This blog was written by Christiana Stamoulis, CFO and Head of Corporate Development at Unum, as part of the “From The Trenches” feature of LifeSciVC.
In June 2015 Unum Therapeutics closed a $65M a Series B round, bringing in capital to support the growth of the company and expansion of its pipeline, as well as new long term investors who could continue to invest in the company throughout its evolution.
Unum’s capital raising approach was relatively atypical. While most high profile biotech companies were coming out of stealth mode with a $30M+ Series A round to support their operations through the next key value inflection point (typically initiation of clinical development), Unum started with a relatively small, $12M Series A round, which was quickly followed by a much more substantive Series B round. The reason for this approach was that Unum’s first significant value inflection point came much faster than that of a typical biotech and required less capital to get there. Within 6 months of closing the Series A round, Unum’s ACTR technology entered the clinic through an investigator-sponsored trial in Singapore and started generating clinical data. Therefore, raising a smaller Series A round to minimize early dilution and then continuing with a larger Series B round, once certain early de-risking had taken place, made a lot of sense.
We closed our Series B during one of the greatest bull runs in biotech. Little did we know at the time that, a few weeks later, the market would turn. This highlights a key ingredient of a successful financing: good timing! However, while timing is key and plays a huge role in the ultimate outcome, there are other factors that can help a company in its fund raising process, factors that that are more in a company’s control.
In this debut blog, I would like to share some insights from our Series B round (and leave some others to share over a beer…).
Planning for and timing a financing
Financing is a key step towards the achievement of a company’s broader objectives. Thus, the timing, shape and size of the financing need to be considered with these objectives and the other corporate activities in mind. In addition, it is important not to think of each financing in isolation but as part of the company’s broader corporate finance strategy and future financing plans.
Advance planning, flexibility, and preparedness can provide significant leverage to a company. Advance planning allows a company to do a financing from a position of strength, which in turn, provides flexibility. Flexibility enables a company to adjust its plans to respond to changing internal or external considerations. Having alternatives also provides flexibility and leverage. At the time of Unum’s Series B financing discussions, we were also in the midst of exploring a strategic collaboration, which had the potential to be an alternative to the financing. As we were eventually faced with two very attractive alternatives, we chose to execute both and further accelerate and expand our planned activities. Finally, preparedness allows a company to take advantage of an opportunity when it arises.
Healthy, vibrant capital markets play a huge role in the successful completion of a financing. Unfortunately, a company has no control over the health of the capital markets and their state can change rather quickly, as we saw in August 2015. A war, a tweet, or broader macro-economic and geopolitical events can trigger a significant change in the direction of the markets. And this can happen quickly, meaning the ability to benefit from a healthy market environment can rapidly disappear. Appropriately timing the capital markets is thus not always possible. However, preparedness and flexibility can allow a company to quickly take advantage of a market opportunity or adjust its plans when an expected opportunity disappears.
Positioning the company
It all starts with the quality of the science and of the team. From there, being able to present a compelling and clear story is an important element of a successful financing. While today’s investors are extremely knowledgeable about science, it is important to present the story in a way that someone with non-scientific training can understand the concept, value, and differentiation of the approach. At times companies can get carried away by the science, dive into the details, and forget about the bigger picture – failing to emphasize the 3-4 most important elements of a story. Being able to describe the fundamental essence of an approach in a reasonably straightforward way, as well as the translation of the basic science into product opportunities, is key. When we were presenting the Unum story, many investors reacted to our approach by calling it “very elegant”, which, to me, was not only a validation of the elegance of our science and our product platform but also a sign that we were successful in telling Unum’s story in a clear and compelling manner.
Sizing the offering
In sizing an offering, a company needs to take into consideration the activities that it would be looking to fund until its next opportunity to do another financing – typically, the next key value creating event that could help drive the valuation of the company. Sometimes a company may feel compelled to limit the size of an offering in order to limit dilution, especially in a more challenging market environment and/or at an early stage. However, it is important to raise enough capital to be able to fund more than one activity through a value inflection point (especially for non-single product companies), to lessen dependence on a single outcome and diversify risk, and to be able to withstand any temporary hick-ups, whether company specific or broader market ones.
When discussing the size of the financing with investors, it is important to provide visibility into how it would help progress the company’s story, the activities that it would fund and the expected timing of the related outcomes. This would enable them to understand how and in what timeframe their investment could help drive the company’s value and generate returns.
Targeting investors
It is important to target investors whose investment approach and objectives fit the company’s stage and near/mid-term plans. In addition, to the extent possible, a company should try to build a diversified investor base, in terms of investment style, investment horizon, other investment considerations and trading motives. It is helpful not to have all investors react to a certain event (good or bad) or to market conditions at the same time and in the same way. Through the Series B round, Unum expanded its investor base and brought in a diverse set of private and public investors, with different investment styles, who could invest in the company both while private and eventually when public. In achieving this goal, it was important to have the support of our existing investors who, given high investor demand, were willing to step back to leave more room for new investors.
Running the process
Running a tight process, where each activity is properly sequenced and timed, is key.
The capital raising process tends to be long and involves multiple phases. Trying to accelerate it may negatively impact the end goal. Early stage companies often represent new stories, technologies and approaches. As a result, taking the time to have multiple meetings with investors, to familiarize them with the company, team, technology, approach, positioning and differentiation is the first key step in a private financing process. And providing them with sufficient time to vet these is crucial. Trying to move too quickly through the process and prematurely getting into discussions on financing size or valuation may hurt the process. Therefore, an early start that would enable a company to take the time in needs to do things right is important.
Companies may choose to use a private placement agent to help with the process. Doing so has its pros and cons. On one hand you have a party dedicated to running such process, with relevant experience and access to potential investors. On the other, you are giving control of the process to a third party who may be well aligned when it comes down to the overall objective of getting a financing done, but whose alignment may be weaker when it comes down to optimizing the terms of such financing. In our case we chose not to use a private placement agent/investment bank given the internal expertise we had at Unum, a good network to leverage, and our desire to maintain close control of the message, the dialogue and the process. However, that meant that we had to dedicate significant time on this financing to compensate for the absence of a party whose sole raison d’être is to run such process.
***
Although no single strategy will guarantee the success of a financing process, hopefully the considerations I’ve outlined here can help as a management team thinks through how to reach their objectives. With thoughtful strategy, careful planning, and deliberate execution, it’s possible to set the stage for a good outcome even in difficult times.