CVs and VCs: Managing the People/Profit Equation

CVs and VCs Managing the People/Profit Equation Joanne E. Harack MaRS BioEntrepreneurship Series, April 16, 2007 1

Agenda Background to the biotech industry ! Personal challenges for founders ! Organizational development framework ! Building organizational capability ! HR functional expertise ! Key processes ! Moving ahead ! MaRS BioEntrepreneurship Series, April 16, 2007 2

Creating Science Businesses A VC’s view: ! “Take people, ideas and money and mix.” A CEO’s view: ! “Biotechnology is about profit and passion.” An employee’s view: ! “These companies provide incredible learning opportunities – if you can take it.” MaRS BioEntrepreneurship Series, April 16, 2007 3

Evolution of Biotech (Life Sciences) Industry Biotech companies have emerged via a ! combination of innovation and entrepreneurship A university researcher and a venture ! capitalist formed Genentech in 1976 1980s and early 1990s – new IPOs followed ! Genentech model Late 1990s-now – consolidation and blurring ! of biotech/big pharma and search for new models MaRS BioEntrepreneurship Series, April 16, 2007 4

What’s Unique about the Biotech Industry? Highly regulated ! Priority on science discovery ! Reliant on VC financing ! High Value on IP/patents/science ! Many influencers: FDA, healthcare, ! reimbursement, patients/consumers Long /complex product to market cycle ! Continuity of thought over extended time ! MaRS BioEntrepreneurship Series, April 16, 2007 5

What are Conventional Biotech Companies Like? Small and mid size companies just ! focused on survival, not best OD practice – recruitment of leaders Accountability to investors/stockholders ! & need for measurements Philosophical dilemma of researchers ! –academic to business environment MaRS BioEntrepreneurship Series, April 16, 2007 6

Typical Organization Dynamics Informal rather than structured career ! development Integration across disciplines ! Teamwork ! “Can do” attitude: intellect + ! pragmatism Professional “HR” functional expertise ! lacking MaRS BioEntrepreneurship Series, April 16, 2007 7

Catbert, Evil HR Director MaRS BioEntrepreneurship Series, April 16, 2007 8

From Lab to Leadership The science of business/the business of ! science Science Business: Gary P. Pisano ! Businesses creating science are ! fundamentally more complex than those using science Unique personal and organizational ! challenges MaRS BioEntrepreneurship Series, April 16, 2007 9

Personal Challenges for Founder/Entrepreneurs Telling the story ! Convincing initial investors ! Selling the concept ! Commercial capability ! Recruiting the team ! Current and future capability ! Letting go ! At what point in the company’s growth ! does my role change? MaRS BioEntrepreneurship Series, April 16, 2007 10

Serial Founders Telling the story Letting go CYCLE OF CHALLENGE FOR SERIAL FOUNDERS Selling the Recruiting/building Concept the team MaRS BioEntrepreneurship Series, April 16, 2007 11

Intellectual Property: An HR Perspective Paradigm shifts: ! Academic “publish/disseminate” vs. ! corporate “keep secret/appropriate” Individual discovery vs. corporate asset ! Assignment of inventions to the company ! Very few academic scientists are willing/able to make the shift on a permanent basis MaRS BioEntrepreneurship Series, April 16, 2007 12

Founder to CEO Raising and managing finances ! Recruiting and building a team ! Creating the corporate culture ! Determining short, mid and long term ! goals Clearly communicating goals to the ! Board and employees MaRS BioEntrepreneurship Series, April 16, 2007 13

Stages of Organizational Development Phase 3 Phase 2 Success/ Late Complexity Transformation – or Death! Early Phase 1 Time/Effort MaRS BioEntrepreneurship Series, April 16, 2007 14

Phase 1 Organization Survival oriented ! Highly entrepreneurial ! Fast mover, adaptable and changeable ! Perpetually cash starved ! Risk taker ! MaRS BioEntrepreneurship Series, April 16, 2007 15

(Early) Phase 2 Organization Demonstrated successes ! Efficiency and effectiveness ! Systems, procedures oriented ! Management focused versus ! entrepreneurial MaRS BioEntrepreneurship Series, April 16, 2007 16

(Late) Phase 2 Organization More meetings and task groups ! Occupied with enshrining and repeating ! known success patterns Ignore or reject innovation outside of ! the “proven” success pattern MaRS BioEntrepreneurship Series, April 16, 2007 17

Phase 3 Organization Close to customers and market ! Searching for innovative solutions ! Adaptable, changeable, “reinventing” ! itself Quality focused internally and externally ! MaRS BioEntrepreneurship Series, April 16, 2007 18

