Pharmacy Times

Turning that Great Idea into a Thriving Business

Author: T. Joseph Mattingly II, Juita-Elena (Wie) Yusuf, MBA, PhD, and Joseph L. Fink III, BSPharm, JD


Mr. Mattingly is a fourth-professional-year student in the PharmD program at the University of Kentucky, College of Pharmacy, Lexington, and is dually enrolled in the university's MBA program at the College of Business and Economics. Ms. Yusuf is assistant professor in the Department of Urban Studies and Public Administration at Old Dominion University, College of Business and Public Administration, Norfolk, Virginia. Dr. Fink is professor of pharmacy law and policy at the University of Kentucky, College of Pharmacy, Lexington.


A pharmacist in Philadelphia launches a program to provide pharmacy services to hospice patients nationwide, leading to a buyout of the firm by Omnicare in 2005 for $269 million. While on an educational rotation, a student pharmacist with a computer science background identifies a way to greatly improve the inventory reordering software of a major pharmacy chain.

A New Jersey pharmacist sees an unmet need for compounded medications leading to the development of a 40,000-sq-ft compounding pharmacy serving human and veterinary patients. A student pharmacist approaches a professor with an idea for an improved child-resistant closure for prescription vials. Do you have a similar entrepreneurial idea that could be commercialized?

Many small businesses and start-up companies begin with an idea of just one person who thinks the idea can be profitable. Many pharmacists see opportunities for the improvement of pharmacy systems or mechanisms that could improve their current practice setting or maybe an advancement that could affect the way the entire profession practices on a daily basis. The question is not whether you have an idea, but if you have an idea, how can you turn it into a marketable product or service? This article—along with additional tools and advice featured exclusively on the Pharmacy Times Web site—is designed to help those who would like to answer that question.

Crystallizing Thinking: The Business Plan

Table
Elements of a Business Plan

The typical contents of a business plan include the following:

? Executive summary
? General company description
? Products or services of the firm
? Marketing plan
? Operational plan
? Management and organization plan
? Personal financial statement
? Start-up expenses and capitalization
? Financial plan
? Appendixes

Adapted from the Service Corps of Retired Executives

An early critical step in the commercialization process is to think through and put on paper a plan to get the invention or innovation from the idea stage to the marketplace. A primary value of the business plan is that it forces a person to crystallize his or her thoughts and to be realistic in projections, providing estimates that can be defended to others. It also documents that the person is serious about this effort because of the time and thought that went into formulating the plan. The business plan will be critically evaluated by others—most particularly potential investors—and it needs a dynamic design, as it will probably be modified numerous times as the effort moves forward and grows. The Table illustrates one method for a business plan, as suggested by the Service Corps of Retired Executives (SCORE).

Numerous resources are available on the Internet to assist with preparing a business plan, but often it will be beneficial to meet with a guide or mentor to assist with the preparation process. Common sources of assistance include your local small business development center or retired business executives who are willing to share their accumulated expertise through a local office of SCORE.

Intellectual Property

Many start-up firms do not have extensive equipment or other physical assets; their most important assets are intellectual property, not physical, tangible property. Patents, copyrights, trademarks, and trade secrets are collectively known as intellectual property (IP). A full discussion of the legal issues with IP is beyond the scope of this article. The best advice is to work with a local IP attorney to protect these important assets of the firm. Securing full and appropriate protection of IP will be a very important factor assessed by potential investors in the enterprise.

It should be noted that if the inventor teams with a faculty member at a local university to work on the invention, this may create an ownership interest for the collaborator, as well as for his or her institutional employer. Or, if you secure funding for your innovations from organizations or foundations, you should review carefully the funding agreements to ascertain whether the funder may later assert some ownership interest.

At this point, some may be thinking, "Why go to all the trouble of pursing commercialization myself? Why not just contact ?Big Company X' and sell them my idea?" The answer to that lies in the fact that such overtures are usually rejected quickly by large firms. The reason is that their in-house research and development staff may already be working on such an invention, and talking to someone outside about it may leave the firm open to a later allegation that Big Company X stole the idea. As a result, letters or other communications bearing such suggestions are automatically returned by large firms with no follow-up or investigation.

