Life Science Investing is Different than Software Tech Angel/VC Deals

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

  1. 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.
  2. 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.
  3. 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%.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.  
  9. 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.
  10. 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.

 

Rockies Venture Club

Your Startup Just Cashed its First VC or Angel Check – Now What?

Rockies Venture Club Post-Funding Strategies

After the first angel or VC funding round closes and the checks are cashed, most startups go through a transformation, like from a caterpillar to a butterfly, that makes them fundamentally different than a pre-funding company.  CEOs who fail to realize the changes that need to happen will end up facing challenges they did not expect.

Here are a few changes that need to take place after funding:

  1. Create a budget.

    No – not your proforma with all the optimistic sales projections – this should be a budget with numbers you can commit to.  Many companies feel like having a million dollars in the bank is an unlimited blank check to buy fancy new furniture or hire a dozen new employees. But all those things drain cash faster than you think and having a written plan for minimizing your burn rate and maximizing the runway to your next raise (or hitting break-even) is going to be an important part of your success.  Running out of cash before you hit the milestones needed for the next raise is a death sentence for your startup.

  2. Update the Professionals that Serve Your Business.

    If you’ve had your Aunt Bertha doing your books, it’s probably time to upgrade to a CPA who can provide you with the advice you need to keep from making mistakes.  A CPA is going to be important once you need audits as well.  Your legal team should now include several different legal specialties including securities, Patent and IP, and general business and contracts.  You probably got your legal house cleaned up in order to get funding and now is the time to get the right people on board to keep it that way.  Bankers, insurance, and other advisors are all going to be able to scale with you as you grow.

  3. Communicate with Investors.  

    Investors notice when you stop calling them after the check has cleared.  This is a bad thing for founders – especially those who are going to need to raise another round.  Future investors will contact first round investors during diligence and a good relationship is important – even more so if you hope to have follow-on rounds from your first funders.  Monthly reports including good and bad news, financials and metrics updates are a minimum.  It’s better to stay on top of the investor relationship and by communicating frequently, investors are more on-board with what’s happening.  Use a platform like Reportedly.co that allows you to see who has opened your messages and also allows investors to comment and offer help when needed.

  4. Balance Growth and Resources.

    You’ve been pitching your $100 million top line you expect in five years, but now it’s time to match your resources to your growth targets.  Grow too slowly and you’ll never raise another round (so you’d better hit break-even) and grow too fast and you’ll run out of cash before you hit the benchmarks for Series A and then game-over.  Perfect balance is what you need for venture success.

  5. Update your Exit Strategy (Goals and Contacts)  

    During your pitch everyone wanted to acquire you, but now it’s time to start executing on your Exit Strategy.  You should include the update in every board meeting and monthly update.  Start making contacts with those companies for whom you create value early on.  If they don’t know who you are, you’re not going to get the multiple offers you need for that 5X multiple you were lusting after.

  6. Metrics.

     Ok, you think you’re growing too fast to waste time on shit like metrics.  Fine – go ahead and be mediocre.  The best companies are crystal clear on what success looks like, how to measure it and what their goals are.  Without metrics, your team is mis-aligned, your investors are in the dark, and really – you haven’t got a clue about where you’re going.  You don’t have time not to do this.

  7. Strategic Plan

    It’s not set in stone, but without a roadmap you’re bound to get nowhere fast.  Companies without at least a lightweight two pager plan find themselves going through expensive pivots left and right to try to figure out what they could have done in the first place with a good planning process.  BTW, statistics say that after three pivots you’re out.

  8. Change from Tech Culture to Sales Culture.  

    So far, success has looked like getting your MVP launched.  You are three founders and a dog coding away in a basement somewhere, but now you need to change gears and become a sales and marketing company with a tech foundation.  Too many companies can’t get out of their tech roots and they keep on coding, but never figure out how to sell.  Break out of your comfort zone and start selling.

