Traditionally, companies that supply equipment to scientific researchers have used direct sales to drive adoption and growth. For start-ups this would typically require a partnership with an established entity. But recently a new strategy has emerged where the web is used both to create buzz about a product, and as a channel to convert interest to sales. A great example is Helixis, which in April 2010 was acquired by Illumina for $105M less than three years after the company was founded.

Helixis, led by CEO Alex Dickinson, emerged from the laboratories of Nobel Laureate David Baltimore and Prof. Alex Scherer at Caltech. Financed with a $10M Series A round funded by Domain Associates, Advanced Technology Ventures and Okapi Venture Capital, Helixis sought to democratize DNA analysis by introducing a low-cost, better, faster PCR machine (known as the Pixo and after acquisition as Eco Real-Time PCR). By pricing their instrument at $13,900 compared to the $50,000 cost of the market incumbents, Helixis believed that the centralized PCR machine shared by an average of 10 researchers represented the past, with their product shaping the future – a PCR on every researcher’s bench. Helixis drove sales using an internet-based channel in the US, combined with 22 distribution partners worldwide. Less than 3 years later, and with a total investment of $17.3M, Helixis was acquired by Illumina ($70M upfront + $35M milestone-dependent).

This is a great story. The dream of every entrepreneur and investor. Indeed, this acquisition represented the first exit for Okapi Venture Partners, generating a 6 X ROI in less than 3 years. Clearly, the Eco Real-Time PCR was a disruptive technology in a rapidly growing marketplace. Further, the co-founders were exceptional, and were supported by a stellar board including Illumina CEO Jay Flatley. But what I found most interesting was the sales and marketing strategy.

Helixis adopted a novel sales and marketing strategy validated by NanoDrop, manufacturers of low-volume spectrophotometers, who were acquired by Thermo Fisher Scientific in 2007. NanoDrop used the web as a platform to create awareness and buzz around their product. This strategy drove traffic to their website where potential customers were offered a risk-free 7-day trial, with the company covering the shipping costs within North America.

The concept of try-before-you-buy is not new in the laboratory equipment market. Sales reps often arrange for potential customers to test equipment in situ, with the cost of any necessary consumables covered by the customer. By cutting out the direct sales, NanoDrop controlled the sales and marketing of its product and did not rely on a third-party who may, or may not be motivated to promote and sell their product.

The growth and expansion of social media enabled Helixis to refine NanoDrop’s strategy of web advertising, webinars, blogs and customer discussion forums. In 2009, they brought on advisors to help with the product launch, including Lynne Kielhorn a co-founder of NanoDrop. Xconomy reported in January 2010 that Helixis had more than 150 orders for its product, which was due to ship the following April, the same month that the company was acquired by Ilumina.

I would love to know the conversion rate of trials to sales for the NanoDrop and Helixis, and how it compares to the traditional model. Clearly if you have a disruptive product, web-based sales and marketing works as evidenced by the acquisition of NanoDrop and Helixis.

The advent of social media is a boon to suppliers of laboratory equipment. Scientist by definition develop new techniques and share new knowledge with their peers. Similarly, they rely on their peers to develop and validate new techniques and equipment. Using social media channels to create awareness and also to generate reviews accelerates the buzz around your product. Coupled with web-mediated decreases in the cycle-time from submission to publication of scientific articles in peer-reviewed journals, this offers start-ups in these markets new opportunities to promote their products.

As interest drives traffic to the product website, sharing risk with potential customers through fixed-time trials of equipment, or alternatively offering to analyze samples using the equipment, a tactic used by Vancouver-based Boreal Genomics, is a proven mechanism to secure sales independent of traditional distributions channels that cut into revenue. Just ask the founders and investors of NanoDrop and Helixis.

Have used a web-based sales and marketing strategy? Or are you a rep involved in direct sales? Please join the discussion by leaving a comment below.

Debt may be a valuable step to conversion from a non-dilutive funding model to an equity financed start-up

Consider this scenario. You are an entrepreneur with an early-stage venture. Emerging from stealth mode, you make it your mission to speak to as many of the great and the good in the community to lay the groundwork for a future Series A financing. (Un)expectedly, someone immediately recognizes that after implementation of your technology – the world will never be the same.

