Life Science Investing is Different than Software Tech Angel/VC Deals.
Companies seeking early stage investment in their biotech, life science, medical device or digital healthcare companies face al
l the hurdles that software tech companies face – and then some more. Many of the hurdles have to do with misconceptions that people have about life science investing, and others have to do with the real differences that exist in this market. Companies raising money in the life sciences have to go through all of the things that tech companies do, plus more, in able to successfully raise funding.
Life Science companies should consider attending the RVC/CBSA BioScience HyperAccelerator to help them through the process. We guarantee participants will be amazed with the quality and usefulness of this unique content that can be found nowhere else!
What BioScience Companies Need to Know
Time-Lines – there are a lot of investors who think that all life science deals take ten years or more because of the huge regulatory hurdles that have to be overcome, and that the capital requirements could be in the hundreds of millions before the company gets to an exit. These investors are missing out on lots of great opportunities. What they don’t realize is that companies rarely move all the way down the regulatory pathway before achieving exits if they’re developing a novel drug, for example. Usually the hurdle is Phase 1 Clinical Trials before a company is acquired, so the pathway can actually be shorter than for some tech investments. Also, many companies are working on repurposing existing drugs for new uses. In this case, all they need to prove is efficacy for the new use which can be a relatively short process. Devices, in contrast to drugs, can achieve FDA approval in just months in some case.
FDA Regulatory Risk – many investors who don’t understand the biotech space have heard horror stories about the capricious, costly and time consuming process of FDA approvals. While these fears are not totally unfounded, most companies pass through the process in a relatively short time and at low cost. We budget about $50,000 and six months for a 510K approval process in some cases. Angel investors have special opportunities to invest in pre-FDA approved companies because valuations typically double or triple after FDA approval, resulting in good returns for investors.
Liquidity Events (Exits) are more obvious for many biotech, medical and life science companies because there is a clear playing field with companies that are regularly acquiring companies as a part of their innovation strategies. There are enough players that companies who are intentional about crafting the best exit can create a situation with multiple bidders to result in the highest exit valuation. Even if the exit pathway seems clear to founders, their presentations should include a clear description of their exit strategy in order to bring the most investors on board.
Intellectual Property is Critical – while most tech and software companies have dropped patent filing altogether, IP is the core to creating value in the life science and medical space. Granted patents are always best, but at least having patents pending with a strong defensive strategy is critical for success. Companies will also need to be able to demonstrate that they’re not infringing on the patents of others. We’ve seen companies who we’ve found to be infringing on patents which made them uninvestable. This is something that companies should research well and be able to demonstrate instead of doing a lot of work, only to have investors find that the project is dead on arrival after several years of effort.
Team Considerations – tech companies often suffer because they have a bunch of coders who’ve been working for years to come up with a product, but they don’t anyone on marketing, finance, or business strategy. Life Sciences can have these problems when they’re staffed with teams of smart PhDs who don’t have the experience or track record to be able to raise funds, transform from a research organization to a marketing organization, or to understand value creation for acquirers. Make sure your company has the appropriate finance and marketing team members on board before raising money.
Market Fluctuations – it seems like biotech is always way up or way down and the current market position may influence investors’ desire to jump on-board with these companies. Founders should be prepared to talk about trends in the industry and why their company will be providing value that either transcends the current market situations, or that the investment cycle is expected to be long enough to stretch beyond any current market challenges.
Marketing Strategies for life science companies are going to be significantly different than for tech or other physical product companies. Some life science companies build an expensive and time consuming strategy that involves hiring and training a sales force who then try to forge relationships with doctors and hospitals in competition with some of the largest and well funded companies in the world. If the company survives that process and gets to an exit, then the first thing that the acquiring company is going to do is to fire all those salespeople and add the company’s product line to their own and get their own sales people up to speed on marketing it. So, life science companies should think about how they add value to their acquirers. Is their value primarily the product itself, the team, the market share, the sales organization, research under way, or something else? Make sure that you’re not pouring resources into something that won’t create value for your acquirers. With that being said, companies will need to establish a market presence in order to validate that the product is of interest to customers and will be a success in the market. This benchmark may be achieved with as few as one thousand sales. These can be achieved through forging partnerships with sales organizations rather than starting from scratch.
