My friend Martin Rigby sketched out a Funding Escalator for me a few years ago, illustrating the progressive process of getting money into a startup. (Martin recently published a book expanding on these ideas, Show Me The Money, with Cambridge Angel Alan Barrell). I use the diagram in my teaching because it’s got two nice touches of reality: there are gaps in the funding that you have to be prepared for, and the lower left box Consultancy or other second income to live on.
Most entrepreneurs take on small consulting jobs, probably around 20% of their time. More than that and the startup investors start to wonder about your commitment to their project; less and I can’t accomplish much. I charge around 200 euros an hour if I am creating content or analyzing data, of half that to review, connect, or advise.
We naturally compete with the big groups that consult full-time. So I was intrigued to get a chance to review two bids from a friend asking which they should accept for their new laboratory analysis startup. In 2.5 months and 23,000 gbp, the first would
- Generate a basic regulatory roadmap to help understand the requirements for technology development from laboratory R&D stage
- Provide our view on the current status of the technology and assay positioning including analysis of competitors with similar assays including performance data, assay formats etc.
- Prepare a power-point style slide presentation that summarises the outputs
- Create a product development plan based on a stakeholder-agreed strategy to develop the technology to a significant commercial milestone
- Prepare a list of potential funding sources and collaborators to further support the development process
In 2.5 months and for 84,000 gbp, the other consultant will:
- Review current data and documentation pack
- Analyse assay configuration(s) to better understand product format and map likely development route
- Perform a basic technical analysis of competitive products to understand key technical aspects
- Generate a basic regulatory understanding, outlining key features of the route-to-market in US and EU and clinical data requirements
- Develop a top-level product development plan that outlines key milestones
I was actually pretty horrified by both proposals.
- The market analysis should include analysis of the market need and patent landscape, along with the competitive analysis. This may include interviews with customers and distributors.
- There is no analysis of the health care or business economics, the pricing or return on investment.
- There is no analysis of exit strategies, including exit points, potential multipliers, or similar deals in your space
- There is no plan for budgeting or fundraising, relative to project milestones, in the final report
- There are very few tangible deliverables: it seems like guidance that could be available elsewhere (regulatory classification and requirements), template documents (the development plans), or simple advice without any introductions. The “list of potential funding sources” is particularly useless.
It made me think about the purpose of hiring a consultant in the first place. Big companies bring in McKinsey because they provide objectivity, gravitas, and gloss to CEO strategies. But for a startup, a consultant should:
- Validate the market opportunity and timing.
- Verify the existing unique (or not yet existing but necessary) qualities of the product.
- Highlight regulatory and patent risks.
- Characterize the customer and exit opportunities.
- Estimate the timing of market entry, adoption rate, pricing, and return on investment.
It’s what I usually expect in a contact; it’s what I would do for my clients. It’s information that a startup needs to go to investors with a clear plan for the business (and budget), to plan milestones and fundraising goals, and to argue that the market and investment opportunities are objectively assessed.
The other eye opener, of course, is that I have got to raise my prices!