They want in. And they want in now.

If you take the money now what will you offer in return?

Providing equity in return for seed financing necessitates valuation of the company. Issue stock now at the current valuation and dilution could be exacerbated in a future Series A financing. This provides a dilemma for entrepreneurs of early-stage technology companies, particularly when a significant value bump is anticipated upon completion of defined short-term milestones. Enter an alternative financing option: convertible debt.

Convertible debt (often referred to as convertible notes or loans), is where the company borrows the money with the intention of converting the loan to stock at a later pre-determined time. This option avoids company valuation and is often associated with lower legal fees – good news for early-stage companies.

Where’s the value for investors?

For investors, debt is most likely considered in the above scenario where the desire to invest in the company is balanced with the realization that the company is unlikely to accept the money at the current valuation. The investor is compensated for accepting convertible notes by the provision of discounts, or a warrant.

Discounts enable the debt to be converted to stock at a pre-determined discount at the next financing round. For example, in our scenario, if the seed investor agreed a convertible loan with a discount of 20%, and the Series A stock is valued at $1.00 per share, the debt will be converted to stock at a cost of $0.80 per share. If the loan was for $100,000, the seed investor would be issued 125,000 shares ($100,000 divided by $0.80) representing a value of $125,000.

A warrant is often referred to as a warrant coverage percentage. In contrast to a discount, the compensation percentage is applied to the value of the loan, not to determine the cost of a share. For example, a warrant coverage of 20% on a $100,000 loan would entitle the holder of the convertible notes to receive an additional $20,000 of securities at the next financing representing a total value of $120,000.

Learn more about convertible debt

For a more educated description of discounts, warrants, conversion caps and all things convertible debt, I would direct the reader to the excellent posts here, here and here. Fred Wilson describes why as a VC investor he generally does not favor taking debt in early-stage companies, and also provides an example where convertible debt proved valuable for a late-stage entity.

Debt an option for early-stage biotechnology companies?

For early-stage biotech companies operating capital-efficient models to develop proof-of-principle data and create value, such as the “leverage start-up“, seed financing as convertible debt offers a bridge between non-dilutive funding and Series A financing. This is particularly valuable when covering activities that are not eligible grant expenses, but have an impact on short-term milestones that will significantly increase company valuation.

Have you used convertible debt to finance your early-stage venture? If so, I would love to hear your experience. Please comment below.

Funding is the lifeblood of all start-ups. You may be fortunate to generate revenue early through sales, but in the capital-intensive, regulation-heavy industries like biotech early funding often has to be secured from other sources. There are many possible avenues for financing, both dilutive and non-dilutive, for example, loans, convertible debt, equity, grants, etc. These are essentially top down approaches. The ubiquity of social media is providing a new bottom-up opportunity – crowdfunding. This post will provide an overview of crowdfunding websites which might offer a source of dilutive or non-dilutive microfinancing capital for the entrepreneur.

Crowdfunding is defined in Wikipedia as “the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the internet to support efforts initiated by other people or organizations”. Leveraging a network to raise money has traditionally been used to support charitable causes. The emergence of the web as a distribution platform has exponentially increased the number of potential donors that can be reached. This rise of web-based social networks has led to the subsequent expansion and divergence of crowdfunding, with dedicated sites to fund everything from making movies, investing in bands, supporting social action, and to fund businesses.

Using crowdfunding as a source of equity finance for businesses could break new ground because government regulations in many jurisdictions often restrict the financing models available for small private for-profit enterprises. For example, in the US there are three main regulatory obstacles that prevent crowdfunding as a mechanism for equity investment: (i) a limit of 499 investors before a private company has to disclose its finances; (ii) an investment is restricted to “sophisticated” investors, i.e. those with substantial personal funds; and (iii) a concern that removing these restrictions will expose unsuspecting investors to fraud. However, recent correspondence in the US between Mary Shapiro, the Chair of the Securities and Exchange Commission (SEC), and Darrell Issa, the Chair of the House Oversight Committee has indicated that the authorities are considering revising the decades-old regulations in light of crowdfunding initiatives.

