Turning that Great Idea into a Thriving Business
Do you have an entrepreneurial idea that could be commercialized? This article describes steps to take to develop your business plan.
Mr. Mattingly is a fourth-professional-yearstudent in the PharmD programat the University of Kentucky, Collegeof Pharmacy, Lexington, and is duallyenrolled in the university's MBA programat the College of Business andEconomics. Ms. Yusuf is assistantprofessor in the Department of UrbanStudies and Public Administration atOld Dominion University, College ofBusiness and Public Administration,Norfolk, Virginia. Dr. Fink is professorof pharmacy law and policy atthe University of Kentucky, College ofPharmacy, Lexington.
A pharmacist in Philadelphialaunches a program to providepharmacy services to hospicepatients nationwide, leading to a buyoutof the firm by Omnicare in 2005for $269 million. While on an educationalrotation, a student pharmacistwith a computer science backgroundidentifies a way to greatly improvethe inventory reordering software ofa major pharmacy chain.
A New Jersey pharmacist sees anunmet need for compounded medicationsleading to the development of a40,000-sq-ft compounding pharmacyserving human and veterinary patients. Astudent pharmacist approaches a professorwith an idea for an improved child-resistantclosure for prescription vials.Do you have a similar entrepreneurialidea that could be commercialized?
Many small businesses and start-upcompanies begin with an idea of justone person who thinks the idea canbe profitable. Many pharmacists seeopportunities for the improvement ofpharmacy systems or mechanisms thatcould improve their current practicesetting or maybe an advancement thatcould affect the way the entire professionpractices on a daily basis. Thequestion is not whether you have anidea, but if you have an idea, how canyou turn it into a marketable productor service? This article—along withadditional tools and advice featuredexclusively on the Pharmacy TimesWeb site—is designed tohelp those who would like to answerthat question.
Crystallizing Thinking: TheBusiness Plan
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
Adapted from the Service Corps of Retired Executives
An early critical step in the commercializationprocess is to think through andput on paper a plan to get the inventionor innovation from the idea stage to themarketplace. A primary value of thebusiness plan is that it forces a personto crystallize his or her thoughts andto be realistic in projections, providingestimates that can be defended to others.It also documents that the person isserious about this effort because of thetime and thought that went into formulatingthe plan. The business plan willbe critically evaluated by others—mostparticularly potential investors—and itneeds a dynamic design, as it will probablybe modified numerous times as theeffort moves forward and grows. TheTable illustrates one method for a businessplan, as suggested by the ServiceCorps of Retired Executives (SCORE).
Numerous resources are available onthe Internet to assist with preparing abusiness plan, but often it will be beneficialto meet with a guide or mentorto assist with the preparation process.Common sources of assistance includeyour local small business developmentcenter or retired business executiveswho are willing to share their accumulatedexpertise through a local office ofSCORE.
Many start-up firms do not have extensiveequipment or other physical assets;their most important assets are intellectual property, not physical, tangibleproperty. Patents, copyrights, trademarks,and trade secrets are collectivelyknown as intellectual property (IP). Afull discussion of the legal issues withIP is beyond the scope of this article.The best advice is to work with a localIP attorney to protect these importantassets of the firm. Securing full andappropriate protection of IP will bea very important factor assessed bypotential investors in the enterprise.
It should be noted that if the inventorteams with a faculty member at a localuniversity to work on the invention, thismay create an ownership interest forthe collaborator, as well as for his or herinstitutional employer. Or, if you securefunding for your innovations from organizationsor foundations, you shouldreview carefully the funding agreementsto ascertain whether the funder maylater assert some ownership interest.
At this point, some may be thinking,"Why go to all the trouble of pursingcommercialization myself? Why not justcontact ?Big Company X' and sell themmy idea?" The answer to that lies inthe fact that such overtures are usuallyrejected quickly by large firms. The reasonis that their in-house research anddevelopment staff may already be workingon such an invention, and talking tosomeone outside about it may leave thefirm open to a later allegation that BigCompany X stole the idea. As a result,letters or other communications bearingsuch suggestions are automaticallyreturned by large firms with no follow-upor investigation.
Financing the Idea
Selected Internet resources include the following:
- The Kauffman Foundation eVenturing Web site—www.eventuring.org
- Entrepreneur Magazine Web site—www.entrepreneur.com
- National Business Incubation Association Web site—www.nbia.org—for information about business incubators and a directory of incubators
- The Wall Street Journal's Startup Journal—www.startup.wsj.com
- The MIT Enterprise Forum—www.enterpriseforum.mit.edu/index.html
Once the idea has been fleshed out anda business plan developed, it is time tostart thinking about acquiring sufficientcapital. The first place to look is anypersonal assets available to go towardthe new project. This does not meanmoving all your retirement funds overto the business account, but being passionateabout the idea should lead youto assume some financial risk.
