Success Hinges on Capital, So Does Failure: Four Key Principles for Scientist-Entrepreneurs to Master Fund Management

Funding is undoubtedly the most concerning and thorniest issue for scientist-entrepreneurs.

Why is it of utmost concern? Because funding is a powerful driver for the commercialization of innovative technologies; without it, the entire entrepreneurial process would come to a halt.

So why is it the most challenging? This needs to be examined from two dimensions,One is “how to secure funding,” and the other is “how to allocate funds wisely.”For scientist entrepreneurs, this is no easy feat. Constrained by limited resources and a lack of systemic understanding, scientists often struggle to access available funding in the market. Even when channels are accessible, they may lack the ability to accurately evaluate these resources; and even if such evaluation is achieved, it remains challenging to deploy the capital in a rational and efficient manner.

Such regrets are not uncommon. Recently, a company in the pre-IPO stage that has completed 13 rounds of financingRoyole CorporationPublicly “crying for help” online, the company is facing widespread wage arrears and its business lines are on the verge of shutdown due to a broken capital chain. The underlying reasons are as follows:Royole CorporationIndependent Director Liu Shuwei pointed out“The three scientist-founders lack experience in market development, generating sufficient operating cash flow, and ensuring the company’s continued operations.”。

It is precisely for this reason that the limitations demonstrated by scientist-entrepreneurs in “fund management” have once again drawn the attention of industry professionals. Therefore, at the “Blue Bay Thought Exchange & Doctoral Lecture Series,”Cao Liulang, Financing Expert at Doctor Tech Think Tank and Former Director of Alibaba's Financial DepartmentShared in-depth insights on the topic of “How Startups Can Effectively Plan and Manage Their Finances.”

The following is a verbatim transcript of Professor Cao’s remarks, edited for reader convenience,VCBeat Orange BureauEditorial revisions were made to the text without altering its original meaning:

Before commencing capital management, the most critical prerequisite is to cultivate awareness, namely“Funding Plan”consciousness.

In reality, many entrepreneurs’ thinking often gets stuck at the “concept” stage, as they lack a clear definition of their funding plans.

Simply put,“Fund Planning” refers to a company’s plan for managing its own cash inflows and outflows over a future period.Including the company's current funds, projected fund inflows at future time points, projected fund outflows at future time points, and specific policies for fund management and utilization.

Furthermore, if entrepreneurs fail to recognize the importance of “financial planning” for startups, it will be difficult to encourage them to proactively engage in sound financial management. So, what is the significance of financial planning for startups?

First, startup capital is the most critical guarantee for ensuring entrepreneurial success.The launch of any project requires startup capital. Whether the entrepreneur becomes an individual shareholder or seeks external investors, the founder must maintain a thorough understanding of their funding model.

Secondly, the rupture of the capital chain is the direct cause of failure for most startups.A break in the capital chain is fatal to a company's development, not because of poor products or a weak market, but becauseCapital Inflows Fail to Keep Pace with Outflows, resulting in sustained losses for the company and ultimately rendering it beyond salvage.

Finally, selecting the appropriate funding plan is most important.An aggressive “funding plan” may lead the company to overspend on non-essential areas, ultimately causing it to bleed cash too rapidly and fail; conversely, excessive conservatism may hinder the company’s ability to keep pace with the market, resulting in missed opportunities.

So, what constitutes an appropriate “funding plan”? Frankly speaking, there is no standard answer to this question, as every startup is unique. Therefore, when formulating a “funding plan,” it is essential to fully take into account the different development stages of the startup.

With awareness established, the next step is to discuss specific operational procedures.

As the saying goes, “nothing can be accomplished without norms or standards.” The formulation of funding plans must also adhere to specific principles and procedures.

Let’s start with the principles.The first principle is to focus on the key points; for startups,The focus of the funding plan should be placed on two aspects: how to allocate funds and how to secure financing.; the second principle is to clearly define the core objectives at the startup stage, as the core goals of different types of startups vary significantly; the third principle is to make pessimistic market forecasts and take preemptive measures.

Next, we will discuss the specific implementation steps. 

Step one is to define the business model.Different business models entail different capital planning strategies. For instance, in the early stages of a scientist-led startup, which is a critical period for new product R&D, there is a need for continuous capital inflow. This falls under“Capital- and Technology-Intensive Entrepreneurship”business model, which we can also refer to as “cash-burning” enterprises.

