of their business instead, and particularly when seeking to retain maximum oversight and decision making control in their new venture, in the face of investor-sided risk management considerations.

Let’s consider the message of that paragraph from the more explicit perspective of a research as product new venture. According to that, angel investors would at least be more oriented towards the outcomes that might be achieved from the research that such a new business would come to undertake. Venture capital investors would be more concerned about the likely business effectiveness of these new enterprises, and about their prospects in succeeding as businesses in being able to do this type of work in the first place. Ultimately, both sides to that are essential and both should be of significant concern to the founders of such a new business. The question here, is one of what side of this effectively-same coin would be highlighted when marketing for funding support, and to whom.

As noted above, I am going to continue this overall line of discussion in a next series installment by turning to consider Scenario 4: crowd sourced funding. Then I will turn to and consider Scenario 5 and then Scenario 1, which I will discuss at least in part, in terms of the other four.

Meanwhile, you can find this and related postings and series at Business Strategy and Operations – 4, and also at Page 1, Page 2 and Page 3 of that directory.

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