Next Phase Newsletter

By Jack Fuller, Business Development, LSN

LSN is a big proponent of the importance of finding the right fit in potential partners. This is true for companies looking to develop assets together, finding the right CROs to outsource drug development, and especially in finding investment partners to help raise capital. Last week, I attended the Massachusetts Life Science Innovation (MALSI) Day, and I was incredibly pleased to hear that sentiment echoed by speakers and entrepreneurs throughout the day.

What we mean by fit is the list of criteria defined by a company/firm’s mandate. For example, with investors, a specific firm’s investment mandate may be to only invest in two or three companies in the next 12 months, targeting companies in the medical diagnostics field who also have a usable prototype. Any company that reaches out that does not fit these criteria has no chance of being funded, regardless of their value proposition. With this in mind, understanding an investor’s mandate is the most important factor when deciding whom to go after.

At the conference, I attended a panel where an Angel and a VC each lauded the importance of having a fit before the even reaching out to an investor. The question was then posed, “in the last 12 months, how many meetings have you had with people who reached out to you cold?” Both answered the same: “zero!” However, they were quick to point out that of all the people who reach out to them cold, the chances of them being a fit for their specific investment mandate hovers somewhere around 1%.

Needless to say, the audience (which was largely made up of emerging life science companies seeking capital) was outraged by this. Here is a room full of life science entrepreneurs, attending a panel about financing in the life sciences, and the panel tells them they have no chance of reaching out successfully. Just before a riot started, they explained the concept of fit. Investors in the life sciences are continually inundated with unsolicited business proposals that have less than a 1% chance of satisfying their specific investment mandate. They don’t have time to look at this unfiltered list, so they summarily dismiss everyone that hasn’t been filtered. The problem with the life science community is that the only real filter they currently have is through personal introductions or partner relationships.

Recently, LSN ran a boot camp at a local Boston incubator to explain to early stage scientists that part of doing a dedicated successful outbound marketing campaign is to take the time to research your look-alike companies and determine who has invested in them in the past. This uber investor list is paramount because they know your type of company, your marketplace and technology. Most importantly though, they have already pulled the trigger with similar companies. Next you want a list of investors who have self-declared “present or future mandate” to invest in a company in your arena or orbit.  This is more difficult but something in which we here at LSN specialize. This is particularly important when reaching out cold to investors.  For example, when emailing an investor you know has a mandate for small molecule cardiovascular therapeutics, it is incredibly impactful to have a subject header “CEO of cardiovascular small molecule company – in town next week – meeting request: First Attempt”  LSN has found that outbound campaigns to investors with whom there is a recognized fit results in a 15-20% open rate!

These two panelists were adamant that they are not opposed to people reaching out to them. However, the current method of blindly reaching out to every VC or Angel on the planet is not helping anyone find prospective deals. The old model of raising funds is being replaced with greater focus on connecting people who need to be in the same room together. LSN was founded on this principle, and is why LSN research spends so much time in dialogue with the investor marketplace. As a more efficient dialogue is created between companies seeking capital and investors looking for opportunities, the speed of product development increases, which in turn leads to a more robust industry with better patient outcomes.

Tags: biotech, biotechnology, CMO, consulting, CRO, family offices, Fundraising, investor, Investors, issue, letter, life, Life Science, life science nation, medicine, nation, news, newsletter, pharma, Pharmaceutical, private equity, research & development, science, startup, venture capital

By Danielle Silva, Director of Research, LSN

As any emerging life science entrepreneur knows, just getting on an investor’s radar is an extremely arduous task. What many biotech firms do not realize, however, is that initiating a dialogue is only the beginning of a relationship that must be managed and maintained over time, and there are still many things that can cause a prospective deal to go south. To help prevent future headache, or even losing a deal during negotiations with potential investors, entrepreneurs should make a concerted effort to avoid some critical errors from the very start.

One thing that often raises a red flag for investors is an issuing company’s capital structure. Are the existing investors difficult to deal with? Is there risk associated with unfavorable terms from previous financings? How much risk of dilution is there due to existing convertible loans, etc.? Some key ways that entrepreneurs can avoid sabotaging future deals is by thinking strategically about how and from whom you raise your first seed capital. Make sure your investors are partners that will be easy to work with past the check-writing stage, and that the terms won’t deter future investors.

