Next Phase Newsletter

By Michael Quigley, Research Manager, LSN

As we enter the so-called “golden age” of life sciences, there is no shortage of funding opportunities for savvy investors. This has not been lost on angel groups.

There has been a significant rise in the number of angel groups targeting early stage life science companies. In the past year, approximately 25% of all angel dollars invested has been in the healthcare sector. Angel groups are making not only more investments but also larger ones, and their focus is longer term.

Syndication has allowed angels to take more substantial positions and to take advantage of the many opportunities available since the contraction in the VC sector. Also, the rise of capital-efficient life science startups, which outsource development, has allowed angels to place more bets and be longer-term players. Granted, angels like all investors prefer a low-risk investment with a fast turnaround, but the changing landscape in the life science arena is enticing them to increase their holding periods in order to achieve that profitable exit.

At LSN we actively track over 150 angel groups, one-third of which are looking to make investments of $1 million or more prior to any syndication. That’s a much higher investment than the $100,000 to $200,000 angels are often identified with. Moreover, many of these groups are becoming increasingly sophisticated in terms of their investment mandates and industry focus. As syndication continues to become more prevalent, angel investors could become important players in the course of a company’s fundraising cycle.

Sources:

http://www.fosters.com/apps/pbcs.dll/article?AID=/20140504/GJBUSINESS_01/140509798/0/FOSNEWS

http://www.lifescienceleader.com/doc/angel-investors-look-at-biotech-0001

By Dennis Ford, Founder & CEO, LSN

I am a big fan of Steve Blank. For those who are unfamiliar he’s an entrepreneur and startup thought leader who has created and promoted relevant timely programs revolving around  startup strategy, fundraising, and iterating small business.

A recent focus of his is i-Corps, an audacious effort supported by a number of government organizations and spearheaded by the National Science Foundation. The goal of this program is to help early stage innovators make their ideas and technologies into real products.

Steve really stresses being “market-focused.” I am simplifying here, but he teaches how to go about validating the market for a product. He is a proponent of polling and surveying techniques that help scientists determine if there are potential clients or users for a particular product. He then encourages scientists to find large groups of these potential users and vet them. If the scientists get agreement, they have validated the market and it’s full speed ahead. If they don’t, the scientists may have to iterate or pivot until they get a group consensus and thus, market validation.

Steve’s process is a universe onto itself. He teaches through his programs why using practical common sense methodologies can drastically help in determining market acceptability. Given the NIH’s recent announcement that they will participate in i-Corps, I’m anxious to see how he adapts his philosophy (developed for software and new age media) to life sciences. I expect that much of his philosophy will transfer well. Nevertheless, the life sciences arena is unique: More often than not, the need is rather obvious: these technologies are changing or saving lives.

Probably half of the early stage life science investors (for example, family offices, venture philanthropy, patient groups, and foundations) are not as concerned as other investors about rate of return on dollars invested. They want to find a treatment for a specific type of patient (in the case of family offices, it is often a family member). This goes beyond “market adoption” and requires a different way of thinking about how to approach fundraising.

The goal for these investors is finding the best assets and the best scientists to move science forward and improve patient lives. It’s not a question of justifying a market. These technologies are addressing serious medical needs, and the key for emerging scientist-entrepreneurs is to identify where they fit and how to target the investors that are right for them. Raising capital in the life sciences is different than a traditional “market validation” approach. It’s all about finding the right investor for you, and positioning yourself accordingly. The real news here is that the NIH is embracing the fact that scientist-entrepreneurs have to broaden their understanding of rudimentary sales and marketing.

By Jack Fuller, Business Development, LSN

Life Science companies pitching investors have a tough job: It’s not easy to convince people to invest in a capital-intensive industry with a low rate of product commercialization. Then there’s the challenge of conveying an extremely specialized and complex idea to people who want to net out the technology quickly. To be successful, companies must work hard to communicate complex ideas at a level that is easily understood by all potential investors, not just the “science-literate.” As Charles Bukowski once said “Genius could be the ability to say a profound thing in a simple way.”

The first place this needs to be accomplished is in a company’s tagline. Taglines are ubiquitous in the industry, but very rarely does a tagline accurately summarize that “special sauce” that makes a company so exceptional. Prospects should be able to read a tagline and grasp the goal of the company.

