By Danielle Silva, Director of Research and Innovation, LSN

Many entrepreneurs make the assumption that investors are solely looking at their technology when they consider taking a stake in their firm. However, this is typically very far from the truth; at the end of the day most investors are investing in the individual and the management team – not the entrepreneur’s technology. This is why almost all investors require a number of face-to-face meetings prior to making an investment. As traditional sources of capital in the life science space continue to dry up, it is becoming more and more important for CEOs to stand out and show investors both their personality and the qualities that will make them a successful founder.

One of the most important things investors look for is a clearly defined vision. A startup’s CEO needs to not only have knowledge of their target market, but also needs to fully understand the individual customer’s problem and how to tackle it. The biggest turn-off for an investor is the “panacea presentation” that details the 27 indications a pre-clinical asset has the potential to cure. You need to have a targeted and focused concept of exactly where you are headed in the market. This vision is especially important because as the company scales, the founder needs to ensure that the company does not stray away from it’s core competency and mission, and that everyone in the firm is aware of the CEO’s vision. Nobody wants to invest in a schizophrenic business.

Founding CEOs also need to have the ability to surround themselves with strategic partners that are not necessarily investors in the firm. Forming these strategic relationships early on can be invaluable down the road. Founders should, however, also seek advisors that are willing to put skin in the game, because advisors who have a stake in the company will represent a vote of confidence in the eyes of other potential investors. Furthermore, founders need to be able to both find and retain talented individuals to help them build their companies, not only give advice. Networking with talented people that have a passion around your target indication or technology can help CEOs identify senior professionals that they can bring in later in the development of the company to fill roles necessary for growth. This is vital because, at the end of the day, the investor is investing in people.

So what does this all mean for founding CEOs? If you do not possess these qualities, find someone who does! The business side of advancing your technology should be managed by someone who can manage the networking role and show investors a focus on getting to market above all else. You should always embrace the opportunity to meet investors in person, but make sure you are prepared to do so. Also, you will always be more compelling in a one-on-one meeting where you can start a real dialogue, rather than lecturing to a room of potential investors. Speaking with (not at) investors at length about your company and your vision will not only help you demonstrate these qualities to the investors, but will also help you determine if the investor posses traits that will help you both work together in the future.

By Max Klietmann, VP of Research, LSN

LSN research spends a lot of time speaking with investors in the life sciences space. As such, I wanted to share some insights gleaned from medical device investors over the past several weeks; specifically, I’d like to highlight two major investor interest trends in the device space that follow a common theme: cost reduction. As medical costs have risen over the past few years, hospitals and care providers are under increased pressure to reduce costs while improving outcomes. This has created a high demand for devices that can not only make an improvement in a patient’s condition, but also make a business case for a hospital’s bottom line. Here are the areas of the highest interest:

Infection Control

Hospital acquired infections (HAI) such as MRSA constitute a major issue for care providers, as these (usually preventable) conditions can massively protract hospital stays and drive up costs, due to complications and the need to treat a secondary indication. Tools and systems that can aid in early detection or prevention of these infections are in high demand, and are a compelling investment opportunity for investors in the space.

Home Care/Remote

Getting patients out of the hospital as quickly as possible is a primary way of reducing hospital cost. One way to safely accomplish this is via remote monitoring and other ways to allow a patient to continue receiving medical care from home earlier than usual. Furthermore, the less time spent in a hospital, the lower the risk of secondary complications such as HAI, further reducing the risk of incremental cost. Finally, remote monitoring often pairs existing technologies (heart monitors and wifi, for example), and can have a relatively inexpensive R&D process – all good things for an investor seeking fast time to market and proven demand.

Though these concepts may be intuitive at first glance, most entrepreneurs in the device space are too heavily focused on an improvement in patient outcomes at any cost. However, at the end of the day the improvement needs to make sense from the standpoint of a hospital’s investment and the likelihood of insurance reimbursement. Device entrepreneurs should consider how strong their business case is to the end-user, and in doing so, can be better aligned with investors’ critical need for return.

By Dennis Ford, CEO, LSN

I spend a lot of time observing and analyzing early stage investment trends in the life science industry. The product of this research has led me to identify the biggest trend in recent years: that new categories of investors are surfacing to fill in the void left by the lack of VC funding.