Step 2 is to clarify the sources and amounts of startup funding.Before launching a company, entrepreneurs need to consider four key questions: First, what is the total amount shareholders plan to invest? How many tranches will the investment be divided into? What is the amount for each tranche, and what are the maximum individual contributions? Second, is angel financing or equity financing necessary? This requires an assessment of the startup’s feasibility and actual funding needs. Third, evaluate whether shareholders have access to bank loans or bond financing capabilities to avoid situations where equity financing falls short and funds become insufficient. Fourth, clarify whether mid-stage project funding will come from equity financing or the company’s own cash flow generation.

Step 3 is to clarify the prediction.This primarily involves forecasting the future self-sustaining revenue generation capability of startups. However, for scientist entrepreneurs running “cash-burning R&D-intensive” enterprises, the core focus lies in product research and development. Therefore, during the early stages, there is no need to concern oneself with achieving financial self-sufficiency, as doing so would inevitably impede the progress of scientific research projects.

Step 4 is to prepare a detailed funding plan.First, based on different business models, prepare a cash flow plan for the company over the next one to two years on a monthly or ten-day basis; second, itemize and fill in the expenditures that are essential to the startup plan according to their projected amounts and timing.

When developing a funding plan, it is essential to prepare for the worst-case scenario. Specifically, entrepreneurs should formulate different plans based on various projections, covering three scenarios: baseline, most constrained, and most flexible. Within these plans, distinctions must be made between one-time fixed expenses, monthly fixed expenses, and monthly variable expenses.

Finally, based on startup projections, record the projected revenue from products or services by amount and timeline. This also requires preparing three statements: base-case balance, pessimistic balance, and optimistic balance. In practice, the optimistic balance is often unattainable, while the pessimistic balance will largely become the base-case balance.

It is worth noting that accurately forecasting the amount, timing, and rigidity of cash inflows and outflows is key to "cash flow planning."

From “Being Able to Do” to “Knowing How to Do” and Even “Doing Well” in Capital Planning Requires Us to Focus on Several Key Details, Specifically:

First, prioritize the most critical areas.This necessitates distinguishing the nature of cash expenditures, thereby helping entrepreneurs identify which decisions are essential and which can be reduced or deferred. For example, one-time expenses such as business registration and office renovation should be minimized wherever possible, whileRecurring intangible expenditures, such as those for system development and product development, require particular attention.。 

Secondly, appropriately adjust the funding plan.Funding plans cannot remain static; they must be adjusted by entrepreneurs based on the actual operational conditions of their enterprises.

Finally, the funding plan for Phase II should be clarified as soon as possible.This also involves formulating different plans based on the specific types of enterprises. For “cash-burning” companies, the focus should be on refining the business plan (BP), devoting substantial time and effort to securing investors, and arranging medium-term financing at an early stage. Throughout this process, both the product offering and the business plan will become increasingly clear, thereby enhancing their persuasiveness.

Scientist-entrepreneurs often fall into many “pitfalls” due to a lack of business acumen, with some even halting their progress because they fail to make timely adjustments. So, what are the “pitfalls” in cash flow management that entrepreneurs can avoid or should be particularly vigilant about?

The first “pitfall” is being overly optimistic about the capital plan.When reality fails to keep pace with plans, companies are prone to collapse. This is primarily manifested in entrepreneurs’ excessive confidence in their startup success rates, progress timelines, equity financing prospects, and personal capabilities. Therefore, at all times, entrepreneurs must formulate pessimistic forecasts to prepare for the worst-case scenarios.

The second “pitfall” is launching a startup without setting a stop-loss threshold.Why Not Set a Stop-Loss Threshold? There are two primary reasons. First, there is a lack of accurate judgment; many failed entrepreneurs did not conduct thorough investigations and assessments of their current development status, leading to continuous plan adjustments accompanied by escalating “futile” investments, ultimately plunging them into abyss.

Second, they cannot let go of what has already been sacrificed. Most entrepreneurs deplete their family savings, sell their homes and cars, and even damage their personal reputation during the startup process. When unable to turn the tide, they are reluctant to give up due to the enormous sacrifices already made.

The third “pitfall” is to disregard financing altogether due to a lack of understanding of the fundraising process.Entrepreneurs should decide whether to raise capital and which financing methods to adopt based on their company’s actual circumstances. If founders hold cognitive misconceptions, such as believing that a lack of understanding about financing means it can be forgone, the company will often miss out on valuable opportunities for growth.

Currently, China's healthcare sector is entering"The Era of Scientist Entrepreneurship", an increasing number of scientists are stepping out of the laboratory and into the entrepreneurial arena.

But this is not easy. The transition from scientist to entrepreneur is a rather arduous and complex process. From the perspective of a scientist, it requires the enhancement of multifaceted capabilities, including"Fund Management", which is critically important, especially for startups in their early stages, as they have very little room for error in this regard.