By Robert Clarke, CEO of Kinaset, as part of the From The Trenches feature of LifeSciVC
As I write, I am on the train back from New York after watching my son’s NYU basketball team play in the 2024 D3 Men’s Basketball Tournament. March Madness D3 style is a great affair as just like D1 there are 64 teams vying for a title (out of 436 D3 vs 351 D1). Alas, NYU ran into a tough Tufts team in the second round and lost a tight one 65-62. That said, all in all a great season with 21 total wins and first UAA conference championship in 30 years. Thanks for letting me share my Dad fandom.
D3 March madness did get me to thinking about an analogy to biotech and doesn’t everybody love when biotech execs or VCs speak in sports analogies? What this triggered for me is a critically important but sometimes maddening question we often hear at biotech companies. In biotech the question can come from one of four “regions” in our biotech bracket: current investors, future potential private investors, future potential public investors, and potential biotech/pharma acquirors.
What do you see as the future exit for your company?
A seemingly simple question. With a seemingly ideal answer: A future exit will be based on the complete success of our novel wonderdrug/pipeline/platform technology that is going to revolutionize treatment for patients in need after a hiccup-free clinical development and regulatory approval path that will attract significant M&A suitors or be the biggest biotech IPO in decades. And that’s why they are called unicorns…because the reality is obviously most often a more challenging path with twists and turns that requires many considerations of exit strategy. But out of those dark days there can be unicorns (see Nimbus and Jeb’s recent blog post; congrats again to Jeb and the Nimbus team).
That being said, this is a critical target question that a management team should be thinking about from the moment of company inception. While we all want our treatment modality to be a complete success for patients, the business of biotech is clearly also driven by the potential financial success that can be achieved by advancing said treatment/platform/medtech whether that be all the way to market or to a stage of development that will make the company an attractive M&A or IPO target. I don’t think that’s novel insight but it is a key point that management must always keep an eye on.
So, what about the “regions” that I spoke of? I am speaking of my personal experience as I think about these different “regions”. I’ve been involved in seed/equity raises with VCs, Series B and beyond rounds to continue development as a privately funded company, took a company public with a switch to working with the public investors/bankers, and of course courted biotech/pharma for potential deals with pipeline drug candidates at various stages of development. And in every case, the context of “What’s your potential exit(s)?” has been part of the key diligence questioning. In the remainder of this blog, I’m hoping to convey some of my personal experiences, where we could have done things differently, and where I could have personally done things differently that would have been advantageous (had I seen it at the time). As a management team and an individual, one really important aspect to manage is that there are only so many hours in the day and we can only be one place at a time but striving to keep all avenues open across all the “regions” is an important goal.
So onto those “regions”…
- Current Investors/Board of Directors
On the context of exit, this is obviously the most important group to get to consensus with on this strategy. As a CEO and management team, it is critical to get alignment when possible from the Board/private investors on how they see the highest probability and/or preferred exit. These are not necessarily the same thing.
Aside from The Godfather “they made us an offer we couldn’t refuse” type of outcome, the BOD/investors may each have a different view of their preference but also a great ability to compromise with their co-investors (and management) to get to an exit that works for everybody.
As a management team and particularly CEO, following the publicly stated dynamics of the syndicate members that have invested in your company can provide educational insight. Understanding where they stand in their current fund when they invested in your company, have they had any recent significant successes or failures from that specific fund, whether they can cross fund invest, or do they do crossover/public investment are a few key points to consider.
As the team focuses on execution and timeline/budget management, having a consensus view of what happens next regarding exit strategy will provide important direction as the company moves to the next inflection point.
In my personal experience as a CEO, devoting the time to connect with investors one-on-one to understand their vision and/or expectations is well worth the investment. Having the individual perspective can allow one to build out the multiple potential scenarios that can lead to an agreed exit strategy from all involved. These can then be brought to the combined BOD and enhance discussions around these scenarios hopefully avoiding a potential impasse at the BOD level.
- Potential Future Private Investors
As the company advances development and works through their current capital, an eye to future potential members of a Series B or beyond syndicate becomes important. Once management and BOD have built a potential strategy around the size of raise, potential insider participation, and intended use of funds, the company is ready to consider seeking that next check (with many other caveats of course).
As the company engages with new potential investors, the question of exit will be one of the most important pieces of diligence that the company will have to address. This new “region” will have a potentially entirely different view of the best path to that exit whether that be expansion of corporate goals with new investment to increase the value proposition, positioning the development path differently to enhance attractiveness to certain biotech/pharma for M&A, or consideration of a strategy that would enable a future public exit that might be more appealing to a fund with crossover investment capabilities etc.
This is where socializing your company story before you need to hit the road can be helpful. Build a target list of investors leveraging the network of company leadership and your investors. Be mindful of feedback from your current syndicate that might indicate certain funds are preferred over others (for whatever those reasons might be). Leverage useful times on the calendar like JP Morgan and banking conferences where the investors tend to be where you can find a slot to introduce your company and provide an overview of what the future fundraising plan looks like. This will allow the company to get a first pass to understand who might be highly interested as well as those unlikely to really dig into the story. This also allows the VCs to have the company on their radar with an expectation that the company will reapproach when the time is right. An important caveat, try and avoid the temptation to keep updating the story to seemingly interested investors when you aren’t actively raising as it is important to avoid what becomes a negative perception that the story is old/tired/been around a while and hasn’t raised funds.