Part and parcel to the new investor group’s trend is a bevy of new entities that are spending time and money vetting and grooming biotech and medtech start-ups.  They range from world renowned hospitals, research clinics, academic tech transfer offices, patient groups, foundations, both private and public sector initiatives all morphing into different forms of life science incubators pushing scientists and their innovative technologies to commercialization.  The essential idea is that there is enough general domain knowledge to pick the likely candidates for success based on their own sector or indication expertise. This is a great concept and is still getting off the ground. However, what most of these initiatives fail to grok is that “the last three feet” of the fundraising/commercialization is the actual going out into the market and finding the channel partner or investor and getting a deal done!

I have met and interviewed countless graduates and winners from these entrepreneurial programs. They graduate with eager smiles and hearts full of enthusiasm, take a deep breath, and then say…now what?

It was Edward R. Murrow who said, “It has always seemed to me the real art is not so much moving information or guidance or policy 5 or 10,000 miles. The real art is to move it the last three feet in face to face conversation.” Although he was speaking about international exchange, I think the quote is wholly applicable to the life sciences.

This last three feet is exactly where LSN staff spends most of their time. At the end of the day, where the real failure lies for many of these initiatives is in that scientist-entrepreneurs remain unprepared for the reality of how difficult the process is for connecting with a partner in the market place. Everybody understands their marching orders, but hardly anybody has been given the training and tools to carry out the mission.

What I am talking about specifically is the basic, tactical sales and marketing 101 skillset (the training) to go out and fundamentally execute a partnering campaign. This has to do with using databases to gather and vet lists of targets to go after, and identifying the low-cost, cloud infrastructure applications (the tools) that will enable and support the endeavor. For example, once you have gathered together the targets that are a good fit for your partnering initiative, you have a list – and the associated tasks – that you will have to manage. Most scientists will go right after the color-coded Excel spreadsheet to do this, which may as well be the kiss of death.

Cloud applications like SalesForce.com can provide you with a fabulous automated list, as well as task-management capability for a small monthly fee. Email applications such as iContact are a necessary tool for your outbound partnering campaigns, and you get a lot of compelling reporting for a low-cost monthly fee that will provide insight into who is clicking and interacting with your emails and outbound marketing. Newsletters, blogging and whitepapers are another excellent way to reach out to targets to either start a dialogue (or continue a dialogue) with multiple clients. These Cloud apps have created an affordable, easy-to-use campaign management infrastructure that just wasn’t here a few years ago. These applications are the picks and shovels for the gold the entrepreneur is trying to mine.

My point here is that there is not a lot going on tactically in teaching the last three feet – how to find and start a dialogue with investors, how to arrange a meeting, schedule a roadshow, run a meeting, and nurture & cultivate an ongoing relationship with your prospective partners. All the aforementioned criteria are critical in finishing what has been started with the scientist-entrepreneurs. After all the pie-in-the-sky strategy and perfect pitch role-playing is done, you still have to go that last three feet, stick out your hand and introduce yourself.

By Jack Fuller, Business Development, LSN

The growing role of Corporate Venture Capital (CVC) in driving early stage enterprises in the life science sector has been well documented and dissected. The majority of corporate investments are structured in four forms: direct investments from the parent company, wholly owned subsidiaries, independent organizations with dedicated funds, and as limited partners in other funds. Understanding the type of corporate investment makes an enormous difference in the type of investment they are looking to make.

CVCs come in two flavors: internally focused on bolstering future technology prospects for the parent company, or externally focused on generating a solid return on the investment, with much less emphasis on the mission of the parent company. The primary strategy has shifted in recent years to favoring an externally focused approach.  This is primarily due to the CVCs appreciating the fact that an initial investment in a company does not provide any significant advantage when it comes to acquiring or in-licensing the technology and the need to hold a diversified portfolio. It is particularly important to understand the CVCs as a viable source of capital, considering the changing landscape of entrepreneurial fundraising.

CVC funding is particularly beneficial for new ventures in the life sciences that operate in uncertain environments because they provide specialized assets and knowledge. Over 1/3 of active CVCs are healthcare focused, with Novartis Venture Funds, J&J Development Corp, SR One, Kaiser Permanente Ventures, Novo Venture, Merck Global Health Innovation Group, Lilly Ventures, MedImmune Ventures, Pfizer Venture Capital, Siemens Venture Capital, Roche Venture Fund and Google Ventures all being in the top 25 most active CVCs by number of deals in the last year. Additionally, studies have shown that financing rounds with a CVC involved tend to be significantly higher than non-CVC funded rounds. The innovation output of CVC-funded companies is also higher, as determined by the number of publications and patents.

