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Business Strategy | Biotech and Life Sciences Capital Raising Strategies

Biotech and Life Sciences Capital Raising Strategies

By Rebecca Potts, CPA

Medical devices and biotechnology are rapidly growing markets. Bioscience venture fundraising and investment surged in 2014 with investments reaching $8.6 billion — a 30% increase over the previous year. Led by early stage biopharma, potential distributions from venture capital-backed IPOs and big exit mergers and acquisitions (M&A) rose 60%, topping $20 billion. Medical devices saw big exit M&A increases as well after a two-year decline.1 Although spending dipped in Q4, overall in 2015 total venture capital money going into biotech was up; deal volume increased by 12%, and average deal size expanded by 15%.2

While it is clear that investment money is out there, what is not so clear is how biotech and medical device companies can best access it, especially given their unique funding challenges. Uncertainties in the healthcare market can increase volatility in investment projections, which impacts financial incentives for investors. Greater risk is associated with financing research and development, given the need to clear clinical and regulatory hurdles before receiving approval and going to market. In addition, with each new stage in development, investors must reweigh the amount of capital needed against the commercial potential of the product.

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Source: MoneyTree™ report based on data provided by Thompson Reuters

Once companies exhaust their initial funding and known resources, they may find themselves in need of new funding sources. The right strategy is essential for raising capital in these promising, although volatile, markets. Here are eight tips for achieving success:

1. Have a capital strategy in place, and know what to ask for.
Your capital strategy should involve planning two or three financing steps ahead, which allows companies to consider varied investment opportunities. In addition, fundraisers (CEOs and CFOs) should determine whether it is better to raise money now or at a later stage. Remember that all outside capital dilutes, so it might not make sense to start raising it before funding is actually needed.

Be clear with potential investors on exactly what the money will be used for and what the next steps will be. This kind of proactive approach demonstrates a detailed plan for moving forward, which suggests the company is more likely to deliver a return on investment.

2. Sell the science.
Make sure the scientific thesis communicating the importance of the product is compelling to potential investors. It should demonstrate that the product is likely to have a specific, meaningful, and measurable impact on patients. Fundraisers often focus on selling the problem (i.e., the disease) and its potential instead of the science that actually addresses it. Present the data that support the company’s scientific claims, but be open about remaining unknowns.

3. Have real market research.
It is critically important to conduct thorough market research about the realistic commercial opportunity for each product. Be specific. Don’t rely on generalities (such as how many patients suffer from a particular condition or how much is spent annually on certain treatments) to demonstrate how much the product might earn.

4. Find the right audience.
Don’t use one generic pitch for every potential investor. Research what their interests are and then highlight the aspects of the current project that best fit those interests. Try to approach investors at the right stage in product development to match the kind of investing they consider. At the same time, don’t overly tailor the pitch by altering the reality of the company’s work. It’s more important to find the right investor than to try to change the company’s story to meet the interests of the wrong investor.

5. Put together a great team.
The product team should have a good balance among solid, well-regarded, and reliable experience and passionate, energetic, youthful drive. Talent and scientific knowledge are essential qualities in team members as is a history of on-the-ground learning through experience and project leadership.

6. Have a realistic valuation in place.
Be realistic with the startup valuation. There are long-term implications to setting an ambitious early stage valuation. The excitement of the current market is not necessarily sustainable over the lifetime of the company. Going with an overly high valuation up front might suggest to investors that a company is likely to bend the truth in the future or is inexperienced.

7. Leverage advisors’ expertise.
The company’s advisors (accountants, lawyers, bankers, etc.) can be valuable sources of information about funding. These professionals have extensive relationship networks and might be able to introduce fundraisers to new potential investors.

8. Engage in external activities.
Don’t overlook the company’s regular activities as opportunities for seeking funding. Media interviews and industry conferences can help get the word out. Ongoing interactions with current investors might lead to future additional funding. Maintain good communication with various stakeholders about new projects and research. Finally, always be prepared with a compelling story that explains how the business will grow over time, and be ready to customize it for different audiences.

Gaining access to funding is an ever-present challenge for medical device and biotech companies in the current market — one that holds great promise yet a high level of volatility. Success becomes much more likely when companies create and execute a capital strategy that is well planned out, backed up by solid research, and addresses appropriate potential investors.

With more than 40 biotechnology and life sciences, medical device, pharmaceutical, diagnostic, and supplement clients, EKS&H serves businesses and organizations that range in size and structure from pre-revenue start-ups to public companies with as much as $350 million in market cap as well as nonprofit research and development organizations.

 This article was originally published in the Colorado Bioscience Association June 2016 Newsletter.

 To find out how our industry experience, connections, focus, and dedicated assistance can help you gain needed capital, please contact Rebecca Potts at 303-740-9400 or rpotts@eksh.com.

1Silicon Valley Bank, “Trends in healthcare investments and exits 2015,” https://www.svb.com/uploadedFiles/Content/Blogs/Healthcare_Report/healthcare-report-2015.pdf.

2PWC, “Life sciences investments depart from year-long high,” http://www.pwc.com/us/en/health-industries/publications/assets/pwc-life-sciences-venture-funding-trends-2015-q4.pdf.