Securing Support For A Compelling Idea PDF

*"Nothing is more powerful than an idea* *whose time has come."* **Securing Support** **For a Compelling Idea** **Precision Polymers, Inc.** This case was written to provide a context for developing a comprehensive funding proposal for a start-up enterprise from within a larger company -- i.e.,...

*"Nothing is more powerful than an idea* *whose time has come."* **Securing Support** **For a Compelling Idea** **Precision Polymers, Inc.** This case was written to provide a context for developing a comprehensive funding proposal for a start-up enterprise from within a larger company -- i.e., "corporate entrepreneurship." Broadly, the case is designed to help students understand how to craft a winning proposal to secure support for a new product/business idea. Emphasis is on crafting a compelling marketing strategy. In developing a marketing strategy that will be reviewed by senior company leaders and outside investors, students have access to customer survey data and data on analogous products to help estimate market size, sales potential, and to craft an initial P&L statement for a new technology. Key decisions involve: (a) whether (how) to use brick-and-mortar v. online v. blended channel models and what role the company's salesforce will play in these various channel strategies; (b) how to arrive at a pricing approach when the company, channel partners, and customers have different and often competing interests; and (c) how to jointly gain product adoption by channels [and] end-user customers. This case is not for sale and is intended to provide a context for discussion in courses at Indiana University. **Precision Polymers, Inc.** **Orphans in the Basement** Sumaya Abdi pulled her car into the lot at Precision Polymers (hereafter referred to as "Precision"), a highly regarded Sonoma, California-based manufacturer of custom engineered specialty plastics. She sat in her car listening intently to an interview on the local public radio station while enjoying the final few sips of her morning coffee. Sumaya happens to be "foodie" and the radio host was discussing the rising demand for free-range eggs with a prominent farmer in the region, Nadia Slevin. Coincidently, Sumaya met Nadia at a wedding reception several months earlier. As the interview continued, Nadia elaborated on free range egg economics. She indicated that the productivity of free-range egg farming has remained largely unchanged for decades. Lately, the only way to meet rising demand is to increase the volume of laying chickens. But that in turn requires farmers to acquire or lease additional land which is also rising in cost. The net result is that prices for free range eggs have been increasing dramatically and are in turn driving up prices for food products in which they represent a material input. The interview ends and Sumaya walks briskly toward the Precision building. As she walked, she recalled her engaging Champagne-fueled conversation with Nadia along with several other friends at the wedding months ago. One of the guests in the group asked about the greatest challenges Nadia faced as a free-range farmer. Without hesitation, Nadia went on about the tendency for chickens to become aggressive in the close quarters of free-range pens. The red comb on top of the chickens' heads often stimulates "pecking fights" which can injure and even kill some of the less able chickens. The pecking is widespread enough that, even without serious injury, it causes enough trauma to reduce egg-laying production. To curb these effects of chicken aggression, it's common to trim the beaks of free-range birds which helps to reduce mortality. But, as Nadia indicated, egg production and bird mortality is still adversely affected by "blunt-beak" pecking. Sumaya recalls Nadia joking that "If only someone could come up with dark sunglasses for chickens so they can't clearly see each other, all would be well." The circle of newly found friends laughed at the thought of the sight, then clinked glasses in a toast to their newly married friends and dissipated into the crowd. A few weeks had passed since Sumaya heard the radio interview with Nadia. She was sitting in a meeting with several colleagues reviewing a stack of patent applications that the company was planning to submit. Precision was widely recognized as having one of the best polymer engineering teams in the nation. The company was well-known for their many compound innovations that found applications in aerospace and healthcare. The CEO wandered by the meeting space and inquired with a smile about whether there were any major commercial breakthroughs lurking in the formula laden documents neatly laid-out on the conference room table. The team laughed somewhat nervously knowing that most patents that the company had been granted over the years never saw the light of day from a new product standpoint. After the CEO left, David Andrews a fellow polymer scientist and collaborator with Sumaya, commented: "You know, we should create a team to comb through our older patents and see if they might have a use today that they did not have years ago when they were granted." Suddenly, Sumaya had a flash of an idea. At the close of the patent review discussion, Sumaya asked David if he had time to meet and discuss a possible commercial application of a patented polymer formulation that they jointly created over five years ago. As far as she knew, their patent was tucked away in the "orphan patent" safe in the basement. **An Idea Whose Time Has Come?