The Other Side Of The Fence

Posted August 5th, 2015 by Ron Renaud, in Bioentrepreneurship, Biotech startup advice, From The Trenches, Fundraising

This blog was written by Ron Renaud, CEO of RaNA Therapeutics, as part of the “From the Trenches” feature of LifeSciVC.

In a previous post I was extolling the virtues of leading a private company. Specifically, the freedom of being able to build our company, RaNA Therapeutics, brick by brick without the constant weight of the public market. For the most part, I remain steadfast in my previous observations but I wish some seasoned, private company veteran could have advised me about the fundraising part.

While RaNA recently completed a very successful and oversubscribed Series B, there is no sugarcoating the process of raising capital as a private company. As someone who has been involved in the public side of our industry for more than 20 years and raised over $500 million, I could not grasp how different the process would be. As a public company CFO and CEO, I have grown accustomed to managing the balance sheet, watching the public markets, watching our stock price, gauging sentiment from current and potential shareholders, speaking with bankers, talking to our board, making a decision to raise capital – then raising the capital. While there are quite a few steps in that public process and a significant amount of work from our banking, legal, and accounting colleagues, the process is fairly rote. Once the decision to raise capital is made in the public setting, it can move very quickly and be completed in weeks and sometimes, in days. Even in a tough public market, capital can be raised if the investment thesis is sound and the price is right.

I joined RaNA in November and learned very quickly that as a private company CEO, I was always going to be in the capital-raising mode. Unlike the public market where market makers establish the value of your company every day, I am now a market maker for RaNA. Real market makers, by definition, are buyers and sellers of stock and in doing so; establish the price of a security at which a transaction can happen. While we are not buyers of our own shares, every private company CEO, CFO or CSO are market makers for their respective organizations. It starts with countless meetings with potential investors. Explaining RaNA’s approach to upregulating genes ran counter to many RNA company approaches to silencing genes. This meant continuously refining the message and sharing the vision and value. The most common questions always seemed to center around comparisons to other RNA-based therapeutics companies and gene therapy approaches. This is going to be the case for any private company trying to establish its value versus established public companies with a market valuation or even other private companies that may be more visible. Either way, this is where transparency is critical. Get interested parties under a confidentiality agreement and share data, be upfront about what your platform, technology, process, etc. can and cannot do and be explicit on planned use of proceeds. The public “general corporate purposes” will not sit well with most private investors. This part of the process will hopefully result in a group of interested investors and perhaps one or two with a desire to lead the deal.

While we were out telling the RaNA story to potential new investors, I had to remind myself, often, that we must also represent the current investors who have assumed all of the early risk and are going to have their ownership diluted. I wont say too much about this because I think the natural tension at this stage is expected but I will say that this is where every image of the misaligned tunnel enters your mind. A colossal engineering feat to bring two sections of a tunnel together in the middle only to find out that the surveyor was off by 100 feet. Similarly – it is solvable with patience and persistence.

This is a good place to point out that there is very little homology between the private and public settings in terms of establishing price. The major negotiation in a public stock offering is usually centered on what, if any, type of discount on your closing price will be offered on the newly issued shares. While we do not always agree with how the public market prices companies with which we have been involved in raising capital, it is the basis for most public transactions. In a private transaction, there is a great deal of back and forth in terms of valuation discussion. One investor may have been involved in a similar deal with another company at the same stage of development, another might have invested in the same therapeutic area and another may be brand new to the space. It is important to be mindful of every competing perspective because in many cases this will be reflected in how they feel about value. This becomes particularly critical when you have investors that would like to lead the round.

With the sacred term sheet from very prominent lead investors in hand; I thought the end was in sight. By the way – I think I told the staff at RaNA that we were getting close to closing our Series B at least 25 times in the last 6-8 weeks before we closed on the financing. I also told our Board the same thing but they knew I was a private company rookie and acknowledged my guidance and continued to provide support. What I did not fully appreciate is that upon receipt of the term sheet, nearly every aspect of what follows is also a negotiation – board & observer seats, timing of financial reporting, budget discretion, option pool and at least a dozen other items. Each issue holds a different level of importance depending on the investor. As you can imagine, there are competing interests between the existing investors and the new investors but even within each of those groups, there are specific issues that are raised, discussed, argued and either incorporated into the final agreement or discarded. The other item is diligence conducted primarily by the lead investors. This is simple; just assume they will want to see everything. My working assumption was that they did not actually want to see everything but their lawyers did and that is quite understandable. What is not so simple is making sure you have enough internal institutional knowledge to decipher some obscure terms of an early employee agreement that has not been with the company in two years or reconciling 127 shares in the cap table that nobody seems to know about. Again, this part of the process requires an inordinate amount of patience and persistence. The good thing is that it is the beginning of the end of the private financing process.

Once our leads were through their diligence and comfortable with the company responses, the final terms were drafted. There was also one last push to round out the syndicate. I found that this was where all of the tedious work up to that point pays off. With strong leads, an in-depth diligence process and competitive terms – investors are much easier to attract and they are usually comfortable with relying on the work conducted by the lead investors. In RaNA’s case, our lead investors (MRL Ventures, the early-stage therapeutics fund of Merck & Co., & The Baupost Group, LLC) are highly respected organizations in their respective industries. Our syndicate of new investors followed their diligence with confidence and minimal additional legwork.

The reason, I want to highlight the grind that is involved in raising private capital is that I am not sure there is a way to make it much easier. My advice would be to pay close attention to every aspect of how your company is organized. Think about this from the very first day you start the company. Even with the best intentions, once things begin to gain momentum, there is an instinct to organize it later. Admittedly, I was quite impressed with the organization of documents at RaNA and thought it would be easy. As a new CEO and with a new head of finance, we were heavily reliant upon others to decipher the previous work. Without question the focus should be on the science and creating value, but try to keep the organizational part in the back of your mind. You will eventually need to devote all of your time to a fundraising process and you will want that to be as short as possible. I had a high school English teacher that would tell us every day “be detailed in your descriptions”. I thought of that teacher many times when questions would arise on details of old agreements, contracts, and other related documentation.

Finally, if you are new to raising capital in the private markets, reach out to others that have done it. Fortunately, I had great coaching from existing board members, a patient and helpful chairman and a good network of other private (and recently public) executives that offered much needed advice. In the end, everyone wants to be part of investing in and building a great company.

My hope is that this missive will serve as comfort to other executives trying to raise private capital. If at any point during the process you feel like you are pushing on a string – you are probably doing it right.

Ron Renaud

CEO of RaNA Therapeutics; ex-CEO of Idenix
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