Magazine Article | February 27, 2015

Finding Investors And Capital To Match Your Goals

Source: Life Science Leader
Ed Miseta

By Ed Miseta, Chief Editor, Clinical Leader
Follow Me On Twitter @EdClinical

It’s a nagging uneasy feeling that consumes anyone who’s ever developed a new pharmaceutical or launched a new pharma or biopharma company. You need to raise money. You need capital. Otherwise, your company may never get off the ground, or that scientific breakthrough you’ve been dreaming of will remain just that — a dream. And by the time a molecule is discovered that may hold some potential, putting more money into the company to optimize manufacturing capabilities is not always the first thing on the mind of investors. In fact, landing any type of venture funding, at any time, can be a difficult endeavor.

That’s why we asked six venture-funding experts to give their advice on how best to pursue the capital that will help your company grow and manufacture your product the way you want it made.

Our roundtable panel included the following funding experts:
Chris Achar, CEO and founder, Genzum Life Sciences
Tiba Aynechi, principal, Novo Ventures
Kevin Judice, CEO and founder, DiCE Molecules
Julie Papanek, principal, Canaan Partners
Jaisim Shah, CEO and board director, Semnur Pharmaceuticals
Mahendra Shah, venture partner, Vivo Capital

When a company is looking for capital funding, how should it prepare, and what should executives bring with them to that meeting?

CHRIS ACHAR, Genzum Life Sciences: When talking to outside investors for the first time, I think having a well-vetted business model is the most important part. Given how competitive the start-up world is today, investors have a lot of options to invest in. For yours to stand out, having that solid business model is everything.

TIBA AYNECHI, Novo Ventures: When people come to us with an early stage opportunity, what's important for us is for people to have a good handle on how much they're raising and what meaningful milestones they hope to achieve. You need to have a well-thought-out plan, and you need to make sure your plan is reflective of the data you have in hand. We don't like to invest in speculative data.

It's important for companies to work backwards. Figure out what the exit scenario is going to be, and when it is likely to occur. Your finances need to be able to take you to that point. You have to think very nuanced and detailed about the project, and not in general terms. We want somebody who thinks in detail and not generalized themes.

Do companies generally come in well prepared?

AYNECHI: I think it's 50/50. Most people assume it will be a smooth ride, but it’s not, and it inevitably takes longer than you think. You really need to think about contingencies and various scenarios if things don't go according to plan.

We also like to focus on the management team. Is this something the team has done before, or is it their first time? As an investor, we are investing in that team. If we have an experienced team, they can always regroup quickly.

KEVIN JUDICE, DiCE Molecules: I think the idea of starting at the end and working backwards is really important. Think about how much capital you need to get to the point where investors can get a multiple of that capital back.

Take into account that what you’re doing is a science-based endeavor. That means there is going to be a lot of back and forth. Always ask yourself if anyone will be willing to pay money for it. At what phase would they buy it? How much money will it take to get this to that phase? This is a for-profit business, and our investors would like to get back a multiple of the money they give you. If you are looking for funding, you need to sit down and think about that.

What happens when someone comes in and they are not prepared? Are you able to help them?

JULIE PAPANEK, Canaan Partners: If someone seeking investment is not 100 percent prepared in our first meeting, we start thinking of scheduling multiple sets of meetings. At that first meeting, if we believe the product is differentiated and there is potential for it, we will start a conversation about who else the entrepreneur might want on his or her team. We also try to make sure the right individuals, such as executives and consultants, are involved at different stages along the way.

To help those entrepreneurs who are less prepared, we like to ask a lot of questions to better understand the product. If we are meeting with a smart chemist or biologist, we will say, "Help me understand what you want to do. Help me understand how this asset, drug, or pathway will meet an unmet need." You need to start with the science.

JAISIM SHAH, Semnur Pharmaceuticals: When you are at the stage where you are talking to investors, there are several areas that you must be prepared to cover. One is a clear understanding of the unmet need you are trying to address. Not just the scientific or medical need, but also the business need.

You also need to discuss how your idea, concept, technology, or product compares to existing therapies. You should address the potential for superiority, not just one or two, but five years down the road. Having a clear understanding of your development path and what the FDA expectations may be for developing your product are keys.

IP is also a key area that a lot of investors focus on. They want to ensure the product they are investing in will have multiple levels of protection. It basically comes down to summarizing the benefits of investing in your venture versus other ventures.

