October 01, 2020
Many articles have been written and will continue to be written on the subject of Biotech/Medtech investing. The following are some of my thoughts based on personal experiences over the past
three years and are not intended to be a comprehensive treatment on the subject. In fact, individual articles could be written about each of the maxims that are stated below. My experience includes
qualifying companies for investment readiness, representing companies raising capital, and being part of a management team raising capital. This article focuses on private pre-revenue startup or
early stage Biotech/Medtech companies that have raised more than their initial seed funding requirements and are seeking between US$2M to US$10M. There are applications to private revenue generating companies too.
While every experience will differ, I do believe that there are some generalizations (or maxims) that can be applied. Seven such maxims are presented below, they are not all inclusive but they form the basis for the following discussion:
Every company seeking investment believes that what they offer is worthy of investment and in many cases this is true. However, you have to start this process with your eyes open and realize that
there are far more investment opportunities available than there are investors. Try and you put yourself in the investor’s shoes; they receive numerous proposals every week, what is it about your
opportunity that is worth their while spending time on? What is the quantifiable market need and how are you going to address it? How are you ultimately going to make them money? My colleagues and
I have adopted the term “heartspark”, that is, the thing that stirs a potential investor to action when they hear about your opportunity. It will be different for every investor and that is why you
have to understand as much as possible about the people you are talking to (maxim #4).
Let’s say that you have your investment story put together, how are you planning to raise the required money? It is beyond the scope of this article to talk about all of the possible investment models.
However, a thorough consideration of where you are at in the lifecycle of your company and a realistic assessment of your current and future capital needs is essential. Have you leveraged relevant non-dilutive
funding such as research grants? They are useful not only for the capital but they can also provide peer reviewed scientific validation. The National Institute of Health (NIH) remains the premier funder of
companies in the US through its SBIR (Small Business Innovation Research) programs while most states have grant programs as do relevant industry organizations.
While many people feel uncomfortable approaching family and friends, they remain a significant proportion of seed funds for early stage companies at least in the US$0-$1M range. In this article the assumption is that your needs are beyond that and so there are high net worth individuals, family offices, strategics (established companies in the field who are looking for complimentary technologies and products), Private Equity (PE) firms and Venture Capitalists (VC’s). Note that VC’s are generally seeking to deploy US$10M or more. Equity as opposed to debt is the general funding method for pre-revenue companies unless you have significant assets for collateral. Don’t underestimate the value of strategics, while they generally don’t invest in early stage technologies, they are usually open to licensing deals and their expressed interest provides credibility with other potential investors. Finally, be prepared to pivot and/or entertain combinations of investment models.
Once you have settled on your likely investment channel(s), personal connections and introductions can really accelerate the process as trust is a critical aspect of the investment process. We continually
ask people we know for their recommendations or opinions on topics that range from places to eat to movies to attend. Why? because we value and trust their opinion. Investing is no different. You may
have a great story (maxim #1) but someone has to hear it by taking your call, opening your email or accepting your linkedIn message or invitation. They are more likely to do that on a referral or warm
introduction from someone they know. If you go through your personal and business contacts and networks, you are likely to have someone who has connections to investment money. If you don’t then the
chances are good that someone in your network knows someone who does. In lieu of this, investor specific conferences like JP Morgan and The Bio CEO and Investor Conference have 15-30 minute “speed dating”
meetings that are designed to quickly match investors and opportunities. They have their place and can be effective but remember you are still meeting strangers for the first time.
Also, understand that there are numerous “middle men” in the investment world. They range from “door keepers” to wealthy people or family offices to firms who have an established clientele of sophisticated investors who they go to for capital raises. In the latter case, their fees can include equity (5-10% pre-investment), cash (5-7% of the value of the raise), expenses, and possibly board seat requirements. Understand that middleman make their money from their investor relationships so they ensure control of the interactions and this can prolong the investment process (maxim #6) .
Investors generally invest in what they understand and feel comfortable with. I have spoken with people who have made tens of millions of dollars in real estate and who are really interested in
Biotech/Medtech, from developing life-saving medicines to clean and green technologies. However, they don’t end up investing a cent because they just don’t understand how it works. Maxim #1 opens
the door but may not always close the deal. Bear this in mind when you are approaching potential investors, do your homework and qualify them as much as they are going to qualify you (maxim #6).
It’s better to move on early (fail quickly) than spend a lot of time with someone who while interested in learning about what you have is not ultimately going to part with their capital.
A track record of success is an important consideration, either in having previously raised capital and / or achieving objectives in your current or previous companies. Another way of saying this
is: “success breeds success” - everyone likes a winner. If you have previously raised capital and delivered real returns then you have credibility. Similarly, if your opportunity has already met
key milestones, and future milestones are clearly mapped, demonstrably achievable, and likely to cause a significant increase in valuation (value inflection point). If you don’t have any of this
because you might be starting out your career then it becomes a harder sell which can be mitigated by having a seasoned or successful team around you and/or respected key opinion leaders who back you.
You have found an interested investor/s and the excitement builds with visions of a quick close because they will clearly see what a great opportunity this is! In reality, you have only just begun
the journey. Seeking investment is a full-time process and investors drive that timing of that process. Also, no two investors are the same and each have different requirements as you enter the
due diligence period. Think of due diligence like a detailed physical checkup when you visit the doctor. Instead of blood draws and scans, there will be examinations of the validity of the technology,
detailed questions on the market opportunity, challenges on how commercialization will occur and reimbursement will be achieved etc. Likely, your answers will have to be repeated to more than one person.
You may have periods of intense investor contact and then periods where it goes quiet and you wonder what is going on at their end. One of the key things to establish early on is an understanding of the
particular investors process including their steps, timing, key decision makers and influencers. This will at least provide a guide as to how you are progressing. The process will usually take a minimum
of three months and likely six months or more depending on what other opportunities they are looking at (remember maxim #1). When you consider this, the number of people that you have to contact to get
real interest, and running concurrent due diligence then you realize how time-consuming raising capital can be.
Determining value is more an art than a science particularly for pre-revenue companies. You can develop all kinds of valuation models but likely your number and the investors number will differ. This is
where negotiation starts and you have to know what deal will work for you. Early stage investors will place a higher discount on your valuation as they seek to “de-risk” their investment. The dilution
effect is real and you have to have a good understanding of what the end looks like, particularly if you are going to require more than one round of funding. Will you reach value inflection points such
that further rounds won’t dilute you too much? This has to be balanced against having a larger share of a company that has a lot of unrealized potential but little tangible value in the eyes of potential
All of the above is likely deflating and daunting for someone new to the fund-raising process. I don’t deny that it is challenging but it is also rewarding as it forces you to crystalize your thoughts and to articulate them in succinct manner. At the end of the day it doesn’t matter how revolutionary, transformational, life-changing (add your own descriptor), your opportunity is if the people whose money you are trying to separate from their wallet don’t “feel” it, can’t visualize it, and simply don’t believe it.