Recently, we’ve been interviewing members of the San Diego biotech investment community to better understand the factors that influence an investment decision. Our goal is to use these lessons learned to create tools in Pharm2Market that help investors identify which early stage biotech companies to track and potentially invest in. Moreover, we want to help startup companies better understand the investment community.
During the course of these interviews with investment bankers, angel investors, venture capital groups and family offices a number of themes emerged. These themes were echoed in last night’s Angel Investor Panel discussion at the San Diego Entrepreneurs Exchange annual event. The panelists included Randy Berholz of Mesa Verde Ventures, Sam Ellis of Tech Coast Angels and Life Science Angels, and Jay Goth of Forentis Fund, and the Murrieta Genomics incubator.
Waiting too late in the game
Too often angel investors are approached by startups who have waited too late to approach the investor community. They’ve either waited until they have significant results to report out, or are ready for clinical trials, and don’t take into account the time required to build a relationship in order to get the investments needed to continue.
The Dating Game
It’s important to understand that engaging with the investment community is about creating long-term relationships. It may take 7 or more meetings over the course of a year or 18 months in order to raise the funds you need.
Often management teams at early stage startups are complete unknowns to the investor community. Investors are more likely to invest in companies where one or more of the principals are known to them from previous transactions. It’s not uncommon to hear an investor state, “if I’ve made money with you before, I’m more likely to invest in you now”. Money begets money.
See The Hill, Take The Hill
In order to build credibility in the investor community it’s important to show progress towards value generating milestones over time. They need to see that you set a stake in the ground, make progress towards it and achieve it. They also need to see that when you fail you’re up front about it, and have a plan for addressing it, or pivoting.
The Company You Keep
“You are known by the company you keep” — Aesop. Beyond using milestones to improve your credibility to investors, credibility is often built through your extended team, in part because those parties go through their own vetting process. Knowing that your company is represented by a well-known legal firm is one of those tickboxes they’ll be looking for. Other investors involved in your company also help build credibility, partners and collaborators, and even your accounting firm can help. Your legal and accounting teams often have the connections that you will need to succeed, so make sure you leverage them.
The Long Run
Angel investors look at relationships as long term. They realise that they’ll be working with you over a 3-7 year period to help advance your drug programs. They may be on your board, they’ll definitely be taking an interest in your progress, but the relationship isn’t and shouldn’t be treated as solely a financial one.
Build Your Network
Scientific founders often have great academic networks, but poor financial networks. You’ll need to leverage your angel investors to help make warm introductions and expand your network. That network should not only include other potential investors, but potential industry partners.
Failing To Ask Questions, Take Advice or Ask For Help
You’re going to pitch to a lot of investors over time. You will get told “no”. But a big mistake is to fail to ask “why”. You want to know if the problem is in the pitch, or if it’s a mismatch for the investment thesis, or if they’re planning on raising another fund, and they’ll be better placed at the point to consider an investment. There are plenty of potential reasons for the “no” — don’t walk out of the room without finding out why. Remember you’re interviewing your potential investors, as much as they’re interviewing you. Don’t forget to treat it as a two-way conversation.
As your relationship with the investor grows, be open to taking advice. A lack of “coachability” on the part of the CEO, can often spell the end of a relationship. Learn from your investors, rely on them for advice and mentorship. Reach out to your investors for help. When you recruit them, look for what they can bring to the table, the doors they can open, the introductions they can make, the partnerships they can foster.
Hailing Frequencies Open
You will get told “no” a lot. But your company may still be compelling enough that the investor wants to track you. You may be a complete unknown to them, and they want you to establish a track record with them, so they can see your performance over time. And while you may still not be right for them, you might be right for someone in their network. So make sure that you keep potential investors updated.
Low-balling Your Ask
In many cases an entrepreneur may low-ball the ask (ask for less money than is truly needed to achieve the milestone). How much runway do you need for the next 3-5 years? What happens if you miss a milestone? Did you pad your asking amount by 20-30% to insure that you have the funds necessary to pivot or overcome that obstacle? Are you paying yourselves and your employees sufficiently to keep yourselves and them focused on the job at hand, and not worrying about the rent or the next paycheque.
You Can Be King Or You Can Be Rich
As Noam Wassermann noted in his article in the Harvard Business Review, you can either be king or you can be rich — but you can rarely be both. Wassermann noted in his article that three years into a venture, 50% of founder/CEOs have surrendered day-to-day management of their companies to others.
There are a variety of reasons for this (outlined in the previous article), but it’s important to put this as a mental milestone on your radar as a founder. Most founders will not see a company through to its IPO. It’s important to realise that and plan for it.
Blinded By Science
Investors see a lot of pitchdecks during the course of a week. But one mistake they repeatedly see is dissertation length pitchdecks from biotech entrepreneurs. Keep it short and simple. Know your audience. Most of them will not have PhDs and will not be specialists in your particular area. If they’re interested, they’ll dig deeper so be prepared with a white paper or other explanatory materials for a followup conversation. But the deck itself should be short and to the point.
The answers they’re looking for include:
- What is your value statement?
- Who is your team and what experience do they bring in getting a drug out the door?
- What is your product?
- Who are you helping? (what’s the indication and total addressable market)
- Who are your competitors?
- Who are your partners & collaborators
- What are your milestones and how will you use the investment to achieve those milestones
Guy Kawasaki’s book “The Art of the Start” outlines what a pitchdeck should contain and what it should not and Owen Klaaf’s book “Pitch Anything” is another good resource that can help you nail the messaging.
Startups live or die depending on their ability to communicate the value of what they’re working on to a lay audience. If you can explain it to your Mom in 5 minutes, and not lose her in the process, then you’re hitting the communication sweetspot — assuming that your Mom does not have a PhD in Biology or Chemistry.
In any case, keep it simple and brief.