Valuation for life science companies seems to have a significant spread which may be caused by inexperience on the founders’ side, or by the uncertainties in the market. Companies that want to raise funds quickly should price their shares competitively with other startups and keep in mind that not every startup ends up with a five hundred million dollar exit.
Life Science founders have a lot of opportunity in front of them if they understand their market and how to take advantage of it. Founders should be prepared to dispel myths and to focus on the clear strategy they have for product development, regulatory strategy, marketing and exit. These will lead to most investor interest and fastest pathway to funding. Life science and medical investments currently comprise about 30% of venture capital investment which shows that investors recognize the opportunities that this space brings. Founders and investors alike should have a clear understanding of the differences between life science and software/technology investments and how to take advantage of them.
All companies raising capital should be well versed not only in the specifics of their industry, but should also prepare solid strategies and complete the following steps before starting their fund-raising activities.
Ten Steps for LifeScience Companies to Prepare for Venture Capital
- Exit Strategy Canvas – identify comparable transactions in the market for both dollar amount and multiples of revenue. Identify early, mid and late stage values the company presents to acquirers. Identify who the acquirers are at each stage of the company’s development.
- Business Model Canvas – this is the core business strategy document that allows a company to understand their unique value proposition, their customer, the channels used to reach customers, core metrics, partners, and how they spend and make money. This one-pager is key to understanding the key concepts behind any company.
- Strategic Plan – Not your grandpa’s strategic plan, but a two-page document that provides a roadmap from where the company is today through its growth. This is the difference between success and failure during Q&A with investors and for the company overall! Research shows that companies with written strategic plans outperform those without plans by 65%.
- Go to Market Plan – people take this for granted when they’re heads-down in the science or tech development, but this is the key risk companies face – getting customers to actually buy the product. Without a strong go to market plan, you’re out of luck with investors who are always concerned about this key risk.
- Proforma – you need more than a great idea to raise money, you’ll need to model out your use of funds, needs for capital, revenues and expenses. A good detailed proforma that is well researched and validated is a must for planning your business and for determining your capital needs and valuation.
- Finance Plan – you need to know how much to raise now (this is harder than you think) as well as your future raises between now an exit. You’ll need to know this to help model your cumulative dilution and to understand what the major milestones are that you’ll need to achieve at each level of funding.
- Valuation – let’s make this simple. You can’t raise money without knowing your valuation, regardless of whether you’re using equity or convertible debt. Go through five valuation models and play them off of eachother to have a defensible position when it comes time for negotiation.
- Term Sheet – this is the key document used in negotiating the deal. Make sure that you’ve got a term sheet in your pocket before you meet with investors so you have a solid understanding of the key terms and how they’re used in venture deals.
- Executive Summary – When investors ask for information, they’ll want a two-page executive summary and pitch deck. The executive summary has all the core elements of your company in a concise format that investors can use to determine their interest in moving forward.
- Pitch Deck – when you get in front of investors you’ll need a pitch deck to present your information. Get this done professionally so that you can communicate effectively in a highly competitive capital market.
Life science companies can get templates, education and mentor assistance in creating all of these in a two-day BioScience HyperAccelerator hosted by Rockies Venture Club and the Colorado BioScience Association. The two day workshop is $995.00 per company and includes a one-year membership in the Rockies Venture Club for the primary participant and a free subscription to the IdeaJam platform to help companies securely get feedback and input on their Provisional Patent Application. Companies using the IdeaJam platform can file patent applications in a fraction of the time and cost of using patent attorneys.
Apply to Join the BioScience HyperAccelerator here ===> https://rockiesventureclub.wildapricot.org/event-2614776
The Next Session is August 29-30th in Denver. Apply by August 22 for preferred admission.