Archive | August, 2013

The Megafund Model: A solution to curing the largest indications facing mankind?

29 Aug

By Vishal Chinchwadkar, Research Analyst, LSN

Can a novel financing tool be the answer to cure some of mankind’s greatest medical challenges? Andrew W. Lo, a hedge fund manager and a finance professor at MIT, recently proposed a revolutionary idea to promote research for cancer. Mr. Lo has suggested the creation of a $30 billion “megafund” targeted at the singular goal of maximizing cancer therapy development. The concept aims to create a diversified portfolio in a single broad indication to mitigate risk by diversifying the fund’s portfolio. At the most basic level, it allows a single large investment entity to tolerate early stage risk by diversifying its allocations along the entire pipeline. This is critical in an indication that affects millions, but remains a major therapeutic challenge (largely due to funding gaps).

Private partnership structures, such as those used by venture capital funds, can’t justify the creation of a diversified portfolio because of the timeline associated with the full development cycle of a therapeutic. Thus they often focus on a specific development stage and hope to pass their investment off to another entity further down the line. The megafund structure is different in that it has enough capital to tolerate the broad diversification of capital across the entire therapeutic development landscape.

Even more interestingly, the megafund structure is organized in such a way that It could draw on capital (at least in part) via the public capital markets via securitization. Securitization is a common financing tool in which capital is obtained from a diverse group of investors by means of equity and debt in order to have claims in the biomedical research. It may seem naïve that so much capital could be raised in a generally poor economic climate, but given the low-interest rate environment, the timing may be ideal for issuing long-term debt.

The megafund concept signifies a paradigm shift in how capital could be allocated to major diseases in the future through a broad-based investor audience, but allocated by experts. Having a skilled management team in control of a portfolio, is a major factor. The public market capitalization of such a fund allows universal participation (like crowdfunding), but keeps experts in control of the vetting of technologies. Within a single portfolio, the open sharing of data, knowledge, and resources across hundreds of research projects can be of great benefit to scientists, investors, and society as a whole. Megafunds might just be the biggest shift in how companies are funded in the life sciences arena moving forward.

 

Hot Life Science Investor Mandate 1: PE Provides Buyouts, Majority Recaps, Family Successions

29 Aug

A private equity group based in the Eastern US, which manages SBIC (small business investment company) funds, has around $200 million in total assets under management. They are currently deploying capital from their second fund, which closed in 2012. The group is interested in sourcing new firms in the life sciences space, typically making equity investments ranging from $1-10 million.

The most important criteria for potential investments for the PE group is the company’s structure. The group provides company owners capital to facilitate majority recapitalizations, majority management buyouts, as well as family successions. Accordingly, they would be especially interested in a firm where a manager is seeking to buyout the company’s owner, a business whose owner is looking to retire, or company owner who is looking for a strategic financial partner. The firm is thus most interested in management teams who are looking to retain or acquire a significant equity stake in their company.

The PE is seeking firms that have at least $1-10 million in EBITDA, and $10-100 million in revenue. The firm is most interested in the suppliers and engineering space. However, they are very opportunistic in terms of sector, and would consider companies operating within any subsector of the healthcare suppliers and engineering space.

Hot Life Science Investor Mandate 2: Eastern US-Based PE Interested in Deploying Funds to CROs, CMOs

29 Aug

A private equity group based in the Eastern US is currently deploying funds from the firm’s fifth fund, which closed at over $500 million. The firm is currently looking for new firms in the life sciences space, and will allocate to around 10 new firms in 2013. The firm provides growth capital to firms, and also executes buyout transactions. Typically, they invest in middle-market companies that have an enterprise value ranging from $10-100, but their preference is firms with values in the $20-80 million range.

The firm is most interested in biotech companies in the R&D services space, and is most interested in contract manufacturing organizations (CMOs), as well as contract research organizations (CROs). The PE is also seeking firms in the suppliers and engineering space and is looking for firms that are producing reagents.

Hot Life Science Investor Mandate: European Tech Transfer Office Eyes Several Allocations for 2013

29 Aug

The technology transfer office of a university based in Europe is currently looking for new investment opportunities in the life science space. They anticipate investing in around eight companies by the end of 2013, and typically allocate between $20,000 and $20 million per firm. Because institutional shareholders back the firm, they have an evergreen structure, and thus can deploy capital as soon as a compelling opportunity is identified.

The tech transfer office is currently most interested in firms in the biotech space, specifically investing in biotech therapeutic and diagnostic firms. They have no particular preference in terms of what indication the company’s product is targeting, and will invest in firms that have products which target orphan indications.

Investing in both pre-revenue companies and companies that have positive cash flow, the tech transfer office will consider firms with products in the preclinical phase of development all the way through firms that have a product on the market. The firm has no strict criteria in terms of revenue and EBITDA for cash flow-positive companies.

Pitching to Investors: The Importance of Understanding Your Audience

29 Aug

By Danielle Silva, Director of Research, LSN

Time after time, I’ve noticed that many brilliant scientists continue to deliver the wrong kind of pitch to investors. The most common blunder that life science entrepreneurs make when raising capital is delivering an overly technical presentation to potential investors. Although this is usually the most frequent mistake that scientists make, another common issue some entrepreneurs run into is misunderstanding who their audience is and actually not digging deeper into the technology. So now you’re probably thinking the solution is to have your presentation lay somewhere in between. The answer, however is not as simple as one might think. If you are a life science entrepreneur who is raising funds, the key to pitching to an investor is understanding who the investor is.

