DermaCare Essay Example

DermaCare Essay Example DermaCare Essay DermaCare Essay Headquartered in Livermore, California, Deer macabre was a start-up even true that planned to market its There unclear acne-treatment device d directly to consume mere using direct response television Scimitar was Dressmakers CEO, and he h and his co founders, Lu Uzi Dad Silva and George Choir were excited AIBO UT the company NYSE prospects. Early clinical trials show wed that the Thermonuclear acne device made pimp apples disappear twice as quo quickly as those left untreated. With those results in hand, Iconic mar and Chi hoi approached angel investors, including Silicon Valley-based V Band of Angels, to raise a Series A ROR undo. Just beef re Thanksgiving vine, the Band Of Angels sent Scimitar a term sheet that offered the company NY $1. 5 million on, assuming a $4. 5 million n pacification Eng valuation. Shortly thereafter, the CEO unexpectedly received d a competing Eng term sheet from Foundation Capital, a venture capital (PVC) firm where his good friend and form mere businesses school classmate Charles Mold was partner. The Vics term sheet offered the com many $4. 0 million in fun ending, assuming a $7. 65 million fascinating value caution. Mold owe structured d the proposed d deal so that Daydreamer would receive e$l million on up front an ND the remain ender after thee Food and Drug D Administration (FDA A) gave Dermatome clearance to market its acne deep vice. Scimitar was in a quandary. The angel and PVC offers were markedly different, and Scimitar was still deciding which one to t recommend d to Dad Silvia and Chi. On O first glean once, the angel term sheet seemed Moore attractive. It offered thee level of fun ending the com many had asked for with h less who whether the $11. 5 million was w really ad adequate to get the dilution. However, the CEO wondered company past the next hurdle. The clinical trials were taking longer than expected, which would w delay FDA paper oval; and thee manufacturing costs for the device were comic Eng in higher than anticipated. On en thing Scimitar knew for certain: He H was eager to close the financing ROR undo. The corn many was running short on cash an ND had recently increased its monthly burn rate after hiring its first employ eye-?an Eng ginger. Furthermore, Deer macabre was at best several months from launching Eng its There unclear device, and a com imitative prod duct-?the Ozone Zit Zapper-?had already beaten them to market. Scimitar a was also ready to get a paycheck; he h had spent the last year working on 0 the Deer macabre venture without pay. Jasper barked at the front door, clearly anxious to get outside De. As mar thought about the or out they woo old take aura undo the tree-lined neighbor Rhoda, he decided to vary their usual walk to avoid his friend Mallows ho use a block away way. Professor or Richard G. Ham mummers and Research Associate Lauren Barley prepared d this case. HOBS cases are developed solely as the basis for class discussion. Cases are not in intended to serve ass endorsements, so urges of primary data, or illustrations of effective or ineffective management. Get 0 2007, 2010 President and Fellow of Harvard College. To order copies or request perm mission to reproduce materials, call 1 -8800-copyright 7685, write Harvard Busing news School publish hint, Boston, MA 021 63, or go to Hobs. Hard vary. Deed. No part of this publication n may be reproduce cued, stored in a retrieval system, used in a spread dishes, or transmitted in any form or by any mean ins-?electronic, mechanical, photocopy Opining, recording or o otherwise-?with hoot the permission of Harvard Busing news School. This document is authorized for use only by Rachel van Muenster in Entrepreneurial Law and Finance taught by Rafael P. Ribs, at HE OTHER from February 2015 to March 2015. 808-064 Daydreamer: Zapping Zits Directly Daydreamer Expounders Luis Dad Silva Dad Silva, a native of Canada, received a PhD in physics from the University of British Columbia in 1988. Soon thereafter, Dad Silva moved to California for the opportunity to work with the worlds most powerful laser at the Lawrence Livermore National Laboratory (LEN). By 1997, Dad Silva was ready for a new halogen. He and his boss then started the medical technology program at LEN, and Dad Silva explained his role as its associate program director: Our mission was to take technology and patents developed at the lab and transfer them to the medical industry. My first experience was to pitch some technology the lab had for treating strokes. We visited some Vs., and eventually a group of Vs. found a CEO and formed a startup to license and commercialism our technology. I was the science guy responsible for the patents and technology, and my involvement with the company lasted about year until the start-up grew up and took over the opportunity. Dad Silva continued to grow the medical technology program within LEN, earning a Federal Laboratory Consortium award for excellence in technology transfer in 1998. But Dad Silva left the LEN in 2001. As he recalled, Increasing security concerns at the lab arose, which made growth more difficult. Bureaucracy began to slow everything down until I was doing very little real science and very little real business. Dad Silva and two colleagues started a technology incubator in 2001 to form companies around ideas the three tainted. Two of their companies, Tetrahedral Systems (a plastic surgery device