Unlocking Intrinsic Value to Get Investor Ready

This episode is coming to you from MTPConnect’s Development Workshop Series held in Sydney for 52 start-up organisations from around Australia. The 2-day program was a terrific opportunity for companies participating in our Accelerator programs to get ‘investor ready’.

Advisory firm Intrinsika’s workshop, ‘Finding Your Intrinsic Value’, focused on how to reframe a company’s value beyond the financials, by identifying and maximising unique assets and pitching this value to investors.  

Intrinsika’s Brett Kensett-Smith and Michael Masterson joined host Caroline Duell at the event to discuss the importance of differentiating your company to capture investor attention and nailing a 30 second pitch. They share their list of intrinsic assets to consider including trade secrets and effective brand building and explain how cleverly navigating the patent landscape can make all the difference to companies looking to scale up.

Chapters

• 0:02 Introduction
• 1:01 Advice for start-ups
• 2:28 Intrinsic assets
• 5:08 Common mistakes companies make when approaching investors
• 5:55 Tips on what a successful pitch looks like
• 12:25 Investment Trends in Biotech and AI
• 13:27 What are you seeing in the biotech/medtech space at the moment?
• 16:54 Maximizing Company Valuation and Investor Pitch
• 16:56 Company valuations
• 22:42 Outro

Transcript

Natalie Vella: 0:01

This is the MTP Connect podcast, connecting you with the people behind the life-saving innovations driving Australia's growing life sciences sector from bench to bedside for better health and wellbeing. MTP Connect acknowledges the traditional owners of country that this podcast is recorded on and recognises that Aboriginal and Torres Strait Islander peoples are Australia's first storytellers and the holders of first science knowledge.

Caroline Duell: 0:34

Hello and welcome to the MTP Connect podcast. I'm Caroline Duell. We're coming to you from Sydney for MTP Connect's Development Workshop series. Joining me from Intrinsika is Michael Masterson and Brett Kensett-Smith, who have run an Intrinsic Value Masterclass. It's a session designed to help startups and SMEs in our accelerator programs to reframe their company's value and pick up some tips on pitching to investors. Welcome, Michael and Brett. Thank you.

Michael Masterson: 1:04

Thanks.

Caroline Duell: 1:06

You guys have worked with a lot of companies, For companies wishing to scale up. What advice do you give them about intrinsic value?

Michael Masterson: 1:14

I think the first thing you've got to work out what makes you special, like, if you're not going to be special, then you're not going to be able to attract capital, which means you're not going to grow and you're not going to end up in the Fortune 100. So we always start with work out what are the assets. So what are the things that are not captured in your traditional financial statements, for example? So I think it'd be fair to say that very few businesses would ever want to be bought based on purely their balance sheet, their fixed asset register and their P&L. So if those documents don't explain the value, then what are the assets?

Michael Masterson: 1:46

Next thing is well, what's going to potentially pull the value of those assets down, eg what are the risks? So they're the first two things that we would always start with, because that leads into well now, how are we going to grow those assets faster than anyone else can to attract capital and then ultimately generate a better return on capital than other investments could for an investor? So it really starts with you know, other than your mum, saying you're special. Why do you think you're special?

Caroline Duell: 2:10

And I understand that there are a list, I guess, of these assets that are beyond you know, the paper trail, so to speak, or the accountancy information. Brett, maybe you can talk to us about that.

Brett Kensett-Smith: 2:21

Sure, yeah. So you hear terms like IP, intangible assets. We break it down into what we call intrinsic assets, because they're the assets that are contributing to the intrinsic value. We have 10 categories, particularly MedTech. The key categories are trade secrets, perhaps their brand Early stage, the brand doesn't have as much value, but it's building the brand.

Brett Kensett-Smith: 2:45

Invention, which covers patents, so oftentimes they'll have a patent position, maybe one or two patent families, maybe several that over time could could really help protect from a legal point of view what they do. But then also into relationships, particularly in medtech, where really no one person can grow a company from the very beginning to the very end and do it all on their own. They need to build out their networks and their relationships. So it could be key opinion leaders, it could be well-regarded surgeons, it could be people from the local area health service, so building out that network of trusted professionals and advisors in reimbursement and in regulatory and so on. So those relationships are critical. And the last one is regulatory. So of course, medtech's unusual compared to a lot of industries where if you don't have regulatory approval you can't sell your device. So having that clear pathway to getting the regulatory approval so regulatory is another intrinsic asset.