For more insight into the potential impact of the SEC announcement see the post on Ross Dawson’s blog. And for a perspective on how government regulations are inhibiting innovation and entrepreneurship in Canada, see the recent excellent post from Mike Volker, a Vancouver-based angel investor.

The following table provides an overview of select crowdfunding websites that may offer the (bio)technology entrepreneur a source of finance.

crowdfunding post table

It is clear that the structure of the financing models described in the table reflect the regulations of the countries where these crowdfunding companies are based; however, there are also mechanisms to maximize the “friends and family” concept to leverage the network effects of online communities created via FaceBook, LinkedIn, etc. This funding avenue for start-ups is set to explode in the coming years and it will be interesting to see what new financial business models emerge from the convergence of web-based crowdfunding and evolving government regulations.

And how will this affect biotech start-ups? Debt financing offered by Cofundit, or loans/commercial paper as described by 40Billion would be unlikely options. Would ProFounder’s investors be happy with the wait for a potential revenue stream in potentially a decade or more? And will the equity investors of GrowVC, Seedups and CrowdCube fund capital-intensive industries, with numerous web-based enterprises competing for their dollars?

I believe that crowdfunding has potentially two distinct constituents: investors focused on financial return such as Angels, VCs and other “sophisticated” investors; and investors looking for a social return on investment based on the “venture philanthropy” model championed by disease-focused foundations such as the Alzheimer’s Drug Discovery Foundation. In both cases, I believe that biotech and technology start-ups will benefit from access to these expanded sources of capital.

Have you raised money through crowdfunding? Or do you consider this avenue as a viable financing option? Please share your thoughts by commenting below.

For those interested in learning more about crowdsourcing mechanisms to support start-ups have a look at these sites:

GoBigNetworks – the biggest network for startup opportunities

WebEquity - WebEquity is a community site bringing together entrepreneurs with business ideas and anyone willing to work on an equity and/or revenue share basis to make them a reality.

Foundrs – recruit great co-founders

For those interested in learning more about crowdfunding check out these additional sites:

KickStarter – a new way to fund and follow creativity

IndieGoGo – the world’s largest global funding platform

Sellaband – where fans invest in music

RocketHub – your creative launchpad

Quirky – social product development

Pozible – crowdfunding creativity (previously Fundbreak)

Fansnextdoor- platform for all creatives to promote and fund their projects together with their fans

Cofundos – community innovation and funding

New jelly –  a crowdfunding site that allows talents to showcase their work, goals and dreams

Start Some Good – igniting ideas, investment and impact

PeerBackers – crowdfunding big ideas

Invested.in – raise money, reach goals, build community

This post was co-written by James Taylor.

The quantity of information accessible via the web can be overwhelming, but through judicious use of free web-based tools a strategy for managing content can be devised. In our experience, biotech entrepreneurs have been slower to adopt these tools than their high-tech cousins. Therefore, this is the first in a series of how-to posts for biotechnologists interested in using web-, mobile- and social-based technologies to source, organize, manage and consume content from the internet.  The following post provides an overview of RSS and Twitter primarily to “pull” content, and includes examples of biotech content sourced using these tools. In later posts we will discuss the use of social media to push your content to the community.

I would love to hear how you use RSS feeds and Twitter to expand your biotech knowledge.

Setup your RSS reader & Twitter Account.

Your RSS reader. RSS has been available for a long time and is one of the best ways to consume and manage massive amounts of information.   If you’re not familiar with it, I highly recommend becoming so. If you are familiar, the following shows how we use it to consume bio-related info. There are many ways to do this but one of the easiest, and what we describe, is to use Google Reader. If you have a gmail account, you already have a Google Reader account (click ‘Reader’, one of the links near the top of your gmail account). If you do not have a gmail or Google account sign up for one at www.google.com. If you don’t want to use Google Reader, Google: “RSS Reader Reviews” to find another reader you like.  Also, put your RSS on all your devices. If you have a mobile device with an app store or reasonable installed software (iPhone, iPad, Android, Blackberry, etc.), you’ll be able to find a good mobile RSS reader.