company) and Imaging Corporation (a consumer products company), were already operational and had received funding by 2002. George Choc Choc met Dad Silva in late 2001. Choc had graduated from University of California, Berkeley, with a BBS in electrical engineering and computer science. After receiving a law degree from the university of California, Los Angels, Choc joined the law firm Wilson, Session, Goodrich Roasts in 1 990 and worked primarily with PVC-backed medical device start-up companies in the Bay Area. In 1995, Choc hopped the fence, becoming a venture capitalist with Indenture Associates, a firm founded in 1986 to fund seed and early- stage investments in medical technology. It was at Indentures that Choc met Dad Silva, who pitched Choc several companies Dad Silva was thinking of incubating and running. Choc described their first meeting: Luis came to me with some deals, which I turned down. But I must have done it in a reasonable manner, because we kept up a relationship, talking at times about various medical technologies. One of the ideas Choc and Dad Silva discussed was using lasers for acne applications. There were many forms of acne, ranging from blackheads, whiteheads, and pimples to severe forms such as cystic or modular acne. Dad Silva, whose scientific background was with lasers, had seen dermatologists use laser technologies in the treatment of mild to moderate inflammatory acne, most commonly referred to as pimples, breakouts, blemishes, or zits. Choc summarized the science behind the laser treatments: Lasers treat acne in two possible ways. At certain wavelengths-?or colors-?lasers go into the skin tissue and generate oxygen radicals, which kill the bacteria and reduce inflammation. At other wavelengths, lasers are basically heat sources that reduce sebum [an oily substance produced by certain skin glands] production by killing and reducing the number of se baceous glands. This decreases the likelihood that excess sebum clogs pores, which can lead to acne. 2 Entrepreneurial Law and Finance taught by Rafael p. Ribs, at HE OTHER from However, a laser was an expensive solution for treating acne. Dad Silva and Choc believed they could replace a laser, which cost between $20,000 and $50,000, with a $5 to $10 heater using a thinning resistor (a thin piece of metal that converts electrical current into heat). As Choc explained, We believed our device could offer similar therapeutic benefits to a laser, but at a much lower cost. Peter Scotch Scimitar Born in Switzerland to a Swiss father and Greek mother, Scimitar earned a bachelors degree from Brown Leistering and an MBA from Harvard University in 1993. By 2002, Scimitar joined Weber Communications (a software company that provided on-demand collaboration applications such as web conferencing), where he was vice president of customer success. A couple of years later, Scimitar left Weber to become vice president of sales and marketing for Lives Inc. Scimitar recalled his experience there: Lives was a virtual call center, and I ran revenue, sales and marketing, product management, and account management. I learned the direct- response television business there. I got to know products like proactive [a three-step skin-care system for clearing and preventing acne], the George Foreman Grill, and Jack Lane Juicer. We tend to think of direct-response businesses-?with their infomercials-?as real schlock businesses. But I watched these companies come up with product ideas, put them on TV, and the phones were ringing off the hook. I learned that when you matched the right products with the right audiences, they were great businesses. A few months into his job at Lives, Scimitar had Choc over to his home. The two had become good friends several years earlier while organizing a school camping trip for their same-aged daughters. Scimitar described the conversation they had in October 2004: George said he wanted to start distributing a printer that could print any JEEP image you wanted on a fingernail-?like a flag or a picture of your kids or dog-?that Luis developed for his Start-up company Imaging. He wanted to know if DRAT would work for it. Old George it was never going to fly. If he looked at the number of people who owned computers, who also watched TV infomercials, and who bought products on TV, there wasnt a big enough market. Plus, the cost of sales was going to be $45 at best, which meant theyd have to sell it for $250 to make any money after marketing and fulfillment costs. A little later into the evening, the two discussed another business opportunity. Scimitar continued: Then George said, What if had a product with a much lower cost of goods-?that was under $10 to manufacture-?that could help clear pimples faster? I replied, Ill write you a check for $100,000 right now if it works. George couldnt understand why I would do that. Coming from his world of PVC-backed medical device start-ups, George assumed the acne device would be sold to dermatologists using a specialized sales force. There are 7,500 dermatologists; the product would sell for $400; each patient would buy a $30 replaceable tip; at the end of the day, it would be a $50 million business. I responded, Why waste your time with 7,500 dermatologists? There are millions of people with acne. And, at a $10 cost of goods, could sell it for $49. 95 on TV, all day long. Sell a million at $50 a pop, and that starts to look more interesting. Then make it two million, then three million. Add some topical acne treatments to the product line and turn a $50 sale into $150. 