Take a look at the taglines below. What do they tell you?

As you can see, taglines run the gamut from completely ambiguous and semi-descriptive  to great ones that communicate a company’s brand and value to potential investors.

The goal of a tagline is not to be clever or cute but to powerfully and succinctly communicate a company’s unique value proposition. There is no one formula for a tagline, as each company needs to distill its entire investor pitch into a crisp statement.

Take a moment to think about your tagline. Crafting a clear one is the first step in the process of creating a cohesive and compelling brand and will form the basis of your outbound campaign.

By Alejandro Zamorano, VP of Business Development, LSN

One of LSN’s Investor Platform clients recently provided some insight on his fundraising campaign. We encourage feedback from our clients as it helps us to validate our methodology and to integrate improvements into our product. Our client is a molecular diagnostics company looking to raise $3 million to $8 million to expand and perform some key clinical studies.

We first met the co-founder a few months before he elected to subscribe to the LSN platform. At first, like many emerging biotech and medtech entrepreneurs, he relied on the executive team’s personal network and referrals to find potential investors. He had a relatively large pre-existing network of almost 72 identified investor targets; thus, he felt that he did not need any additional help. The concept of “fit versus referral” was clear to him, but nevertheless, he felt sufficiently armed to pursue the campaign under his own steam.

In his first few months of fundraising, he reached out to his network and received responses from 36 of his prospects. He was then able to convert 25 of those responses into meetings, of which 11 remained interested in continuing the dialog. Despite his initial success, he soon hit a wall and was left waiting as his investor prospects began discussions internally. Weeks passed and investors delayed their decisions. It became apparent that in order to master the numbers game, he would need more prospects that were strong fits for his particular company. Before long, he resurfaced to LSN and elected to subscribe to the investor platform.

In the first 90 days of using the LSN Investor Platform, LSN was able to help this client identify and reach out to a global target list of 148 potential investors outside of his network. With the help of a clearly defined campaign strategy, and armed with all of the necessary cloud infrastructure to run an effective campaign, he was able to get 38 positive responses from investors he had previously not known about. He was then able to convert 17 of those responses into meetings, of which 9 were interested in continuing the dialog.

By expanding his list of qualified fits, our client was able to triple his meetings and double his investor conversations. He remains in negotiations with 20 investors currently. This is a shining example of why it is important to contact investors outside of your network and not to exclusively rely on referrals. Moreover, it shows that the same result could have been achieved in half the time, had our client started his campaign using the LSN Investor Platform form the outset. It all comes down to finding the maximum number of prospects and tactically working those leads into a handful of relationships that ultimately end in allocations.

By Maximilian Klietmann, VP of Marketing, LSN

LSN regularly speaks with numerous early stage entrepreneurs on the subject of asset focus. All too frequently, scientist entrepreneurs are reluctant to choose a single asset for the focus of their company unwilling to believe that it is in their best interest. Despite the feedback LSN gets from ongoing conversations with life science investors, many emerging biotech entrepreneurs still see this as a debatable point.

The typical arguments that emerging life science CEOs make against a single-asset focus may appear to make sense at first: Investors should prefer multiple shots on the goal or a portfolio of products is worth more than the sum of its parts. However, the key point that is often missed is that multiple assets frequently spell increased risk from an investor’s perspective. Why is this? It can be boiled down to three basic factors.

Capital Efficiency: The process of moving a therapeutic from discovery through the clinical trial process is extremely expensive, and it’s not getting cheaper anytime soon. Many investors tell us that given the inherent risks already present in the development process, they want their capital to be going towards the development of a single product that the whole company is focused on. This is preferable to spreading funds across a number of projects (increased overhead) that will get a portion of everyone’s focus (decreased attention).

Time to Market: The value inflection created by FDA approval is huge. A single asset on the market is almost always more valuable than a handful awaiting approval to move to the next trial phase. Relating to the capital efficiency point above, most investors we speak with would rather see one asset receive all the capital to move it across the finish line faster, regardless of the promise any other drug candidates may have.

Management Focus: This is the big one. Picking a single asset and having a laser-like focus on how to move it through the pipeline and to market shows that the management is dedicated, has clarity of vision, and is aligned with the investor. It exudes a “shortest line to cash” attitude and lets the investor be confident that the entrepreneur is able to lead the company.

