Autopsy of a start-up disaster
When a business flatlines, it's tempting for all involved to play the blame game in an effort to stave off humiliation. And then, just as quickly, the whole ordeal is swept under the rug. But what does anyone learn? Paul Ryan meets a former biotech start-up CEO who had the courage to put her lifeless company under the knife. in the name of science.
Failure. It really is the hardest thing to do well.
Most new businesses fail inside the first three years. The figures vary, but generally the start-up attrition rate is said to be somewhere between 50 and 80 percent. With so much failure around, you'd think we'd have a healthy attitude towards it. After all, we learn more from mistakes than successes, right?
In Australia, particularly, we have a propensity to sweep failure under the rug and move on. But failure is a good thing, as long as the correct lessons are drawn from the ashes. A culture that is petrified by fear of failure rarely succeeds.
Earlier this year, Dr Roslyn Brandon, former CEO of the once promising and then extinct Australian biotech start-up, Genetraks, bucked the cultural trend and compiled a brutally honest case study analysing the reasons for the company's demise - a sweeping overview of the mistakes made and lessons learned.
Brandon, a veterinarian by training, dedicated much of the document to the specifics of Genetraks's case. As she pointed out in the introduction, part of her reason for writing it was to set the record straight ("the truth is, after all, more instructive than rumour"). Yet, from a slightly loftier vantage, Brandon's more pressing motivation was to "constructively assist other entrepreneurs (and potentially VCs) on their paths to success in the commercialisation of high technology in Australia".
The result provides a compelling insight into commercial failure in Australia and the way we, as a culture, cope with this common occurrence.
Lesson 1: have a go
When I finally get Dr Roslyn Brandon on the line, the first thing she does is thank me for taking an interest in her failure. I tell her, in earnest, that it is my pleasure.
"I get very tired of the attitude towards failure that we have here, compared with the States," she says. "You wouldn't wish failure on anyone, but when they do fail, you expect that they should learn and be a lot better off having made those mistakes. Unfortunately, in Australia, it seems, when you fail you fail, and that's the end of you. It's a fairly defeatist attitude to have, because how else do you learn? As children grow up they learn from their mistakes. I don't know why that should change when we become adults."
The Queensland-based Genetraks group commenced in November 2000. It was established to develop and commercialise gene expression technologies for monitoring health in performance horses initially, and then for human athletes. The ultimate aim was to market a point-of-care device that could be used by veterinarians track-side to monitor the status of the horse's condition, particularly its immune system.
By way of example, when Northerly was scratched from the 2002 Melbourne Cup due to questions over its fitness, Genetraks claimed that its technology could have been used to accurately determine whether the champion thoroughbred was fit to race.
Genetraks, which began in Dr Brandon's house, raised a total of almost $12m in private equity and public grants. But by August 2005 (when Brandon resigned as CEO), following a deferred listing on the ASX, souring board relations and still no product in the market, Genetraks failed to raise further necessary equity capital in the US and was placed into voluntary administration in December 2005.
Lesson 2: know your risk
Winston Churchill once said, "Success is going from failure to failure without losing your enthusiasm." Fair enough, but it's not easy when people would rather bury you than be reminded that, sometimes, things don't work out as planned.
Brandon's analysis contains two startling admissions. Firstly, if she knew then what she knows now, Genetraks would never have been started. Secondly, and more disturbingly, some bright ideas are too expensive, too risky and too time-consuming for a start-up to commercialise (in Australia, in particular).
This second point is something that entrepreneurs are loathe to admit. It is poison to their sanguine conviction that anything and everything is possible. But Brandon's conclusions are very much anchored in reality - and she has the scars to prove it.
Given what Genetraks was trying to accomplish, it now seems remarkable that the company was able to convince investors to back it.
"I've never worked as hard as I did to try and get that first lot of funding in," says Brandon. "We spent most of our time on assisting the VCs to understand the risks associated with the business. And I must confess that I don't think we understood the risks of the business nearly as well as we should have at the beginning."
The risks were considerable. Genetraks needed to create an entirely new market rather than take a share of an existing one. It didn't help that the company also began to focus development on a diagnostic product for which the originally-funded technology was not suited. And perhaps most importantly, the performance horses market for which the technology was designed was too small in Australia (where the company based itself to save on costs) to sustain this kind of venture.