Brett Kensett-Smith: 3:50

So intellectual property is a general term which, when people hear it, it's kind of vague. People think it's patents, other people might think it's trademarks, other people might think it's copyright. So we prefer not to use the term IP or intellectual property because it's kind of meaningless. You need to drill down a little bit further.

Brett Kensett-Smith: 4:11

On the patent side, though, really interesting something to be careful of is over-patenting. So a lot of companies think, oh, to have a really defensible position, I just have to build my patent portfolio, file patents Now, one or two patents, maybe five, depending on what you have. That might be the right way to go for part of your intrinsic asset portfolio, but it's one tool in the toolbox. So you need to expand beyond patents. So something you would have heard me say was a former director of the US Patent Office basically was quoted as saying, yeah, most patents have no value, and other studies have shown that 97% of patents will not return a dollar to their investors, to the people who paid the bills. So that's where we say, okay, patents are an important tool, but they can be overdone.

Caroline Duell: 5:08

Michael, I wanted to ask you what are some of the common mistakes you see companies making when they're trying to put their value to an investor.

Michael Masterson: 5:18

Look, it really ranges and, as Brett said, there are certain common elements. You know, typically over 70% of the companies we deal with don't own their brand in the way they think they do. Eg, for example, they've registered their logo, but they haven't actually registered their word. It'd be like Apple, for example, only having their logo, but of course anyone else could go and call themselves Apple computers and get around it that way, because it's only the visual representation. Again, brett talked about, you know, using a patent when you should keep it as a trade secret or, vice versa, keep it as a trade secret when you should patent it.

Michael Masterson: 5:52

Probably I think the biggest mistake that I see companies doing is fundamentally look, the ecosystem is full of really lovely, well-intended people. You know, no one wakes up and says how do I give bad advice today? But you've got to be able to step out of how you generate income for what you do. And so, for example, if you're a particular service provider that provides service A and someone comes to you and says, hey, do I need service A? Well, unfortunately, you're probably in a conflicted position. So you really want to take advice from people that, ideally, aren't benefiting from that advice but, more importantly, have got what we describe as battlefield experience. You know it's where they've literally been in a license or a sale transaction with a large, typically US medical device company and you've actually got the deal through.

Michael Masterson: 6:39

Not that you had a meeting or you know the discussion didn't go ahead, but did you actually conclude that and ultimately generate your client a return on capital? That, to me, is the ultimate litmus test. Or, as we joke and we're talking about some of the participants today it's how do we turn you into a case study? But again, I would come back to ask the right questions, which is 90 of the problem. If you ask the wrong question, you are always going to get the wrong answer. So again, understand what your assets are, deal with the risks, but ultimately ask it of people that ideally don't benefit from that.

Michael Masterson: 7:11

And there's some amazing people. You know we work with people like Rob McInnes and others that you know are great. I mean, they're they're the ones we don't want to be up against in a negotiation and hopefully Rob feels the same way. So there are some pretty amazing people in the ecosystem. And the other one I would say is Anne Angel. You know, I mean, we worked with Anne for many, many years and again, what they're really good at is directing you to the right people to ask those questions of.

Caroline Duell: 7:34

So you're really talking here about trusted advisors for startups and people that are new, perhaps, to this space, perhaps being overwhelmed by the amount of advice they're getting in the sector. Who do they turn to and who can give them an objective view of their intrinsic value? Right, yeah, and I think again.

Michael Masterson: 7:53

You know I talked earlier today about the partnership we have with MTP Connect. It's critical. You know MTP Connect's role in the ecosystem is to try and be that traffic cop where you come to them and say, hey, look I, this is what I'm trying to do, where should I go next? And again, people like ann and rob deeply connecting the community as a we and, more importantly, what you you want to do is identify who else is in the community, both from a capital side, advice side and, again, this is why one of our most valuable intrinsic assets and has been for some time is is that relationship with mtp connect, because we trust each other and that's why we also refer our clients to come and look at funding options through mtp connect, but not just a funding option, but who are the relationships that we might know?

