By Michael Quigley, Research Manager, LSN

The formation of direct-investment arms financed by insurance companies, hospitals, and healthcare providers is a growing trend in the life sciences industry. The research team at LSN has identified at least 15 that are actively seeking opportunities at this time. And after reviewing the 10 most recent investment mandates for these organizations and speaking with them, it is clear that they all have a singular focus: reducing the cost of care. This makes sense. By investing in life science companies, these organizations can lower the costs of care and increase profitability, while establishing an equity position in a growing company. It’s a win-win approach.

Interestingly, these organizations also have very similar ideas about the types of technologies that they want to fund in order to lower the cost of care. Fifteen have stated interests in health IT, 12 in medical devices or diagnostics, and 5 in therapeutics. It would appear that the financial requirements for therapeutic assets are too large and investment timelines are too long for some of these types of investors. However, the requirements for the health IT and device sectors are more manageable—and are red hot. Furthermore, the subsectors of patient monitoring, diagnostic devices, wearable and mobile medical devices, surgical tools, hospital hardware, and elder and chronic care all come up time and time again when speaking with these investors.

These investors also are uniquely positioned to assume the role of strategic partner for early stage companies for several reasons. First, many are able to aid in the organization of clinical-trial participants, since they are healthcare providers. Second, many are able to perform a deeper level of due diligence, since they have staff who would be the end users of many of these medical products and tools. Third, these investors tend have insight into the reimbursement process and environment, which has been known to be the bane of many early stage or newly commercialized medical devices. Finally, these investors ultimately realize their ROI when your product reaches commercialization and begins to reduce the cost of care; they are not looking to reach (or force) a value inflection point so that they can sell out to other institutional investors.

Given all these factors, these direct-investment arms are excellent prospects for companies that fit the investment mandates.

By Dennis Ford, Founder & CEO, LSN

According to many pundits at conferences and across the internet, venture capital firms in the life science space have been shifting to later-stage investments. Despite significant activity among the other categories of life science investors, industry chatter still seems to be caught up with venture activity. However, when you take into consideration the full spectrum of investors that LSN tracks, the majority of investor interest is focused on companies with assets that are pre-clinical or in Phase I of clinical trials. But wait, there’s more! In this article we’ll be taking a look at data from the LSN Investor Database to highlight the case.

The chart below shows data from an export of the 1,000 most recently updated LSN investor profiles from the LSN Investor Platform with a stated preference in terms of development phase. It is clear that the overwhelming majority of these profiles have an orientation towards emerging companies with pre-clinical or Phase I companies.

 

The chart below further validates this orientation towards early stage investments. It shows the distribution of 315 investors who have expressed their development phase preferences through a 1-on-1 conversation with LSN researchers.

This stands in clear contrast to what is often cited as the overwhelming trend in the space. It is often claimed that investors are shying away from the early stage segment of the life science marketplace. However, most of the time, those who are pointing out this trend are referring to the venture firms who have moved further down the development pipeline or left the space. The remaining categories of investors seem to have moved to fill this gap, and the data validates this trend.

When you begin to look closely at the foundations, family offices, venture philanthropies, virtual pharma, mid-level private equity, patient groups, hedge funds, government organizations, angel groups and various corporate venture capital firms that are also investing, the landscape improves for early stage life science companies.

The advice remains the same – be open to all categories of investors, do your research, and identify those that are the best fit for your sector, indication, and phase. This is the basis of a successful fundraising campaign in today’s investor landscape.

By Maximilian Klietmann, VP of Marketing, LSN

We’re in “stealth mode” is one of the most common buzz phrases LSN hears from emerging scientist-entrepreneurs. This is often the cited justification for a lack of Web presence, failure to create formalized materials, and an unwillingness to build a dialogue with investors. However, as noted in my article from last week, stealth mode ranks among the top 10 fundraising misconceptions.

Often, protection of ideas is the primary reason scientist-entrepreneurs give for being in stealth mode. As LSN’s CEO, Dennis Ford, likes to say, “Ideas are more like mushroom spores than lightning strikes: they spread organically and often pop up in several places at the same time. Execution is what determines your success.”

Another reason companies give for being in stealth mode is that they “aren’t ready to approach investors yet.” However, what many entrepreneurs miss is that the right time to approach investors is well in advance of when you need the money. It can take 9-18 months to raise capital, so starting early is in your interest. A proactive approach allows you to introduce your concept to investors, build relationships, and identify what needs to happen for your asset to become “investable” per that investor’s mandate. Then, when you are prepared to actually seek capital, you know who’s interested based on existing dialogue, and you know what questions need to be answered.

In short, it is important to consider the full implications of staying under the radar. There are clear tactical advantages to preparing your target investor audience for your concept. In fact, you may be hindering the progress of your company otherwise.

