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The Market Strata for Early Stage Innovation

18 Dec

By Dennis Ford, CEO, LSN

Understanding where emerging life science companies fit into the competitive landscape and how to position them in front of an investor audience are two of LSN’s guiding mantras. It is critical to take the time to understand where your firm fits and to develop a cogent, lucid and compelling brand and message. This helps investors understand the bet they are making. Understanding the “technology impact” of your product or service and its relationship with the general marketplace is crucial.

Personally, I parse technology according to my own rule of three.  Is the product disruptive, breakthrough or iterative?  Answering the question allows me to map the technology against the universe of investors that are a good fit.  After all, context is really what you are trying to achieve when meeting with an investor. Being able to quickly get the investor to understand where your technology sits in the overall scheme of things counts a lot. I spend lots of my time with life science entrepreneurs and I will share some of my insights regarding the few categories.

Life science companies with “disruptive” technologies have the potential to change the world in a big way. The word “disruptive” is often overused in the life science industry, so let’s take a moment to discuss exactly what it means: These are technologies that literally disrupt the industry – This is the rare, once in a blue moon, technology that literally changes the game (However, in the “golden age” of life science, these disruptive technologies may be on the rise.) This could be a cure for diabetes, an AIDS vaccine, or something similarly groundbreaking on a huge scale. These disruptive technologies are the holy grail that all investors are looking for and when identified are quickly shepherded to the A-list VCs. That is all well and good except that it’s 20 or so high flying VCs and 30-40 chosen companies (anyone’s guess). So what about the rest of the marketplace?

The “breakthrough” technology companies have significant technology solutions for major medical needs. These can be viewed as “leapfrog technologies” that change treatment paradigms or improve outcomes in a big way. These are not necessarily “disruptive,” but they are undoubtedly valuable innovations that impact patients in a very major way. Let’s just say for arguments sake that these breakthroughs companies number in the hundreds, and they are tasked with marketing themselves to the right investors, because the shrinking VC population isn’t necessarily accessible or the best route for them. The breakthrough companies need to be educated on the new categories of  investors are filling the void left by the VCs.

The “iterative” technologies are next generation innovations. This can be distilled down to a better, faster, cheaper, or otherwise improved next generation of existing technologies. These are easy to understand, because the previous version exists, so investors can easily grasp the value. However, these companies number in the thousands, and they have a challenge getting on any investor radar screens.  These companies are tasked with having to really dig deep in terms of finding the right investor fit and translating that into a cogent, targeted marketing campaign.

I started Life Science Nation (LSN) to track the other 10 categories of life science investor that are filling the VC void. LSN researchers create profiles through one-on-one personal interviews regarding their particular interest in life science investment. These investors are family offices (single and multi), venture philanthropy/patient groups, virtual pharma, mid-level PE, angel syndicates, hedge funds, foundations, endowments, pensions and corporate venture. At the end of the day LSN’s job is do the research, find investors, interview them, write up their profiles and investment mandates and get that data into the marketplace. Understanding how your technology fits into the marketplace allows you to understand which investors you should be targeting.

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Corporate Venture & Foundations Investing Early

18 Dec

By Lucy Parkinson, Research Analyst, LSN

When the LSN research team gathers mandates from investors, we’re taking the pulse of the future; we ask about what the investor is seeking going forward, what areas of their portfolio they want to build up, and which new breakthrough technologies they want to be a part of.  This has allowed LSN to identify a few trends that 2014 may hold for life science investment.  Today, I took a deep dive into what our mandate data says about who is seeking to invest at which stage in a product’s development. Here’s what I discovered:

Venture capital is going later.  Traditionally, venture capital firms were seen as the go-to for a new life science company in need of capital to fuel their earliest trials.  But of the active venture capital firms LSN has spoken to, 15% say they refuse to consider investing in preclinical projects at all. The bulk of VCs (about 50%) now declare that they’re agnostic about developmental phase, and will invest at any point through to Phase III.  About 25% consider investments in therapeutic companies that have a product on the market and are generating revenues – a realm of investment that was traditionally reserved for private equity funds.  Among medtech investors, very early-stage companies may have an even tougher time with VCs; a third of VCs that invest in medtech don’t consider opportunities in companies that have no in-human data.

