What Can Possibly Go Right?

We agree up-front what can possibly go wrong (and right) with the investment and its remedies.

The goal is to maintain enthusiasm and commitment toward the blockbuster+ pursuit in the face of all the obstacles and opportunities that surface after we start exploring. The funding agent+ balances a need for control with a need to maintain a sense of ownership and responsibility on the part of the research team. The research team balances a need for time to overcome obstacles (or realize opportunities) with a need to reassure the funding agent that his or her funds receive proper stewardship.

Funding agents put money in up-front with a promise of future returns, and are naturally anxious. They have immediate skin-in-the-game. They structure the funding agreement to build researcher skin-in-the-game. It’s all about the money. But they understand their money is wasted without passion and excitement on the part of the researchers. So to address unexpected findings, both positive and negative, we build on this mutual need. Keep the funding agent comforted; keep the researchers passionate.

Researchers acknowledge that funding agents are naturally anxious and seek protections against precipitous actions. We put in place mechanisms that forestall these actions: the financial advantage will come from taking the time for a full assessment of any new situation. As an example, we protect against regrets+ on the part of the funding agent. Discontinuous discovery+ can take time, more than a decade, and we need in place autonomous, binding mechanisms that acknowledge this timeframe. When you make an investment decision, you acknowledge it can take years to exit from this investment.

Funding is not a fixed number. Imagine instead a line of credit which is several times larger than the estimate of what it will take for the research. I don’t fill out a new loan application for each new withdrawal. Instead, I recognize that each new withdrawal increases my level of indebtedness, and pushes back the date when I’m finally debt-free. Obstacles and opportunities mean that researchers make the tactical decision to go further into debt, because they see this as beneficial. In judging whether or not this line of credit is being used judiciously, we look at results, not at the level of indebtedness.

We don’t spend too much time up-front worrying specifically about what can go wrong, because the list is limitless and we’ll end up creating a new cottage industry for lawyers. Instead we agree that much will go wrong (and right) and we build mechanisms that incorporate this reality into funding decisions. That is, we incorporate skills in overcoming obstacles and leveraging opportunities in our assessment of team achievements. It’s not that we want teams to get good at overcoming obstacles as a raison d'être: instead we acknowledge obstacles as commonplace in blockbuster pursuits, otherwise someone else would have already gotten there.

We have in place all the standard clauses of any venture term sheet: protection of Intellectual Property, disposition of shares in a termination or resignation, board observers, etc. These standard clauses are the captured experience from many hundreds of thousands of similar investments. But we also have in place standard clauses for mechanisms to amend or modify the term sheet. We are not shackled by the past: we seek instead new agreements that acknowledge the uniqueness of World Class R&D.

We have in place all the rights and responsibilities for both parties with regard membership+ in the franchise. Continued membership hinges on the continued value you bring to the overall franchise: your contributions to the shared resources of the club (e.g., contributions to annual confabs, the flipped matrix+). Of course, success comes from membership, and is a condition of membership. Loss of membership does eventually lead to loss of funding.

Let’s assume, because that’s what this is all about, you hit the jackpot: your first blockbuster product. What will you do with all that money? Do we continue to fund the research effort? There are a few key questions:

  • What have you done for me lately?
  • Do you have potential for further blockbuster pursuits?
  • Can you maintain the discipline and enthusiasm of the team (nothing ruins a team more than success)?

You don’t get to take the money and run unless it’s in the best interest of the majority owner, which in most cases will be the funding agent / corporation. How we handle success is a key part of our up-front agreement.

Ideally each of your staff will spin off their own ventures, giving you a pride in mentorship that goes well beyond the temporal benefits of your own success, and feeding our growing stream of promising new investment opportunities. We recognize and encourage this as part of our up-front funding agreement. We make it in your best interest to allow exceptional staff to pursue their own personal dreams. We grow the franchise from within.


Home Page June 2010

 

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