A private equity group based in the Central US has raised three funds, and has around $300 million in total assets under management. The firm is always looking for new opportunities in the life science space, and typically allocates around $20 million per firm ($10 million of the group’s allocation is typically equity, the remainder is financed using debt).
The firm is currently most interested in companies within the suppliers and engineering space, as well as biotech R&D service companies. The firm is particularly looking for medical device companies, as well as CMOs and niche chemical production companies. The firm solely invests in US based firms.
The PEG is only looking for firms that currently have products that are on the market. Additionally, they are looking for companies that have at least $15-100 million in annualrevenue, and prefer firms with annual EBITDA in the $3-15 million range. Consequently, the firm will not consider early stage pre-revenue companies.
Hot Life Science Investor Mandate 2: PE Group with Diverse Investment Interests Seeking New Targets – April 4, 2013
1 AprHot Life Science Investor Mandate 3: Nonprofit PE is Interested in Wide Range of Investment Opportunities – April 4, 2013
1 AprA nonprofit private equity fund headquartered in the Eastern US has roughly $50 million in assets. The firm’s mission is to create positive social impact via direct investment in several sectors that constitute major areas of concern in third world countries, including healthcare. The PE invests across the life sciences sector, and is always evaluating new opportunities that offer compelling solutions to major public health problems in the developing world. The firm has no set time frame to make an allocation, but would invest if a compelling opportunity were uncovered.
The firm makes initial equity investments ranging from $500 thousand to $2 million, with most investments close to the $1 million mark. This capital can be provided as either debt or equity financing. The firm is interested in all areas of the industry, including therapeutics, diagnostics, devices, and service companies (especially CMOs). The firm doesn’t have a specific mandate regarding phase or indication, but prefers later-stage assets. It will however invest in preclinical opportunities with the right co-investor. The firm is comfortable making allocations to companies in the US, Europe or in relevant emerging markets.
An Update on Incubators
1 AprBy Max Klietmann, VP of Research, LSN
Incubators have become an increasingly integral part of the life sciences landscape. They play a key role in the advancement of nascent technologies from an academic research stage to commercial potential. However, in my discussions with many emerging life science entrepreneurs, I’ve learned that there are a number of myths and misconceptions about what value incubators really provide. However, statistics consistently show that the value of adoption by a good incubator considerably decreases risk and time to market. This article seeks to explain exactly what incubators are, how they can help move your company forward, and what to look for when evaluating an incubator to partner with.
Incubators in the context of life sciences can be loosely defined as a shared laboratory space to facilitate the growth of early stage companies and technologies. They are often run by universities, state or regional economic development organizations, research institutions, large industry players, or some combination thereof. The most basic mission of these organizations is to increase the success rate of early-stage companies for a variety of reasons. These typically include identifying future customers, creating valuable jobs within a certain region, or to find early-stage technologies that could be future investment or partnering opportunities.
A good incubator committed to its constituents offers a number of powerful advantages – First and foremost, there is the advantage of sharing space and equipment, which means massive cost savings. This is a huge advantage in the current investment environment surrounding life sciences, as capital efficiency is becoming a primary focus of investment evaluation in a highly capital-intensive space. Second, a good incubator offers resources and fosters an ecosystem that can help emerging companies to quickly fill gaps, learn best practices, and develop a more informed strategy to reach the market. These benefits can take the form of pro bono legal or financial services provided by firms seeking out future clients, consultative services provided by the incubator itself, or simply being surrounded by other entrepreneurs. Finally, it puts your company in the context of a network that helps to build out a highly compelling team. Most life sciences entrepreneurs previously existed either in the context of academia or within a large biopharma. They may be brilliant scientists developing cutting-edge technologies, but they lack the business sense to fully comprehend that their asset is the basis of a business, not just a research publication. Incubators provide a network that can help entrepreneurs find the right people to fill this gap.
All of these sound nice, but will they actually increase your company’s probability of success? In short, yes – According to the National Business Incubation Association (NBIA), partnering with a hands-on incubator (not just rental lab space), doubles the likelihood that a company will still be operating five years later. This is because incubators exist to move companies forward and get them ready for their next round of funding. Considering that there has been roughly a 50% funding drop for early stage companies over the last two years, incubators clearly provide a huge advantage in this regard.