So which new investor categories are most aggressively targeting early-stage therapeutics?  Here are a few of the trends that could forecast the coming year’s activity: Foundations are backing commercial work.  Of the foundations we’ve spoken to who are interested in making research grants to for-profit companies in 2014 as well as to academics and non-profit institutions, almost 50% will only consider funding preclinical and Phase I work.  These groups often tell us that this strategy is designed to make their research dollars go further, and to de-risk projects that they see as important.  If a foundation thinks your research work is important, they may be able to offer you a $100,000 grant to conduct some risky preclinical research; if that trial produces a solid result, another investor with deeper pockets is likely to step in, make an investment and advance the product to market – and getting new treatments to patients is what a foundation cares most about.

Another notable player at this stage is corporate venture capital; unlike VCs, almost all corporate VCs are looking to invest in preclinical work in 2014. Also, they have deep pockets and a declared need to uncover innovative science, so these may be some of the leading players when it comes to capital allocations in the coming year.

So what factor do corporate VCs and research foundations have in common that enables them to put money into breakthrough preclinical work?  Judging from the conversations we’ve had with them, the common factor is scientific expertise.  These groups are notably more specific than VCs; many foundations are pursuing a cure for a specific disease, and corporate VCs usually have specific strategic interests dictated by their parent companies.  About two thirds of venture capital firms are opportunistic generalists when it comes to choosing which indications to pursue; under half of corporate VCs are opportunistic in this regard.  As foundations and corporate VCs have specific focus areas, they’ll also have deep understanding of these areas and that means they’ll have more faith in their ability to pick outstanding preclinical projects to support.  If your company is at an early stage, reaching out to these fellow experts in your field could be much more beneficial to your search for funding than approaching a venture capital firm.

Investors Building Life Science Companies from the Ground Up

12 Dec

By Alejandro Zamorano, VP of Business Development, LSN

LSN tracks ten categories of life science investors around the globe. Recently, we have begun to follow and emerging trend of established investors creating and launching their own companies. These investors are cognizant of the critical importance of good management when it comes to asset commercialization. The school of thought behind this innovate approach is that emerging technologies stand more of a chance when strong leadership and organization is put around an asset from the get-go. So, why is this occurring and how exactly is this being executed?

From the firms LSN has spoken with, this approach is essentially an fusing two key elements – Access to capital and access to a network of experts, both of which help to make leaner, faster, and more efficient companies. It all starts with sourcing novel science from a translational researcher, and building a business structure around it.

Since the investor is starting the company, it is possible to structure the “perfect” company from the ground up. This goes beyond investor fit – it’s a custom tailored company to fill a portfolio need. This can create significant advantages early on in the company’s life cycle, as fundraising seed capital isn’t a problem. By avoiding this part of the process, the company can focus on moving the science forward. Moreover, the company can structure the management strategically from the get-go, by having a business-savvy CEO in place who has the sales experience required to turn innovative science into a company.

Add to this that the investor can shepherd multiple assets through the pipeline by outsourcing work to CROs, and you have a great lean model for building a portfolio of companies. This model is gaining traction, so stay tuned as LSN tracks this evolving trend.

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Adapting Your Start-up to the Investor Mindset

12 Dec

By Max Klietmann, VP of Marketing, LSN

LSN spends a lot of time speaking with both investors and early stage life science executives. One of the constant themes in our experience is the disconnect between what investors want to see when evaluating companies, and the way in which early stage executives present themselves. Though there is a broad spectrum of elements that influence an investor’s decision to allocate, there is only a handful of factors that can make or break an investor dialogue early on. If you, as an early stage entrepreneur, understand how to address these points up front, you are likely to see significantly higher success in your fundraising efforts:

  • Competent Management – A racecar is only as good as its driver. Similarly, a technology without excellent management is dead in the water. Savvy investors invest in people, and the ones that have been around the block are able to see if a CEO has what it takes. Take a look at yourself and your team – the scientific acumen is undoubtedly there, but take a hard look at the business acumen and sales ability of your management team – do they have what it takes? If not, find someone who can drive, while you engineer.
  • Technology – This is a big one, whether your technology is a disruptive innovation or an iterative improvement to existing technology. Learn to explain your product succinctly, and be able to tell an investor exactly how it fills a demonstrated market need. Show investors the nature of your technology – showcase it, and explain why the competition doesn’t stand a chance in your slice of the marketplace.
  • Focused Approach – It’s easy to get caught up in the potential applications of your technology, but this can be a pitfall. Many CEO’s are eager to show all of the diseases that could be addressable by their small molecule, but it translates to a lack of focus from an investor standpoint. Don’t get me wrong – having backup plans in your back pocket is always a good thing, but pick one product, one indication, and show your investor prospect that you have the laser focus to get it done.
  • The right target population – We’ve spoken about knowing your marketplace at length. Do your research, and make sure you are targeting the right population from your investor audience’s standpoint. Are you a solution for a broad indication with lots of prospective customers, or are you better suited for the shortened regulatory path around a niche orphan disease? Choose one and be able to explain why your product is the hottest thing to hit this area.
  • A clear path to market – Have a roadmap for your regulatory path and key partners to help you move forward. Nothing is ever set in stone, and things will constantly change, but it means a great deal to an investor that you aren’t only thinking of stepping from A to B, but C, D & E are also being considered in your present decision making.

At the end of the day, you need to sell each prospective investor on these points. There will always be further criteria to discuss and deal terms to navigate, but in order to have the ability to choose investors, you need to have a relationship with several. Meet these key points, and you should be well on your way to raising a round on terms that fit your company’s needs.

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The Myth of the NDA

12 Dec

By Danielle Silva, VP of Business Development, LSN

Most fledgling entrepreneurs are (understandably) protective about their technologies. In turn, it is common for them to ask investors to sign an NDA before engaging in a dialogue. An NDA (Non-Disclosure Agreement) is essentially a confidentiality agreement that two parties engage in to ensure that the information shared amongst the two parties is not made publicly available. Companies do this in an attempt to ensure that any technologies or processes that are integral to the firm’s operations are not disclosed to any other party. However, an NDA can discourage conversation, especially if incorporated into the introductory dialogue. So what is the right path to follow when considering whether or not to put an NDA in place?

Firstly, always consult your lawyer. This article isn’t intended to be legal advice, rather it is intended to help you think strategically when engaging investors. Many life science entrepreneurs may be tempted to make investors sign NDAs before even speaking with them. However, these investors typically look at hundreds or even thousands of deals every single year. An NDA could discourage a conversation. Especially when targeting investors that get a lot of solicitations, and NDA will probably constitute a burden. If you can’t express to an investor in the initial dialogue why your company has value, you’re probably not ready to start talking to investors. That doesn’t mean that there is information worth protecting, but you needn’t disclose “the secret sauce” in the introductory email.

Secondly, keep in mind that investors aren’t purely looking at your technology, they are also looking at you. Ideas are more like mushroom spores than lightning strikes – They emerge simultaneously from various sources, and the right leadership (not just the right idea) makes the difference between success and failure. Management is just as important as product from an investor standpoint. Many entrepreneurs we speak with are surprised by how many companies are in their competitive landscape. There is probably someone else doing something very similar to you, so rather than hiding your idea, show investors how you, as an executive, can do it better, faster, and more effectively.

Finally, remember that the purpose of your initial dialogue is supposed to facilitate a relationship. If things look promising and meetings surface, that’s the right time to discuss putting together an NDA with your lawyer. Avoid making it appear that it’s complicated to do business with you from the get-go. Again, always consult your lawyer before engaging in investor dialogue, but remember to keep a tactical mindset. Fundraising is a numbers game and the easier you make it to start a dialogue, the more meetings you’ll net.

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CRO Trends in 2014

5 Dec

By Alejandro Zamorano, VP of Business Development, LSN

As we round out the final quarter of 2013, LSN looks towards the new year and what it holds for CROs (Contract Research Organizations) within the life sciences. LSN maintains regular dialogue with a broad spectrum of CROs – from top-tier full service organizations, to small niche-specialized research companies. Based on our market insight, here are the top behavior trends among CROs for 2013 as we continue to see strong growth in this critically important sector of our industry:

The Death of the Passive Business Development

The CRO space has become increasingly crowded over the past year, and with mounting pressure on biotech companies to achieve capital efficiency, the market is becoming increasingly competitive. CROs that rely on inbound leads and recurring revenues from longstanding partners will face serious challenges in an environment where only the hunters survive. Those organizations that iterate their business development tactics will be the winners, and outbound sales will rule the day. As the industry matures, we will begin to see more sophisticated marketing campaigns as sales organizations adapt to the new market dynamic.