  9. Speed up.

     You’re on the clock now and capital is the most powerful accelerator out there.  You’ve got to code fast, sell fast, grow fast.  Companies that think they can continue on their old pace don’t get venture capital.  It’s a race against the clock with ROI multiples of 10X in five years, 25X in seven, there’s no time to waste and the slow starters won’t ever get to Series A.

  10. Investors are your partners.

     Now that the deal has closed, and all the negotiations are done, it’s time to tap into your investor base for help, connections and advice.  Keep them in the loop and engage them – they’re worth a lot more than just capital.

 

Good Luck

Post funding transformation is hard and unnatural for most founders.  Pay attention to your successful peers and remember that getting rounds of funding are not what this is all about – work towards creating a great, meaningful company with huge value for your exit partners!

 

 


Peter Adams is the Managing Director of the Rockies Venture Fund, Executive Director of Rockies Venture Club and Co-Author of Venture Capital for Dummies, John Wiley & Sons, August 2013.  Available at Amazon.com, Barnes and Noble and your local bookstore.

Top-10 Twitter Action Tips – Don’t Read If You Don’t Get Twitter or Care To

Written by Tom Cross @techtionary

I gave a talk on Twitter at Rockies Venture Club Hyperaccelerator. This is a week-long effort to help startups understand everything they need to do to not fail or at least not fail as fast. I do the Twitter for @rockiesventure which topped 10K (click on image to follow RVC) this week. The reaction from the audience went from skeptical to being annoyed at even the idea. Now I can’t change their hearts and minds about Twitter but maybe, just maybe get them to understand marketing in terms that most of them were male – sports. Coaches of nearly all sports use “playbooks” to guide their team hopefully to victory. There are hundreds of plays like marketing plans, coaches and marketing leaders try as many as they can. Some work though many don’t because the other team (like customers) change their mind, are fickle or just don’t play the way you want them to play. In addition, sports teams like customers change every year or even everyday with new ones being added and old ones retiring changing the game landscape (marketing) in ways no one can understand. One must also realize that any playbook or marketing plan needs to change as often as customers do. In the end, my class was successful from my perspective as like President Trump is doing with Twitter allowing companies to connect directly to their customers and supporters.

easy

not easy

Here is the summary of the slides below –

  • If you still ask “why” Twitter, the answer is both easy and hard.
  • The easy answer is – it is the new way to connect with your customers and provide customer service as they don’t complain by just calling you they increasingly complain via Twitter with the famous hashtag #fail which can go viral.
  • If you think it is just for promoting your corporate blogs and blather, you are likely missing out on how customers really feel about you, this is the hard answer because customers just buy from someone else.

Toms’ Top-10

Use as a guideline but the must-haves are 1-strong thought leadership, 2-stronger calls-to-action and 3-persistent constant delivery.

1 – #1 it is a social network, not a broadcast network, people want to feel listened to not just talked down to.

2 – Write compelling customer-centric “thought leadership” guiding them on ways to improves their lives, not just about your solutions or views.

3 – Write compelling CTA-calls to action to get them to not just listen but act.

4 – Engage-engage and engage more with others not just post your own “selfies” though as often or always add a pic, gif, or video to your post.

5 – Like exercise do it daily and it’s a marathon, not a sprint – no just once and done and certainly not use tools. While stair master can help with exercise, you still have to walk-the-walk yourself.

6 – Lift all boats, helping others helps you.

7 – Cross post on other platforms – realize your customer may be elsewhere.

9 – Integrate all website content and have an overall thoughtful content in all formats and platforms.

9 – Use an EDCAL-editorial calendar to manage and coordinate content over the year.

10 – Remember followers also have followers and so engaged with all.

I don’t pretend to have all the answers or know-it-all. My mom gave me a business card a long time ago and it said, “if you think you know what’s going on, you’re probably full of sh–.” Alas, I do help clients grow their Twitter presence and believe it works it if you work it right like above. Thought leadership, CTA-call-to-action and constant promotion works for Starbucks, McDonald’s and others. Even Google is advertising now as they want to expand their own piece of the swamp.

