cvs and vcs: managing the people/profit equation

MaRS BioEntrepreneurship Series,April 16, 2007 1

CVs and VCs

Managing the People/ProfitEquation

Joanne E. Harack


Agenda

! Background to the biotech industry

! Personal challenges for founders

! Organizational development framework

! Building organizational capability

! HR functional expertise

! Key processes

! Moving ahead


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.”


Evolution of Biotech (LifeSciences) Industry

! Biotech companies have emerged via acombination of innovation andentrepreneurship

! A university researcher and a venturecapitalist formed Genentech in 1976

! 1980s and early 1990s – new IPOs followedGenentech model

! Late 1990s-now – consolidation and blurringof biotech/big pharma and search for newmodels


What’s Unique about theBiotech 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


What are Conventional BiotechCompanies Like?

! Small and mid size companies justfocused on survival, not best ODpractice – recruitment of leaders

! Accountability to investors/stockholders& need for measurements

! Philosophical dilemma of researchers–academic to business environment


Typical Organization Dynamics

! Informal rather than structured careerdevelopment

! Integration across disciplines

! Teamwork

! “Can do” attitude: intellect +pragmatism

! Professional “HR” functional expertiselacking


Catbert, Evil HR Director


From Lab to Leadership

! The science of business/the business ofscience

! Science Business: Gary P. Pisano

! Businesses creating science arefundamentally more complex than thoseusing science

! Unique personal and organizationalchallenges


Personal Challenges forFounder/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?


Serial Founders

Telling the story

Recruiting/building the team

Letting go

Selling theConcept

CYCLE OFCHALLENGEFOR SERIALFOUNDERS


Intellectual Property: An HRPerspective

! 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/ableto make the shift on a permanent basis


Founder to CEO

! Raising and managing finances

! Recruiting and building a team

! Creating the corporate culture

! Determining short, mid and long termgoals

! Clearly communicating goals to theBoard and employees


Stages of OrganizationalDevelopment

Time/Effort

Success/Complexity

Phase 1

Phase 2

Early

Late

Phase 3

Transformation – or Death!


Phase 1 Organization

! Survival oriented

! Highly entrepreneurial

! Fast mover, adaptable and changeable

! Perpetually cash starved

! Risk taker


(Early) Phase 2 Organization

! Demonstrated successes

! Efficiency and effectiveness

! Systems, procedures oriented

! Management focused versusentrepreneurial


(Late) Phase 2 Organization

! More meetings and task groups

! Occupied with enshrining and repeatingknown success patterns

! Ignore or reject innovation outside ofthe “proven” success pattern


Phase 3 Organization

! Close to customers and market

! Searching for innovative solutions

! Adaptable, changeable, “reinventing”itself

! Quality focused internally and externally


HR Priorities at Each Stage

! Recruitment

! Rewards and Recognition

! Employee engagement


Questions to Answer

! What is the key HR driver in thebusiness plan?

! How will we grow the company?

! What do we want to be known for?

! What will it take to succeed?


What is the key HR driver inthe business plan?

! In the heyday of dot.com companies, masshiring was typical; turnover was also high andrapid. This kind of hiring is not appropriate ina 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 needpeople who know how to get to the clinic.

! What specific events will trigger hiring for thecompany?


How will we grow thecompany?

! Two approaches:

! Hire the ideal management team and they “hiredown” the rest: in very well capitalized companiesthe conventional wisdom is to hire themanagement team first, but you have to beprepared to “over hire” and fire later

! Hire key positions/individuals and fill in the restlater: less well funded companies fill out a partialscientific “swathe” to demonstrate success quickly


What will it take?

! If taking the “top team down” approach, theexecutives MUST be able to act as individualcontributors (you do not want a senior teamof “delegators”)

! If using the “key positions” approach,everyone in the company must becomfortable with ambiguity, role overlap

! Appropriate balance of opportunistic andplanned hiring

! Compensation philosophy and structureshould reflect the value proposition


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


Board of Directors

! Formal Charter and roles; fiduciaryresponsibility

! Investors play a major role (choosethem carefully!)

! Internal vs. external directors

! Governance: private vs. public


Clinical Advisory Board

! Focused on clinical outcomes – not thescience per se; predominately M.D.s

! Must report to the CEO (or head ofregulatory/clinical) usually with a formalrelationship to the Board (ethical and liabilityoversight)

! Typically created at the pre-clinical discoveryphase

! One or two members may serve asconsultants/advisors to CEO or Board prior toformation of the CAB


HR Functional Expertise: HiredIn 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 beendelegated to others are then integrated into the HRfunction

! If discrete HR function is present in the early stage,the incumbent performs additional roles


HR Functional Expertise: HiredIn or Outsourced? (cont.)