MAHENDRA SHAH, Vivo Capital: We do late-stage investing, so the companies that come to us have a proof of concept in humans for the target indication they want to develop. The first thing we would do is make sure the IP for the product has been taken care of.

Second, we would look at whether the formulation is there to manufacture a commercial product and if the necessary resources are available, all the way down to the required APIs.

A third thing we look at is the marketing plan and whether the company will be able to market the product on their own. If they can’t, we would want to know how they might go about partnering the product, and at what stage of development that should happen.

Finally, we make sure the Phase 3 clinical end points are no different than in Phase 2, to make sure there are no surprises during the study and that the company is not trying to cut corners. At that stage we do not want to take any chances. We have to make sure the company is fully funded to do a thorough enough trial to get the results they need to sell the company.

What is the due diligence process that takes place from the first meeting until the time a check is issued?

ACHAR: It can run the whole spectrum. On one hand the due diligence process can involve a basic business overview. On the other hand it can include a review of financials and even visits to various facilities. For example, I once had a group of investors that I took to India for two weeks. I took them to the R&D facilities, the clinical trial sites, and even the sites of our manufacturing partners. The investors wanted to have confirmation that the due diligence of the investment has been properly addressed.

AYNECHI: I always tell people to create a data room so that all important documents can be housed in one location. You often have to deal with multiple people across multiple locations with differing degrees of expertise. Having all those documents organized and in one central location greatly simplifies the process.

You also want to make sure you have your entire team available for meetings. Not just the CEO, but your CMO, your CSO, and other key members of the management team. They all need to be available for multiple meetings, not just the first one. If everything is well organized and well presented, we can do investments in as short as six weeks.

JUDICE: With a preclinical asset you are asking investors to take a big leap of faith. Being organized and having your presentation reflect a level of scientific rigor is critical. Keep in mind the average VC shop will see thousands of unsolicited business plans every year and will accept maybe 50 or 100 meetings. If you're in a meeting with them, you've already cleared a high bar and want to make the most of it.

I recommend going in and explaining what you’re doing and why it's different/ better than what the five closest competitors are doing. You've got to get through all of that in the first 5 minutes, because after that you will start to lose them. If you notice everyone looking at their iPhones, you are probably not doing well.

J. SHAH: For preclinical stage products it is important to know how quickly you can get to a go/no-go decision. You can spend a lot of time in preclinical doing early stage work that will not get any specific answers to help you decide in which direction to go. The sooner you can get to that decision point, the stronger your case will be.

M. SHAH: It is absolutely critical that you have a clear understanding of the competitive landscape for existing products with the same indication as the product you are developing. You have to know the landscape well and have key opinion leaders you are working with that have bought into your theory.

If we call a key opinion leader and they say they tried this concept and it doesn’t work, the project is dead in the water. Having someone for us to call on will make your life much easier.

Today many different types of funding are available. How do you identify what will be the best source of funding for a given company?

ACHAR: It all depends. I have always felt the best kind of capital comes from the early believers and key opinion leaders. The early investors are the most crucial part in development. They create the first wave and get other potential investors excited.

AYNECHI: There are certainly foundations whose sole purpose is to advance science in a certain area, and it's great to get that kind of money. Companies really need to think about the diligent use of that early stage capital and how to leverage it the best way they can. I would be less concerned about how you raised a million dollars than I would be with what you actually did with it.

We like to think we are advancing science, but at the end of the day these projects still have to make financial sense. But having said that, we don't really look at money as a qualifier. Just because you were able to attract investment from a foundation does not mean that we should be funding the exercise.

I would also caution companies against taking investor money that's too small and too early. That money can become very expensive for you at some level. If there are too many small shareholders, that can make it difficult for us to invest in a company.

PAPANEK: I have seen some capitalization tables come over with 150 names on them. I would worry that some of those people are not qualified investors and that at some point we will have to figure out how to get their capital out of the company. This is why you should think hard about whose money you are taking because it can lead to some very awkward conversations, and we don’t want to put people in those situations.

I would still recommend looking at all funding options that are available. I have looked at the Michael J. Fox Foundation and other organizations that have written some sizable checks. But at the same time I don't evaluate a company better or worse if it has money from a foundation.

