TURNING SCIENCE INTO BUSINESS

1. TURNING SCIENCE INTO BUSINESS Christopher L. Tucci Chair in Corporate Strategy & Innovation Ecole Polytechnique Fédérale de Lausanne (EPFL) November, 2009

2. Agenda • How to do a quick check on an opportunity • Setting up shop at EPFL • Sources of financing

3. Business Concept Proposal • The very first exercise you should do when you have a new idea! • Six-line max description of the opportunity or idea • Benefit to paying customers • Benefit to end-users, if different • Sources of opportunity • Market potential • 5-year projection of revenues and gross profits • Critical assumptions

4. Benefit to paying customers / end-users • Write down the value to the company (or person) paying the bill (e.g., for a newspaper it would be an advertiser, for a parts supplier it would be the OEM or assembler) • Look at the payback period, should be one year or less, certainly not more than three years • Write down the benefit to end-users, would they perceive a high value or a low one? • If you can’t articulate these, your opportunity probably is not very good!

5. Sources of opportunity • Write down the source of this opportunity, i.e., what created the opportunity? • For most science-based startups, this is usually technological innovation, but it could be • Demographic changes • Changes in tastes and preferences • Process needs • etc

6. Market potential Use back-of-envelope calculations to estimate market size What is the population? Every hospital in Switzerland? Every disk drive in an iPod? What share of that population can you serve? How quickly could this market grow? Should be at least 30% per year, and certainly no less than 10% per year What does the market structure look like (fragmented (better) or concentrated (worse)?) What is the size of the market in CHF terms? Should be at least CHF 100M per year and certainly no less than 20M per year

7. Financial forecasts Back of the envelope calculations of Gross Revenues (turnover) Costs Gross profits For the next five years

8. Critical assumptions • You’ve made a lot of shortcuts to arrive at the numbers in the previous slide • Which of these shortcuts are you most uncomfortable with? • These are your CRITICAL ASSUMPTIONS • If you are wrong about these (in the negative sense), your whole concept may not be worth pursuing

9. Opportunity assessment • Decide whether the opportunity is high- vs. low-potential • Do you want to continue? • Use your critical assumptions in your milestone planning!

10. Setting up shop at EPFL • http://vpiv.epfl.ch • You should discuss with your scientific collaborators (advisors, team members, post-docs) and decide how to handle the intellectual property • Apply for Innogrants and / or CTI funding • Can continue on the payroll for a few months while setting up in the Parc Scientifique

11. Financing Options • Family & Friends • Angels • Private Placement • Venture Capital • Strategic Partner • Boot strapping • Banks

12. Qualifying & Quantifying Your Options Source: Gaal & Company, Inc.

13. Why Not Self-Finance or Family & Friends? • Cons • Sharing of risk? • How big? • Answerable to others now (ie-Board seats, etc..) • More dilutive to founder stakes • Are you as disciplined? • What about personal conflicts? • Painful to fail (damaged relationships?) • Pros • Probably no loss of control • Stakes of founders less-diluted • Very private • Little due diligence • Legal default proceedings rarely invoked

14. The Truth About Angels • Invest close to home • Cashed-out entrepreneurs • “Kick the tires” • Markets and technologies with which they are familiar • Typically not interested in life-style ventures • Terms and conditions — More informal • Often provide financing gap • Trend currently is towards investing in groups (“Band of Angels”) Source: Kessinger Consulting

15. Types of Angels • Tier 2: Smart Money • Have the reputation and the credibility • Portfolio approach (less “on scene”) • Has the contacts • Won’t invest as early on - management team has to be more complete and market opportunity better conceived • Tier 3: Passive • Primarily a follower • See less deal flow • Don’t have experience base • Tier 1: Active Builders • Willing to be mentors • Spend 1-2 days/week at company • Fill in management gap • Provide contacts to vendors, etc.. • Re-strategize market opportunity • Provide access to VCs What Are You Going to Get And How to Find Them? Source: Mehta & Company

16. The Truth About VCs • Average industry funding = ~$10-20 billion • Average size of single funding =~$5,000,000 • Investment horizons – Varies but generally 5-7 years • Terms and conditions – More formal (extensive due diligence) • Lose more control – Demand board seats • Bring experience and industry knowledge (hopefully) • Potential Upheaval – Sometimes replace management/ original founders Source: Kessinger Consulting and “The Early Stage Equity Market in the United States,” paper by Jeffrey Sohl 1998

17. What Are VCs Looking For??? • Strength of Product/Service • Strength of Market • Proven Companies • Strong Management Team • Exit Strategy

18. Thank you and good luck! Christopher L Tucci christopher.tucci@epfl.ch http://csi.epfl.ch