The pros from PureTech Ventures (Boston), Accelerator Corp (Seattle) and BioAdvance (Philadelphia) spent some time yesterday setting the table of today’s current early-stage biotech investing climate and proceeded to illuminate some absolutely critical elements to incorporate while on the fund-raising trail.
Without a doubt the present day funding gap or ‘valley of death’ is real and there are a variety of elements catalyzing this basin. In the wake of the market downturn of 2001 angel and other seed-stage life science investors were crushed by follow-on down-round financings ( - a round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the company by earlier investors). Venture investors have subsequently been required to spend on average both more time and money per start-up until a liquidity event. In 2004 the average age of a life science company at IPO was 6.25 years, more than double the time (2.50 years) in 1998 (Source: VentureXpert). More funding was(is) required to get to support a public offering but with a lower value at IPO. The reverse economic engineering of the institutional dollars calc’ed a need, to avoid negative pre-money valuations, to move further along the product cycle development continuum, bypassing previous entry points of early discovery and lead development to more frequently IND ready molecules or even Phase I assets. Combine this shift in risk tolerance with the evaporation of the angel and seed investors and thus there is your funding gap or ‘valley of death’.
The investor community assesses certain common elements to help determine whether a company is ‘fundable’ or not. For example: Is there clear product differentiation and ability to achieve key milestones in one to three years? WHY – because investors prefer to fund in milestone-driven tranches via key value inflection points. Is there significant unmet need with large potential markets and associated science appearing in high-impact journals? WHY – because investors deem it necessary to drive funding and importantly, partnering interest. Is there a strong intellectual property position with freedom to operate? WHY – because investors regard this as one of the key value assets for an early-stage entity. Is the scientific advisory board comprised of the leading experts in the world and complemented by top notch management? WHY – because more than anything investors invest in people. It is commonly accepted belief that having no management team is much preferred to than having the wrong team, be certain to avoid involving friends and colleagues who have not previously excelled in the proposed role(s).
It is important to approach the funding process by also doing diligence on those capital sources who you are approaching, introductions from credible sources are helpful. Understand the ‘comps’ of peer companies (Note: most common range of pre-money valuations of initial financing rounds are in the range of $1M to $4M, Source: PureTech Ventures). Some primary considerations for the entrepreneur to consider in whether or not to approach a particular capital source are: What stage of the asset(s) is the preferred participation point, What size investment is preferred, What are the markets and sectors that are preferred and How is there strategic value to the investor relative to the investors overall portfolio (what does the portfolio tell you?). If your road-show bears no fruit and is deemed not fundable by the traditional venture community be persistent (within reason) and learn from the feedback and adjust accordingly, consider going back to the drawing board and architecting in the necessary elements that may shift the investor community perception of the offering, e.g. incorporating serial management or building/strengthening a world-class scientific advisory board. Or consider the option of licensing the technology to a strategic partner.
When presenting your opportunity be accurate – that is, prepared, clear and concise, recognize that typically you have one shot at getting in front of a particular investor and that the investor community is small enough such that word may travel relatively quickly prohibiting other presentation opportunities if you really ‘step in it’. Be certain to demonstrate what is novel and different about the opportunity, don’t allocate a lot of time on what the audience already knows, e.g. how big the oncology space is. Work to draw a straight line from here to success e.g. correctly identify your first indication, know whether/how your product will be reimbursed, understand development hurdles and the regulatory path, work to acquire other (non)-dilutive resources such as SBIR/STTR grants, and have a back-up plan to manage risk, e.g. a platform technology with multiple products or multiple indications.
Some of the most common themes for rejection are that the intellectual property is weak, narrow or non-existent, the landscape may be too crowded (including in the clinic, not only what is already commercialized), the size of the market often does not support the required developmental costs and perhaps the most common is that the team does not have the relevant demonstrated successful experience.
So if just starting down this somewhat daunting path and looking for insight and assistance in assembling an investable package look to Fitzsimons BioBusinesss Partners for assistance. Click (HERE) for more information.