Even more recently, CVCs have actually started co-investing in rounds with each other.  Initially, this makes little sense as the parent companies are directly competing for the same technologies. However, as the CVC firms become more familiar with each other, they have begun to understand how each structures their deals, and are more comfortable sharing the table with another big name player. The shift toward independently-operating venture funds is big pharma’s response to keep the innovation pipeline flowing, with the decline of truly early stage VC funding. This is good news for early stage ventures, and should be carefully considered when planning a fundraising strategy.

By Max Klietmann, VP of Research, LSN

Innovative collaborative models are a defining part of the life science industry. We’re all familiar with alliances between big pharma and venture capital, the academic/commercial collaborations of the tech transfer space, and most recently, the development of early stage technologies by research hospitals. Currently, another emerging trend is poised to make a significant impact on the industry on a global scale: Global collaboration between research centers, incubators, and bioclusters in the form of organized therapy development alliances.

So what does it look like? The model, which has already been adopted by a group of six research institutions in the US and Europe, aims to integrate the entire value chain of the drug development pipeline – from discovery through distribution – by having all of the relevant stakeholders involved. Essentially, it is a collaborative strategy that puts research groups, universities, tech transfer offices, CROs, industry organizations, service providers, investors, and big pharma under a project umbrella that allows compounds to be quickly vetted, shepherded through the development and trial processes, and brought to market.

But what does this mean? Since these alliances are formalized groups aimed at advancing drug discovery and development on a global basis, it increases the chances of getting all the pieces in place to bring a drug to market several fold. It creates communication, standardized processes, and facilitates the sharing of best practices and resources. All of this is being made possible by enhanced information sharing and physical logistics, as well as data management capabilities. It translates to a new model for translational science commercialization, and could be a key answer to bridging the valley of death by bringing capital, service providers, and big pharma capabilities to emerging assets globally. This trend is likely to accelerate in the remainder of this year and into 2014, so prepare for a paradigm shift.

 

By Michael Quigley, Research Analyst, LSN

Throughout the existence of this newsletter, LSN has discussed at length the trend of family offices moving towards direct investments in the life science space. However, family offices remain an obscure investment entity to many of our readers. In this article, I want to shed some light onto what exactly constitutes a family office, why their numbers are growing, and why they are such a crucial player in small- and medium-sized enterprises.

To begin with, traditional wealth advisory and asset management firms provide clients with advice on investments, and may provide insight into insurance, tax, and budget-related decisions. Family offices, on the other hand, act as personal CFOs for ultra-high net worth families – and individuals handling all of these issues – as well as generational wealth management, philanthropic donations, legal issues and management of tangible assets. Each family office is unique in that its services are a function of the demands, skills and financial requirements of the family or individual whose money they manage.

These organizations exist primarily in two basic forms: Single Family Offices (SFOs) and Multi-Family Offices (MFOs). SFOs – as the name suggests – manage the finances for a single family or individual with a net worth generally over $100 million, with an average of around $600 million. MFOs, which have been recently gaining popularity, serve the same purpose, only they cater to the needs of multiple families with a minimum net worth around $20 million and an average of about $50 million.

The amount of capital held by family offices has been growing recently as a result of an increased demand for complete personalized financial management, SFO’s expanding to multiple clients, MFO’s lowering their asset requirements, and as traditional wealth managers (following the market demand) are offering more holistic services, transforming their business model to become MFO’s. Industry experts estimate that there are currently over 4,000 family offices in the United States alone, with well over $1 trillion in combined assets under management, making them a very significant source of private capital. (1)

Historically, family offices have been the funders of alternative assets such as venture capital and private equity funds, thus stimulating small- and medium-sized enterprises. As discussed in a previous LSN publication entitled “The Perfect Storm,” family offices have been discouraged by the performance of these alternative investments, and are beginning to bypass these types of funds and invest directly into privately-held companies themselves.

Many family offices involved in this trend are utilizing the skills and knowledge of the particular sector that made the family its fortune to identify strong investment opportunities, where they also have to ability to add value beyond capital. (2) What’s more, as long as family offices have been in existence, the majority have maintained a portion of their clients’ capital for the purpose of philanthropic allocations. Recently, philanthropy is becoming less of a donation and more of an investment focused on a measurable, positive social impact on society as a gauge of ROI. With this mindset, family offices are investing directly into industries like life science, where a scientific breakthrough could have a massive, lasting positive impact on a global scale. (3)

Family offices are both increasing in number and in involvement in direct private investments. There are many factors contributing to these two trends, and one of the biggest beneficiaries will be private companies fundraising for the growth of their enterprise. Family offices looking for an impact with their investments do not have the same standards for ROI as traditional investment firms who are under immense pressure to generate consistent returns by shareholders, and are therefore offering better terms with less stringent restrictions on time-to-exit than traditional private investors.

