In Part I of this series we analyzed VC investing trends and the Life Sciences market condition during the current COVID-19 economic crisis and compare to the 2008 financial crisis. The focus on life science tools, technologies and services that enable discovery, development, and manufacturing of both traditional biologics as well as cell and gene therapies.  If you are a founder or CEO of a new startup looking to raise funding, what should your strategy be during this turbulent and uncertain market?  What is the likelihood of finding investors? If you find investors, are they willing to deploy? What should you expect as far as timing and terms? Our first recommendation is to not make assumptions. Not all funds are conserving capital during this time; in fact, it is likely quite the opposite in Life Science Industrials. On the whole, we have observed a consistent level of deal flow and deployment opportunities. Through conversations with colleagues at other funds and strategics, we see a continued appetite to invest in innovation across Life Sciences.  However, some growth equity and venture capital funds with large portfolios may find themselves in cash preservation mode to ensure that their existing portfolio companies are adequately supported if and when they need a cash injection to weather this storm. 

We also advise entrepreneurs to consider the many types of investors currently in the market to identify better potential investment partners given their position.   If you are just getting underway with your venture and seeking a pre-seed or seed round, micro-VC’s and high net worth individuals are actively looking to write smaller checks for higher potential reward.  This is a phenomenon consistent with previous downturns.   However, given the nature of the current crisis (one caused by a disease for which there is not yet an identified treatment or vaccine), Life Sciences Industrials are attracting the interest of investors who may not have previously considered this space.  While in the past it was a largely ‘under-the-radar’ subsector, now the headlines and daily discussion of diagnostics, therapeutics and vaccines contribute to growing public interest in the space and the businesses operating here.

Funding now, what are the opportunities?

Hopefully, from Part I there was a sigh of relief that growth equity and venture funding rebounded quickly after the financial crash of 2008 and is expected to do the same during this crisis.  This is particularly true for seed and early stage funding. Furthermore, as of June 2019, VCs were sitting on nearly $189B of available capital so we expect there still significant capital available compared to 2008.  Our unique insights into the Life Sciences Industrials market have us watching another potential windfall for fundraisers.  Over the past several years, the larger bioprocess players (Danaher, MilliporeSigma, Sartorius) have been battling through acquiring technologies to strengthen their offensive or defensive position, as the case may be.  Some have been late to the party and are playing catch up, while others have been focused on massive transactions (recent Q1-2020 finalization of Danaher’s Cytiva acquisition), but all seem to be getting highly focused on the next inorganic growth targets to consider.  In addition to VC funding, an entrepreneur may be able to partner with a strategic player for needed capital and a clear exit down the road, as long as it’s on favorable terms.  Beyond the venture funding landscape, Evercore ISI has recently observed that many of the leading Life Sciences acquirers have been bolstering their cash through equity raises at significant levels -- ranging from a few hundred million to upwards of $2 billion. This approach will also prove interesting for future market consolidation and M&A plays over the next couple of years.      

What should you expect?

Regardless of your potential funding source there are certain realities you have to accept.  For the next 6 months, your fundraising deal funnel will likely be limited to investors you have already met and are speaking to.  Even the most tech savvy, virtual working teams will likely need to have met face to face to solidify a deal, especially if your technology needs to be seen in action to be fully appreciated and valued.  Virtual demos and virtual meetings will help overcome some of these issues, and you should be prepared to offer some flexibility in providing access or virtual demos.  No matter what, the entire process may take longer than usual, so it is best to start the dialogue.  In fact, an incredibly important point for entrepreneurs: don’t wait until you need to raise money to engage with potential investors!  Put in the time and energy to cultivate relationships with potential investors through updates, calls, newsletters and conferences.  Investors will need to talk to your clients, test or demo sites, and speak with board members / references during due diligence. Under the current COVID-19 constraints, this may be difficult even with the option of corresponding virtually.