** Sumaya and David's orphaned patent was awarded for a quick-curing (drying) liquid polymer that was targeted to address a need in emergency healthcare. In many cases, surface-level incisions are sealed in emergency settings by using what amounts to temporary "super glue" until they can be properly treated. Precision's liquid polymer addressed many of the shortfalls in the liquid adhesive types of treatments. It was not an adhesive per se but rather a spray mist that instantly set (cured) and adhered to skin creating an extremely thin yet durable layer of protection. The product also has an antimicrobial property that inhibits the formation of harmful bacteria and is gas permeable so wounds could get air which aided in healing. Sumaya recalled with great pride that it was an amazing breakthrough technology that was critically acclaimed in multiple professional journals and was approved for topical use. The product did not get the expected level of marketplace acceptance and after two years, Precision pulled it from the market. Sumaya walked into David's office with his favorite afternoon snack from the company's café -- a freshly baked cookie and double long-shot espresso. She reminded him of the liquid polymer medicinal patent. David winced as he recalled it with some anguish due to its limited commercial success and the long and tedious research that went into creating it. Sumaya described the exchange she recently had with Nadia regarding "chicken pecking" and the news about the challenges faced by the industry to meet rising demand for free-range eggs. Sumaya believed that a drop or narrowly directed spray of the quick set liquid polymer in the eyes of a chicken might harmlessly cloud a bird's eyesight enough to solve the chicken pecking problem and thus increase egg farm productivity. She reviewed her notes from the research that led to the patent and recalled that it cures on contact and is about the thickness of plastic wrap. The formulation could be adjusted slightly to reduce adhesion so that a chicken could still open and close its eyes. She was concerned about having a polymer in place for an extended period in that it might attract dust and cause irritation. While not tested in chickens, Sumaya found a formulation that would gradually dissolve in a way that would slightly and painlessly scar a chicken's eyes thus blurring vision without having the actual polymer present for more than a few weeks. She had already done a quick web search on the egg production industry and exclaimed to David: "Imagine the business opportunity we would have with an estimated 370 million egg-laying chickens by 2025!" David leaned back in his chair and mustered a smile. "On its face that does seem like an incredible opportunity" he said calmly. "And the company has shown limited interest in resurrecting orphan patents. Most of them simply languish and a few get sold or licensed to other companies. But I'm happy with my job here at Precision and it seems like you are too, and both of us seem to be on a nice career progression. We have moved quickly from being bench scientists to overseeing large new product innovation teams. Aside from that, we both have young kids starting school. I'm not sure it's the right time to quit and take that leap." Sumaya indicated that she largely agreed with him. But she also wondered if they would really need to immediately quit their jobs outright; perhaps they could work out a deal with Precision to license the patent and pursue this opportunity on a small-scale test basis. "If it begins to take off" she said, "we can reassess our priorities and options at that time. It could be a win for Precision and for us." David was intrigued by the idea. As they were wrapping up their discussion, David and Sumaya pondered their next steps. Sumaya suggested that they talk with Precision's General Counsel to learn more about how to license the patent in question while keeping their "day jobs" at Precision. **A Bit of Due Diligence on the Market** Sumaya and David began to explore the egg production industry. Not surprising, there was variance and inconsistencies in the demand and supply numbers reported in various industry publications. There was also great inconsistency in data on egg production economics. Still, they felt that they could get a reasonable sense of demand trends and egg farmer financials. Following is a summary of what they learned: **The Egg Production "Eco-System."