Michael Masterson: 8:36

You know duncan mckinnis is like an encyclopedia in new south wales. You know amelia, same um. So you've got some amazing intrinsic assets within the MCP Connect that people essentially get free access to just by picking up the phone and saying, hey, I'd like some help.

Caroline Duell: 8:50

Perhaps, brett, I'll ask you. In the workshop this afternoon you've been asking some of these startup companies and innovators who are moving along the development pathway with their medical device products to do a 30-second pitch about their intrinsic value. Can you give us some tips on what does success look like? How can you nut that out in 30 seconds?

Brett Kensett-Smith: 9:13

It's really hard that's what I say, particularly when we did put everyone on the spot. It's the sort of thing to nail a 30-second pitch actually takes time and curation of language and getting to the nub of things. So we were a bit mean on the group. Now most people went over a minute, but never mind, it was all good fun. But the key thing is to keep remembering what it is. It's an introduction. It's not hey, do you want to buy my company, it's starting a conversation. So if you can really get out a few key things in those first 30 seconds to get people excited and on the hook, then you can worry about building that relationship again with the people who you're trying to educate about your business and then going deeper.

Brett Kensett-Smith: 10:03

So, starting with really simply, what do you do? And the what do you do is not a 20-page journal article submission. It really is really short and succinct. It's, you know, 10 words what do you actually do? And the second part is what's the unmet need? Why is someone going to buy your product? What's that unmet need that you're trying to to fulfill? That's part two. Third one is particularly because today we're talking about, you know, getting interest from, from external capital investors is how are you actually going to derive revenue that's going to give them a return on their investment? That's one thing that's often missed in information memorandums and pitches and so on is actually letting the investor know how they're going to get their money back. So what's the market look like and why are you going to take part of it? And the last one is and that comes back to that intrinsic asset value proposition, which is what assets do you have in your kit bag that are going to either stop or prevent followers coming?

Caroline Duell: 11:08

in and taking your market and, Michael, do you have anything to add to that? That pitch advice for startups?

Michael Masterson: 11:13

Yeah, I think, as we talked about today is don't pitch explain. And I think this is a really key key part of that sort of that discussion proposal is that first sort of 30 seconds is how do I engage you in a conversation? And the better and more succinctly you can do that, the more likely it's going to generate interest and intrigue from the other party to say, oh, tell me more. And you know, as the other advice that we quoted today is, you know, if you want advice, ask for money. If you want money, ask for advice. So when you take people on that, that journey, and really that's the first 30 seconds of the start of the conversation as to what you do, and then that lets them, oh, let me ask you some questions, and then you know to follow on from that first 30 seconds is really the next three minutes as well. How do you answer those follow-on questions in a way where that person's ultimately seeing value in what you do, whether it be by way of the product or service, the customers or them making a return on their money or ultimately becoming the dominant player in your sector? Because if you do that correctly, people will normally want to give you their money. In fact they will almost beg you to take their money. And at that point, from the company's perspective, who's receiving that income? They can now sit back and let's say they've got 10 different investors and look at well, okay, you're bringing capital me, but what are the intrinsic assets you're also bringing to me? What are the networks, the relationships, et cetera?

Michael Masterson: 12:40

And the example I gave is you know the easiest way to increase someone's valuation by one, if not two, zeros. You just put Warren Buffett on your board, and that one's pretty hard to kind of argue against. Oh yeah, so my point there is that it's not that he's investing money or he's doing anything else. He hasn't even agreed to buy the product or the service, but he's essentially putting his brand around, your brand. To brett's earlier point. So again it's if you play the game the same way everyone else is playing, then you will fall in the same pitfalls. So you've got to differentiate yourself, because these investors they could be receiving, you know, 20, 100s a day, and so you've got to be different. And you've got to do that in that first page, in fact, ideally just one page. This is basically why you should have a conversation.

Caroline Duell: 13:22

What are you sort of seeing out there in the biotech midtech space at the moment? Is there interest for new midtech and biotech innovations or are you seeing any trends around investment in the space?

