Does Firm Location Affect the Likelihood of Funding?

19 Jun

By Danielle Silva, Director of Research, LSN

In the US, there are two states that are known for being hubs for life science firms: Massachusetts and California. For this reason, the two states have logically become capitals for investors in the sector; some of the most well known private equity, venture capital, and angel firms that invest solely in the biotech space are based in either Massachusetts or California. But what happens if your firm is based outside of these two states? Will it be more difficult for your company to raise capital? The answer depends largely on what investor groups your firm is targeting.

Angel groups, for instance, are associations made up of high net-worth individuals that pool their money together in order to make investments in early-stage companies. These groups tend to focus on regional investments. Typically, an angel group’s investment goal will be to help stimulate economic development in a particular region. While some groups may focus on other types of investment themes (for example, investing only in female-owned businesses), most of these firms are regionally focused.

Another reason angels are usually regionally focused is because they tend to have no budget outside of the capital they put aside for investments. These groups also have limited full time staff for the same reason. Because of this, it is very difficult for angel groups to visit companies that are outside of their state. Even if the group does visit a company that is located outside of their state, it would be hard for them to have a company in their portfolio that is located far from their headquarters. Furthermore, angel firms have limited deal flow, and often times will not actually source a good number of deals outside of their state.

Private equity firms and venture capital firms lean towards a more opportunistic approach compared to angels in terms of where firms are located. Both groups certainly have larger budgets, and thus partners are able to travel more to visit attractive investment targets. Many of these groups, however, are operationally focused. Accordingly, many of these firms will favor deals that are close to their company’s headquarters so they can check in on the company and make sure everything is running smoothly. Many venture capital firms now will even act as quasi-incubators, maintaining additional office space for their portfolio companies at their headquarters. This is not only to help their portfolio firms that cannot afford to pay high rent, but also allows investors the ability to offer office space that is close to their own company so they check in on the company more often than they normally would be able to.

So does this mean you have to relocate your firm to Massachusetts or California to be successful? Of course not. Although there are undoubtedly more life science investors in both Massachusetts and California, there are certainly a number of investors located outside of those areas. What firms should do is make a target list of all investors that are located within their general region that invest in life sciences firms. These will be the low-hanging fruit, which a firm raising capital should be reaching out to first to begin with. Also, if the company raising capital is located in an unfavorable area in terms of investor concentration, there is still no need to worry. If the product or service is compelling enough, most investors will be willing to literally step outside of their typical geographical investment mandate and start a dialogue with the company.

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