Investor Fit: It’s Not Just About Money

By Lucy Parkinson, Research Analyst, LSN

LSN’s articles on fundraising are largely based on the idea of finding investors that are a strong fit for a life science company’s offering. However, once a conversation with an investor is started, it becomes a complex process. There are a plethora of criteria that many fundraising executives may not be aware of that do have a significant impact on investment decisions. Moreover, an investment represents a long-term relationship that needs to be maintained. In short – Fit isn’t just about pairing cash with an asset.

I interview investors on a daily basis. Yes, we do talk about the assets – such as whether an investor is more interested in biotech or medtech, what stage of asset development an investor is interested in buying into, or which indication areas show the most promise. We also talk about typical allocation sizes and the frequency of allocations. However, one of the most important elements we discuss is the investor’s approach to portfolio building, and what qualities they want to see in a management team before they sign a deal.

In LSN’s experience, it typically boils down to control of the company, which can manifest itself in a number of ways. Let’s face it – nobody likes unnecessary exposure to risk, and investors want to do what they can to reasonably reduce their risk relative to their return. This often manifests itself in a positive way. For example, a corporate VC that offers a portfolio company free expert advisory, access to corporate resources, and easy access to a potential exit into the mother company. However, a dispute over control can lead to serious problems as well, and an entrepreneur should be mindful of how to parse the marketplace depending on different investors’ missions.

Here’s an example – You have a small molecule for oncology and a venture philanthropy in the cancer space chooses to invest. What happens when you find out that even though your asset is promising for cancer, you have a much faster path to market with a totally different disease area. You may now be restricted in your ability to pivot due to your investor’s indication-specific orientation. Similarly difficult situations can arise when it comes to management decisions, and a proactive VC may desire to replace elements of a portfolio company’s core team or to make a significant change in strategy. Vinod Khosla recently questioned the wisdom of these VC-led leadership decisions.

The point is, as an entrepreneur, you need to think both tactically and strategically, and that will help guide your decisions in choosing an investor group to target. So when you initiate your outbound campaign and term sheets begin to surface, think about getting your company to the next level, but be mindful of the levels after that as well.