Michael Masterson: 13:41

I'm going to start with what I see as a key problem in the space. As we said at the MTP conference last year, the point I finished with is probably the best point. If you've come out of a research lab or kind of a scientific background, you're normally not standing on that burning platform. You're getting paid, you've got a job and now you're in a startup or an early stage company and most investors will give you 12, maybe 18 months worth of cash. Not many research projects conclude in that timeframe, so the speed of pace is often one of the biggest impediments, and so when we hear, in particular, from investors say, oh no, I'm not going to invest in biotech, again it's a bit like saying I don't believe in patents.

Michael Masterson: 14:19

Both extremes are wrong and I think, as we've seen with you know, companies like agros and uh, many others in this space of which we're working with you know these are absolutely billion dollar companies, but what they traditionally are not great, as they're great at the science, but they're not great at the explanation. And again I come back to that's one of mtp connect's role is to, you know, give these researchers, these amazing people who create great products and services, the ability to explain through working with either people like ourselves or others to investors, so that investors can give them money. So I don't think there's an issue with capital in this market. In fact, I think it's quite the opposite. I think the problem is the same problem that's always been around is that they're not great at explaining. Or you have the other extreme which we use today is Theranos, who were great at telling the story and the narrative, but couldn't actually deliver on the science, and so both are equally as bad.

Caroline Duell: 15:08

Do you have anything else to add to that, Brett?

Brett Kensett-Smith: 15:10

From a technical view, of trends, for example, I'm not seeing any necessarily, I mean other than the obvious, such as artificial intelligence. However, having said that, because there are quite a few from a diagnostic point of view at the moment, but they've actually been around for a while we worked with a company five, six years ago who was working on a software platform for using AI for early diagnosis of lung tumours. So it's not five or six years ago it doesn't sound like that long ago, but really AI has only taken off thanks to ChatGPT and so on. So from a trend point of view, that is trendy, but whether it's long-term, sustainable, et cetera, you need more.

Brett Kensett-Smith: 15:56

This is where people get stuck. They've got the AI and they think it's all about the software, when in fact, give it a few years and the AI software will be writing the AI software. So it's not actually the software and it's really interesting. It's actually access to data to train the AI. If you get some exclusive relationships around access to certain data pools, that's where the value lies. So it's that aspect. And then, of course, the other thing is well, what's it replacing? What's the impact on the health system? So, if you look at a company like Artria, their software platform, which is AI-based, and they've got excellent data that they have access to. It can basically get through four times as many scans versus going through human eyes, so there's an instant value proposition right there. So, in terms of trends, ai, but I'd say it's trendy. That's what I'd say.

Caroline Duell: 16:54

You say that most companies' valuations are inaccurate. Yes, can you expand on that?

Michael Masterson: 17:00

Yeah, it's predicated on the first assumption that the valuation captures all the assets. And if the person who's done the valuation only understands the tangibles or the balance sheet, the P&L, the fixed asset register, then they're missing, in most cases, 90% plus of the value. So if that 90% plus hasn't been captured, either by just even replacement asset value or, more importantly, how those assets are going to generate future cash flow, because most companies are in the process of scaling and, in particular, if you're investing into a growth company, you're typically buying forward revenue. So if you're not telling that revenue story very well, then guess what your valuation is too low. Second of all is that if you're not talking to the right potential buyer, investor, partner, et cetera then the context is out and clearly your business is probably worth a lot more to Medtronic or Boston Scientific than it is to any of us. Third is timing. As we saw with COVID, if you were doing anything around vaccine development pre-COVID not that exciting During COVID, your valuation went through the roof. But last but not least, if you were doing anything around vaccine development pre-COVID not that exciting During COVID, your valuation went through the roof. But last but not least, if you can't explain it in a way where the other party can be able to explain it internally. It's not going to happen.