Developing Therapeutics

Tempted by the success of their clients, and a wealth of in-house expertise, a handful of CROs are starting to leverage their proprietary technology platforms in the hopes of developing their own novel assets. This will cause a shift within the industry as the lines start to blur between a CRO and a biotech company. The biggest obstacle to success in 2014 will be the ability to raise the necessary funds needed to shepherd the asset through clinical development, especially when the focus of management will be split. However, considering the fact that CROs already have revenues from the service side of the business, they may require less outside capital for asset developments, making for an enticing investment opportunity.

Consolidation

Private equity groups are becoming a major play in the CRO space, providing much-needed capital for growth. Many of the PE players in the space are purchasing and consolidating mid-level players to create economies of scale and synergies of business. Buyouts will certainly provide some liquidity events, but more importantly, consolidation will be an important counterbalance to the growing number of CROs. Moreover, as private equity groups create more efficient players via M&A activity, the pressure is on for smaller players to stay competitive.

Investor Partnerships

Today, the growing trend among service providers is to team up with well-known investors that have a continuing demand for certain basic services such as clinical development and contract manufacturing. By building these alliances and by outlining a discounted rate, CROs can create a consistent supply of customers by providing investors with a price break. This is a win-win in both situations, where investors get increased control and cost efficiency for their portfolios, while CROs gain a powerful dealflow engine.

Investment Activity

LSN recently covered the trend of CROs making direct investments into life science companies. This trend is also likely to accelerate as CROs take advantage of the opportunity presented by early stage companies strapped for cash in the form of services-for-equity arrangements, or outright corporate venture activity.

2014 will be an interesting year for CROs, as the increasing competitive nature of the industry will leave only the most innovate companies to enjoy market growth. Be sure to stay tuned as LSN continues to track the key market dynamics affecting service providers going forward.

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Understanding Technology Risk & Investor Mindset



4 Dec

By Lucy Parkinson, Research Analyst, LSN

LSN recently released an article detailing the competitive landscape for therapeutic indications, and how your asset fits in. We all know that not all subsectors are equal from an investor standpoint; if you’ve been out there looking for investors, you’ve probably discovered whether your particular niche is currently ‘hot’ or ‘cold’. You’ve also probably noticed that investor appetite shifts, and that cold sectors can quickly turn red hot, and vice-versa.

So what drives these trends in life science investment, and what does it mean for your company?
 
Given the rapid pace of progress in life sciences, many investors find it hard to keep on top of every new innovation, particularly if their firm doesn’t specialize in life sciences. Though things change, opinions are often influenced by past experience. “We’re only human,” one investor told me last week. “We lost money on our diabetes investments, so we’d think twice about investing in that field again.” Many factors influence an investor’s risk assessments. One is the size of the potential market; it’s ironic that some investors have come to see larger markets such as diabetes and heart disease as unacceptably risky. A large market means established competition, expensive clinical trials and high overhead costs required to attain market share.

Even if an investor feels like they can rely on the science behind your product, they may have a prior opinion of your technology.  Some subsectors came to be seen as damaged goods due to publicized failures, and rather than focusing on the mistakes that were made and learning from those mistakes, investors may see an entire technology area as being a poor investment. Such failures can set a field back for years, as the gene therapy field experienced after a patient death in a clinical trial at the University of Pennsylvania in 1999. Fortunately, gene therapy has slowly recovered from this setback and is starting to see investment interest again.

So how can you optimize your search for financing if you’re working on something that’s seen as a tough sell?  The most important thing to keep in mind is that it’s not just about your technology; investors are also looking at you, and perhaps 50% of the factors that influence their investment decision will be related to you and your management team, not simply your products.  If you can show them that you’re a great business leader with enough experience in your field to learn from past mistakes made by others, and that you’ve got a solid team who have the skills to succeed where others failed, they may be willing to take a risk on you.

Next, look at investors who have backed successes in your field; finding an investor who’s a fit for your company and has invested in your area in the past is one of the most important aspects of fundraising. Seeking out the winners can help you hit the right target investors.

Finally, target funding sources who have incentives other than risks and returns. Foundations, patient groups and government funds might regard the promise of a potential breakthrough in your field as being worth placing a stake on, even without any guarantee of returns, accelerating the funding cycle, and shortening your time to market.

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