** Egg farmers operate within an interesting "business eco-system." In many ways, the industry is highly modernized and sophisticated. There are trade shows, trade publications and specialized websites that provide the latest scientific evidence on effective flock management and business practice. At the same time, there remains considerable reliance on "word-of-mouth" to discover and convey new farming tips. For example, most states have agricultural extension services offered in association with major state universities that provide technical advice and related services both online and in person (face-to-face or via Zoom). And local and regional feed and farm equipment distributors remain among the most trusted sources of guidance for egg farmers. These vendors often provide "one-stop" shopping for farmers beyond farm production equipment and feed. Many offer a range of important support services. In the area of egg production, these often include veterinary support, delivery of new laying hens (referred to as pullets) to the farms, debeaking, handling the disposition/sale of later-life chickens, and the creation of customized feed blends, among other services. To make flock management easier for farmers, many farm supply stores bundle these types of services as "pre-set annual service agreements" that are tailored to the needs of individual farmers. Pullets (young egg-laying birds) represent a material cost of egg production. Their prices vary by type of bird. Prices for the most common types average around \$12.50 each. The farm supply stores often buy the pullets from hatcheries and debeak them if requested by farmers (at a price of about \$0.20 per pullet) before delivering them to the egg farms. The debeak fee is usually bundled with the price of the pullet. See Exhibit 2 for supply store debeaking economics. More recently, some of the larger supply stores are acquiring "hatcheries" and growing chicks to the pullet stage as a way of ensuring stable pullet supply. Sumaya recalled Nadia talking about the local Rural King, a large farm equipment, feed, and supply store. Rural King was a major gathering place for farmers in the region. According to Nadia, it's the only full-service source of feed and supplies for the 30 or so commercial egg laying farms in the area not to mention the grape growers and cattle ranchers. Sumaya was curious and stopped into Rural King on a Friday late in the morning on her way to a lunch meeting. She commented to a store salesperson roaming the floor "Wow, it's pretty busy today." to which the salesperson replied "Just a normal day, most of these folks are regulars that we see every week or two. I think the free coffee and snacks in the lounge are a big draw. Folks tend to linger there for a while and get caught up agricultural gossip." Sumaya explored the store for a while, got a cup of coffee, overheard a few conversations about ways farmers are dealing with rising summer temperatures, then headed off to her meeting. **Armchair Market Research: Coffee Talk with Nadia** It had been several weeks since Sumaya and David seriously discussed the opportunity. In the meantime, David got informal word that Precision's General Counsel was going to recommend to the CEO that the company license the quick-set liquid polymer to David and Sumaya assuming all parties could reach an agreement on terms. Sumaya also did a bit of background work on any competing products on the market. As it turns out, over 50 years ago, a start-up created eye inserts for chickens to reduce pecking. From what Sumaya could tell, the product failed in the marketplace largely because it led to eye infections in some birds. She felt that the formulation of the quick-set dissolving polymer spray she and David had in mind would not cause physical harm to chickens. Also, 50 years ago, most chickens were housed in cages indoors and she speculated that the effects of chicken pecking were not as prevalent as they are in today's cage-free environment. Sumaya and David met at a local coffee shop. They were both feeling highly optimistic about the business opportunity -- 328 million laying chickens across the U.S., and even if the most viable market was limited to free range chickens, that still represented 97 million birds. And the expectation is that demand for cage-free eggs will continue to increase. David commented to Sumaya "This seems like a can't miss opportunity. This will be breakthrough technology that could transform the egg production industry. All the hours we put into creating the quick set polymer formulation may at last pay off. This could really shake up the egg industry; we have an innovative solution to handling an age-old problem." To get an additional perspective, Sumaya let David know that she reached out to Nadia and invited her to join them and share her thoughts on their idea. Just then, Nadia arrived and following greetings, got settled in over her latte. Sumaya quickly turned to business and asked Nadia about how serious the pecking problem really is and if farmers are content with available solutions. Nadia indicated that she thought pecking was a serious matter, and said she was surprised that many farmers she knows simply ignore it. Nadia speculated that "They either don't recognize the impact it has on their business, or they simply accept it as a cost of being an egg producer. Others might also be concerned about animal cruelty associated with debeaking." Nadia continued "For most farmers, the current and long accepted practice is to clip or use a laser on the chickens' beaks when they are young; It's kind of like clipping your fingernails. It's somewhat effective at protecting the chickens