The next likely source for fundingis known in the field as the "3 Fs ofFinancing"—friends, family, and fools.In the early stages of a business, entrepreneursmay need help from the peoplearound them—perhaps those who knowfirsthand of the individual's unique abilitiesand dedication to the project.
Although you can go to your localbank to apply for a business loan,bank lending officers are typically ill-equippedto evaluate early-stage entrepreneurialventures and are more waryabout providing loans. Another potentialsource is the US Small BusinessAdministration (www.sba.gov), whichoffers a portfolio of different start-uploans and has offices distributed acrossthe country.
An individual applying for a small businessloan should be able to answer—indetail—important questions like: Howmuch capital do you need? Where isthe money going (eg, toward operatingexpenses, prototype development,testing and validation, advertising andpromotion, etc)? When will repaymentof the loan be expected?
When dealing with sources of potentialfunding, it will be important to have2 key components in your communicationplan for the undertaking. The firstis an "elevator pitch," a brief but enticingdescription of a product or servicedesigned to be delivered in a short timespan equivalent to the time spent ridingan elevator. The second is a PowerPointpresentation about the effort that runs15 to 20 minutes in duration. This wouldbe used in forums where more time isavailable to describe the plan.
Sources of Assistance andBusiness Expertise
The budding entrepreneur has greatknowledge of the invention or innovationbut may have little firsthandexperience with launching a businessenterprise. Fortunately, a number ofsources of business assistance exist tohelp, such as the local Small BusinessDevelopment Center of the SCOREoffice. Other resources include technology-based business incubators or localuniversities or colleges that may providesuch consultation or assistance services.These last entities also may be ableto assist with construction of prototypesof the product being developed.
The Internet is a very useful tool forobtaining information about pursuingcommercialization of an idea. It can beused to find out whether someone hasalready invented what you have in mind,can assist with market assessment andbusiness planning, and can provideinsight about dealing with potentialinvestors (Box).
The thrill and excitement of launchingan effort to take an idea throughto commercial success may create animpatient feeling that could cause youto make decisions that create financialproblems later in the process. Havinga well-thought-out business plan canbe critical to the eventual success ofthe task. Great financial rewards canflow from such a project, but they areassociated with some degree of risk. Itis important to prepare thoroughly andobtain sound legal advice and sufficientconsideration of how your involvementin the initiative will end to protect yourselfand your assets, while positioningthe quest to succeed.
More Funding Sources to Start Your Business
The following resources also are availableto secure start-up funding:
State-Level Science andTechnology Grant Programs: Forideas with an advanced science ortechnology aspect, as opposed to animproved business process. Examplesinclude the Kentucky Science andEngineering Foundation Research andDevelopment Excellence Program andthe Indiana 21st Century Research andTechnology Fund. These programs appearto be very supportive of innovationsin the health field.
Small Business InnovationResearch (SBIR) or Small BusinessTechnology Transfer (STTR): Thesefederal government grants assist withfunding early-stage innovations bysmall businesses that meet the criteria,such as significance, appropriateconceptual framework, novel concepts,scientific environment or evidence oforganizational support, and having anappropriately trained investigator. Anumber of federal agencies participatein these programs, with each emphasizingtopics of interest and importanceto its mission. Each agency has its ownWeb site to discuss its SBIR/STTR grantprogram, but central sources of informationcan be found at the Web sitesof Zyn Systems, www.zyn.com/sbir, aswell as the US SBA, www.sba.gov/sbir.
Bridge Funding: A number of stateshave programs to financially supportdevelopment of grant applications forthese programs and to provide thisfunding to assist with gap periods inthe flow of such funding. Some statesalso have grant-matching programs forthese SBIR/STTR federal funds. Theseprograms have 2 advantages. First, theyoffer grants, meaning that repaymentis not required as would be with aloan. Second, the applications are peerreviewed, so securing funding meansthat someone knowledgeable in thefield thinks you are on to somethingworth pursuing.
Angel Investors: A major fundinggap can come up between the initialfunding of a business initiative and gettingit to a point where venture capitalinvestors might view it as an attractiveinvestment. Fortunately, an affluentgroup, known as angel investors,may be able to meet this need. Angelinvestors provide start-up capital forcompanies in exchange for ownershipequity (ie, they become part ownersof the enterprise). Angels are typicallywealthy individuals who invest partof their portfolio in young companiesin an attempt to find the next "garage-to-Wall-Street" business like Hewlett-Packard, Microsoft, or Amazon.com.Starting with a contact at the localsmall business development office canbe a good way to get plugged into theseresources. Frequently, such wealthyindividuals keep their identities andinvestment interests confidential so thatthey will not be swamped with individualsseeking investment funding.