! Most commonly outsourced (Phase 1organizations):

! Payroll: ADP or Ceridian

! Recruiting of senior leadership, includingDirectors: Executive Recruiters, specializedsearch firms

! Employment contracts; ESOP; IPassignment documents: law firm


HR Functional Expertise: HiredIn or Outsourced? (cont.)

! Irrespective of whether the expertise resideswithin or outside of the firm, internalaccountability must be assigned

! “Outsourcing” does not mean delegating allresponsibility or eliminating commitment oftime

! Failure to manage outsourced functions in acoordinated manner from the beginning>rework, inconsistencies and unnecessaryexpense later!


Recruitment: TalentAcquisition

! Recruiting/selection is both an “art” and a“science”

! “Would you date anybody? Selectionmatters!” Piers Steel, University of Calgary

! People are the fundamental building block ofbusiness growth and competitive advantageno matter how you choose to build out theorganization

! Logistics of the recruiting process requirefrequent “refreshing” as organizationsdevelop


Talent Acquisition: theParadox

! In annual surveys, 85% of executivesacross mature industries say that theircompanies do not have enough talentor are chronically short of talent; yet -

! CEOs report spending less than 10% oftheir time on talent acquisition anddevelopment.


Talent Acquisition: SomeChallenges

! Candidates in general are harder to find,more selective and difficult to “land”;

! Recruitment of Directors has become moredifficult (demographics, competition, personalliability);

! Demographic profiles and immigration areincreasingly important;

! Global “war for talent;”

! Mistakes are costly.


Recruiting Process

! Sourcing

! Evaluating

! Selling

! Closing


Sourcing

! Goal: to reach and connect with highlyqualified candidates who aren’t looking for ajob.! At the right sites.! From the right people.! In the right way.

" Build your recruiting practices so that peopleseek out your organization.

" Work with recruiters who understand yourvalue proposition, will negotiate rates, andcan represent you credibly


Evaluating

! Understand the job/role

! Interview with a team; prepare aheadof time

! Use behavioral interviewing

! Perform “due diligence” - references

! Collect feedback quickly

! For senior hires, consider formalassessment (e.g. ghSmart)


Selling

! The best talent are very discriminatingseekers of information, and are hard torecruit

! 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


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 OURCOMPELLING FUTURE


Some Possible ValuePropositions

! High performance “winner” in our niche

! Big risk/big reward

! Therapeutic breakthrough that saveslives (idealist)

! “Lifestyles”


Closing: The Offer Letter

! The simpler the better

! Executives

! Others

! Timing and timeliness

! Formal orientation commences wellbefore arrival

! Elicit feedback


Compensation philosophy andstructure

! There is no “best way” to structure totalcompensation

! The kind of organization you are building willdictate the relative emphasis placed on:! Base salary

! Bonuses

! Equity

! Benefits/intangibles

" The market and how you relate to it willdictate salary benchmarking


Compensation philosophy andstructure (cont.)

! Most early stage companies fail to think through acompensation philosophy

! Most early stage companies do not think throughhow to structure the ESOP – the investors/Board willbe focused on the senior team and the overall capstructure.

! Without conscious, deliberate planning, the optionpool allocated to employees can be depleted tooquickly.

! Compensation issues typically surface with the thirdemployee!

! It is worthwhile seeking external professional advice(consulting, surveys, industry associations.)


Performance Management


Performance Management

! Goal Setting and Review Process! Keep it REALLY simple – early stage companies change too

quickly to make investment in complicated systems eithernecessary or practical

! Keep the expectations clear – the goal is to align individualand corporate goal achievement, not a “scientific”measurement of each employee’s contribution

! Remember that it is really about two way communicationand feedback – which should be ongoing, not an annualevent

! It is not about money! Consider separating annual salaryincrease decisions from the review process


Creating Engagement

! Turnover in biotech companies is high(>20%)

! Below the management team mostvulnerable; more problems of fit andculture

! Variations across organizational levelsand functions


Creating Engagement (cont.)

" Components:

! Fit and belonging

! Status and identity

! Emotional reward

! Economic interdependence

! Trust and reciprocity


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 confrontingconflict and non-performance


Defining Organizational Cultureas 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


In Conclusion…

Employees: Build Individual Capability

CEO: Build the EnterpriseVCs: Build Wealth

“HR”

“HR”= human and organizational capability

cvs and vcs: managing the people/profit equation

Economy & Finance

science science business

science discovery

science businesses

science unique personal

hr priorities

biotech industry

key hr driver

business plan