from seriously harming each other, but the birds continue to peck each other albeit with blunt beaks. Debeaking is also a hassle, so farmers often request debeaked replacement pullets (new replacement chickens of egg-laying age). Even so, beaks grow back and need to be re-trimmed after about six-to-eight months. Farmers often simply out-source debeaking as part of agreements with the farm supply dealers." Nadia went on to note that debeaking also has a short-term effect on egg production. "I figure that the trauma from debeaking costs me six eggs per year per bird. And even with debeaking, I probably still lose about 15% of my flock due to pecking. At \$12.50 per replacement hen, it adds up." David then shifted the conversation to the proposed innovation that he and Sumaya are considering as a replacement to debeaking. David explained it this way: "When the birds are young, rather than debeak them, they would receive a drop of the quick-set polymer in each eye and they are on their way; no pain, no trauma, slightly blurred vision, the birds could still open and close their eyes, and hopefully, no aggressive pecking. And the applicator bottle makes it easy to apply so no special training is needed." David also indicated that the installation of the drops would take the same amount of time as debeaking, so there would be no added labor cost for farmers (or to the feed stores if done by them) to make the switch. Nadia grinned and laughed a bit, asked a few questions, and then got serious: "If this works, it could be a meaningful advancement." Hearing this, Sumaya and David gave each other an enthusiastic "high five." As the three of them stood up and got ready to leave, Sumaya asked Nadia "If we get the go-ahead on the patent, would you allow us to test the product on a small sample of your chickens? We would of course compensate you for your time and for any productivity loss if things don't work out." As they walked, Nadia thought about the idea and agreed. She recalled running field studies in her agricultural economics courses and indicated that she would be willing to run a simple controlled experiment: Nadia agreed to take a free-range pen and divide it in half \-- 1,000 hens debeaked and 1,000 hens treated with the quick-set polymer and would measure injuries incurred, bird mortality, food consumption, and egg production as well as tracking any medical side-effects. Nadia also indicated that if David and Sumaya would like to create a brief email survey to understand farmers' perspectives on egg farming practice, she would be happy to send it to her network. While David and Sumaya felt that they were ready to move ahead without a survey, they finally decided to go ahead and undertake a short one using Nadia's email list of farmers in the region. See Exhibit 4 for a summary of the results. **The Patent Negotiation and Possible Start-up Financial Support** Following multiple discussions with Precision's General Counsel and the CEO, the company agreed to license the quick-set polymer patent to Sumaya and David. The terms were straightforward. They could use of the patent for three years at an annual fee of \$200,000. Precision also agreed to manufacture the product and load it into the appropriate air-tight dispensing containers that would apply the appropriate pre-measured amount of the polymer. The company still had the manufacturing and packaging equipment from the medical application of the patent and agreed to manufacture and bottle the polymer for David and Sumaya's application. Precision normally took a 3x markup on direct production cost but, during the three-year pilot period, the company agreed to charge David and Sumaya only for the direct costs of manufacturing (with no mark-up) which were estimated to be about \$12.50 per bottle. Each bottle would be sufficient to treat 250 chickens. Assuming a successful pilot launch, the re-negotiated use of the patent would likely include four parts: a revised fixed annual fee for the use of the patent, manufacturing costs that would include Precision's standard 3x mark-up, a sliding percent of sales above some threshold to be determined, and first right to bring the new business back into the firm (essentially acquire it) or to receive a pre-negotiated percentage of the net proceeds if the business is acquired by another firm. During discussions regarding the licensing agreement, the CEO and CFO indicated that the company would consider providing venture funding under separate terms and would like to see David and Sumaya's business plan when its ready and before product launch. As Sumaya and David left the meeting with Precision's General Counsel, they realized that it was time to name their new company and the product. In the coming days they settled on "Free Range Friends" as the company name and "SafeFilm" as the product brand. They felt that both names implied the notion of humane solutions for egg production and that the company name was general enough to allow for line extensions into new animal care products over time. **SafeFilm Trial Results** Sumaya was sitting in her office when the phone rang. Nadia was calling to provide a snapshot of the results of a trial of SafeFilm. She confirmed that the