Your Twitter account. Twitter is quickly becoming many folk’s portal of choice for news and content. It is a platform that has many ways to access information.  The following gives some useful ways we use it.  To set it up, go to twitter.com and get an account.  Get a desktop/mobile Twitter client. A good review of clients here: (link)

Follow General Industry Related Stories and Buzz

1) Use RSS to follow interesting industry news sites. For your favorite sites, click the RSS icon or copy the link to subscribe (how to guide). Some RSS news feeds of interest

• Fierce Biotech (link)
• Xconomy Biotech (link)
• Wall Street Journal VC (link)
• etc., etc.,

2) Use RSS to follow useful blogs. Most blogs have the ability to follow via RSS, which makes following many of them very easy. Here are some good ones worth checking out:

• A company blog: Complete Genomic’s blog (link)
• A VC blog: Life Science VC blog (link)
• An entrepreneurial blog: Nature Biotech Trade Secrets (link)
• JT’s blog: PersistentChange (link)
• ER’s blog: Sc!deation (link)
• etc., etc.,

3) Use RSS to follow journals. Most journals allow you to follow their articles via RSS. If you use a good reader, you’ll find interesting articles quicker than flipping through the hard copy magazine. Some journals of obvious interest are:

• RSS to Science: (link) (copy the url to your Google Reader ‘Subscribe’ field)
• RSS to Nature: (link) (copy the url to your Google Reader ‘Subscribe’ field)
• etc., etc.,

4) Use Twitter to follow folks you think are interesting. Twitter is all about following folks to hear what they have to say in real-time.  When you find folks you think you are interesting, follow them.  Don’t worry about following too many as you can always unfollow later.

Follow Specific  Content & Searchers in Real-Time

1) Use RSS to follow PubMed searches. If you are conducting research, commercializing technology, or investing in biotech, you likely want to keep up to date on articles published in your field. An easy way to do this is to create an RSS search using PubMed. This is easy.  After you’ve conducted a search at PubMed, you’ll note the RSS link above the search bar.  By clicking this you can copy the link address of the generated XML link and paste this into your Google Reader ‘Subscribe’ field. For instance, here’s one I’ve saved for research on “Cancer Genomics” (link)

2) Use RSS to follow patent searchers. If you are commercializing technology, you will want to stay abreast of any new patents or patent applications in your field of interest. A useful way to do this is to use Google Scholar and search for patents in your area of interest. At the bottom of the first page of your search result, you’ll see an RSS link to “Stay up to date on these results using the patents RSS feed on ____”.  To retrieve this feed, cut and past the url to your Google Reader ‘Subscribe’ field. For instance, here’s a patent search on “Cancer Genomics” (link)

3) Use Twitter to follow searches of interesting topics. If you are interested in a particular topic you can search for these in twitter (eg. “personalized medicine”). Using your client or mobile client, you can setup a stream specifically to follow these searches.  Here’s how to do this in the client we use, TweetDeck (link).

5) Use Twitter to follow tagged trending topics. Hashtags (#) are used in twitter to tag tweets with specific search terms. This is very useful for when there is a coordinated effort across the community to link tweets together, like in live micro-blogging. One way we’ve found this very useful is in following events, like conferences, that you can’t make in person. The Xconomy writes provides a good example for BayBio2011: (link).

Review and organize content.

1) Save articles of interest to read later. I review my RSS feeds and Twitter streams regularly and scan the titles for articles of interest. When I read an RSS article that I wish to share via Twitter (see below) and/or store for future reference, I star the article and share with my Evernote account.  This can be fairly automated for RSS (tutorial).  When I see an article in Twitter that I want to read later, I can also send to Evernote (tutorial).

2) Group content and people you follow on Twitter into useful lists. Your RSS reader allows you to organize your feeds into lists.  This allows you to quickly scan articles of a specific domain of interest.  Organizing those you follow in Twitter into lists is also very useful. For instance, you may want to have a list of folks who focus on genomics and others that focus on synthetic biology. You can even follow lists made by others: (example).

