The Magnificent Seven-Fundraising Challenges Facing Life Science Entrepreneurs

12 Mar

By Dennis Ford, Founder & CEO, LSN

Dennis bookEntrepreneurs in the life science space face a myriad of challenges on the commercialization journey including fundraising. While the current open IPO window has certainly shed positive light on the sector, early stage life science companies are still facing an uphill climb when it comes to fundraising. There is simply a limited amount of capital available to fund a burgeoning number of products, ideas, and solutions that can no longer be supported by government or academic sources. However, the supply and demand of capital is not the only hindrance to an early stage life science company; below are seven fundraising pitfalls that we hear about on a daily basis in our dialogues with investors and entrepreneurs.

  1. Contributing to “White Noise”

An investor’s inbox is often bombarded with messages describing the latest and greatest opportunities; however, more often than not, these opportunities are outside of that investor’s wheelhouse.  You need to match your company to an investor’s current mandate. There are simply not enough hours in the day for an investor to read, let alone respond to, all of these messages, and as a result, many go unnoticed or do not receive an adequate review. While there are those investors who do not specify their investment interests, fundraisers in the entrepreneurial community can remedy this problem by taking the time to properly research and qualify the investors to whom they are reaching out.  Make sure when you go after an investor you know it is a fit for your company’s sector and stage of development.

  1. Lacking A Clear, Concise Message

Having a clear and concise message can significantly improve your odds of standing out amid the “white noise.” When your opportunity can be understood quickly, investors can more easily identify whether it is something to which they should allocate more time for review. Unfortunately this is not something widely accepted by many scientist-entrepreneurs, who insist on sending reams of data prior to establishing any initial interest. This not only impedes their ability to initiate contact, but it also adds to the overall problem by clogging the communication. It’s imperative to develop an ongoing dialogue with investors that are a fit. It works and makes both parties more efficient.

  1. Misunderstanding the Time, Effort, and Capital Required to Fundraise Successfully

At LSN we begin conversations with entrepreneurs with three basic questions: “Are you fundraising?” “Do you know how long it will take?” and “Do you know how much it will cost?” We do this to determine how savvy the entrepreneur is regarding raising capital. LSN staff need to gauge how well prepared a fundraising CEO is for what lies ahead. In our experience an average campaign can take anywhere from 9 to 18 months and can cost anywhere from $60,000 to $100,000, when you factor in expenses such as those associated with being on the road and the development of marketing collateral and a website, it adds up.  Understanding the time and cost commitment required is crucial in determining when you need to start your campaign. Additionally, if you are raising money to stay alive, as many in this space are, you want to make sure you have enough cash reserves to last until you can lock down an allocation.

  1. The Myriad of Third Party Capital Raising Entities that Overpromise and Under Deliver

Many entrepreneurs who lack the time or skills necessary to run a campaign on their own hire third party groups or individuals to fundraise on their behalf. At LSN we have heard countless stories of groups that promise access to a vast global network of investors, which, in reality, often consists of just a few personal contacts along with a number of investors that may not be investing in companies that match your profile. These third parties don’t often take the time to maintain the list of investors on their networks to determine who is active and what they are really looking for. This “not-being-in-synch” often leads to “mercy meetings,” which ultimately go nowhere since they are based only on a favor and not on fit. The importance of an accurate, up-to-date list of targets cannot be underestimated when fundraising. Entrepreneurs that come to LSN also report a lack of transparency from these groups regarding who they are communicating with about the opportunity and what feedback they are receiving. When considering a third party for assistance with your fundraising, it is vital to receive a valid reference from a company in your space who has worked with them in the past. At LSN we keep track of everything on SalesForce.com and our clients can log in 24/7 and see which investors have been called, when they were contacted and which staff member is responsible for following up. Additionally, the client can read all the notes from the conversation and review any action items.

  1. Not Having a Plan B

When going into due diligence and later stage conversations with potential investors or partners, countless entrepreneurs fall into the trap of becoming so confident in the likelihood of investment that they cease to continue reaching out to other groups. This path is dangerous for a number of reasons. First, despite every positive conversation, until the money is in the bank, there is always a significant chance that the investor will not make an allocation. If you put all your faith in one investor who leads you on for months while you halt other fundraising activities, you will lose valuable time in your campaign and may even have to start from scratch. Second, we have heard from investors that it can be fairly clear when the entrepreneur is not talking to other potential investors, which will have a negative impact on the leverage that the fundraising CEO has when negotiations begin.  Third, the majority of financing rounds taking place in the life science arena today are made by a syndicate of multiple investors. Even if the investor you are communicating with agrees to invest, to close out the round you will likely need others to join, and the formation of a syndicate can be expedited if you have been in constant dialogue with a number of investors.

  1. Surface Thinking

When a person is in marketing mode, he is in dialogue with investors in order to facilitate a relationship that will result in a capital allocation.  Email canvassing, phone canvassing, WebEx presentations and road shows are all part of the dynamic. Sending an email to a bevy of targets in Asia or to Family Offices in North America without thinking about how to track the number of opens with an email report is counterproductive. To get more out of the email, you can use email campaign software to track this information.  By wiring the email with a few links that can be clicked upon to take the reader to your website, or to allow the reader to download a white paper, you can determine which investors are interested in your message and would be a good fit for your company.  Surface thinking is just sending the email without thinking deeply about how to get results out of the email campaign.  You need to get past the surface concept of an email; send it to a targeted list that can be monitored and reported on based on interest shown through opens and clicks. Targeted emails can help determine fit.

Phone canvasing isn’t just making a few phone calls and leaving some hasty message.  Like email, you need to get down past the surface of a phone call and keep your elevator pitch on the tip of your tongue.  You need to be precise and compelling.  You need to think of what you will do if no one picks up, and what to do if someone does pick up.  Being cavalier and frivolous in your investor canvassing creates white noise and doesn’t move you forward in your campaign.

  1. Informed Content

When you do your research and know an investor is a fit for your sector and stage it makes sense to start to think about how you can create some content that highlights your firm and your product or service. HubSpot has preached this concept for a long time.  Basically, informed content is about showing your value by getting content into your market space that is timely and compelling.  Informed content acts as a beacon for your company. It draws and guides people to you.  LSN’s newsletter, Next Phase, goes out to 15,000 global readers on a weekly basis. There are a lot of innovators and investors that read this newsletter.  We try and offer up helpful and insightful content that sheds light on the life science investor universe.  We highlight investor trends, we carve up our investor data and present up to date metrics on who is investing in what, and we do deep dives into the 10 categories of investors that we track.  Our goal is to do anything we can do to help our innovators and or investors connect more easily and understand each other better.  As a result, we get a lot of responses flooding in over the transom every week.  This action leads to business relationships.

These are just a few of the issues that we see life science entrepreneurs struggle with when trying to raise capital. With capital in limited supply, it is crucial that you avert these mistakes at every step of your fundraising campaign. By better understanding potential pitfalls and setting up your campaign strategy to avoid them, you can greatly increase your chances for a successful fundraise at a fair valuation.

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