News Life Sciences Column: Steps to life science company success
Column: Steps to life science company success
Order Reprints
Follow @MiBiz
By Jonathan P. O’Brien
and Phillip D. Torrence
Honigman Miller Schwartz and Cohn LLP
Nationally, U.S. venture capital funding in the life sciences sector declined during the fourth quarter of 2010 according to findings from the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association (NVCA). In contrast, overall investment was up in 2010 relative to 2009 in the Midwest, including Michigan.
Although this trend is encouraging news, the competition for finding and raising funds is fierce. There are several steps, however, that you can take to increase your company’s success at fundraising.
• Make a good first impression by being prepared. Gather all important company materials that investors will want to review. These include incorporation documents; employment and consulting agreements; any license, material transfer and intellectual property agreements, including assignments; and scientific results related to the key company products. If possible, set up an electronic data room. Once started, the data room can be updated as additional relevant company documents are generated. Electronic data rooms can also be customized to control who accesses the materials and how those individuals access your information, e.g., read-only, printing rights, etc.
• Once you have assembled all of the materials, review them. If possible, perform a mock investor due diligence meeting using your counselors and advisers. Hopefully, this review will assist the company to identify and, possibly, address any issues well before you are in your first investor meeting.
During this courtship, first impressions matter. Knowing exactly what is in your documents and how to handle tough questions from investors often means the difference between failure and success — no matter how good the product or technology. Investors have a short attention span. If you fumble around with documents or cannot address important questions quickly, investors lose confidence and interest, and move on to other opportunities.
• Demonstrate that you understand your technology sector. Broaden your business plan by developing a strong global intellectual property and regulatory strategy. Although you may only have a single patent filing at an early stage of development, your company’s strategy should include a long-term intellectual property plan that will continue to protect on-going development and commercialization efforts.
• Keep in mind that some strategies do not necessarily have to rely solely on patent exclusivity. For example, strong trade secrets or regulatory exclusivity periods can provide just as much, if not more, protection than patents. Whatever your strategy, make sure that you take a global perspective. Failing to address why you have (or don’t have) a certain strategy in South America, Europe and/or Asia can be lethal to the process and may severely diminish the valuation of the investment.
• Be prepared to explain how your strategy provides product exclusivity relative to your competitors. It’s not enough to know who your competitors are. Smart investors already know who your competitors are when they attend the first meeting. As part of your company’s SWOT analysis (strengths, weaknesses, opportunities and threats), invest time in conducting a freedom-to-operate clearance of your product and in identifying how you might be able to gain a competitive advantage. Assess whether your company has a single product versus a “platform” technology that can facilitate commercialization of multiple products (i.e., one trick pony).
• Discussions with potential investors about company strategies and analysis should be carefully crafted so as to avoid waiving the privileged nature of legal opinions obtained from counsel. In order to minimize these risks, consider having your legal counsel participate in the mock due diligence meeting and review the materials that you propose to discuss with the investors. If practical, invite your legal counsel to attend the discussions with the investors.
• Develop a realistic and complete budget. Most companies severely underestimate or altogether forget to include budget items for continued maintenance and implementation of the company’s global intellectual property strategy.
• Finally, be realistic on valuation. It is better to own a small piece of something big than a large piece of something small. Many companies make a big mistake of throwing out completely unrealistic valuations, which immediately turns off investors.
The rule of thumb with venture investing is last money in is always the first money out in an exit event. Remember, pigs get fat and hogs get slaughtered. LW
Jonathan P. O’Brien, Ph.D., Honigman Miller Schwartz and Cohn LLP, is chair of the firm’s intellectual property practice group and partner in the corporate and securities department.
Phillip D. Torrence, Honigman Miller Schwartz and Cohn LLP, is office managing partner in Kalamazoo, chair of the firm’s financial institutions practice group and partner in the corporate and securities department.
