Managing in an early stage R&D company is different than managing in an operating company... it takes a thorough understanding of the differences to carry the business through to a successful outcome.Mainly the issue stems from where the working capital (WC) comes. Raising WC is a critical responsibility of the founder and subsequent leaders while still in R&D mode. This can be a drain on the founder and on executive leadership. As a result WC is both a critical measurement and something that is harder to grasp during times of soft capital markets.
It is interesting to acknowledge that in an operating business the measurement tools are mainly based in the Income Statement and Cash Flow Analysis. When planning, in operating mode, most of the target measurements are around dollars... revenue, margin, profit, and a series of ratios like GM, DSO, ROCE and so on. All of the departments are managed to keep the business moving forward, and additional focus can be paid to specific problems, new products and new markets.
On the other hand, in an R&D stage company, the main focus should be on getting the product ready for market; development of the patent portfolio; and so on. But absent a critical tool... cash... none of the R&D company's other goals can be achieved. The realization that absent cash from external working capital funding, even the best operating manager will fail.
The problem with this situation is that most founders do not have access to large supplies of capital, so they are forced to raise funds. At first this may be relatively easy... relatives and friends are the usual source. Then government agencies help along the way. The founders then start needing to leverage accounts payable for more time and the funding spiral ensues. The company burns funds at rates that require management focus. It is critical to have employees that can multitask with little supervision and recognize when they have to report problems. This means that critical employees are very aware of the cash position of the company... in fact, all the employees end up knowing.
The cash burn becomes critical when measured against the working capital... this becomes known as the runway... the number of days or months that the company has before it can't operate anymore. The founder needs to understand that much of her/his time must be focused on forecasting the runway, and lengthening it. S/he also needs to ensure that the employees hired along the way are ones that have demonstrated an ability to withstand the knowledge of the runway and burn rates.
Because the business requires such a focus on working capital, it is incumbent on the investor to also understand that founders may not know their cash needs all that well. When founders start, they are in hand-to-mouth mode... get money, spend it... have money spend it... spend money, go find it! We can call this type of fundraising "incremental".
All this fund-raising activity draws focus from the real target that needs tending... getting the product ready for market. As a result, pleasing the investor becomes more important, just so that more money can be found. This then starts another spiral that is oriented to unfinished products. Always moving forward with the best story, and doing the things that sound best. Incremental funding by investors may result in several undesirable outcomes... poor product and/or company failure.
Experienced operating company managers can be sourced to help out the founder. New management may lead to improvements in identifying needed product revisions and customer development requirements. It is at this transition that the focus of the founder and the potential investor must change. From incremental funding, to significant investments that will lengthen the runway to the point that the founder and managers can focus on finishing products and customer development. It is also important for the founder and investors to ensure that the experienced operational managers that are hired are well accustomed and/or knowledgeable of the challenges of the R&D business.
In order to rationalize this investment, the investor needs to understand that the measurements of the company can not all be financial, even with the requirement of a larger capital outlay. As in the earlier stages, it must be dated milestones of product or customer developments that are measured. These milestones should obviously be ones that are designed to increase the value of the company for the investors. Longer term R&D investing is not a leap of faith if appropriate market knowledge is in place.
While all of this is going on, it is critical to have strong financial managers in place to maintain good planning and execution. The financial managers must remain neutral to the issues and can not be anything but solid in financial planning analysis and milestone measurement functions. Good founders will understand these issues and utilize the expertise of all of their employees... rather than encumber them with their own interests. Good investors will try to better understand the basis of success... and what milestones will assure accomplishment of its long term financial goals.
It is interesting to acknowledge that in an operating business the measurement tools are mainly based in the Income Statement and Cash Flow Analysis. When planning, in operating mode, most of the target measurements are around dollars... revenue, margin, profit, and a series of ratios like GM, DSO, ROCE and so on. All of the departments are managed to keep the business moving forward, and additional focus can be paid to specific problems, new products and new markets.
On the other hand, in an R&D stage company, the main focus should be on getting the product ready for market; development of the patent portfolio; and so on. But absent a critical tool... cash... none of the R&D company's other goals can be achieved. The realization that absent cash from external working capital funding, even the best operating manager will fail.
The problem with this situation is that most founders do not have access to large supplies of capital, so they are forced to raise funds. At first this may be relatively easy... relatives and friends are the usual source. Then government agencies help along the way. The founders then start needing to leverage accounts payable for more time and the funding spiral ensues. The company burns funds at rates that require management focus. It is critical to have employees that can multitask with little supervision and recognize when they have to report problems. This means that critical employees are very aware of the cash position of the company... in fact, all the employees end up knowing.
The cash burn becomes critical when measured against the working capital... this becomes known as the runway... the number of days or months that the company has before it can't operate anymore. The founder needs to understand that much of her/his time must be focused on forecasting the runway, and lengthening it. S/he also needs to ensure that the employees hired along the way are ones that have demonstrated an ability to withstand the knowledge of the runway and burn rates.
Because the business requires such a focus on working capital, it is incumbent on the investor to also understand that founders may not know their cash needs all that well. When founders start, they are in hand-to-mouth mode... get money, spend it... have money spend it... spend money, go find it! We can call this type of fundraising "incremental".
All this fund-raising activity draws focus from the real target that needs tending... getting the product ready for market. As a result, pleasing the investor becomes more important, just so that more money can be found. This then starts another spiral that is oriented to unfinished products. Always moving forward with the best story, and doing the things that sound best. Incremental funding by investors may result in several undesirable outcomes... poor product and/or company failure.
Experienced operating company managers can be sourced to help out the founder. New management may lead to improvements in identifying needed product revisions and customer development requirements. It is at this transition that the focus of the founder and the potential investor must change. From incremental funding, to significant investments that will lengthen the runway to the point that the founder and managers can focus on finishing products and customer development. It is also important for the founder and investors to ensure that the experienced operational managers that are hired are well accustomed and/or knowledgeable of the challenges of the R&D business.
In order to rationalize this investment, the investor needs to understand that the measurements of the company can not all be financial, even with the requirement of a larger capital outlay. As in the earlier stages, it must be dated milestones of product or customer developments that are measured. These milestones should obviously be ones that are designed to increase the value of the company for the investors. Longer term R&D investing is not a leap of faith if appropriate market knowledge is in place.
While all of this is going on, it is critical to have strong financial managers in place to maintain good planning and execution. The financial managers must remain neutral to the issues and can not be anything but solid in financial planning analysis and milestone measurement functions. Good founders will understand these issues and utilize the expertise of all of their employees... rather than encumber them with their own interests. Good investors will try to better understand the basis of success... and what milestones will assure accomplishment of its long term financial goals.