Financing the Idea

Internet Resources

Selected Internet resources include the following:

Once the idea has been fleshed out and a business plan developed, it is time to start thinking about acquiring sufficient capital. The first place to look is any personal assets available to go toward the new project. This does not mean moving all your retirement funds over to the business account, but being passionate about the idea should lead you to assume some financial risk.

The next likely source for funding is known in the field as the "3 Fs of Financing"—friends, family, and fools. In the early stages of a business, entrepreneurs may need help from the people around them—perhaps those who know firsthand of the individual's unique abilities and dedication to the project.

Although you can go to your local bank to apply for a business loan, bank lending officers are typically ill-equipped to evaluate early-stage entrepreneurial ventures and are more wary about providing loans. Another potential source is the US Small Business Administration (www.sba.gov), which offers a portfolio of different start-up loans and has offices distributed across the country.

An individual applying for a small business loan should be able to answer—in detail—important questions like: How much capital do you need? Where is the money going (eg, toward operating expenses, prototype development, testing and validation, advertising and promotion, etc)? When will repayment of the loan be expected?

When dealing with sources of potential funding, it will be important to have 2 key components in your communication plan for the undertaking. The first is an "elevator pitch," a brief but enticing description of a product or service designed to be delivered in a short time span equivalent to the time spent riding an elevator. The second is a PowerPoint presentation about the effort that runs 15 to 20 minutes in duration. This would be used in forums where more time is available to describe the plan.

Sources of Assistance and Business Expertise

The budding entrepreneur has great knowledge of the invention or innovation but may have little firsthand experience with launching a business enterprise. Fortunately, a number of sources of business assistance exist to help, such as the local Small Business Development Center of the SCORE office. Other resources include technology- based business incubators or local universities or colleges that may provide such consultation or assistance services. These last entities also may be able to assist with construction of prototypes of the product being developed.

The Internet is a very useful tool for obtaining information about pursuing commercialization of an idea. It can be used to find out whether someone has already invented what you have in mind, can assist with market assessment and business planning, and can provide insight about dealing with potential investors (Box).

Conclusion

The thrill and excitement of launching an effort to take an idea through to commercial success may create an impatient feeling that could cause you to make decisions that create financial problems later in the process. Having a well-thought-out business plan can be critical to the eventual success of the task. Great financial rewards can flow from such a project, but they are associated with some degree of risk. It is important to prepare thoroughly and obtain sound legal advice and sufficient consideration of how your involvement in the initiative will end to protect yourself and your assets, while positioning the quest to succeed.

More Funding Sources to Start Your Business

The following resources also are available to secure start-up funding:

State-Level Science and Technology Grant Programs: For ideas with an advanced science or technology aspect, as opposed to an improved business process. Examples include the Kentucky Science and Engineering Foundation Research and Development Excellence Program and the Indiana 21st Century Research and Technology Fund. These programs appear to be very supportive of innovations in the health field.

Small Business Innovation Research (SBIR) or Small Business Technology Transfer (STTR): These federal government grants assist with funding early-stage innovations by small businesses that meet the criteria, such as significance, appropriate conceptual framework, novel concepts, scientific environment or evidence of organizational support, and having an appropriately trained investigator. A number of federal agencies participate in these programs, with each emphasizing topics of interest and importance to its mission. Each agency has its own Web site to discuss its SBIR/STTR grant program, but central sources of information can be found at the Web sites of Zyn Systems, www.zyn.com/sbir, as well as the US SBA, www.sba.gov/sbir.

Bridge Funding: A number of states have programs to financially support development of grant applications for these programs and to provide this funding to assist with gap periods in the flow of such funding. Some states also have grant-matching programs for these SBIR/STTR federal funds. These programs have 2 advantages. First, they offer grants, meaning that repayment is not required as would be with a loan. Second, the applications are peer reviewed, so securing funding means that someone knowledgeable in the field thinks you are on to something worth pursuing.

Angel Investors: A major funding gap can come up between the initial funding of a business initiative and getting it to a point where venture capital investors might view it as an attractive investment. Fortunately, an affluent group, known as angel investors, may be able to meet this need. Angel investors provide start-up capital for companies in exchange for ownership equity (ie, they become part owners of the enterprise). Angels are typically wealthy individuals who invest part of their portfolio in young companies in an attempt to find the next "garage-to-Wall-Street" business like Hewlett-Packard, Microsoft, or Amazon.com. Starting with a contact at the local small business development office can be a good way to get plugged into these resources. Frequently, such wealthy individuals keep their identities and investment interests confidential so that they will not be swamped with individuals seeking investment funding.

