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The Ideal Physician EntrePreneur.

My 20-year career in academic pathology and administration did not teach me much about how to raise money for a start-up company. If I thought at all about venture capitalists, it was with a naive sense that they invest large sums of money in smart people with great ideas. The venture capitalist was the source of money and business expertise that helped the physician or the scientist with the brilliant idea to start a successful company.

As an executive at a biotech start-up company completing its third round of venture capital fundraising, I have met with several venture capitalists to help explain the business and scientific plans for our company. I have also been fortunate to discuss with many venture capitalists and physician entrepreneurs how he system really works.

A physician with a new idea or technology often cannot turn to a bank or the stock market to obtain money for a biotech startup company. Banks often require tangible assets to secure a loan, and the physician entrepreneur in an information-based new economy often has little in the way of hard assets. In the industrial economy, companies usually had to have at least $10 million in revenue before they could entice an investment bank to help them with an initial public offering of stock to raise capital.

Venture capitalists supply the entrepreneur with capital during the high-risk time from inception of a new idea until the company can access the stock market to raise money. The venture capitalist helps the start-up with capital and advice for a period of time and then leaves the company when it goes public.

The intelligence, charisma, talent, speaking ability, reputation, accomplishments, and personality of the entrepreneur are all important to the venture capitalist. The new idea or technology is also critically important, but it turns Out it is of secondary importance. Even more important than the character of the entrepreneur and the brilliance of the new insight is how well that particular sector of the economy is predicted to perform. The pension funds insurance companies, and university endowments who invest with venture capitalists expect a 30 percent annual return, and the venture capitalists look to the hot sectors to realize that return. Genius physician entrepreneurs with great ideas for a company in an industry that is under-performing will have a hard time raising venture capital.

The ideal physician entrepreneur

So, who are the physician entrepreneurs that venture capitalists say make the most attractive partners? My contacts were consistent in describing the ideal physician entrepreneur as:

* An expert in an area that Wall Street perceives as hot

* A public speaker who can enthusiastically communicate scientific and business plans to a variety of audiences

* A team leader who is willing to share equity in the company with other employees

* A recruiter and a motivator

* An implementer who can achieve milestones quickly that allow the company to go public as soon as possible

* A realist who does not resent the terms of the typical deal

Venture capitalists structure the deal with an entrepreneur to provide as much protection for the investors as possible should the company not prosper and to allow additional investment should the company flourish. A venture capitalist might invest $4 million in return for a 40 percent preferred-equity ownership of the company. Preferred stock status often provides the venture capitalist with special voting rights and first claim to all of the company's assets, at the expense of the entrepreneur who has common stock, should the company go belly up.

Anti-dilution clauses also protect the venture capitalists at the expense of the common stock holders from equity dilution if fundraising occurs at lower company valuation because the firm is not doing well. Venture capital firms also spread the risk around by having lead investors and follower investors, so that more than one firm invests in a round of financing. The typical deal is stacked in the favor of the venture capitalist and not the entrepreneur.

Parag Saxena, Managing Director and Head of Private Capital of Invesco, believes that physicians should stick to their core competencies and ally themselves with others who have the marketing, finance, business, and management expertise that any growing company needs: "Just because someone is an excellent cook does not mean that he can successfully run a restaurant business," comments Saxena.

Other venture capitalists commented on the tendency of physician entrepreneurs to overestimate their own importance and to underestimate the contributions of others to the company's success. Entrepreneurs also sometimes fail to recognize that each stage in a company's development demands a different set of leadership skills, and that even the founder may have to step down as CEO when a new skill set is required for the company to grow.

A lot more patience than imagined

David Shulkin, MD, CEO of Doctorquality.com (a Philadelphia-based quality benefits management start-up company) was told that raising venture capital would be easy based on his impressive CV and accomplishments in the quality field. Although ultimately successful, he found the exercise took much more time and energy than he expected. "It's a jungle out there."

"Physicians are action-oriented, and I found that repeating my story over and over again to countless venture capitalists was frustrating. It required a lot more patience than I usually have." comments Shulkin. He was also surprised at the phone calls that were not returned by venture capitalists and the meetings that were unexpectedly canceled. "As a physician, I was used to having all my calls returned. Collegial respect is not universally practiced by venture capitalists."

He advises physician entrepreneurs to search for the venture capitalists that they connect with intellectually and who share the same values. "You are going to spend a lot of time with these people and you should find people you truly enjoy working with" suggests Shulkin.

Other physician entrepreneurs recommend doing due diligence on venture capitalists who want to invest in their company. Many wish they had learned more about how many other boards their venture capitalists attend; some wished their investors had run their own business and had more specialized industry expertise and experience. Several said it would be useful to try to ascertain if an investor expects to be actively involved in the day-to-day operations of the company.

Connections in a global economy

My own experience contributed to my education about how the process really works. I was surprised at how global the economy has become; we met with many American, Asian, and Middle Eastern investors. I was not expecting to meet so many MDs and PhDs working as venture capitalists; in one meeting, a venture capitalist quoted a review article from that week's Nature, and another asked questions about the recent New England Journal of Medicine Scandinavian twin study concerning environmental and genetic causes of cancer.

Everyone in the venture capital world seems to know everyone else, and personal connections are important in getting in front of venture capitalists. They receive as many as 30 or 40 new business plans a day, so it is often difficult to attract their attention without a personal introduction.

The entrepreneur and the venture capitalist both need each other, but the structure of their relationship has considerable built-in tension. When the company succeeds, both are handsomely rewarded for their efforts. When the company fails, resentment has been known to occur between the entrepreneur and the venture capitalist.

Kent Bottles, MD, is President of the Genomics Repository of Genomics Collaborative, Inc., in Cambridge, Massachusetts.

KEY CONCEPTS

* Venture Capitalists

* Start-up Companies

* Physician Entrepreneurs

* Raising Capital

* Selling Your Ideas

How does the sometimes elusive and high-stakes world of venture capital really work? How can physician executives with innovative ideas or new technologies approach venture capitalists to help them raise capital to form a start-up company? These important questions are explored in this new column on the physician as entrepreneur. The ideal physician executive is described as: (1) an expert in an area that Wall Street perceives as hot; (2) a public speaker who can enthusiastically communicate scientific and business plans to a variety of audiences; (3) a team leader who is willing to share equity in the company with other employees; (4) a recruiter and a motivator; (5) an implementer who can achieve milestones quickly that allow the company to go public as soon as possible; and (6) a realist who does not resent the terms of the typical deal. The lucrative world of the venture capitalists is foreign territory for physician executives and requires a great idea, charisma, risk-taking, connections, patience, and p erseverance to navigate it successfully.

What are Venture Capitalists Looking For?

* An expert in an area that Wall Street perceives as hot

The ideal physician entrepreneur is:

* A public speaker who can enthusiastically communicate scientific and business plans to a variety of audiences

* A team leader who is willing to share equity in the company with other employees

* A recruiter and a motivator

* An implementer who can achieve milestones quickly that allow the company to go public as soon as possible

* A realist who does not resent the terms of the typical deal

Kent Bottles, MD
COPYRIGHT 2000 American College of Physician Executives
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2000, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:portrayal
Author:Bottles, Kent
Publication:Physician Executive
Geographic Code:1USA
Date:Nov 1, 2000
Words:1520
Previous Article:What Do You Know?
Next Article:The Importance of Building Alliances.
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