Filtering the Noise: How Life Science Investors Manage Prospects

6 May

By Maximilian Klietmann, VP of Marketing, LSN

Max Smile 2

In this newsletter, we often discuss how emerging life science entrepreneurs should think about their fundraising strategy. This week, we’re going to look at the fundraising process from the perspective of a couple of investors.

I called a corporate VC fund and a family office in the LSN network; each is actively making allocations and has a mandate to make at least five investments over the next year. I asked a simple question: What does your typical month look like?

The deal-sourcing executive at the corporate venture fund was quick to say, “We get a lot of referrals, but more often than not, they’re only generally targeted. There are a few people in my network who really understand what we are looking for. I trust their judgment, and they pass me more relevant leads. However, most of the referrals I get aren’t great fits for us.”

Entrepreneurs should keep this in mind. You may get referred, but that doesn’t mean you are going to get funded. You may even get a meeting, but very often it will be what we at LSN refer to as mercy meetings: investors agree to meet with you not because your technology is a fit but because they feel obliged because you were referred, or thought they’d do you a favor. Such meetings rarely lead to anything substantial and investors will not spend a lot of time on.

“On average, I probably get 30 to 50 business plan submissions a week,” remarked a manager at a California-based family office. “Some are referrals, but most are unsolicited emails.” That equates to about 1,500 to 2,500 business plan submissions in a year for an investor that is looking to make only five investments. “Simply put,” he said, “I can’t reasonably go through that much information. I have to make a decision whether or not to continue reading after the first few sentences.”

This underscores how important it is for entrepreneurs to succinctly communicate their value to investors. “I’m sure there’s some great technology I’ve passed on, but if the CEO can’t tell me why his company is special in the first page, I’m not interested in doing business,” noted the family office investor.

So how many meetings result from unsolicited submissions? Answers from the interviewees varied from 15 to 30 meetings a month. This is an average hit rate of one out of ten. However, only a fraction of these ever move into due diligence and ultimately get funded. At the end of the process, a typical ratio for these investors is approximately one allocation for every 300 potential deals they come across.

How do emerging scientist-entrepreneurs improve their odds then? An accurate and up-to-date global target list of relevant investors that are a fit is critical. However, it’s not productive if you can’t immediately communicate why you are a great fit for an investor. This requires crisp marketing collateral that clearly explains what sets you apart from the other 30 to 50 proposals an investor received that week. In addition, you should stay focused and get as much feedback as you can. If an investor passes, ask why—that might be all it takes to get them to take another look and agree to a meeting.

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