No Excuses

There are no consequential constraints on how an Investible Unit gets to its blockbuster+ product. You’re measured on the 5 P’s, but these you know before joining the club. You define the research area in which your team will work. You pick the blockbuster product as a result of your voyage of discovery. We work together to define how you execute your voyage, but it was mostly of your own choosing (i.e., your Business Plans and Operating Model). So the beginning, the end, and the route between these two were largely of your own making, and even then, you can change them based on interim results. Only the blockbuster pursuit itself is non-negotiable, and if you’ve made it this far, you wouldn’t want it any other way.

There are few resource constraints on your effort. Obviously there are limits. But if the need is fair, then resources are available. Although hard and fast rules are not written down, you will be judged based on your stewardship of the resources at your disposal. No expensive junkets to exotic locations on the funding agent’s nickle. Besides financial resources, you also have exclusive access to the best available technical and business resources. Resources are not a constraint.

You have a funding agent that tries to avoid the temptation to take the discontinuous and make it continuous. They understand the nature of the blockbuster pursuit and don’t try to change nature. In exchange you understand we have a commercial organization that needs to be fed. When you find your blockbuster product, you want a commercial organization that is practiced and experienced in taking that blockbuster to market. You also understand that your experience in launching sub-blockbusters redounds to your benefit in the hunt for that next blockbuster. Everything is arranged to make your blockbuster product, when and where it happens, a success.

Your team has daily on-the-ground facilitation on how to execute to World Class R&D status. This is your Independent Evaluator+. This respected individual is part of your team. They not only represent you in-front of the funding agent during progress assessments, they are an additional valuable resource to make your team as effective as it can be. They are the eyes and ears of all senior management, both of the Investible Unit, and of the funding agent. They are truly independent, but of course, Investible Units+ come and go, whereas the funding agent is often constant.

So you have the resources, the incentives, the training and education, the team, and an exciting science. The final ingredient ensures funding agents do not renege on the World Class R&D investment contract. Big success, the “good state of nature” in the economists’ equations, is unpredictable in both direction and timing. We need investment funds to continue to flow, i.e., the funding agents must continue to provide dependable cash in exchange for interest-bearing convertible debt (convertible to common shares) for time frames that can be a decade or longer. See note below.

Funding agents will take on an ownership position only up to the point (e.g., 70%) where researchers will still sense their ownership in the endeavor. Let’s assume researchers require 30% to sense their ownership. Once the level of ownership of the research team drops below 30%, then further ownership on the part of the funding agent becomes counterproductive. Until we reach the “good state of nature” the house is worth far less than the mortgage, and researchers will be sorely tempted to just walk away. It’s the promise of the 30% that keeps them working to pay down the mortgage. And, that 30% must be the percentage of a house that can be worth billions.

What keeps the funding agent from walking away, i.e., from cutting off further funding short of a 70% ownership? We provide multi-year funding agreements as a reward for exceptional results. But these multi-year agreements are not given away up-front. They are earned on the part of the research team as a reward for results. Exceptional results get exceptional access to funding. All teams have access to the ‘line-of-credit’ for their efforts, but only a few are guaranteed access to this ‘line-of-credit’ across multiple years. Should the funding agent exit from the investment, for whatever reason, multi-year agreements remains intact. Researchers can thus earn even greater protection from having the funding agent pull the investment rug out from underneath them.

The funding agent should not be tempted to cut funding of franchise operations+. Funding for these operations come significantly from the members and these operations are mostly staffed by member employees. This does not give much of a cost-savings target but does entail lots of financial downside. Should the corporation arbitrarily cut franchise operations, the negative impact on finances will be immediate, more than offsetting gains from the cuts.

What else do you need to be successful? Cooperation from Mother Nature. If the “dog ain’t got no legs” to borrow a phrase from a consultant colleague of mine, then it don’t matter if you hang steak from the ceiling. Even in this we are quite reasonable. You show me the research effort will not succeed in a commercially-viable time frame, and we’ll forgive your debt, and we may be able to work together again. If I come to this conclusion on my own, then you’re blackballed from participation in the club, and this, we make sure, will not be a good thing to have in your CV.

The ‘strategy’ for mid-game+ is to make sure the only reason you fail is because you did not live up to your own expectations. In that case, we both have failed. No excuses.

Note: Discussion of using convertible debt instruments for a simple arms-length, two-party agreement is found here. Click on the One-Click Download link once you visit the referenced site.

Home Page July 2010