Often, these angel investors areorganized into angel investment clubsto share the risk, as well as to drawon the expertise of others who haveknowledge and experience in fieldsother than their own. The Angel CapitalAssociation's (ACA's) Web site (www.angelcapitalassociation.org) providesa directory of angel groups that aremembers of or affiliated with ACA thatcan serve as a good starting point for asearch for this type of funding.
Pre-Seed and Seed Funding: Anotherdesignation of funding the innovatorwill encounter is "pre-seed" and"seed" funding. Pre-seed funding isused to finance activities directed atestablishing that a new technology hasa certain level of commercial and technicalviability to attract investors. Theseactivities often include assessing themarket, developing a business plan,and creating a working prototype of theinvention.
A common estimate of pre-seed fundingis between $5000 and $20,000. Thatgeneral category of funding is followedby seed funding used to help a businessdevelop an idea, create the firstproduct, and market the product for thefirst time, typically when the initiativeis around a year old, and the leader hasnever before created a product or servicefor commercial sale. (www.businessfinance.com/seed-funding.htm).
Venture Capitalist Groups: Thenext major source of business fundingis venture capitalist groups. Like angelinvestors, venture capitalists providecapital to new companies in exchangefor a share in the business. They alsomay provide professional advice andtake a more active role in some of thecompany decision making in additionto acquiring equity. They nearly alwayswill seek at least 1 seat on the firm'sboard of directors to help monitor andmanage their investment.
Venture capitalist groups seek investmentsthat are too risky for standardcapital markets and loans, and becauseof that, may yield very high rates ofreturn. The trade-off, however, is thatventure capital funding and influencecan greatly help to get a product to themarket faster. Additional informationabout venture capital and sources ofventure capital can be found at theNational Venture Capital Association'sWeb site, www.nvca.org.
Key Terms and Acronyms in the Field of Commercialization
Accredited investor: An individualwhose net worth, alone or with a spouse,exceeds $1 million or whose annual earningsexceed $200,000 alone, or $300,000with a spouse. Certain investments areavailable only to accredited investorswho, because of the level of their assets,are assumed to be more sophisticatedinvestors.
Business plan: A formal written documentoutlining business goals and howthey will be met, along with brief informationabout the leaders of the initiativedesigned to communicate with potentialinvestors.
Elevator pitch: A brief descriptionof a product or service designed to bedelivered in a short time span equivalentto the time spent riding an elevator.Potential investors may evaluate this ona first-pass basis to assess whether toinvestigate the possible investment.
Incubator: A facility or program providingaccess for young growing companiesto appropriate rental space withflexible leases, shared basic businessservices and equipment, technologysupport services (management guidance,technical assistance, or consulting),and assistance in obtaining thefinancing necessary for growth (www.nbia.org).
Pro forma financials: Calculatedfinancial projections compiled in orderto forecast the financial health of anundertaking. Typically, these are forwardlooking and may tend to includean overdose of optimism by the leaderof the initiative.
Service Corps of Retired Executives(SCORE): An organization offeringbusiness advice for no or modest costfrom retirees who have "walked thewalk" (www.score.org).
Small Business Administration(SBA): A federal agency directed at assistingsmall enterprises (www.sba.gov).
Small Business Development Center(SBDC): A network of offices withexperts in a variety of fields availableto meet with prospective entrepreneursand provide no-cost consulting and lowcosttraining (www.sbdcnet.org; www.asbdc-us.org). (www.businessfinance.com/seed-funding.htm).
Sometimes the budding entrepreneurgets so focused on and swept up inthe process of getting the enterpriselaunched that he or she loses sight ofthe important other end of the process—formulating an acceptable avenuefor leaving the business once itgets going. It may well be that certaindecisions made early in the life of theundertaking will limit the alternativesmuch later when the time comes towithdraw from further involvementwith the enterprise.
The most common alternatives availablefor getting out of a deal are asfollows:
- Sell out to other owners or to afriend
- Be acquired by a larger company
- Have a public stock offering throughan initial public offering
- Liquidate the assets of the firm
- Create a "lifestyle company," wherebyyou draw a substantial salary off thecompany and keep it small by not reinvestingin expansion
Exit strategies for gracefully departingthe enterprise are different fromgrowth strategies that also will needattention. Those focus on plans andefforts to create value for the firmand the customer, either through newproducts and services or new businessmodels for delivering those productsand services.