Often, these angel investors are organized into angel investment clubs to share the risk, as well as to draw on the expertise of others who have knowledge and experience in fields other than their own. The Angel Capital Association's (ACA's) Web site (www.angelcapitalassociation.org) provides a directory of angel groups that are members of or affiliated with ACA that can serve as a good starting point for a search for this type of funding.

Pre-Seed and Seed Funding: Another designation of funding the innovator will encounter is "pre-seed" and "seed" funding. Pre-seed funding is used to finance activities directed at establishing that a new technology has a certain level of commercial and technical viability to attract investors. These activities often include assessing the market, developing a business plan, and creating a working prototype of the invention.

A common estimate of pre-seed funding is between $5000 and $20,000. That general category of funding is followed by seed funding used to help a business develop an idea, create the first product, and market the product for the first time, typically when the initiative is around a year old, and the leader has never before created a product or service for commercial sale. (www.businessfinance.com/seed-funding.htm).

Venture Capitalist Groups: The next major source of business funding is venture capitalist groups. Like angel investors, venture capitalists provide capital to new companies in exchange for a share in the business. They also may provide professional advice and take a more active role in some of the company decision making in addition to acquiring equity. They nearly always will seek at least 1 seat on the firm's board of directors to help monitor and manage their investment.

Venture capitalist groups seek investments that are too risky for standard capital markets and loans, and because of that, may yield very high rates of return. The trade-off, however, is that venture capital funding and influence can greatly help to get a product to the market faster. Additional information about venture capital and sources of venture capital can be found at the National Venture Capital Association's Web site, www.nvca.org.


Key Terms and Acronyms in the Field of Commercialization

Accredited investor: An individual whose net worth, alone or with a spouse, exceeds $1 million or whose annual earnings exceed $200,000 alone, or $300,000 with a spouse. Certain investments are available only to accredited investors who, because of the level of their assets, are assumed to be more sophisticated investors.

Business plan: A formal written document outlining business goals and how they will be met, along with brief information about the leaders of the initiative designed to communicate with potential investors.

Elevator pitch: A brief description of a product or service designed to be delivered in a short time span equivalent to the time spent riding an elevator. Potential investors may evaluate this on a first-pass basis to assess whether to investigate the possible investment.

Incubator: A facility or program providing access for young growing companies to appropriate rental space with flexible leases, shared basic business services and equipment, technology support services (management guidance, technical assistance, or consulting), and assistance in obtaining the financing necessary for growth (www.nbia.org).

Pro forma financials: Calculated financial projections compiled in order to forecast the financial health of an undertaking. Typically, these are forward looking and may tend to include an overdose of optimism by the leader of the initiative.

Service Corps of Retired Executives (SCORE): An organization offering business advice for no or modest cost from retirees who have "walked the walk" (www.score.org).

Small Business Administration (SBA): A federal agency directed at assisting small enterprises (www.sba.gov).

Small Business Development Center (SBDC): A network of offices with experts in a variety of fields available to meet with prospective entrepreneurs and provide no-cost consulting and lowcost training (www.sbdcnet.org; www.asbdc-us.org). (www.businessfinance.com/seed-funding.htm).


Exit Strategies

Sometimes the budding entrepreneur gets so focused on and swept up in the process of getting the enterprise launched that he or she loses sight of the important other end of the process—formulating an acceptable avenue for leaving the business once it gets going. It may well be that certain decisions made early in the life of the undertaking will limit the alternatives much later when the time comes to withdraw from further involvement with the enterprise.

The most common alternatives available for getting out of a deal are as follows:

  • Sell out to other owners or to a friend
  • Be acquired by a larger company
  • Have a public stock offering through an initial public offering
  • Liquidate the assets of the firm
  • Create a "lifestyle company," whereby you draw a substantial salary off the company and keep it small by not reinvesting in expansion

Exit strategies for gracefully departing the enterprise are different from growth strategies that also will need attention. Those focus on plans and efforts to create value for the firm and the customer, either through new products and services or new business models for delivering those products and services.