JUDICE: If you're an entrepreneur, any money is good, especially if you're seeking pre-institutional funding. We have gotten money from the NIH and from small SBIR (small business innovation research) grants, for example. It is truly non-diluted, and it doesn’t distract us. There is paperwork that has to be completed, and I have heard people complain about that. But is there anyone else out there willing to give you free money and not make you fill out forms? If it’s good money, then you take it.

M. SHAH: If you received money from a foundation, that says a lot to me because it is aware of other studies going on for that indication and still made the decision to invest in your idea. That will give you credibility. Today, many of those groups are growing and now have access to a lot more money. At one time they used to give away free grants. Now they are becoming more sophisticated and will ask for their money back in some form.

How should representatives go about selling their company?

ACHAR: Keep in mind that you are not just selling a company. You are selling a new medical approach, a new way of doing business, or quite possibly a whole new treatment space. So you have that burden as well.

This actually goes back to some of the earlier comments about having a solid business model and the right key opinion leaders on board. Make the case that you are promoting a viable product, that you have a plan to make it happen, and that you have a portfolio team that believes in the product. Vetting each one of those steps in your pitch is crucial. Be consistent and thorough throughout the entire process.

AYNECHI: I think the sales approach varies based on the stage of investment. If you are looking at a preclinical company, you are very much focused on the fundamentals of the science. The data aspect has to be good, and the management team is also key. We have invested in companies that were literally ideas, but they were brought to us by people who were successful and had a track record in this space. We knew they could actually execute on the idea.

If we are looking at a later stage product that is in the commercial stage, we often will look to have a CEO with significant commercial experience who can handle the launch of the product. We have seen investment opportunities where we liked the science but did not feel confident with the management team. We would not be averse to going back to them and recommending that they enhance the management team. At the very least, we would want them to be open to adding a new executive, a CMO, or someone to fill any gaps we see in the team.

We also like to avoid potential issues before they arise. This is a small community, and reputation does matter.

What are your thoughts on crowd funding from the patient population?

M. SHAH: I just saw a business plan where people from the IT area were setting up a platform on which they could ask the patients to contribute ideas about what they would like to see. The plan called for raising money from patients and their family members to fund the ideas. I think this is a model that will work but not for new drugs. I think old drugs could be repurposed using that kind of a funding model. I think patients will respond to safer and more efficacious versions of drugs they've been struggling with, perhaps for chronic conditions, by repurposing or reformulating drugs.

How big a factor in raising funds is a company’s use of third-party suppliers?

ACHAR: I think it's very important, especially if you're a start-up. Being a start-up, you probably don't have the state-of-theart facilities or infrastructure to do it yourself. That means you need to outsource all aspects of the drug process, including development, clinical trials, and manufacturing.

When we decided to outsource, we picked the number one partners in each of those categories. Those companies had great reputations, and we chose them to convince our partners that we were using the best R&D facility, the best CRO, and the best manufacturing group in the industry. We felt that was very important.

AYNECHI: I agree that if you are an early stage company it is very important. At that point in the process, you do not want to have to invest money in the necessary infrastructure. The quality of your vendors is critical, so you want to go with the right outsourcing options, not just the least expensive. That is something we definitely look at when we are doing investing.

JUDICE: For a preclinical company just starting out, infrastructure and personnel can be very expensive. Much of the science nowadays is commoditized, so the longer you can put off having a lab and hiring people the better off you’ll be.

PAPANEK: I work with some virtual companies as well, and we are increasingly trying to find vendors and suppliers that are able to help a start-up company with chemical synthesis, biological assays, and disease-specific expertise.

Increasingly, we are also asking our companies if they know who, exactly, at the CRO they are working with. If the entrepreneur is working with a CRO team, but we get a different project lead and person to contact every time we call, that's something we would be concerned about. We want people who are fully dedicated to our project. We have a good relationship with our contracting groups and recommend them within our portfolio.

M. SHAH: I would say at least 95 percent of the companies I work with are outsourcing most or all of their development needs. I recommend working with the best companies available. Don't try to save a few dollars because that will come back to haunt you. Even if something looks expensive, just do it. If you don’t, you are going to end up having a problem and paying a higher price later on.

Our general rule is to hire the best professionals you can find who are capable of delivering the results you need. Choosing the wrong partner will reduce your value significantly, so always invest your money wisely