By Lucy Parkinson, Senior Research Manager, LSN
What’s it like to be in the driver’s seat of an early stage fundraising campaign? At the recent RESI Conference, LSN brought together four life-science executives for a “Tales from the Road” workshop to hear their firsthand accounts of navigating the fundraising process and raising capital. What stumbling blocks had they hit, how had they solved the issues, and what had they learned about raising capital? How did they go about finding potential investors, and how did they determine which investors they should pursue?
Here are the make-or-break points that our entrepreneurs stressed.
Having the Right Team
As Shantanu Gaur (CSO, Allurion Technologies) explained, the quality of the management team is particularly important when a very early stage company is raising capital. Before a company plots a development timeline, acquires data, talks to regulators, or makes a business projection, the company begins with a management team and an idea. Seed-stage investors therefore focus on the quality of the management team and the potential of the idea. Given that Shantanu was a young entrepreneur—he had not yet graduated from medical school—he built a team with “plenty of grey hairs” that could provide the industry experience he lacked. This team was able to convince investors that it was the right team to advance the idea and realize its full potential.
In addition to experience and the ability to appeal to investors, the entrepreneurs on our panel mentioned two other ways in which having the right management team is an absolute necessity.
First, many life-science companies raise money from friends and family to turn the lights on before gearing up for their first institutional financing round. If the individuals on a management team have strong personal networks, those contacts can become initial sources of support.
Second, raising capital requires having a staff that is not only dedicated to the fundraising process but also has the wide range of skills required. Rick Berenson (CEO, Thermalin Diabetes) noted that although it’s vital to have a team member who’s strong at pitching, there must also be a team member responsible for meeting logistics and chasing investors for follow-up discussions.
Following the Four Steps to Raising Capital
Rick Berenson explained the four steps of the fundraising process (Rick calls these the ‘four Ss’): sourcing investors, screening investors, segmenting investors, and selling to investors.
Several of the panelists had successfully made use of the LSN Investor Platform to connect with investors outside of their existing personal networks. This particularly rings true in the family office space, where panelists said it was often hard to find an initial contact. Other sources panelists mentioned included Gust.com, local angel networks, and lists of major donors to charitable foundations in the relevant disease field.
The next challenge, as Kurt Dieck (CEO, Biosortia Pharmaceuticals) put it, is identifying the few investors who will be willing to sign a check from a global target list of potentially hundreds of investors. This is the process of screening investors. How do you decide who to prioritize? Here, the entrepreneurs told us that investor fit plays a key role, often in a way that becomes more nuanced than simply being in the right indication area and phase of development. For example, if your company’s strategic plan involves global regulatory approval and sales, a globally active investor will be a better fit than a regional investor. Again, having the right team is vital; a campaign can be run far more efficiently if there is a team member dedicated to qualifying investor leads, finding the alignments between the company and each investor, and sending out personalized teasers to get an investor’s interest.
It’s also important to keep an eye on an investor’s mood; does the investor seem excited to have follow-up meetings with you, or do you seem to be last on his or her priority list?
Frederick McCoy (President and CEO, NeuroTronik) pointed out that the screening process goes both ways—which of the investors you’re meeting could you picture as being involved with the company after the financing round has closed? Which investor would make a strong board member, or a relevant strategic advisor?
Segmenting interested investors is the third step. When will each investor be willing to get involved? Rick Berenson noted that raising capital in life sciences is like making a movie in Hollywood: what gets investors interested is knowing that other investors are interested. Some investors like to declare their interest early, taking a risk in return for a commensurate reward. Others want to see who else will come in before joining to close out the round. And still others may pass until the next round, while they keep in touch and watch your progress.
Finally, with all your targets in line, the last step of the process is selling to investors.
Recognizing That Fundraising Is Selling
What is fundraising? According to Rick Berenson, fundraising is a sales process, and it’s therefore about overcoming all of the possible objections to close a deal. An early-stage life science company has to sell investors on complex, cutting-edge technology. The sales process for an early-stage fundraising campaign therefore involves making the investor comfortable with the risks involved.
One persistent difficulty the entrepreneurs identified was that of unvoiced objections; it’s hard to make an investor more comfortable about a concern if he or she hasn’t told you what it is. Shantanu Gaur told the audience that it often takes many meetings for these problems to be voiced—and then more meetings before the investor becomes comfortable with the answers.
But is it possible to preemptively address these problems? Kurt Dieck suggested exploring with investors all the initial objections you had to pursuing your technology. Tell investors how you overcame each cause of skepticism and why you’re now excited to be part of this opportunity!
The entrepreneurs also explained the importance of tailoring pitch content to the audience. Fred McCoy suggested beginning with a top-level pitch deck and letting investors ask deeper-level questions. That way, you can lead each investor through the fine points that matter to them—whether it’s a question of pharmacokinetics, regulatory pathways, or financial projections. In this way, you will appear confident on the details while not overwhelming investors with details that aren’t of concern to them.
Finally, Rick Berenson advised to be sure to speak each investor’s language. If you only speak to investors in the language of a scientist, the message won’t get across; by being adaptive and engaging in their own language, you have the opportunity to build a real connection.
For those who were not able to attend the fourth RESI Conference in January, LSN would like to bring the Healthcare IT Investors panel to you. In this panel, five investors explained their current investment mandates and shed light on the hot topics in the Healthcare IT field:
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