3 Company Background By November 2004, Dad Silva and Choc were ready to form a company around their Thermonuclear acne-treatment device. Choc sought Scimitars advice as they began their CEO search. Choc recalled, l had largely forgotten the discussion Scotch and had had the previous month. Hough Scotch might know someone he could recommend for the CEO position. I was surprised when he said he wanted the job. As Scimitar took Choc down to Los Angels to meet with gurus in the DRAT industry, Choc warmed to the idea of having Scimitar as the companys CEO. Choc recalled, The head guru didnt throw us out, which I thought was a good sign. In fact, he gave us a allowable offer for the company. I could have been offende d. Instead, thought, Wow, there must be something there. And you know what? Scotch could make a good CEO. Dad Silva quickly agreed, adding, All Scotchs previous employers had glowing comments about him. He also really believed in the product-?he tested the device on himself, and he was ailing to put his own money in down the road and not take a salary until we could raise money. Scimitar remained at Lives over the next five months but began working on a business plan with Choc. In late November, Choc and Dad Silva filed the articles of incorporation, calling their new company Daydreamer. The two contributed $10,000 each for early product development and intellectual property work. They wrote and filed provisional patents on their idea by the end of the year. The Thermonuclear Acne-Treatment Device In January 2005, Dad Silva began early concept work on the first prototype of the acne device. He farmed the project out to a group of Russian nuclear scientists he had met while working at LEN. The Russian scientists chose equity in the company instead of getting paid for their services. Scimitar commented: These guys are gods in the physics world. There are material scientists, electrical engineers-?all under one roof. Luis told them what we wanted, and what it had to do. In two weeks, We had the first concept. Luis burned his face, but that was part of the development cycle. We tested a whole bunch of different capacitance capabilities, and wed sit there and say, Wows that feel? Gaga! By February 2005, the first prototype was ready for testing. The device, which was AC powered, used a very short blast of high heat on the surface of the skin to reduce the inflammation and redness caused by acne pimples. It was a big box with knobs that controlled the four temperature settings, ranging from 60 degrees to 1 20 degrees Celsius. Two wires ran from the box to a thin- film resistor that was applied directly to the skin. Dad Silva called it the Frankincense version of the device. Choc added, l had friends who told me, Dont get near me with that thing. Nonetheless, the three found some ailing family members (including Cohos wife and daughter), friends, and colleagues who tried the device, accumulating anecdotal evidence that their invention worked. Business Model In spring 2005, Scimitar fine-tuned Dressmakers business model. His research indicated that roughly 45 million people suffered from acne in the U. S. Lone and spent approximately $2 billion on over-the-counter (ETC) treatments, many of which were ineffective. ETC treatments could be classified as either preventative or spot. Preventative treatments were designed to clean skin to prevent pore blockages (e. G. , daily cleansers or exfoliates) or deliver medication (e. G. , benzene peroxide or salicylic acid) to the surface Of the skin to help prevent n ew acne breakouts. Topical spot 4 treatments were used to clear pimples faster once they had occurred. Scimitar commented, There was no clear evidence that any of these spot treatments worked. They were basically marketed as hope in a Daydreamer planned to sell the Thereafter product line, which included the acne device (spot) and a line of topical acne treatments (preventative), directly to consumers using infomercials that targeted women and mothers of teens with acne. Scimitar explained the companys rationale behind using DRAT to distribute its products: We believed the potential market was much larger by selling our product line directly to end users rather than using a specialized sales force to call On the 7,500 dermatologists who would then sell it to their patients. We debated using the retail channels for distribution, but a typical brand-management company spends $50 to $1 00 million to launch a consumer product at retail. It gives 40% to 60% of the profit away immediately to the retailer who is selling it. And the company still needs to spend money on building wariness of its product. I thought we could sell Thereafter directly to the consumer using DRAT. Our marketing and fulfillment costs would be high, but they wouldnt equal the amount we would give away to the retailer under the first scenario. According to Scimitar, there were several keys to success in the DRAT environment. He described what these were and why Thermonuclear was well positioned for success: First, there has to be a large population of people who want or need the product, which means it typically has to appeal to one of three core needs: l want to feel better about myself-? or look better; l want there to like me more; or l want to save time and be more efficient. Second, the product has to be demonstrable with compelling testimonials.