1 http://familyofficesgroup.com/Report.pdf

2 http://www.familyofficereview.com/family-balance-sheet/investments/article/753/direct-investing-taking-care-of-business

3 http://online.wsj.com/article/SB10001424127887323551004578441002331568618.html

By Dennis Ford, CEO, LSN

The Good

I like crowdfunding for the life science arena because this industry already has a proven global audience that “votes with their feet” through a vast web of charitable platforms that raise money for research. Take, for instance, the crowds on any spring/summer weekend walking for this or that cure; the fact that everyone is in some way affected by disease makes these crowds not only readily available – but also relatively knowledgeable – potential investors.

Another unique value that these potential investors possess is that they emphatically want to change the world and help mankind. The fact is that almost everybody already donates in some capacity to research that aids in fighting disease, be it the extra dollar at grocery store checkouts or a planned donation to a charity or foundation. The question is whether or not crowdsourcing portals channel this worldwide source of capital in an adroit and compelling way. Basically, the net/net here is that crowd sourcing is already alive and well – and working. However, the biggest question is if the model can be transferred into the general population of potential investors made accessible by the jobs act, not just the accredited ones.

A side effect of this medium is that when you get onto the grid with your fundraising campaign, and are now in the mix and published, you are visible to everybody, which means an investor (or syndicate of investors) can come over the transom and write a big check and solve the fundraising issue by including you in a portfolio of life science assets.

So, the good is: it will work for launching a firm. However, you cannot raise over $1 million per year, and over $500k requires extensive filing and compliance, which can easily become an administrative headache.

The Bad

The main issue here is the numbers game that one has to play in order to reach a seven-figure goal, which translates to a large volume of required investors considering the SEC limits on investments in equity crowdfunding (see chart at the bottom of this article) – not to mention how to create dialogue and manage ongoing relationships with a group of investors of this size.

Crowdfunding is a paradigm shift. However, the ante into the game is where the biggest questions of all arise. Some sites are showing a very greedy edge, with equity positions ranging from 2 to 10+%, and/or a piece of the monies raised (between 5 -20%); that’s a pretty steep business model for a virtual company profile and a three minute video. As I look at the first batch of crowd sourcing portals and their associated business models, I am reminded of the Wild West and the stereotypical cast of characters. The mantras from the entrepreneurs who run these portals are pretty much all the same: “the risk to the investor is low because the investment dollar amount is low,” with the lofty slogan “the people will decide what makes its way into the market”.

Translating this into experimentally based life science technologies may be tricky, as the general public isn’t necessarily going to grok the subtleties of therapeutic biomarkers, or mechanisms of action, or physics-based, next-gen medical devices. The obvious candidates for this kind of funding, therefore, are easily understood healthcare IT solutions and/or simply comprehensible medical devices. The trick then for the therapeutic technologies is to take the high road, and use a similar easy-to-understand, high-level approach when pitching their technology.

Keeping it simple and using crowdfunding as a tactic for part of the strategy for early stage capital raising will be fine. However, it won’t be the full-blown solution to the industry’s capital needs.

The Ugly

How ugly can it be if you cannot see it yet, and where does crowd funding really fit? In my opinion, the fog has not been cleared on the regulatory side, and we have to wait for the rules and regulations to come down from on high. As of July 2013, no one knows what crowdfunding for equity investment currently really looks like!

I can speculate that because of the associated regulations, the best bet is as follows: if you need less than $500K to jump start your company, then you do not have to make the considerable investment of filing audited financial statements, which may also include compliance issues like keeping track of all communications through phone, email, and face-to-face meetings, etc., which translates to a very large administrative overhead.

The Bottom Line

The big challenge for the translational scientists is simplifying their message to a wider, less technically versed audience. Science needs to move through the experimental process step by step, and therefore, trying to get funding step by step is a reasonable approach if it is part of an overall fundraising strategy. What I mean by this is avoid the guardrail-to-guardrail, fits and starts approach, and have crowdfunding as a tactic in your overall strategy. Find small dollars to demonstrate efficacy, and then move on to the traditional groups and the new direct family offices and institutional investors for the larger capital needs.

At the end of the day, the scientist-entrepreneur has to understand that if he wants to play, he has to educate his or herself in the world of capital allocation, and the map that they use to do this has to be fresh and accurate and not dependent on the old models of fundraising, but rather reflect all the options, and how those options may map to the company’s needs over the next 5-7 years. The real take away from this discussion is that you need to create a strategy that covers all stages of your company’s financial needs by drawing the map of investor prospects for each stage.