Pitching to Venture Philanthropy Firms/Family Offices

The first fallacy I mentioned (getting too technical during a presentation) often occurs when firms pitch to family offices and venture philanthropy firms. These investors are often times indication oriented, meaning that their specific mandate focuses on the disease that the technology is targeting, and these investors are typically agnostic in terms of the mode of delivery. Therefore, when pitching to these investor groups, life science entrepreneurs should stress the indication their product is targeting as well as any subindications that may be applicable. Since both of these groups focus on philanthropy as a part of their mandate, the entrepreneur should focus on the social return on investment.

Pitching to PE, VC, and Hedge Funds

Firms will also often focus too much on their technology when they are presenting to private equity groups, venture capital firms, and hedge funds. In terms of how in-depth you cover the science behind your product, your pitch to these firms should lay somewhere in between your pitch to family offices/venture philanthropy firms and big pharma – a happy medium if you will (I discuss the pitch to big pharma/corporate VCs in the next section).

These investors are very hands-on, so stressing that you have a great management team is more important to them than the science that goes behind your technology. Side note: for more on this topic see my article from last week’s issue What Qualities Investors Look for in Founding CEOs. Where this does not apply is when you are speaking to a venture partner at a venture capital firm, or an entrepreneur-in-residence at a private equity or venture capital firm. Individuals in these roles are typically industry veterans who are ex-CEOs or current executives of biotech firms themselves who often times hold PhDs. Thus if you are presenting to these individuals, it is appropriate and necessary to take a deeper dive into the technology than you normally would with other individuals at a VC firm, PE group, or hedge fund.

Pitching to Big Pharma/Corporate Venture Capital Firms

Scientists for the most part get it right when they are pitching to big pharma and corporate venture capital firms. These groups of investors are looking for a highly technical overview of the product that you are developing. What they want to see is an in-depth overview of the mode of delivery, and generally the indication is important as well but it is the former that is most important to stress. What some scientists do forget though is that it is still important to stress the management team in presentations to big pharma and corporate VCs as well, as these types of investors often work very closely with the companies they invest in.

At the end of the day, what is most important is to do your due diligence on an investor before giving your presentation. Find out who specifically at the firm you will be presenting to – and what their background is – before you start putting together your pitch. There is no one-size-fits all presentation that your firm can create to tailor to every audience, each investor is unique, and consequently, you should never delivery the exact same presentation twice.

The Chasm of Skepticism: The Greatest Barrier to Raising Capital

29 Aug

By Dennis Ford, CEO, LSN

Recently, I have been interacting with a lot of startup incubators and accelerators, revolving around fund raising boot camps that LSN teaches for scientists.  Basically, LSN’s “Discovery to Distribution Boot Camp” stays away from the strategic and concentrates on the tactical aspects of commercializing and raising capital. The marketing task is all about doing the research and finding a list of investors that are a fit for your products or services. It’s really a marketing 101 exercise: the first step is LSN helps them identify all the companies on the planet that look like their firm. In marketing parlance, this is identifying and sizing the competitive landscape.

Why is this important? This exercise – when done properly – will not only include most of the look-alike companies, but also the look-alike-companies and their lead and co-investors that have invested in the past and present. This über list of investors is quite valuable, as we know that these investors will understand the company, the market and the product, service or technology. I refer to this list as the global target list, and the reason is that these investors are a fit.

The next aspect is finding even more investors that are a fit based on present mandates to invest in the future. These investors have dry powder (investable capital), and are looking to allocate. When done properly, LSN can help them aggregate a list of relevant investor targets in their orbit that have shown a distinct past, present or future investment interest. Sounds simple enough, but here is where the world of the scientist collides with the world of the generic sales and marketing.

Time and time again when we put on these boot camps, the inevitable questions arise. The list is great, but am I allowed to call these investors? I hear that if someone doesn’t refer you, investors won’t talk to you. Can you prove to me or give me a reference of someone that has actually called an investor cold? I want proof that getting a list of investors that are a fit is how entrepreneurs actually raise money. On and on, the skeptical scientists create a thousand reasons why getting a list of investors that are a fit for their particular market segment or indication won’t work, and how in the past it worked like this (the old, outdated map). Enter the sequel to the Valley of Death version 2.0: The Chasm of Skepticism.

I make no bones about who I am and where I come from; I am genetically a sales person. I have been selling for decades, I am a selling CEO, I am an entrepreneur with 8 startups under my belt. Of the 8 startups I have been involved with, I have been part of the executive management team, the CEO or the founder. I have been part of 2 IPO’s and 4 acquisitions, with 2 more in the wings (I hope). So please imagine my reaction having spent my life in sales, marketing and business development when I have to debate whether a person who is a startup entrepreneur is allowed to make an outbound phone call to a complete stranger to move his/her company along.

What is even more chilling is this ethos is passed around in the life science marketplace as some sort of rule. Entrepreneurs shun rules. Entrepreneurs break rules. Entrepreneurs don’t listen to the status quo out-of-date dictums, and they don’t use old antiquated maps! They create new ones they do whatever they have to do. They jettison their comfort zone. They embark on hideously uncomfortable journeys. They do whatever it takes and making a blind cold call to a complete strangers who are a known fits for their product or service isn’t even the ante into the game. So here is how to get across the chasm of skepticism: get a list of investors that are a fit for your firm, do an email introduction, and then call and set up an intro meeting, then rinse and repeat.

Hot Life Science Investor Mandate 1: NPO looking for Biotechs Developing Brain Disorder Therapeutics

15 Aug

A non-profit based in the Western US with nearly $50 million in assets is interested in biotech firms developing therapeutics that target brain disorders. The firm typically allocates from the hundreds of thousands into the millions per firm, and is looking to allocate to one more firm in the life science’s space for their second fund. They are especially interested in technologies that are able to deliver therapeutics across the blood brain barrier, as well as the personalized medicine space. The firm prefers funds that are in between phase I and phase II of the clinical development process, but will consider products in preclinical, phase I, and phase II development.