Summer is gone and the hectic autumn schedule is upon us (despite hitting 96F in Boston on Wednesday): back to the routine of board meetings, SABs, conferences, diligence sessions, and a ramped up travel schedule.
Importantly, this also means that all those biotech startups with plans to fundraise in 2013 have kicked their efforts into high gear: September through Thanksgiving is one of the busiest times of the year for startups trying to raise capital. The supposed summer doldrums are behind us, and the fundraising element of a CEO’s annual goals has a four-month clock ticking on it.
With that in mind, I thought I’d share a few general rules – more like loose guidelines – about how to increase your odds of a successful fundraising. Most of these I’ve touched on before on this site (here) but felt they were worth mentioning again:
1) Know your investor audience. This seems so obvious but its amazing how little attention is paid to it. Even after I posted a blog about how Atlas wasn’t doing diagnostics deals anymore, I still get dozens of diagnostic deal proposals. Same goes for our focus on early stage; the number of PIPES and Series D’s that come across my desk is staggering given how open we’ve been about what we are looking for. Two key components to knowing your audience are the firm and the partner. Make sure the firm has a portfolio on their website that looks like your deal: single asset plays vs platforms, early stage vs late, novel vs reformulation, therapeutics vs other, etc… Hopefully they’ve had winners that look like your deal. In addition, make sure the firm has raised a fund in the last four year; if not, they probably don’t have the funds for you and are just meeting you to “stay in the market”. Lastly, make sure the partner you are reaching out to has sponsored those kind of deals and isn’t on 15 boards currently.
2) Know what you are, and what you aren’t. Lots of models or “worldviews” can and do work in biotech – true platforms, asset-focused entities, roll-ups, spec pharma plays, etc… Don’t try to be all things to all people; instead, understand what you are trying to do and be true to it. Shoehorning a business plan into a “conventional biotech” script just because you think that will have the broadest appeal isn’t a prescription for success. Don’t (overly) tailor your pitch to the investor; know yourself well enough to tailor your choice of investor to your pitch. This point is tightly linked to understanding the right audience but is obviously the flip side of that concept.
3) Sell the science, because that’s what we’re buying in early stage startups. Too many pitches waste a ton of time trying to tell us that Alzheimer’s is really big disease, heart failure kills more than cancer, and Genzyme made big markets out of orphans. Yes, we all know that. Focus instead on the crux of the investment decision in early stage: is the scientific thesis compelling and are we likely to have real impact on patients. Credibly frame up that story, lay out the data supporting its claims in a thoughtful way, try to eliminate hand-waving by being open about what you know and what you don’t know. I’ve reviewed this in a post a couple years ago: “In God we trust, all else bring data”. Review Begley’s Rules for high quality, reproducible science and show, if you can, how you’ve addressed points like these. Obviously clinical stage fundraising campaigns have a different set of topics to address, but the general message here is focus on data and medicine as that’s the first hurdle for most sophisticated investors. Raising B-rounds have their own hurdles and its worth revisiting them here.
4) Make sure your team has some grey hair, but not so much as to lack youthful enthusiasm. A clear pairing with the exciting, credible science outlined above is the need for solid, backable team. Talent is essential. In some ways it’s chicken and egg with great science: great talent rarely jumps at crappy science, and great science is what it takes to recruit great talent. Importantly though, biotech startups work in a highly nuanced, regulated, and complex science-driven world that isn’t well taught in books – its best practitioners have learned through years of apprenticeship, project leadership, and portfolio learnings. Make sure your team has some of this deep experience on its roster. This is where a carefully crafted SAB might be helpful, as I’ve discussed before (here). But you can’t start a new biotech company with a team of Medicare-eligible former industry executives at its helm; make sure you’ve got a good blend of grey-haired experience and “youth” (under 50?). I turn 40 next year, so 50 feels like the right definition of youth from my vantage point.