Michael Masterson: 18:13

And the reality is that if you've developed, you know, a product or a service, you're almost certainly, in biotech and medtech, not going to be taking that through to a full execution like a CSL has. And everyone forgets CSL was funded by government to begin with. You know Commonwealth Serum Laboratories. So when you've got an abundance of capital, unlimited capital, it's pretty easy to grow. So if you're in those sectors you're going to be exiting probably to a large American or European biotech medtech company. And the people you're in those sectors you're going to be exiting probably to a large American or European biotech medtech company. And the people you're going to be dealing with, as we are dealing with now, across multiple clients, they're not that senior, they're normally senior within their region but not within the company. Then you've got to enable them by explaining where the value is so that they can go and champion you internally. But then you might get to say the M&A team, depending on the value and you're hoping it's a big check you've got to get to the credit committee and potentially even the board, and it always comes down to explaining those first three. What are the real assets that differentiate you? How are you going to differentiate them from competitors? In other words, why do they have to buy you?

Michael Masterson: 19:20

And then the other classic mistake we see a lot of people make is that they go and talk to one party. They don't run a process, and it's like taking your house to auction and only having one bidder. That's not good for you. So again, that's why you normally are bought by either a supplier, a competitor, a customer, or you go through some sort of financial exit. It might be an IPO or a PE firm buying you. They're really sort of your four exit points. But again, these are sort of some of the classic mistakes is people are not thinking about what's the other person? Who's never heard about what you do? How are they going to explain it internally? And I think during the pitches today you know really demonstrated that the struggle that pretty much all of them had was explaining what they did really succinctly, let alone the other three parts, as Brett went through. So if you can't even get that first bit really short and I mean that should be under five, ten seconds then you're going to struggle with the other bit because most people have switched off.

Caroline Duell: 20:19

How do you move from pitching to investors to them pitching to you, Michael?

Michael Masterson: 20:24

You've got to offer them something that they don't think they can get somewhere else. It's scarcity. You know, everyone wants to be the investor who was first money into Google or Tesla or Amazon or, you know, microsoft, and most people talk about their wins, not their losses. Soft um, and most people talk about their wins, not their losses. And most investors have had a really bad experience, especially if they've been at it for a little while, and in particular, at the smaller in town the angel investors because they're taking the biggest risk. You know they're investing when nothing's really been de-risked. There's probably no due diligence, probably someone like us hasn't worked with them. So at that point you really are playing roulette. You're taking lots of small bets and hoping one of them pays off. So it's about again explaining to that investor why you're different. Why are they going to miss out on the next air trunk, as we talked about today?

Michael Masterson: 21:18

It went from literally people saying to Robin Kuda, go get a job, you're uninvestable. Literally people saying to Robin Kuda you know, go get a job, you're uninvestable. You know they've exited two weeks ago for $24 billion and, looking at it in hindsight, it was all really logical to us. You know, from the first call I had with Robin, I could see why he was going to attract investment. My job was to help him explain to investors, and in particular because he didn't file a single patent. And so Robin and I spent quite a bit of time actually practicing how he was going to not pitch to them but actually explain to them and start it with something quite logical, which is we've deliberately not filed a patent because we've taken external advice and this is why. And then actually just regurgitating exactly why, we said to him not to patent what he was doing.

Michael Masterson: 22:02

But to Brett's earlier point in, in certain industries, in particular biotech, medtech patents can play a really significant role, but in a data center probably not so much, because you can't detect infringement. So again, it's always about looking at it through the investor's eyes, because they're seeing lots of different things and if they're seeing, say, 20 companies in a day, what makes you special? And if you can't explain that, not just explain it, but explain it succinctly so you keep their attention they're not going to engage with you, which means you're not going to go investment, which means you're not going to be able to turn that capital into growth and then use that growth to then drive additional capital, eg you're not going to be an agross or an air trunk.

Caroline Duell: 22:38

Well, I think you've wrapped it up perfectly. Thanks. Well, I think you've wrapped it up perfectly. Thanks, michael. Thanks, brett, for coming onto the MTP Connect podcast to talk about valuing your company, pitching to investors or possibly getting investors to pitch to you. It's been a pleasure, thank you.

Michael Masterson: 22:52

Thanks for the opportunity.

Caroline Duell: 22:55

You've been listening to the MTP Connect podcast. This podcast is produced on the lands of the Wurundjeri people here in Narm, Melbourne. Thanks for listening to the show. If you love what you heard, share our podcast and follow us for more. Until next time.