One effective method of ensuring a more favorable set of deal terms from the onset is via a non-participating liquidation preference. Here’s a hypothetical situation: If an angel investor invests $1 million in a company and negotiates a simple 1X non-participating liquidation preference, and then the firm is sold for $4 million, the angel investor will get $1 million and the remaining $3 million will be divided amongst the firm’s common shareholders. Obviously, some investors may have a higher multiple preferences, but negotiating non-participating liquidation preference with early investors can mitigate the risk that more institutional investors will not invest due to concerns over a firm’s equity dilution.

Another important component of a company’s capital structure is the capitalization table. A capitalization table is a cash-on-cash analysis of the percentage of ownership for investors and founders, the value of equity for each round of investment, and equity dilution. Some firms may have a large number of small investors that could cause issues for the companies owners or investors down the line. This is one of the issues that crowdfunding can cause, as it can attract large numbers of “unsophisticated” investors. If the entrepreneur should ever go down the road of “herding cats,” it is important to show prospective investors a clear strategy to repurchase as much equity from these “micro-investors” as possible, and convert any of the remaining preferred equity holders to common stock. Often just having a clear answer to an investor concern is helpful in itself.

Showing potential investors that you are business savvy and strategically-minded can be just as important as illustrating how compelling your product is. Avoiding these missteps proves to investors that you not only benefit yourself and the other stakeholders of your firm, but also that you have the ability to run a business.

These mistakes should be avoided at all costs when going through the due diligence process with investors. If you are an entrepreneur who is in the due diligence process with an investor, and do happen to have such setbacks, don’t be alarmed. Acknowledging that you have made these mistakes and speaking with your potential investor about how to resolve these issues will help show them that they are not just making an investment, they are forming a partnership, and that you are doing everything possible to generate a return on investment for themselves and future investors.

Tags: biotech, biotechnology, CMO, consulting, CRO, family offices, Fundraising, investor, Investors, issue, letter, life, Life Science, life science nation, medicine, nation, news, newsletter, pharma, Pharmaceutical, private equity, research & development, science, startup, venture capital

September 16, 2013, 60 State Street, 33rd Floor, Boston, MA

By Dennis Ford, CEO, LSN

After attending a dozen or so investor conferences over the last year, I was amazed at how lopsided the attendance is. Presenters at these conferences – the folks looking to raise capital – are typically totally disproportionate to the actual “real live” investors with mandates to invest. In some cases, it’s astonishing; recently, I was at a three-day conference that had one 45 minute panel of VCs – and that was it! Even worse, most of these investor conferences are just a mosh pit of 3rd party service providers seeking funded startups to sell their products to.

Like any entrepreneur, I couldn’t help but think that there has to be a better way of matching early stage science with early stage investors. In light of that, LSN is pleased to announce Redefining Early Stage Investments, an ongoing global conference series focused on creating and maintaining a dialogue between emerging therapeutic, diagnostic, and medtech companies, and early stage life science investors.

As the name implies, this conference series aims to present the new landscape of early stage investments in life sciences, a rapidly shifting arena in which yesterday’s rules are no longer in effect. The traditional path to raise capital has been through friends & family, angels, government grants, and venture capital. Government sequestration and VCs with limited mandates has made the pool for capital in those two venues tenuous. However, new investors have entered the arena, and Redefining Early Stage Investments seeks to map out the new landscape.

So how is Redefining Early Stage Investments different? It seeks to fill the void left by traditional investors by identifying and actively including new categories of investors, including venture philanthropy, patient groups, corporate development, and virtual pharma. Previously, large institutional investors, family offices and wealth mangers would fund the VC channel, but subpar returns over the last decade have forced these entities to rethink past money manager-centric strategies, and now they invest directly themselves. These new direct investment players such as family offices, endowments, foundations, and pension funds are in it to win it, along with the other new active life science investor groups – hedge funds, mid-level private equity and angel syndicates. All the aforementioned entities have changed the life science investment landscape, and LSN wants to feature & connect these new players to the new innovators.