Here are a few slides from the presentation and click on any for the complete presentation. If you like I will walk you through it or at least answer any question if you email me and we can setup a time to talk on the tele or Skype. I have proven clients and references or if you prefer you can also contact @evankirstel he can help you as well.

rvc2

rvc

 

 

 

Marketing Dilemma: Time and Capital is Key

The marketing dilemma in todays start-up world can be defined by the need for capital to increase marketing, but also the need for marketing to gain capital. Read more

Impact Investing Night 2016

Impact Investing Night 2016: Keynote Speaker

Each Watson semester is an intensive fifteen week program in which scholars receive weekly mentorship and coaching sessions, free international legal support (through a partnership with Thomson Reuters), training in the hard skills and frameworks to take their ideas to the next level, and a community of peers that will last far beyond Watson. We aim to be the Olympic training ground for next generation change makers and you can expect the experience to be both challenging and fun. Below are four key elements of each semester. Speaker Eric Glustrom, Watson University’s founder, will be discussing how to measure the impact of an investment.

dBMEDx is a medical device company waging war against health-care acquired infections . We recently launched the BBS RevolutionTM, a next generation bladder scanner that battles both CAUTI and patient-to-patient transmission while delivering the quadruple aim of better outcomes, lower costs, more satisfied patients and more empowered providers. We are seeking growth capital to support our efforts to exit in 3 – 5 years. We have FDA clearance, CE mark, 5 patents and we’re generating revenue! Learn More Here

Intuitive Innovations delivers products and services for older adults that improve quality of life, independence and safety. Products combine technology and universal design that’s high tech on the inside, intuitive on the outside, and fashionable. Intuitive’s first product, the I Love You Band (I?U) comprises a watch, a PERS (personal emergency response system), and multimodal communication capabilities which collectively improve connectedness while providing peace of mind to loved ones. Learn More Here

Revolution Systems develops and sells the Revolution, a sorting line that is configurable, scale-able, self balancing and upgrade-able. Incumbent suppliers offer specially designed systems on a project basis that are elegant, but expensive and rigid. Revolution Systems’ focus on local communities and businesses, has resulted in an affordable system that can grow and adapt as the needs of the program change. Focus on smaller markets and creation of a flexible product allows us to achieve scale more easily than our competitors, reducing product cost to put recycling within reach of small communities and businesses. Learn More Here

Wave Solar is making an Impact with our Solar Steam Engine. A complete energy system for your home or small commercial building that provides electricity, heat, hot water and air conditioning, all from solar thermal panels plus natural gas. Given the back-up energy, the system will work in bad weather without storage, or work all night long as a back-up generator if the power grid is down. One percent of our systems will be installed for free in schools in third world countries. These systems will be reconfigured to purify dirty water into drinking water, provide a refridgation for a school, and run off garbage as a back-up energy source. Learn More Here

This event is available to be watched via livestream!

Why Venture Capital may not be a Silver Bullet for Startup Funding.

alternatives to venture captialVenture capital is a great solution to many startups’ finance problems, but it’s often not the best solution and, even when it is the best solution, it often works best as a part of a suite of financial solutions rather than a silver bullet that solves everything in one move.

Venture capital, including angel investment, is the most expensive type of capital out there. So why would so many people be intent on going for the most expensive option when others exist?  A typical VC is looking for a return of 60% or greater on their investment – compounded annually.  That means that at three years they want 4X. At five years it’s 10X. At seven years it’s 25X and at 10 years it’s a whopping 100X return on investment.  All of these are 60% compounding returns.

Venture capitalists need big returns to help offset their big risks.  About half of their investments might result in a complete loss of invested capital, so they need to have investments capable of being home runs in order to pay for all the losers.

There are different ways to create a capital strategy for startups who want to both grow fast, but minimize dilution and reduce the cost of capital.  Rather than using just one very expensive type of capital for their startup, they may use a suite of different sources that are appropriate to the phase of development.

Early Stage – Before VC

Early stage companies have many sources of capital available to them, even if they don’t know it.