product was easy to apply, there were no side effects, and took about the same time to apply as debeaking. In terms of product efficacy, the trial results were converted to annualized impact. Compared to debeaking, bird mortality for chickens using SafeFilm dropped from 14% to 2% and egg production only dropped by one egg compared to an annualized rate of six eggs for debeaked chickens. An amazing surprise is that food consumption also declined for the SafeFilm condition. Nadia thought that the decline in pecking may have lowered chickens' stress levels resulting in reduced metabolism and hence appetite. Nadia estimated that a farmer with 20,000 chickens could save about 220 pounds of feed per day. At the time, the feed that Nadia used cost about \$580 per ton. And finally, there were about 20% fewer cases of eye-related infections in the SafeFilm condition. While this finding was statistically significant, as a farmer, she was not sure about its practical significance since -- i.e., there were 10 eye infections out of 1,000 debeaked chickens compared to eight in the SafeFilm condition. Sumaya hung up the phone and sprinted down the hallway to David's office, closed the door and proclaimed: "We have a huge winner on our hands! It's going to be super easy to get farmers and investors on board. We are going to transform egg production! It's going to be so rewarding in all ways to see our lab breakthrough have such a large and visible impact." **Crafting a Business Plan** [Start-up funds and initial operating costs]. To launch their business, David and Sumaya felt that they could not go to friends and family for funding if they were not willing to make a commitment to the business themselves. Each contributed a large fraction of their personal savings/ retirement funds (collectively about \$500,000) and raised another \$750,000 from other sources. They also realized that securing resources from Precision would also be important. Both realized they would need to generate sales quickly to demonstrate business proof of concept, generate cash flow so they do not burn through their seed money too fast, and enable them to secure additional funding from Precision and external sources. Precision was helpful in that the annual licensing fee was payable over 12 monthly installments. Exhibit 3 provides a summary of their estimated initial operating costs. They set to work to craft a business plan that would help justify funding from Precision's senior leaders and could later be updated for "outside" support. [Initial scope]. In terms of an initial strategy and operating budget, Sumaya and David decided to focus first on California. It's among the top ten egg producing states with about 5 billion eggs annually. From Sumaya's initial research, it appeared that there were about 300 commercial egg farms with about 180 of them having flocks of 75,000 or more. And as of January 2022, California's Proposition 12 went into effect and required all eggs in California to be produced using cage free methods. The expected success in California would in turn provide the proof-of-concept necessary to create a case for funding a nation-wide roll-out. [Initial operating budget]. David and Sumaya felt they would initially need three (3) salespeople and that each one could cover about 70 farms. They were also aware that, even though they had a patent, it was approved over five years ago and it was likely that other polymer companies had similar inventions or could "knock-off" the SafeFilm patent in short order if there was a business incentive to do so. [The business model in preparation for funding requests]. As they began to develop their product launch plan, Sumaya and David faced three central decisions: (1) how to price SafeFilm, (2) whether to make their company a completely online play or to involve the farm supply retailers/service providers, and (3) how to best convince farmers to switch from their current (often long entrenched) pecking solution to SafeFilm. **Preparation for Funding Meeting** David and Sumaya agreed that their initial thoughts might need to evolve as they learned more about the market. More immediately, however, they realized that there was a lingering non-trivial matter: In about three weeks, senior leaders at Precision wanted a presentation of the SafeFilm business plan that would not only offer a well-reasoned "pilot launch" strategy for California that addressed pricing, channels, and a marketing approach for converting farmers from current practice and ensuring repeat purchases, but would also need to provide credible estimates of revenue and offer a sense of when the business would start making a profit in the initial test market (i.e., California). The clock would soon begin ticking on their personal seed capital. David and Sumaya realized that even if Precision helped, it would be important to also have a credible "proof of opportunity" story to share with potential investors. Still, they remained highly energized: "This is big. Our larger goal is to make cage-free chicken farming more productive and, in doing so, bring down the price of cage-free eggs. We are on the brink of creating a more affordable and more humane source of high-quality protein for all."