The conference will feature an exclusive partnering pavilion solely dedicated to early stage entrepreneurs and life science investors. Service providers will be there as sponsors, and there will be plenty of opportunities to meet with them as well. However, this investor conference is meant to be different in that it creates & facilitates meetings based on a common fit, which promotes compelling conversations and the development of qualified investor relationships.

The conference is an all-day event, set in the heart of Boston, the global hub of life sciences. It will feature eight unique early stage investor panels that will provide the latest perspective on the state of investments in the industry. These sessions will run concurrently with presentations featuring some of the hottest biotech & medtech startups in the life science arena.

Who should attend? Redefining Early Stage Investments is ideally suited towards emerging biotech & medtech companies seeking to raise capital or out-license technologies, early stage life science investors, companies seeking to in license emerging technologies, and organizations that sell products & services to emerging companies. Click here to register now!

Tags: biotech, biotechnology, CMO, consulting, CRO, family offices, Fundraising, investor, Investors, issue, letter, life, Life Science, life science nation, medicine, nation, news, newsletter, pharma, Pharmaceutical, private equity, research & development, science, startup, venture capital

By Max Klietmann, VP of Research, LSN

LSN has been covering the impact of personalized medicine as it becomes increasingly feasible for implementation in a variety of clinical areas. This convergence of big data, genomics, proteomics, and bioinformatics is fundamentally reshaping the treatment paradigm. One particularly interesting effect of the proliferation of these technologies is the way it is impacting early stage research and development. The trend that the industry is leaning towards is the development of therapeutics designed for highly specific patient groups with a particular make-up of factors correlated to treatment efficacy. Essentially, drug developers are creating niche products in anticipation of an age of niche treatments and a totally different competitive landscape.

In the wake of healthcare reform, the question of treatment efficacy has become a critical factor in determining the future success of a product (considering the tightening of reimbursement guidelines). However, the ability to determine the factors related to positive outcomes on the genetic level allows for the development of more effective treatments for specific patient subgroups.

Many emerging biotechs have recognized this reality, and are thus beginning to focus more in effective treatments for small populations, leveraging the power of genomics technology, which is rapidly becoming more and more affordable. LSN closely tracks emerging biotech companies globally, and the trend is clear – it is becoming increasingly common to see emerging companies in the preclinical stage targeting so-called micro-indication areas, rather than blockbuster disease categories.

This strategy is also compelling for investors, who are able to now target major indication areas with a strategy similar to that of an orphan disease company. The result is more compelling trial data, a higher likelihood of approval, and diminished risk. Essentially, the trend is becoming one of smaller, more secure plays rather than the macro plays of past decades. It means a more stable industry, more predictable returns for investors, and better care for patients. However, it also means that fit is more critical than ever when finding the right partners in terms of investors and suppliers, as the industry as a whole becomes more granular and targeted.

Tags: biotech, biotechnology, CMO, consulting, CRO, family offices, Fundraising, investor, Investors, issue, letter, life, Life Science, life science nation, medicine, nation, news, newsletter, pharma, Pharmaceutical, private equity, research & development, science, startup, venture capital

By Max Klietmann, VP of Research, LSN

The life sciences arena has been aware of the substantial market opportunity that the developing world represents when it comes to delivering diagnosis and therapy. This segment of the population suffers largely from preventable and/or easily treated diseases that could represent massive opportunity for pharmaceutical and device companies to improve outcomes and increase revenue streams. However, the challenge has been – and continues to be – getting treatment to patients in remote, impoverished, and underdeveloped areas. However, recent developments in the diagnostic device space are beginning to address these logistical issues, and delivering product to patients in these markets is becoming a reality. This is being driven by rapidly decreasing costs of disgnostic technologies, investor demand for larger addressable patient populations, and lower regulatory thresholds for diagnostics.

One of the biggest problems facing emerging markets is an inability to effectively diagnose patients. Considering that most disease-related deaths in the third world stem from preventable and easily-treated conditions, diagnostics are one of the easiest ways to address public health issues. Governments in China and Russia, for example, have been actively supporting initiatives to bring affordable diagnostics and treatments to remote and/or underserved regions for exactly this reason.

