By Dennis Ford, CEO, LSN
One of the greatest challenges facing life science CEOs leading biotech or med-tech start-up firms is that they are faced with being in nearly perpetual fundraising mode. Deciding upon the best method to raise capital can be difficult, as each choice bears its own burden. Either in-house staff can agree to own the burden of fundraising, or they can choose to outsource to a third party.
While at first, unloading this tedious and laborious task to a third party firm or marketing expert sounds enticing, it is important to have a clear understanding of what you are doing. These outsourced fundraisers are called third party marketers in the alternative investor parlance – better known as 3PM’s. There are various ways to distinguish and classify 3PM’s, but I tend to group them into three main categories:
- The first category consists of large financial companies that have very deep pockets. These companies are able to spend the millions of dollars needed to staff a high-end professional fund-sourcing machine through their cap-intro teams. Then there are also around a dozen well-known, private big brand firms who are able to effectively shop you around to their investor network. The only issue with this is that it is difficult to navigate your way in and thus, determine if you are a fit for them and their fund raising business. This is because most of the business is referred through a sourcing network that has been around for decades, and has become something of an “old boy’s network.” Lastly, within this group there is the VC, which – by most accounts – uses the herding mentality, in that it herds other VCs together to set you up with capital. VCs have lost their luster for various reasons, but they all come down to not being able to make returns on investments, and losing credibility as a result. There are a few that have done well and they are in the driver’s seat, but the market place is squealing due to their perceived predatory terms.
- The second tier players – some who do quite well – are the loosely affiliated, retired executives who have a decent who’s who global rolodex of investors and can form business consultant or 3PM firms to use their connections to raise capital. This can be effective or can be a wash depending on who it is and the circumstantial timing.
- Next is what I like to call the “wild west.” These firms can be 1-6 man firms that range from the fast-and-loose, to serious, button-down Business Development, to all the types in between. Typically, these guys are regional shops with local connections, or sometimes with specific reach into capital repositories comprising mostly angels and family offices. If you are a good 3PM, the work is extremely difficult, as investor interests change with the markets. Overall market perception of this type of 3PM is that they make a lot of promises to the client, but tend to always take the path of least resistance – meaning that the hot client gets the attention, while the rest are left waiting.
3PM’s in general have a mixed reputation in the market. I have developed a guideline to help you in your evaluation of a 3PM. Find references that have long term satisfaction from deals brought by the 3PM. Understand the subtly and nuance of the 3PM’s business culture, and how the 3PM handles deals. 3PM’s promise a lot and have been known to deliver less. Retainer fees should be high enough to keep the 3PM in the game, but low enough to keep him hungry. New 3PMs are often filling in while they develop a long-term career opportunity. Are they a one-man band, or even worse, a bunch of high-powered marketers with no stable leader to reel them in and no back up staff to help with research and preparation? Having support staff is critical, as is having the opportunity to be introduced and speak with them in order to better understand the firm. Consider setting a monthly retainer based on a mutually agreeable set of goals. Here a list of suggested qualifiers.
1) How many present deals/clients is he working on? Too few, and he isn’t a hustler. Too many, and he goes after whatever is hot and leaves you with little attention if you’re not.
2) Track record – how much, where, when, for who, from? If a 3PM can’t immediately elaborate on his last few deals, that’s a red flag.
3) References – as stated above, they have to be relevant, in context and current.
4) Culture of his 3PM – hopefully having understood the universe of fundraising, the 3PM can speak positively of his own firm’s culture.
5) How the 3PM does deals. Again, the 3PM cannot go blank on any question, but this one is especially important.
6) Basic trust is essential – if you do not trust your 3PM, you have nothing. Trust your gut.
7) Many investors want direct contact, and do not want (or appreciate) a middleman. What will the 3PM do in that situation? The best answer is that he usually can make a compelling case to stay, and doesn’t get in the way of a deal.
8) Good 3PMs live off their investor relationships and their reputation as a good and fair businessman.
9) Good 3PM’s are focused in targeting investors, and do not ever use a mass-canvassing approach. If they are into spamming, they are not worth your time.
10) 3PM’s understand investors’ needs and desires. They employ a rational, systematic approach to canvassing for an investor fit. This means lots of tedious research. The 3PM should understand the value of fit.
In short, my suggestion to life science executives is that you should choose your fundraising partners wisely, and understand the value of direct VS 3PMs. To conduct an effective direct campaign, you must define a targeted list of investors that fit your investment profile, and then with the help of your staff, start directly reaching out to your investor prospects. Remember it’s about starting a dialog and building a lasting relationship, because at the end of the day they are investing in you, your team, and your products and services.
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