By Lucy Parkinson, Research Manager, LSN

We’ve talked about the fact that many venture capital firms have withdrawn from investing in early stage biotech startups, contributing to the so-called “Valley of Death.” However, there are still a number of life science VCs that remain active, so what are they doing with their dry powder now and why?

Talking to VCs recently, we found that the bulk of these funds are diverging in two directions. Some VCs are looking for nascent technological breakthroughs that are, generally, still a long way from becoming biotech startup companies. These VCs are building companies around these breakthroughs, gaining access to new scientific works either by maintaining a network of leading academics or by performing initial research entirely in-house.

There are some clear benefits to VCs taking this approach. Firstly, they can acquire assets for very low prices, before any of the classic value-inflection points. Secondly, the VCs can control a company’s direction from start to finish; they can select a management team and make strategic decisions, without a scientist entrepreneur getting in their way.

However, this strategy requires that VCs have a lot of connections and expertise. Scientists must be willing to hand their work over to the VCs, and the VCs must be capable of selecting and developing the most promising of these risky, very early stage assets. These VCs can cherry-pick the most compelling breakthrough ideas and build companies in-house, from the ground up, around these new assets. This then leaves real biotech startups—companies with pipelines and management teams—out in the cold (as far as VC investment goes). As a representative anecdote, an investment partner at a VC firm told us that in the past year, the firm reviewed 982 outside plans and invested in none of them. Another partner at the same firm later told us that it would consider investing in an external biotech startup but only in opportunities that were about three years pre-IND.

Other VCs have abandoned their appetite for technological risk and are instead focused on finding promising late-stage assets that they shepherd towards a rapid exit. These VCs typically look for investments that can be realized (often via a sale to big pharma) in a timeframe of 18 months to 3 years. Some have adopted a virtual pharma model and are focused solely on investing in assets rather than companies, either by in-licensing or simply acquiring late-stage product candidates and then managing the entire development of the asset until the exit point. Others do make equity investments in biotech companies, but some of these investors nevertheless see the company’s existing management as an optional add-on; one partner at a late-stage VC firm told us, “The development team is not necessarily the commercialization team.”

So what’s the takeaway? If you’re a late preclinical or early clinical-stage biotech company with a fully-formed team and a long development path ahead of you, this may actually be good news. More non-traditional investors will likely continue to move into this piece of the market to take advantage of the opportunity left by the VCs. The turbulence in the VC arena is far from over, however, and LSN will continue to monitor the latest trends in the investor space as the sands continue to shift.

By Michael Quigley, Research Manager, LSN

Earlier this week, the FDA announced a new program that intended to provide earlier access to unapproved medical devices for certain patients. The EAP (Expedited Access Premarket Approval Application) program will allow companies to directly engage with the FDA sooner to collaboratively develop a plan for collecting scientific and clinical data in order to get patients safer and more effective devices sooner. The basic objective of the program is to diagnose and treat patients who are suffering from serious conditions and have medical needs that are unmet by current technology.

So, which companies are allowed to apply for the program? According to the FDA, a company is eligible for participation in the program as long as the medical device in question meets these standards:

• It is intended to treat or diagnose a life-threatening or irreversibly debilitating disease or condition.

• It is able to meet at least one of the following criteria:

1. The device targets an indication where no approved alternative treatment/diagnostic exists.

2. The device is technology that provides a “clinically meaningful” advantage over existing technology and/or approved alternatives.

3. Availability must be in the patient’s best interest (as determined by the FDA).

• The device has an acceptable data-development plan that has been approved by the FDA.

So what does the EAP program mean for the industry as a whole? One obvious foreseeable impact is the attraction of more direct investment into early stage devices.  This is great news, especially since early stage devices have had a tough time raising capital in recent times.  Moreover, early collaboration with the FDA means more guidance in setting clear clinical endpoints and having a better definition of what data is required to move forward. This increased regulatory transparency will hopefully increase the odds of approval (another checkbox for more risk-averse investors). At this point, the FDA has only released preliminary information on the program, but device companies and investors should keep an ear to the ground, as the details of the new program are released over the coming weeks.

Source: http://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm394294.htm