So how do you pick the right one? Fit is the most critical piece of the puzzle – It isn’t necessarily the most prestigious incubator that you should be focusing on. Look for those that provide services relevant to your firm, and ideally are specialized in helping companies similar to yours. Shop around – ask how long a typical member remains in incubation before moving to the next level, and make sure the organization is personally committed to your company’s success. Making this evaluation should be a carefully-planned and well thought-out decision. A solid relationship with a strong, hands-on incubator is one of the easiest ways to decrease risk surrounding your company. Heck, you may even learn a thing or two!
How to Stop the “Valley of Death” From Getting Deeper
1 AprBy Danielle Silva, Director of Research, LSN
In the life sciences space, most scientific breakthroughs fail to translate into commercial product. There are many forces behind this trend, including regulatory issues and many emerging scientist-executives’ lack of business acumen. The largest issue, however, is that many emerging biotechs are unable to obtain the necessary funding to move an early stage research project down the pipeline towards market. This gap, which continues to widen, has become known in the industry as “The Valley of Death.”
LSN maintains a focus on the Valley of Death, because it is chiefly an issue stemming from an inability to make the right connections with investors, rather than a problem with the fundamental science behind an early stage asset. As we’ve discussed previously, in recent years, LSN has seen traditional sources of capital for scientists and young stage life sciences firms, such as venture capital funds, all but dry up. That means there is even more competition to get a meeting with these investors, and because these investors are becoming more risk averse often times the firm with a less disruptive, but later stage product will be the winner, not the scientist with the novel discovery.
So what can the life sciences industry as a whole do to prevent the valley of death from getting wider? Quite simply, there needs to be a forum for early stage scientists to engage with the new sources of capital in the space. In today’s environment, it’s really all about targeting the family offices seeking to contribute money to accelerate research for a specific indication. All of the pieces are in place for a completely new paradigm of philanthropically-driven private capital pushing the next generation of drugs to market. The key to this will be in creating an environment for both parties to engage face to face collaboration towards a common goal.
Think Inside – then Outside – the Box when Mapping Your Fund Raising Strategy
1 AprBy Dennis Ford, CEO, LSN
LSN regularly works together with emerging life science firms looking to raise capital in order to move an asset forward. Though there are some fundamental rules of the road when navigating the ever-changing investor landscape, much of this process must be tailored to the particular company. Often, when asked how a company should compose a target list of investors to go after, we explain the principles of inside-the-box and outside-the-box approaches to investor prospecting. This article explains the basic idea behind both, and how your life science company may benefit from each or a combination of the two.
The inside-the-box approach is fairly simple and intuitive – the idea is to take some time to conduct a survey of the past investment history of a pared-down list life science investors that have already committed capital (voted with cash) to look-alike companies with similar products to yours. What I mean by this is companies with products that would be considered in the same general orbit (e.g. small molecules in phase II targeting cancer). If you think about it, these investors have already educated themselves, created a mandate to invest in your specific arena, and made allocations. These investors already get what you do and they understand the critical points to examine during due diligence to justify an investment. There are many ways to gather this investor data; LSN has this data readily available, or you can conduct the research on your own by looking through investor portfolios. Once this list is created, it is a very powerful tool. First off, you know everyone you reach out to is already a fit to some degree. They get you, your company and your products! It is more than likely that if you are diligent and you have tenacious follow-up, you will more than likely be able to close the investor down on an introductory call, and hopefully, secure an audience with the investor. And as we’ve said many times before, investor fit is really the key to allocations of capital.
The outside-the-box strategy addresses the one shortcoming of the inside-the-box strategy. That shortcoming is the fact that historical data is exactly that – historical! The investor arena within life sciences is constantly shifting, and there are constantly new investors looking to enter the space, and many previous investors are either tapped out of capital or have moved away from the space. This is where it becomes advantageous to find what we in the financing realm call “opportunistic investors.” Typically, an opportunistic investor’s modus operandi is essentially “cafeteria investing.” That is to say, if something interesting comes onto the radar screen, the opportunity passes muster and we like it…then we will invest. On the surface this may sound like a cavalier investment strategy; others in the know might call it adroit. Adroit, because it has the capability turn on a dime without being encumbered by a restrictive mandate and has the ability to react to something that is hot or interesting. Opportunistic investors can be in front of the curve, and if they are in the right place at the right time, they are often are the first movers in disruptive areas of innovation. There are plenty of opportunistic investors because they are seeing the wealth of investment opportunity in the vacuum that now exists through the lack of capital in the early stage VC segment. These entities often include family offices, angel groups, and in many cases, early-stage corporate venture funds.