Hand-held and portable low-cost diagnostic devices, genomic sequencing and proteomic profiling are all being developed by a number of companies for developing nations. These are designed to be simple, robust, and user-friendly. Historically, this technology was enormously expensive, and cost prohibitive, even in developed markets. However, as the cost of genomic sequencing and proteomics has declined, new opportunities have made themselves apparent. However, delivering this technology to, for example, remote villages in Africa, presents its own challenges (e.g. harsh climate, high temperatures, contamination risk). Thus, much of the technology being proliferated for this purpose is technology initially designed for battlefield use that can now be scaled for larger markets with similar requirements to field-deployed medical units. Combine this opportunity with the fact that regulatory requirements to enter many developing countries have a much lower threshold than developed markets, and you have a very attractive investment prospect.

Investors are increasingly becoming aware of this as well. As pressure from investors has pushed many companies to seek larger addressable populations, emerging markets present a compelling opportunity to find these patients. Medical technology companies developing in vitro diagnostic devices are in a unique position to easily target this opportunity (relative to therapeutic companies, who in most cases have higher regulatory thresholds and a significantly more costly R&D process).

In-vitro diagnostic device companies should consider the option of using this type of market approach when courting investors. The opportunity to rapidly proliferate product to a market with a serious need and low regulatory barriers is a compelling target for a strategic buyer down the road. “Grooming for exit” in a market that offers a buyer a turnkey market entry option is one way to stay ahead of the curve and take advantage of macro trends in the life sciences arena.

Tags: biotech, biotechnology, CMO, consulting, CRO, family offices, Fundraising, investor, Investors, issue, letter, life, Life Science, life science nation, medicine, nation, news, newsletter, pharma, Pharmaceutical, private equity, research & development, science, startup, venture capital

By Dennis Ford, CEO, LSN

I wanted to discuss the general vetting process for scientists, whether it be vetting scientists to present at a conference or selecting scientists that are developing early stage products to invest in. LSN’s staff attend a lot of life science conferences, and we are always interested in the types of companies asked to showcase their technologies at these events. This is always interesting to see, because sometimes spectacular technologies are presented by poor presenters, and in other cases, less interesting technology can be made to appear groundbreaking by the right speaker. Considering that LSN is organizing an Early Stage Life Science Investor Conference September 16th, I wanted to explore the concept of “vetting” presenting companies more deeply, as we select companies to present at our event.

The process of vetting potential investment opportunities is an interesting topic, especially in the case of early stage biotech firms because there is really no formulaic way to vet scientists other than the obvious data gained through trials – but the issue is for early stage biotech firms robust data simply isn’t there yet. I would like to point out that the VC community has had some very smart minds “formally vetting” science for a long time, but as we all know, the results have not been the greatest. The question is simply, why? If VCs can’t pick them, then who can?

Investing in life sciences almost reflects the nature of the field itself – trial by experimentation. An investor cannot simply evaluate a potential investment based on a firm reaching a few key performance milestones. There are also many science research publications that track the leading edge science and cover the latest and greatest strides forward in the space, but being highlighted in such publications rarely has a direct correlation to success in the market.

A lot of times, it really isn’t the fundamental science or underlying technology, but rather the person(s) driving the endeavor that determine success or failure. My take is that it all comes down to the inventor/entrepreneur and their own personal quest to move the science and technology forward. This is why so many investors end up investing in a management team rather than in the specific technology that the scientist is developing. This however leads to another challenge – if early stage life science venture success is a function of science (which can be objectively validated) and people (an aspect that is impossible to quantify on a start-up scale), then who can evaluate the true quality of an investment?

I will posit that if you had 100 leading scientist entrepreneurs, all with great science and inner drive, that only 20 of these scientists (applying the 80/20 rule) are capable of learning what they need to learn to do the rest of the work that would get their science to the market. The extra work I am referring to here is taking that giant step of learning rudimentary sales and marketing skills that enable an entrepreneur to go outbound and seek out the capital needed to move down the pipe, and realizing that you need to spend money to make money. I talk to gifted scientists on a weekly basis, and there is no doubt that their hearts and minds are in the right place. However, it is only a minority of these scientists that are so possessed that they will virtually learn anything and do whatever it takes to get their science to market.