You don’t need to publicize your IP. Highlight your team’s expertise and story, and call yourself in “discovery mode” rather than “stealth mode.” Then, when you’ve got an asset in place and you need capital, you’ll be able to call upon the relationships you’ve established, which will help your fundraising campaign.

Get the investor world ready for you, and you’ll be ready for it.

By Michael Quigley, Research Manager, LSN

I am always excited when I come across unusual life science investment models in my investor outreach. Recently, I learned about a fund whose primary investor, a philanthropic foundation, is providing the other investors in the fund with a “partial loss protection guarantee.” Under the guarantee, a first loss of up to 20% of invested capital is fully covered and 50% of any subsequent losses is also covered. This fund structure makes the risk/return profile for the investment much more attractive to investors and in theory will draw more total capital than in a traditional loss–sharing investment model. Basically, in an effort to get more investors to provide capital towards a specific indication, the foundation is voluntarily taking a bigger slice of the potential down-side.

This model known as “first loss capital” or “FLC” has been seen in other impact industries and social investments, such as education, home ownership for low-income populations, and healthy food for poor countries.  Providers of FLC historically have been endowments, foundations, and government organizations looking to catalyze a positive social outcome. These investors tend to have a deep focus on a specific target sector, and often a better understanding of the underlying risk associated with an investment than the generalist investors they wish to attract. By agreeing to cover a portion of the downside risk, they have the ability to bring more dollars to their primary cause.

The life science space is positioned for FLC to become a major financing solution. Increasingly, endowments, foundations, and government organizations are looking for ways to increase their impact by directly investing in emerging life science companies. If successful, FLC could be a tool for these organizations that stimulates innovation and growth in the biotech space by lowering the financial risk in a sector that is often perceived as high risk. The ideal outcome would be to attract the more financially motivated investors and bring more capital into the space.

By Maximilian Klietmann, VP of Marketing, LSN

In almost every case, the scientist-entrepreneurs approaching LSN are falling victim to one or more fallacies that are propagated through the industry. LSN is in a dialogue with over 5,000 investors around the world, and the reality is that what many entrepreneurs believe to be sound business logic could be dooming their companies. This article compiles the top 10  fundraising misconceptions so that you can avoid these pitfalls.

1.     Your existing network is enough. This belief is especially common among first-time fundraisers. They believe that the relationships they have are more than enough to get them funded in short order. However, after a few months, the enormity of the fundraising task becomes clear; it’s a numbers game and you will need a lot of investor candidates to call upon. A great article that dives deeper into this subject can be found here: https://blog.lifesciencenation.com/2014/01/23/a-word-on-when-to-go-outbound/

2.     Professional marketing collateral doesn’t matter. Often, scientist-entrepreneurs believe that the “science sells itself” and professional marketing materials are not necessary to raise the money they need. Nothing could be further from the truth. Investors receive thousands of unsolicited business plans in a year, and if you haven’t thought about how to set your company apart and effectively communicate the value succinctly, you’ve already failed in your outreach.

3.     Fundraising won’t take long. Many entrepreneurs naively assume that they can raise the capital they need in a few months. However, the reality is that finding the right investors and going through the due diligence process can take up to (and often more than) a year. From the outset, expect a minimum of 9 to 12 months (if you’re lucky) to raise the capital you need.

4.     Focusing exclusively on partnering. Fear of dilution, loss of control, and other factors can make entrepreneurs afraid of equity investors. This leads to an exclusive focus on asset partnering that drastically reduces the odds of moving the company forward. You need a global target list of all potential sources of capital. Only once you’ve cast a broad net and you’re in dialogue with several parties, do you have the luxury of being picky.

5.     More data is needed before speaking to investors. This may seem counterintuitive, but you need to speak with investors as soon as you can. If they want to see more data, they will let you know, but at least the line of communication has been established. Otherwise you are squandering valuable time and preventing your own progress.

6.     “We’re in stealth mode.” This is even worse! Ideas are more like mushroom spores than lightning strikes: they spread organically and often pop up in several places at the same time. In short, don’t worry about your ideas being stolen. You have more to lose by hiding yourself from the world. Get the world ready for your launch.

7.    “We’re in due diligence with a VC.” Fundraising is a numbers game, and most due diligence never leads to an allocation. Due diligence should not be used as an excuse to stop fundraising. In fact, it should encourage you to redouble your efforts.

8.     Exclusive focus on one category of investor. This is related to #4. Don’t be selective before you have options. As the saying goes, you miss every shot you don’t take.

9.    “We’re not interested in talking to associate-level staff.” Associate-level staff are the gatekeepers of the industry, and C-level staff operate largely on their recommendations. Never underestimate the value of anyone who could be a path towards getting funded.