SBIR (Small Business Innovation Research), Advanced Industries Proof of Concept and many other federal and state grants are available for early research and proof of concept.  Often these are expensive research projects whose risk is much greater than can be justified even for venture capital.  Startups that use these sources of funds can increase their value and decrease their technical risk without any dilution to the founders.

Another source of early stage funding comes from specialty service providers.  Attorneys and CPAs will often defer compensation or work out an equity deal in exchange for early work.  You might be able to get your patent filed for zero out of pocket costs using this kind of deal.

In Revenue

Companies that are in revenue have lots of new non-VC sources of funding available.  Consider accounts receivable finance to cover your rapidly growing need of cash to carry AR through thirty to ninety days before it gets paid.  Some lenders will even lend on purchase orders so you can get the capital you need to buy the components you need to build your product.

If your product is a SaaS (Software as a Service) platform, then your cost of goods is going to be people, not product.  Consider using Equity Compensation for all or part of your payment to your developers.  There are both individuals and development companies who will swap a portion of their compensation for equity.  You’ll need to have a good handle on your valuation, but why not give equity directly to your developers rather than give it to VCs who give you cash which you then turn around and give to developers?

So, there are many more types of finance options available to you than can be described here.  The main point to remember is that you are not required to use just one mode of funding.  Look at all of the available sources and design a suite of solutions that provides the best solution to your situation.

To learn more about how to use creative funding along with venture capital, or instead of it, consider attending the RVC’s Colorado Capital Conference November 15-16, 2016.  If you’re not in Denver on those days, you can register to participate in the conference via live-feed.

More information and registration at www.coloradocapitalconference.org

Colorado Capital Conference

 

 

 

Peter Adams

 

Peter is Executive Director of the Rockies Venture Club, Managing Director of the Rockies Venture Fund and teaches in the Colorado StaVenture Capital for Dummieste University MBA Program.  Peter is co-author of Venture Capital for Dummies, (John Wiley & Sons 2013) Available at Amazon, Barnes and Noble and your local book store.

 

 

 

Valuing Startup Valuations – Webcast

Understanding startup valuations is often a complex and murky process.  Peter gives you great insights on what you think you are worth, what you are really worth and also importantly gives you guidance as to understand valuations from the startup to exit.

Valuations

Valuations

The latest addition to our educational webinar series, covering startup valuation, is here…
Peter Adams, Managing Director of Rockies Venture Fund and Rockies Venture Club, presented “Understanding Startup Valuation”, covering the fundamentals of valuations and tools entrepreneurs can use when developing their own models.

After founding/co-founding and investing in multiple successful startups, Peter shares what he’s learned – don’t miss out on watching the replay if you haven’t done so yet!
Preview of topics in “Understanding Startup Valuation”:

How to determine valuation on an early-stage, pre-revenue company
Why traditional valuation methodologies don’t work for early stage companies
Why an exit strategy is required in order to conduct a valuation exercise
Valuation methodologies that CAN be used as part of your model
Tools and resources you can use in developing your valuation model

 

Attractive Pitch

The first pitch to investors is in many ways the company’s first date. It is the investors first experience with you and your company.  The end goal is to receive a second date. Yet, with many top notch pitches coming through it takes more than just a solid proof of concept and innovative idea to gain interest. Read more

Top Questions Angel Investors Will Ask Entrepreneurs

It’s highly important for entrepreneurs to be prepared when they pitch their startup company to angel investors. Before the pitch, entrepreneurs should prepare by anticipating questions angel investors might ask. If you don’t have thoughtful and reasonable answers, it will definitely reduce the likelihood of an entrepreneurs company getting funded. We’ve prepared a list of key questions angel investors might ask during a pitch.

Read more

SEC Adopts Rules to Permit Crowdfunding

Rockies Venture Club is pleased to share the news that more than three years after passing the JOBS act, the SEC has adopted new rules to permit crowdfunding.  This means that those who could not previously qualify as an “accredited investor” with $1 million or more in assets or $200K in annual earnings or more, can now participate in early stage investing.

Read more