By employing both of these strategies effectively, an emerging biotech can quickly and easily navigate the global investor space tactically, leading to faster dialogue generation and a quicker route to allocations.
Hot Life Science Investor Mandate 3: Family Office Seeks Opportunities in Medtech Space – March 28, 2013
26 MarA family office located in the Western US with around $100 million in assets is looking for a compelling opportunity for allocation within the next 6-9 months. The office invested in more than five deals in 2012, typically between $1-5 million per firm.
The foundation is most interested in medical devices, and will look at firms within the full gamut of medtech subsectors. Typically, the office allocates to firms that have at least one product on the market. They have no strict criteria in terms of a firm’s EBITDA or revenue, but require that any firm in which they invest has goals to lower the cost of healthcare.
The Mantra and Myths of Capital Efficiency
26 MarBy Danielle Silva, Director of Research, LSN
As time-to-exit has become protracted for life science investments in recent times, capital efficiency has become somewhat of a buzzword in the industry; but it seems that many firms still struggle with understanding not only what capital efficiency is in the context of the life science space, but also how to demonstrate it to potential investors. In the past, many young life science companies believed that more is always better – the more capital raised the better, and in turn, the bigger their valuation the better. Just because a firm is able to raise more capital does not mean the firm has in turn increased value for the firm’s stakeholders.[1]
It is still important for life science firms to constantly be in fundraising mode in order to keep an ongoing dialogue with potential investors, and companies still need to be cognizant of the fact that they need to raise money in order to get to the next round of funding. However, life science companies need to keep in mind the mantra of capital efficiency – doing more with less – creating more value with less capital, which is what life science firms need to focus on in order to both gain investor interest and create value for their investors.
Often, when investors refer to firms that do not have a “capital efficient” model, they point out firms that have been able to raise a good amount of capital in a small amount of time. Raising a huge lump sum is not always a bad thing – but if firms aren’t able to provide any returns to shareholders on the huge sum invested, then receiving this large allocation does prove to be problematic. Firms that aren’t able to illustrate that the investment has created any value will have trouble raising money in subsequent rounds, even if they are somehow able to show that there is a dire need for the capital.
Capital efficiency also plays a huge part in driving down the cost of capital over time – which is something life sciences firms also need to keep in mind when raising capital, considering the relatively large number of financing rounds required before product reaches marketability. Your firm needs to create more value with your cash on hand than your burn rate. If you don’t follow this rule, then subsequent financings will continue to dilute your company’s value.
The major question for life science companies, then, is how to achieve capital efficiency and how to demonstrate it to potential investors. One way to improve capital efficiency is to simply gain an understanding of the cost it will take to get to market – this includes what regulatory risks/costs may be associated with developing the technology and the firm’s target market for the product. Understanding the risks and the market will help the firm to more accurately identify if their firm is being overvalued or undervalued – again, if the firm is overvalued it will exacerbate problems with obtaining follow-on funding and raise the cost of capital in the long run.
Another useful concept that life science companies need to keep in mind is that time is money – if failure is inherent, then the firm needs to be able to quickly change their strategy and be able to identify an alternative market, indication, or application for the technology being developed. One of the most important aspects of capital efficiency is to be efficient on an operational level; firms need to leverage their existing capital base and if possible monetize their non-core assets at an early stage.
In order to prove that your firm is capital efficient, you will need to provide potential investors with financial statements, as well as outline your team. Illustrating that you have hit key milestones with a lean staff is an integral part of demonstrating capital efficiency to investors. Additionally, if your projected infrastructure expenditures or current spending to operational spending exceeds a ratio of 1:1 then this will be a huge red flag to investors.[2] Furthermore, to illustrate capital efficiency, it is important to make multiple projections for regulatory costs to show investors that you have already thought about the best and worst case scenario for getting the product to market.
If all these factors are taken into consideration by life sciences firms, it can help a company to become much more capital efficient. In the end, for life sciences firms and investors, capital efficiency is a win-win – the cost of capital is reduced for life science companies, and the return on investment is greater for investors. Thus, moving forward in order to attract investor capital life sciences firms will need to adopt the mantra of capital efficiency. If there is one thing you keep in mind – you will always need twice as much money and time as you think, and there will always be bumps in the road. Plan for it, and you are immeasurably closer to success.
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