Next, what is the investor’s liquidity situation?  We spoke of all the dry powder that is on the sidelines, but some funds have more liquidity than others.  As an entrepreneur, be aware of the current situation of a potential investor, from their perspective. Given the current crisis, they may be enacting different strategies to weather the storm as well.  A VC fund that generally invests in late stage, big ticket rounds may not be writing checks right now and may be holding off to see where valuations stabilize.  Others may need to divert their energy and cash to float some of their portfolio companies through this storm.  Conversely, some research may show the group you are speaking to has made several small seed round investments, and continuing to expand their portfolio during this time.   In general, we have observed that funds focused on life sciences are continuing to deploy nearly stable at pre-crisis levels.

Put your best foot forward

More than ever this is a time when you need to think like an investor.  If you are an early start-up, your pitch needs to focus on a realistic path to commercialization.    How much will it cost, what are the value-creating milestones and what do early sales look like?  Investors do not want to hear their investment dollars are simply to float you through this crisis to figure out your launch strategy later.  If you are already in the commercial phase, your pitch should have two components: the operational side and details about your sales funnel.  Operationally, the focus must be on costs and burn rate – investors need to know you are serious about managing operating expenses and you are willing to make tough decisions to extend runway.  This is particularly relevant if you require a large R&D or IP budget in order to advance the portfolio.  Top line sales projections will not be enough.  Investors are going to need more assurances such as:

·     What has your sales trend been since this crisis started?

·     What does your repeat business look like? Is there recurring revenue?

·     Are existing customers purchasing more or less? Are they delaying orders by a quarter or two?

·     Do you rely heavily on academics or small biotechs that might also find themselves temporarily cash-strapped?

·     How will you acquire new customers, perform demos and conduct site installations at this time?

It is critical that you consider how your product fits with the current economic condition and you can speak to this product-market fit with investors accordingly.  Are you selling an off-the-shelf, $50k bench top system with consumables, or a larger process system requiring hundreds of thousands of dollars outlay with a long lead time?  These details will have a large impact on your sales cycle, when you will recognize revenue, as well as the probability that your sales funnel will become a reality.  Investors know this and want to see you are factoring these elements into your plan.

Finally, it is worth preparing your story and your materials via a data room to make it as easy as possible for investors to understand your business and get access to critical information so they can reach a decision or ask for any additional materials.

The devil is in the details

If you are fortunate to find an investor with a mutual vision, understanding and appreciation of the industry and sector, then additional time might be spent calibrating deal terms considering market dynamics.  Some terms are simply inherent to the investor class you are speaking with, whereas others are related to this crisis.  If we take the example of a strategic investor mentioned above, you can expect some terms to be floated regardless of market conditions such as right of first notice of an acquisition offer. Lower valuations seem to go hand in hand with economic downturns. Be aware that founders understand that funding rounds are historically discounted 10 - 25% during economic downturns and are adjusting valuations and expectations from the start.  Contrary to what you might think, this is not due to investors taking advantage and deflating value because they see an opportunity to do so.  Put yourself in their shoes – investors enter the deal knowing their investment dollars may be deployed in your company for a longer than expected period of time. Their risks are higher and there is a greater likelihood that they will need to invest more in your business if the downturn continues for a prolonged period and impacts your: sales, valuation, exit multiples, R&D needs or anything else!  This is a time when founders need to ask: do I want the perfect deal terms or do I want the capital and the help to realize my vision sooner than later? Chances are your investors have navigated and survived, or even thrived, during multiple past down-cycles, and it is a real benefit to have these voices at your table.

Part 2 Wrap Up

Simply put, these are challenging times for founders and investors. Sacrifices must be made in order to fuel the economy and leverage this setback as an opportunity for future prosperity.  Entrepreneurs should be optimistic as investors are actively deploying capital and we are in a sector with the best potential for an early rebound from the current crisis.  To maximize fundraising success, founders need to think like an investor and pitch accordingly.  Doing everything possible to show you are thinking about how to best run your operation and maximize sales during this crisis will ensure you will get that much needed capital.  Patience through a more prolonged process and showing some flexibility on deal terms will prove to your potential partner that you are willing to work as a team in good times and bad.