HR Priorities at Each Stage Recruitment ! Rewards and Recognition ! Employee engagement ! MaRS BioEntrepreneurship Series, April 16, 2007 19

Questions to Answer What is the key HR driver in the ! business plan? How will we grow the company? ! What do we want to be known for? ! What will it take to succeed? ! MaRS BioEntrepreneurship Series, April 16, 2007 20

What is the key HR driver in the business plan? In the heyday of dot.com companies, mass ! hiring was typical; turnover was also high and rapid. This kind of hiring is not appropriate in a business driven by breakthrough science. Biotech business plans do not typically have ! “hire 40 scientists” as business milestones. If your key milestone is clinical, you need ! people who know how to get to the clinic. What specific events will trigger hiring for the ! company? MaRS BioEntrepreneurship Series, April 16, 2007 21

How will we grow the company? Two approaches: ! Hire the ideal management team and they “hire ! down” the rest: in very well capitalized companies the conventional wisdom is to hire the management team first, but you have to be prepared to “over hire” and fire later Hire key positions/individuals and fill in the rest ! later: less well funded companies fill out a partial scientific “swathe” to demonstrate success quickly MaRS BioEntrepreneurship Series, April 16, 2007 22

What will it take? If taking the “top team down” approach, the ! executives MUST be able to act as individual contributors (you do not want a senior team of “delegators”) If using the “key positions” approach, ! everyone in the company must be comfortable with ambiguity, role overlap Appropriate balance of opportunistic and ! planned hiring Compensation philosophy and structure ! should reflect the value proposition MaRS BioEntrepreneurship Series, April 16, 2007 23

Scientific Advisory Board Timing & leadership ! Charter: how do you want to use the SAB? ! Role: advisor to the development process; ! typically report to the head of development; do not play an operating role Value: facilitate academic collaborations; ! provide sanity check on the science Rewards: equity or honorarium ! MaRS BioEntrepreneurship Series, April 16, 2007 24

Board of Directors Formal Charter and roles; fiduciary ! responsibility Investors play a major role (choose ! them carefully!) Internal vs. external directors ! Governance: private vs. public ! MaRS BioEntrepreneurship Series, April 16, 2007 25

Clinical Advisory Board Focused on clinical outcomes – not the ! science per se; predominately M.D.s Must report to the CEO (or head of ! regulatory/clinical) usually with a formal relationship to the Board (ethical and liability oversight) Typically created at the pre-clinical discovery ! phase One or two members may serve as ! consultants/advisors to CEO or Board prior to formation of the CAB MaRS BioEntrepreneurship Series, April 16, 2007 26

HR Functional Expertise: Hired In or Outsourced? In general, dictated by: ! Existing expertise, previous experience and/or comfort level ! of CEO Volume (tasks, employees) ! Degree of difficulty ! Objectivity required/desired ! Discrete functional expertise often added at Phase 2 ! (or 30+ employees): HR functions that have been delegated to others are then integrated into the HR function If discrete HR function is present in the early stage, ! the incumbent performs additional roles MaRS BioEntrepreneurship Series, April 16, 2007 27

HR Functional Expertise: Hired In or Outsourced? (cont.) Most commonly outsourced (Phase 1 ! organizations): Payroll: ADP or Ceridian ! Recruiting of senior leadership, including ! Directors: Executive Recruiters, specialized search firms Employment contracts; ESOP; IP ! assignment documents: law firm MaRS BioEntrepreneurship Series, April 16, 2007 28

HR Functional Expertise: Hired In or Outsourced? (cont.) Irrespective of whether the expertise resides ! within or outside of the firm, internal accountability must be assigned “Outsourcing” does not mean delegating all ! responsibility or eliminating commitment of time Failure to manage outsourced functions in a ! coordinated manner from the beginning >rework, inconsistencies and unnecessary expense later! MaRS BioEntrepreneurship Series, April 16, 2007 29

Recruitment: Talent Acquisition Recruiting/selection is both an “art” and a ! “science” “Would you date anybody? Selection ! matters!” Piers Steel, University of Calgary People are the fundamental building block of ! business growth and competitive advantage no matter how you choose to build out the organization Logistics of the recruiting process require ! frequent “refreshing” as organizations develop MaRS BioEntrepreneurship Series, April 16, 2007 30

Talent Acquisition: the Paradox In annual surveys, 85% of executives ! across mature industries say that their companies do not have enough talent or are chronically short of talent; yet - CEOs report spending less than 10% of ! their time on talent acquisition and development. MaRS BioEntrepreneurship Series, April 16, 2007 31

Talent Acquisition: Some Challenges Candidates in general are harder to find, ! more selective and difficult to “land”; Recruitment of Directors has become more ! difficult (demographics, competition, personal liability); Demographic profiles and immigration are ! increasingly important; Global “war for talent;” ! Mistakes are costly. ! MaRS BioEntrepreneurship Series, April 16, 2007 32