In conclusion, there is a lot off good tools out there to manage the information we face everyday.  Using these is extremely helpful managing the deluge of important content and having less slip through the cracks.  These are some of the ways we use these tools, but if anyone else has any tips/tricks to recommend, please put them in the comments

I recently had the pleasure of catching Denver-based band DeVotchKa at the Commodore Ballroom in Vancouver, BC. The grammy-nominated  four piece ensemble were touring to promote their latest album 100 lovers.

Before I joined my co-founders on the startup rollercoaster, I regularly enjoyed live music, particularly up-and-coming British bands that I could see for a fraction of the price and in more intimate settings than my friends back in the UK. One of the bands that overcame my union-jack-tinted glasses was DeVotchKa when they last played Vancouver at the now defunct Richards-on-Richards. But what I appreciated back in 2008 really resonated today – DeVotchKa may be a four piece ensemble, but they play 12 instruments to generate their unique sound. When I saw Jeanie Schroder switch between Sousaphone and flute, and Shawn King drop the drumsticks to pick up the trumpet, and Tom Hagerman dance his fingers over the keys of the piano or accordion, and lead vocalist Nick Urata play a theremin with his guitar – I pictured my colleague, James Taylor and I, juggling business model development,  contract negotiation, licensing, IP, HR, fundraising, product development, customer development and countless other elements as we build towards a sustainable business. I hope that we demonstrate at least a fraction of the competency in our startup multitasking that DeVotchKa display in their multi-instrument masterpieces.

For me it is the theremin that is the final piece in DeVotchKa’s product that sets them apart from the competition. What is the theremin in your business?

Read about more showbiz lessons for entrepreneurs from Justin Bieber and Charlie Sheen.

Tasmanian Devil (from http://tassiedevil.com.au/aboutdevils.html)

During the southern hemisphere summer of 2007, I was fortunate enough to be living on the Australian island state of Tasmania where I spent four months as a visiting scientist at the University of Tasmania. While I was there, I volunteered to assist a Masters student who was trapping and securing radio collars on Tasmanian Devils in the far north of the island. The purpose of this study was to determine the home range of these carnivorous marsupials – knowledge that could be crucial to prevent the spread of Devil Facial Tumor Disease (DFTD).

DFTD is a very unusual cancer, not because it is fatal, which it is, but because it is contagious. Even more unusual, the contagion is not a virus or bacteria, but the cancer cells themselves. Affected animals present with lesions predominantly located around the mouth and transmission occurs when a diseased animal bites a healthy animal (which occurs often during mating and communal eating). This close-contact agression causes cancerous cells to dislodge from facial lesions and seed in the fresh wounds of healthy individuals. DFTD, first recorded in 1996 has caused an 80% decline in the population to date.

Clonal transmissible cancers are unusual because mammalian immune systems are equipped to detect and destroy foreign cells. This is why high dose immunusuppressants are necessary to prevent rejection following organ transplantation. In contrast, Tasmanian Devils are susceptible to DFTD because their immune systems do not recognize the cancerous cells as foreign.

DFTD arose because the lack of genetic diversity in the Tasmanian Devil population limited that species’ ability to adapt to new environmental challenges. Changing environments are also a threat in the business world, and like the Tasmanian Devil, corporations could succumb to these challenges if a lack of diversity prevents their evolution. Case in point is the pharmaceutical industry. The so-called “patent cliff” has been well documented, where a number of blockbuster drugs from the stables of a variety of big Pharma companies are due to go off patent in the next couple of years, with a corresponding precipitous revenue drop. The pharmaceutical industry has responded with mergers and acquisitions and the dust is beginning to settle after the megadeals of 2009: Pfizer’s $68 billion merger with Wyeth, and Merck’s acquisition of Schering-Plough for $41 billion. From the outside, these deals look like cost saving exercises and pipeline padding. Indeed, it is estimated that Pfizer and Merck will save a combined $7 billion. But are these new entities up to the challenges of the rapidly evolving patient-centric healthcare system? For example, in the traditional Big Pharma business model where “blockbuster drugs” are king, can the companies that arise from these mergers readily adapt to personalized medicine, where the model will be selling less of more? Perhaps the answer lies in another deal witnessed in 2009 – the merger of Roche and Genentech.