Scientists that know what they need to do to succeed realize they need to get their messaging down so that it can be understood, and understand that they need to learn rudimentary marketing skills. In my mind, if they budget the funds, make the commitment to do the marketing, attempt to create the web presence and buy a database to enable them to go after investors and partners, then they are committed and aware, and thus vetted enough to deserve a chance to pitch to investors.

LSN is putting on an early stage investor conference in Boston September 16th, and LSN is soliciting presenters from a dozen or so of the top private and academic incubators in the U.S., as well as European and Asian scientists looking for early stage funding. We vet by word of mouth from our early stage science and business development partners, from our own in house science team reviewing responses from our newsletter’s request for innovation, our early stage investor network, and from our own LSN client base.

However, at the end of the day, it is the investor who needs to do the vetting, and ensure that the person on the other side of the term sheet has what it takes to succeed. We will have some great and interesting technology at the conference, and will also have some early stage investors that most entrepreneurs are not aware of. I understand that there is a vast difference between academic and private, and where the two intersect is where we are focusing the event.

Tags: biotech, biotechnology, CMO, consulting, CRO, family offices, Fundraising, investor, Investors, issue, letter, life, Life Science, life science nation, medicine, nation, news, newsletter, pharma, Pharmaceutical, private equity, research & development, science, startup, venture capital

By Danielle Silva, Director of Research, LSN

In past issues of the LSN newsletter, we’ve spoken at length about how venture funding the life sciences space has become increasingly scarce, especially for early stage companies in the sector – basically, the number of venture capital funds has significantly decreased, and those that are left are investing in later stage companies and are much more risk-averse. Those that remain are mostly the large, well-known and well-capitalized firms. However, a new group of venture capital investors are emerging on the scene, and these investors – known as social venture funds – have a much different philosophy than their traditional venture counterparts.

Social venture capital firms are similar to traditional venture capital firms in the sense that they are investing in early-stage, often pre-revenue firms. The major difference between the two, however, is that generating ROI is secondary to creating social impact for the social VC. In the past, it was very difficult for firms focused on making a social impact to receive funding, because investors perceived that there was some kind innate tradeoff between making a socially responsible investment and generating a financial return. Despite this fact, the number of social venture capital funds has started to increase as of late.

Social venture capital firms are similar to venture philanthropy firms, another group of investors who we discussed in depth in a previous edition of the LSN newsletter. Venture philanthropy firms, however, are often formed as the venture arm of a foundation or family office, with the goal moving the science along for a certain indication. Social venture funds, on the other hand, have a broader investment mandate, and are structured from the start as a venture fund.

In the past, social venture capital funds mainly focused on supporting green technologies. However, the scope of their investment focus has widened significantly in the past few years to many different kinds of investments that are making some kind of social impact, which has lead these firms to consider themselves as “impact investors”. Unlike traditional venture capital firms, social venture capital funds aren’t investing in a large number of small opportunities, hoping for one blockbuster investment. Instead, they are investing based on what they believe will have the largest social impact. Furthermore, they tend to have longer holding periods than traditional venture capital firms – usually around seven to ten years.[1]

In the life sciences investments specifically, these firms are allocating in many different areas. During a recent conversation with an LSN analyst, one east-coast based social VC noted that they were extremely opportunistic in terms of their allocations within the life sciences space. The firm invests in companies developing therapeutics, diagnostics, medical devices, and even has an interest in the biotech R&D services space, such as contract manufacturing organizations (CMOs). What this suggests is that these funds have a much broader scope than venture philanthropies, which typically invest in therapeutics, diagnostics, and sometimes medical devices targeting a specific disease area.

Ironically, many social venture capital firms have actually outperformed their traditional venture capital counterparts in terms of ROI. As traditional venture capital firms begin to dwindle, and the need for capital in the life sciences space becomes greater, it seems as if more and more of these social venture capital firms will begin to emerge as players in the life sciences arena, especially if investors begin to realize that social impact does not hamper financial returns.

Tags: biotech, biotechnology, CMO, consulting, CRO, family offices, Fundraising, investor, Investors, issue, letter, life, Life Science, life science nation, medicine, nation, news, newsletter, pharma, Pharmaceutical, private equity, research & development, science, startup, venture capital