5) Biotech R&D is all about risk management and mitigation, so have clear sense of the first major de-risking. Said another way, make sure you paint the picture of a thoughtful, steady reduction in risk around the program relative to its stage: e.g., proving superior efficacy in the key animal model, comparative safety vs other actives, key IP filings, etc… Lay out the “de-risking” timeline that you expect to execute against, and the case for why investors should get in before the next risk reduction. You may hesitate to fully articulate the nuance here in hopes that your investors don’t tranche the capital; good luck with that strategy. But I think you’ll increase your odds of raising money with an honest view of these de-risking milestones.
6) Ground your valuation expectations in reality. A couple years ago the weight of the markets depressed all valuations in early stage venture. But now with a frothy IPO market, there are clear signs of irrational exuberance flowing back into the startup financing world. I’ve had seed-stage deals recently trying to benchmark against some of the preclinical companies with $500M+ post-IPO values (“we should be at least x% of their value”). The right startup valuation is obviously the market-clearing price at the time, so if an entrepreneur can actually get irrationally high valuations, go for it. But an early stage valuation has long term implications (like pricing a Series B), so its important to keep in mind that the excitement of the current market isn’t likely to be sustained for the lifetime of most seed-stage companies today. Any entrepreneur that overplays his hand on this point frankly raises questions about irrational behavior in the future.
7) Present a credible case for the long-term capital needs of your company and the likely liquidity paths. All startup plans should have a realistic long-term business plan that addresses the likely funding required to liquidity. It should frame up what funding is likely to come from equity vs other sources. Given that all plans will fall apart upon contact with reality, this proposal need not be more than “hand-grenade” accurate; for example, does the plan require $20M, $60M, or $100M+ in equity financing to get to a liquidity event for investors/shareholders. Some descriptive scenarios for what that liquidity event could look like is important. Unlike 24 months ago, an IPO could be a credible scenario today. This funding and liquidity analysis should have a prominent role in any pitch deck, but importantly shouldn’t be the focus.
8) Your introduction to a venture firm matters. Cold calls, or more commonly “cold emails”, have a hit rate near zero; don’t bother. Hiring a regional or boutique investment advisory firm to raise your initial round of funding is also not a productive way to reach a top tier venture firm. Be the creative entrepreneur that you are and find a way to get an introduction to the venture firm and partner you want. Reach out to the biotech firms in their portfolio. Find them via social media and impress them with your 140-character charms. I’ve even had entrepreneurs reach out to me on the soccer field after coaching my daughter’s game. Figure out a way to make it happen.
9) Don’t skimp on legal advice as you lay out the foundations of a startup. Nothing hurts a startup fundraising’s early momentum more than poor corporate fundamentals: odd structures, cap tables, huge but useless boards, lack of IP or Freedom to Operate, or a poorly drafted academic option/license agreement. As Peter Thiel has said, foundations matter (here). I’ve hit this type of a wall recently on several deals that I initially got excited about. Find a good counsel with experience in biotech and get to know them. Many will provide heavily discounted advice during the startup/seed phase and backend their fees after a Series A closes. In addition, hire a real licensing lawyer to review the option and the license framework to make sure the diligence requirements aren’t absurd, the financial elements “work”, etc… A buddy who is a retried real estate lawyer just doesn’t cut it. Finding a venture firm willing to work with you on these foundational “formative” issues is a great way to solve this topic.
10) Crank up the energy – the time is now. Be psyched about “doing well by doing good”. Tell the vision of how you will impact patients and change medicine for the better. Be excited and share your infectious passion (without coming across as an unbackable zealot). It’s a fine balance of course, but without passion startups don’t succeed. Importantly, focusing an early stage biotech pitch too much on making money, quick flips, and comparable exits turns most early stage VCs off frankly. We all recognize great returns in biotech happen to companies developing exciting therapies – focus on the latter, we’ll understand the former in our heads.
Fundraising is never easy, and it never has been. But hopefully this shortlist can help improve the success rate for biotech startups during the autumn fundraising blitz.
Good luck.