10.  Issues around focus and organization. This is less of a misconception and more a point of frustration. Raising money today is a hard job that requires laser-like focus, determination, and a highly professional level of organization. Color-coded spreadsheets won’t cut it. Make the commitment from day one to make a minimal investment in the right cloud infrastructure to enable your campaign.

Avoid these mistakes and you’re well ahead of the curve. Best of luck and happy fundraising!

By Dennis Ford, Founder & CEO, LSN

Providing shared space, services, equipment, and expertise to budget-conscious scientist-entrepreneurs who are looking to prove a hypothesis and launch a company is the mission of life science incubators. And they have helped many start-ups.

However, increasingly, scientist-entrepreneurs are disappointed with what they’re finding. LSN hears a lot of complaints because we are in dialogue with a lot of the firms that populate these incubators. They acknowledge that incubators are less expensive than going it alone. Still, they say the lab space is too expensive, the promise of seeding seasoned players who can augment the founding team often goes unfulfilled, and there’s little to no tactical fundraising support.

The last point is particularly important since the life science industry is poised at the entryway of a new golden age. However, this advancement will not happen without capital. The lack of fundraising support will stymie not only the technology of individual companies but also the growth of the industry.

“Packaging” a company is a core function that I-Banks and underwriters perform when preparing a firm for an IPO. They spend many months grooming and coaching the fundraising executive team, getting the story straight, developing the brand and message, and creating professional marketing collateral in order to have a successful road show. These key elements have not yet been incorporated into early stage fundraising, despite an obvious and compelling need to raise capital.

In addition, although many incubators profess to have strategic partner connections, in reality, these connections can fund only a limited number of opportunities.

Incubators are largely out of synch with new fundraising best practices. What incubators offer from a marketing perspective is “pie in the sky” strategy and “perfect pitch” role-playing scenarios, leaving the scientist-entrepreneurs generally clueless as to how to prepare for raising capital and unprepared for the reality of connecting with a partner in the marketplace. Everybody understands their marching orders, but hardly anybody has been given the training and tools to carry out the mission. LSN calls this void “the last three feet,” which involves understanding how to put a tactical fundraising campaign together that enables the vetting of target investor fits, meeting these investors, and securing allocations.

Of course, it’s easy to criticize and point out flaws, and most of the senior staff at the incubators I am familiar with are working overtime to improve overall efficiencies. The incubator executives genuinely want to help commercialize the technology of their constituents. And no one disagrees that there is more to do and a need for more compelling programs to facilitate commercialization. However, to have a profound impact, successful incubators must focus on tactical programs to help the scientist-entrepreneurs navigate “the last three feet” to get their products to market.

 

By Michael Quigley, Research Manager, LSN

LSN identifies and contacts new life science investors worldwide on a daily basis. Over time, the research team has developed several methods for getting a foot in the door when we don’t have a prior relationship. We’ve written previous articles about preparing introductory emails. However, this article describes techniques that can be used when those emails go unanswered.

In our experience, receiving a response to an investor email largely depends on three factors: investor fit, clarity of message, and a respect for the investor’s process. In other words, you need to find firms that are likely to have an interest in your opportunity and then reach out to the appropriate people with a lucid email. However, if you have done this and haven’t heard back, these tips may help stimulate a response.

The Second Attempt

Resending your initial email with “Second Attempt” at the beginning of the subject line has proved to be successful. This may sound forward or aggressive, however, investors are generally not offended. In fact, they often respect the persistence of an entrepreneur. Investors usually don’t have the capacity to read all of the emails they receive, which is why this approach can work. I’ve even been thanked for the reminder on occasion.

The Admin: A Secret Weapon

Administrative assistants are the gatekeepers of the investor world. As such, they have a tremendous amount of power and knowledge. They screen calls and emails, coordinate meetings, and often understand more about the interests of their firm than you might think.

When you have been unable to reach an investor, attempting to contact the admin with a request for help can often prove fruitful. Whenever speaking with an admin, be it by phone or email, it is crucial that you be courteous, as he or she will be passing your information up the chain and you want to give a positive impression. By having your verbal message or succinct email passed on by the admin, you are again demonstrating respect for the time and process of the investor, as well as showing persistence in a professional manner, something investors love to see in entrepreneurs.          

A Quick Question

When all else fails, send an email with the subject “Quick Question” (or something similar) and a clear, direct message that reads: “Is XYZ Ventures seeking new investments in the life science space? I have been trying to get in touch with the firm for some time but without success.” This can be effective because it is often an easy email for an investor to respond to. Then, when you have begun an email dialogue, you can easily introduce the investor to your opportunity with a brief email, pitch deck, and executive summary.

There are instances where this technique or the others won’t work. However, they will help you improve your odds. Good luck!