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.

Can Women be Angel Investors?

Women make up the fastest growing community of angel investors and it’s changing the face of Angel Capital for the better.

Angel groups like Rockies Venture Club have been beating national averages for investing in women and minority led companies with 54% of our portfolio consisting of women and minority led companies vs a national average of just 14%.  But in order to balance the ecosystem it’s important not just to invest in women led companies, but to engage women angels who can help mentor startups and who can gain experience serving on the board of directors of some of the startups they invest in, thus paving the way for increasing the number of women on corporate boards at all levels.

Research shows that companies with women on boards out perform those with no or few women.  Companies wit

RVC Women Investor Network

h the highest percentages of women on their boards outperform their less diverse peers by 66%.  We have certainly seen these trends in our portfolio companies and are committed to developing further diversity in our community.

We have launched the RVC Women’s Investors Network  (WIN), led by Barbara Bauer.  The network has had several well-attended events that focus on angel education and making connections.  The group is based on four principles that play on women’s strengths:

Engagement: Programs that allow people to work together and share wisdom of crowds to make good decisions and great investments.

Give Back: WIN members have years of business experience and they want to be more than just a check – they like to mentor and coach up and coming companies.

Act From Knowledge: Women like to understand the landscape before they jump in and invest.  No more “fake it until you make it” – that can cost thousands for new angel investors!

Education: Classes, workshops and “get to know an angel” events provide deep venture capital knowledge to get WIN members up and going quickly and confidently.

If you’re interested in engaging with the group, volunteering, or just learning more, consider attending the WIN Luncheon at the Angel Capital Summit, Tuesday March 21 on the DU Campus.

Click HERE to register

If you’re interested in learning more about Angel Investing and Venture Capital, you should definitely attend the full Angel Capital Summit.  Tuesday-Wednesday March 21-22 in Denver.

Click HERE for more information and to sign up.

Want to learn more about Rockies Venture Club?  Check us out at www.rockiesventureclub.org

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