Recruiting Process Sourcing ! Evaluating ! Selling ! Closing ! MaRS BioEntrepreneurship Series, April 16, 2007 33

Sourcing Goal: to reach and connect with highly ! qualified candidates who aren’t looking for a job. At the right sites. ! From the right people. ! In the right way. ! quot; Build your recruiting practices so that people seek out your organization. quot; Work with recruiters who understand your value proposition, will negotiate rates, and can represent you credibly MaRS BioEntrepreneurship Series, April 16, 2007 34

Evaluating Understand the job/role ! Interview with a team; prepare ahead ! of time Use behavioral interviewing ! Perform “due diligence” - references ! Collect feedback quickly ! For senior hires, consider formal ! assessment (e.g. ghSmart) MaRS BioEntrepreneurship Series, April 16, 2007 35

Selling The best talent are very discriminating ! seekers of information, and are hard to recruit Focus on the right motivators: (advantages, ! benefits, capabilities, challenges) Sell the candidate – not the company ! Ensure fit with your culture as well as the job ! MaRS BioEntrepreneurship Series, April 16, 2007 36

Selling (cont.) Who we are: vision, mission and values ! Where we came from: the lore ! Where we are going: the lure ! HOW THE CANDIDATE FITS OUR ! COMPELLING FUTURE MaRS BioEntrepreneurship Series, April 16, 2007 37

Some Possible Value Propositions High performance “winner” in our niche ! Big risk/big reward ! Therapeutic breakthrough that saves ! lives (idealist) “Lifestyles” ! MaRS BioEntrepreneurship Series, April 16, 2007 38

Closing: The Offer Letter The simpler the better ! Executives ! Others ! Timing and timeliness ! Formal orientation commences well ! before arrival Elicit feedback ! MaRS BioEntrepreneurship Series, April 16, 2007 39

Compensation philosophy and structure There is no “best way” to structure total ! compensation The kind of organization you are building will ! dictate the relative emphasis placed on: Base salary ! Bonuses ! Equity ! Benefits/intangibles ! quot; The market and how you relate to it will dictate salary benchmarking MaRS BioEntrepreneurship Series, April 16, 2007 40

Compensation philosophy and structure (cont.) Most early stage companies fail to think through a ! compensation philosophy Most early stage companies do not think through ! how to structure the ESOP – the investors/Board will be focused on the senior team and the overall cap structure. Without conscious, deliberate planning, the option ! pool allocated to employees can be depleted too quickly. Compensation issues typically surface with the third ! employee! It is worthwhile seeking external professional advice ! (consulting, surveys, industry associations.) MaRS BioEntrepreneurship Series, April 16, 2007 41

Performance Management MaRS BioEntrepreneurship Series, April 16, 2007 42

Performance Management Goal Setting and Review Process ! Keep it REALLY simple – early stage companies change too ! quickly to make investment in complicated systems either necessary or practical Keep the expectations clear – the goal is to align individual ! and corporate goal achievement, not a “scientific” measurement of each employee’s contribution Remember that it is really about two way communication ! and feedback – which should be ongoing, not an annual event It is not about money! Consider separating annual salary ! increase decisions from the review process MaRS BioEntrepreneurship Series, April 16, 2007 43

Creating Engagement Turnover in biotech companies is high ! (>20%) Below the management team most ! vulnerable; more problems of fit and culture Variations across organizational levels ! and functions MaRS BioEntrepreneurship Series, April 16, 2007 44

Creating Engagement (cont.) quot; Components: Fit and belonging ! Status and identity ! Emotional reward ! Economic interdependence ! Trust and reciprocity ! MaRS BioEntrepreneurship Series, April 16, 2007 45

Creating Engagement (cont.) Treat people as partners – not ! “resources” to be managed Communicate, communicate, ! communicate Clean and safe physical environment ! Opportunities for self expression ! Coaching, counseling and confronting ! conflict and non-performance MaRS BioEntrepreneurship Series, April 16, 2007 46

Defining Organizational Culture as the Company Grows How does the organization see itself, ! others, the world? What does “good” look like? ! What is an example of a “failure”? ! Quality of conversation ! Formality of feedback ! A diagnostic is helpful ! MaRS BioEntrepreneurship Series, April 16, 2007 47

In Conclusion… Employees: Build Individual Capability “HR” VCs: Build Wealth CEO: Build the Enterprise “HR”= human and organizational capability MaRS BioEntrepreneurship Series, April 16, 2007 48

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CVs and VCs: Managing the People/Profit Equation

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