From personal experience in this “region”, keeping relationships warm with VCs/PE investors you’ve worked with before or new names is important. When a previous company went public, I was thrust into a different world (the next “region”) of investors to consider with a different dynamic around the fundraising process. As I navigated that new dynamic, I did not do a good job keeping up with my VC network. In that time, VC contacts changed roles, the markets changed, and the context of how many early stage VCs operate became different. When it became time for what’s next, I was keen on a new private opportunity where the VC contacts were once again critically important. I can gladly say it worked out well re-establishing these relationships and building an outstanding VC syndicate for my current company but it may have been that much more streamlined had I made sure I stayed in closer contact with the private investor community.
- Future Public Investors
2024 has opened relatively well for biotech and the previously shuttered public market offering seems it may be opening up with positive outcomes. Having this potential exit strategy available provides an important balance for biotech/pharma as others have written about here previously. If the IPO market can support robust post-IPO action, current investors as well as cross-over/IPO investors can become very bullish about opportunity. For a company, having an IPO (or maybe a reverse merger) as a potential path to capital in the near term as well as way to sustain a company through commercialization/sales and beyond is certainly a strategy to consider. No revelations here but as the market seems to be improving, it will be interesting to understand what type of IPOs (or RMs) the public market seems most supportive of regarding stage of development, capital raise size, specific sector within biotech, and/or asset profile (single asset vs diversified pipeline).
Of course, getting to the public market or on the radar of the public market is another thing entirely. So, although your company may be early in development or in a private investment cycle with an intention that M&A will be the way, it is never too early IMO to try and make introductions to bankers and potential public investors. In my experience, this is an entirely different dynamic than managing relationships with the private investor networks.
For those not in the know on the public markets, spending time with bankers/analysts is a good first step and a valuable use of time. Getting to know how the analysts in particular see the sector you work in is important. They can provide insights into what trends are developing as well as to how they may see your particular therapeutics/modality fitting into the future marketplace. Keep in mind they may have no real interest in you or your company (particularly if you are far away from going public) but instead are gathering competitive intelligence around the future marketplace for a name already under coverage. That’s all right as there can be really good learning on both sides.
Just to help set expectations from my own experience, as a private company, unless you are soon to consider going public or your company just had a fantastic public announcement about clinical data (or have unicorn status), getting slots at JP Morgan and other banking conferences can be an uphill competitive battle. Not unworthy of the attempt but not something that one should expect comes easy. And then if you get the slot as a private company at a mainly public company banking conference, don’t take it personally if attendance at your session is relatively spartan while say Jeb is next door with a room packed to the gills. It’s more important to think about this as part of growing your company’s profile and building relationships with bankers/analysts for when it comes time to put together your lead bank and banking syndicate for a S-1 deal road show.
Once you are public, the dynamic changes significantly yet again and that could certainly be whole blog post on its own that more experienced public operators could do better than myself.
In the “wish I knew then” category, understanding the tiers of banks and who fits in where relative to the biotech public market ecosystem would have been immensely helpful. We all would of course hope to see bulge bracket banks at our door bringing us out to blue chip investors ready to oversubscribe. But it is just as likely that a smaller bank who knows the biotech space well will be the right fit to successfully achieve an IPO. And the “bottom right” names (on the deal cover sheet) that might help fill out a public investor syndicate are important to know as well. Down the road, as twists and turns inevitably happen, having broad access to public capital via banking colleagues is a good thing to have in hand. There definitely can be a #1 seed bank down to a #16, but all of these “seeds” could be helpful in the future.
So onto those “regions”…
- Biotech/Pharma potential partners
Not to sound pedantic, but biotech/pharma potential partners are keen on the potential exit strategy of your company. I know, you are thinking, their acquisition is the exit strategy of my company. Develop our therapeutic/modality to a point of inflection based on clinical data or commercial sales, and biotech/pharma M&A comes in and makes everyone involved dreams come true monetarily. This is certainly the Godfather scenario that makes that happen.
But the reality is biotech/pharma will want to understand potential exit strategy as they manage their own complex dynamic of timing, attractiveness/competitiveness of the asset (“we have to have it”), stage of development balanced against potential future development risk, and potential future market (or market competition for approved products) to cite a few of the checks and balances that come into play for an M&A. Combine this with the likely much more complex deal approval process and the often changing dynamics of pharma strategy. Pharma wants an understanding of company exit strategy regarding competitors for buying or the potential for the company to say “we’ll do it ourselves” and raise more money/go public. This then puts the ball in pharma’s court (another sports analogy!!!) to decide if they are moving now on an M&A. And just keep in mind that “now” can range anywhere from pre-clinical stage to commercial asset for a deal to happen. The adage of “pharma will be willing to pay more later for an asset further de-risked” by additional development does have truth to it.
And one last consideration for exit strategy that we might not want to think about at all, but we definitely must, is what if we aren’t invited to the big dance at all? The prospect of failure in drug development lurks around many corners with a long list of potential areas to run into insurmountable challenge. As management and C-level executives, planning for all contingencies is incumbent upon us. While we always should prepare for success, keeping in mind what could be done in the event of an unforeseen curveball should be an exit scenario that is prepared for. Considerations of the target patient population, the employee base, and of course the investors who’ve supported the company in the event of this type of exit can go a long way.
And that brings me to my exit strategy for this blogpost. Stop typing.