The acquisition of Genentech by Roche following a long-term partnership integrates two truly culturally diverse organizations. The Savile Row suits of the Swiss giant partnering with the frayed Levi’s of the Bay Area biotech represents the best example of “genetic” diversity arising from the 2009 megadeals. Whereas, Pfizer and Wyeth, and Merck and Schering-Plough could be considered cut from the same cloth, it is hard to imagine Roche hosting Friday night keg parties in Basel in the same way that Genentech has done in San Francisco since its inception. Roche is very much aware of these cultural differences and appears committed to Genentech’s autonomy, at least for now, by providing an independent budget and drug portfolio. The merger has solidified the desire of both companies to pursue personalized medicine. Genentech’s breast cancer drug Herceptin has been at the forefront with the use of a genetic test that selects patients who are more likely to respond to therapy. Further, Roche is a leader in developing diagnostic tests. Can the merger built on these complementary strengths, both culturally and technologically, provide the diversity necessary to meet the challenges of a changing healthcare system? Or will Pfizer and Merck demonstrate that it is better the devil you know?

Let me know what you think by posting a comment below.

Yes We Can.

This now (in)famous mantra was the cornerstone of the successful strategy to elect Barack Obama the 44th President of the United States. It is the “We” in Yes We Can that completed a revolution in U.S. politics that began in 2003 with Howard Dean’s ultimately unsuccessful Presidential campaign, where the low-cost distribution power of the internet was used to engage the “We” in grassroots campaigning, and more fundamentally, in donations. Zephyr Teachout and Thomas Streeter describe the “$100 Revolution” in their book Mousepads, Shoe Leather, and Hope: Lessons from the Howard Dean Campaign for the Future of Internet Politics, where individual donations of $100 were sought from two million Americans to support the fight to unseat George W. Bush.

David Plouffe, Obama’s campaign strategist, expanded this internet beachhead and built “the list”, with contact details for over 13 million U.S. voters. During the Presidential campaign, social media was used to communicate directly with Obama supporters to mobilize grassroots evangelists across the country (see the video below for David Plouffe discussing the campaign, and his book The Audacity to Win, with authors@google).

In both these examples, web-based donations averaged less than $100 and contributed substantially to the $50 million total raised by Dean and the $745 million that fuelled Obama’s march to the White House. What is more remarkable is that the audacity of the internet donation campaign enabled Obama to forgo contributions from large private corporations and Washington lobbyists, thereby redistributing influence from the few to the many.

You are probably thinking what has U.S. politics got to do with new ideas in drug discovery, development and commercialization? If social media can democratize funding for U.S. Presidential campaigns, can this model be used to support drug development? In a recent blog for the Harvard Business Review, Ariel Hauter from internet start-up Armchair Revolutionary described his company’s plan to introduce a new model to support the development of a wide range of social programs from robotics to disaster relief. The website achieves this by combining a social gaming platform with a crowdsourcing funding model. Building on the success of low-cost apps and songs such as those on iTunes, Armchair Revolutionary plans to largely support a project portfolio (expected to reach 250 projects in the next few years) with donations of 99-cents. This is indeed a revolutionary business model that spreads the cost across the many, rather than the few, especially given the cost per project could range from $500K – $1 million.

But like the Obama model, Armchair Revolutionary involves more than simple donation. It seeks your active participation in projects by inviting you to complete tasks for points. Despite their current simplicity, completing tasks is surprisingly addictive (is this the “gaming” element of social gaming?).

Could the Armchair Revolutionary funding model be adapted for more mainstream drug development projects? Why not? Like Presidential campaigns, drug development is notoriously expensive, with estimated costs for FDA approval reaching $1 billion per drug (this figure includes the cost of failures). And as Obama’s team demonstrated, the low-cost distribution power of the web removed the reliance on contributions from large corporations – an attractive alternative if Big Pharma is not interested in developing drugs for your disease.

Can we use crowdsourcing as a model to fund and develop new drugs to improve the lives of patients and their families?

Yes We Can.

Let me know what your thoughts by posting a comment below.