Lesson 3: passion will only take you so far
The pages of Anthill are filled with successful entrepreneurs touting the merits of passion as the commercial elixir. But it is worth noting that there is a word for passionate entrepreneurs who doggedly pursue folly: foolish.
Brandon believes that, while Genetraks's board lacked passion, its founders had it in droves. But that wasn't enough to save the company from its many missteps.
"I think that passion is essential, but it's only half the ingredients. Passion, connected with the right technology, connected with a large market is probably the best set of ingredients for success," says Brandon. "I know of a number of other ventures that have made exactly the same mistakes, if not more mistakes, but their technology was further advanced and their ultimate market was a lot bigger. A business can't be a success without commercial discipline."
Genetraks fell for the trap that catches many ambitious companies; it measured its success in terms of capital raised and spin-offs created rather than revenues, profitability and products in the market. "Business is business, and until we have products in the market with customers paying for those products, we don't have 'success'," Brandon writes in her case study.
It's fair to say that the Genetraks experience left Brandon with a complicated opinion of early stage Australian venture capitalists. She makes the point that VCs are extremely busy – often sitting on the boards of up to ten portfolio companies – which can mean that they are not able to contribute as much strategic input as a fledgling start-up requires.
"As CEO, I found that I had a dearth of real strategic input and the ability to devote time to the development of the business, which hit home when it started to run into problems," says Brandon. "The thing we need to keep in mind is that VCs are learning, just like entrepreneurs. They're getting in there and making mistakes – they have failures in their portfolios as well."
Lesson 4: learn your lessons
We all like happy endings, just as we choose to derive meaning from the past through the prism of the present. For Brandon and some of the original members of the Genetraks team – the true believers – the Genetraks experience was merely a prelude to bigger and better things. In many ways, it was the failure they had to have.
Following the demise of Genetraks, Brandon purchased the group's IP assets. In time, she launched a new company – Athlomics Pty Ltd – to apply the earlier lessons and get right what Genetraks had gotten wrong. Athlomics is developing a generic platform of genes for the assessment of immune effort in humans and animals. Brandon has also started another company, Uptake Health, an animal health company exploring opportunities in Australia and through a business partner in the US.
"Athlomics remains a higher risk company than Uptake Health, but it's not nearly as risky as Genetraks was, because we have a lot of IP," she says. "We can never stop making mistakes, but the lessons I've learned are definitely being put into place. It's the only way to grow""
15 INSIGHTS FROM A BATTLE-SCARRED START-UP CEO
- Be brutally honest with yourself. Be wary of hearing 'what you want to hear' and not 'what you need to hear'.
- Pay attention to those things that wake you up at night – they are usually important.
- Have a complete understanding of all the risks at all times (with contingency plans formulated and updated regularly).
- Keep a low public profile. Stay out of the headlines until you at least have product near to or in the market.
- Stay humble and open-minded about any advice that is given or offered. You can always learn from anyone and everyone.
- High quality governance and mentoring is critical. The right independent and commercially-focused Chairman is worth his/her weight in gold.
- Insist on performance appraisals for individual Directors and the CEO on at least an annual basis.
- Directors of the Board should be selected for the commercial value each can bring to the organisation's future development and success.
- All Directors should be required to step-down after one year of service. They may be reappointed by a two-thirds majority for further years, but only on a year-by-year basis.
- VCs may not necessarily make good Board members and are ultimately faced with a conflict of interest due to their exit focus and excessive workload.
- 11. Crawl before you can walk. Walk before you run. The first product is important – it has to be "a humdinger" – and all the resources of the company need to be focused on getting product to market as cheaply and as quickly as possible.
- Hire slowly and fire quickly. When hiring – especially overseas, use a reputable recruitment consultant even though it will cost you more - and listen to their advice.
- Never agree to a payment of any up-front fees for the conduct of due diligence. If a VC is really interested in the deal, due diligence will be conducted at their expense until the deal is sealed.
- Keep in touch with your 'inner voice'. If it feels right, it's right. If it feels wrong, then do not proceed. All the logic in the world can tell you it's right, but if the inner voice is doubtful, don't do it.
- Some bright ideas are just that – they are too expensive, too risky and too time consuming for a start-up to commercialise (in Australia, in particular).
Thanks go to Anne-Marie Birkill, CEO of i.lab Incubator (where Genetraks was originally located), for bringing Dr Roslyn Brandon's case study to our attention. It took courage and vision and was done with the education of entrepreneurs in mind.
This article courtesy Australian Anthill Magazine.