8 Key Factors for Taking Your Company From Founding to Exit16 February, 2018
Every life sciences entrepreneur’s ultimate goal is to realize a successful and profitable exit for their startup. After all, if you are the founder of a life science organization, you have more than likely taken a significant pay cut from your previous career. You may not be getting paid at all, and further, you might be racking up a six-figure balance on your American Express card. Why would anyone work so hard for so little? It is because founders have grasped that the payoff is waiting at the exit.
Building a life sciences company from the ground up can be incredibly difficult. However, it can be incredibly rewarding at the same time, both personally and financially. But how is it done successfully? How do you take a company from founding to exit?
At ShareVault, we have facilitated M&A transactions worth billions of dollars, and we have learned a few things about building a successful life sciences company and ultimately realizing the goal of a successful and profitable exit. What follows are eight key factors that we believe are critical in the process of taking a life sciences company from founding to exit.
#1 MAKE SURE YOUR DOG CAN HUNT
Successful life science companies are based on innovative science that meets an unmet medical need. It is not enough to take an existing solution and make incremental changes. A startup's science needs to be truly game-changing and serve a passionate market need. Your product needs to be dramatically different and both clinically and financially superior to the market you are going into.
It’s important to do a deep dive from a market research standpoint, so you understand the big market, the sub-markets, the competition, and the milieu of variables which you are eventually going to go to war with in order to determine if your dog can hunt or not. When the work is complete, it is time round up inventors and to look candidly in the mirror and accept the fact this dog may not. The reality is that eight or nine out of ten don’t. If your dog can't hunt, it's time to look for a new dog.
#2 MAKE SURE YOUR TEAM CAN PLAY NICE
Companies don’t move from founding to exit over the course of a year or two. It happens over many years or a decade. At the very outset, it is essential to have mutual trust and respect among the team you assemble. You are going to be talking and working with these people every day, so it is important both for you and for the success of the company that you can play nice. The last thing you want to do is work day-in and day-out with people you don’t get along with.
#3 MAKE SURE YOUR PIGGY BANK RATTLES
Many times people think that if you have a great idea, people are just going to throw money at it. The reality is that there are a lot of great ideas out there. Investors, especially institutional investors, are inundated with business plans making it difficult to rise to the top. You might have a great idea, but there are probably a hundred great things that a given investor is evaluating at a given point in time. So, it becomes imperative to have realistic fundraising expectations.
Founders should also be aware that SBIR grants are rarely enough to move a product to the next level and should not be relied upon in lieu of other types of funding. They take a long time to get, and the market can change rapidly while a company is chasing SBIR grants. In order to advance a technology forward as quickly as possible and avoid the hurdles presented by a changing market, it is imperative to have the best product and then develop the best story and investor presentation imaginable so investors can get excited about your novel technology. If it’s not novel, chances are you will not be looked at, and you won't get the funding.
It is also critical for most companies to have some sources of non-diluted funding. Non-dilutive funding does two things for a company. First, it serves to drive the science in the early days when it is incredibly challenging to get institutional investors interested in a pre-clinical asset.
Secondly, it validates your technology. If you get funding from a preeminent institution in a particular area of disease research that serves to legitimize your technology. Those kinds of research institutions don’t invest millions of dollars unless they think the science is excellent.
#4 MAKE SURE TO DO YOUR STRETCHING
Flexibility is important. Often startups are so focused on their perceived markets that they can miss opportunities. Once upon a time, there was a company that was using liquid nitrogen to treat esophageal cancer. One day they were approached by an interventional pulmonologist who thought the same technique could be applied to the lungs. They were so entrenched in their little GI tunnel that they had never considered alternative applications. Liquid nitrogen expands at a 700:1 ratio. One cc of liquid nitrogen creates the equivalent of a liter bottle full of gas. Obviously, that has to be managed when it is inside the body. In the GI systems, it is relatively easy because you just insert a tube and pull the gas out. In the airway, it’s a whole different story. Here there is less space and the tissue is fragile. They did not think it could work. They talked to GI opinion leaders and the inventors and everyone advised against it. However, the pulmonologist was insistent. They eventually conducted experiments at the animal lab at Cleveland Clinic and discovered that it worked. That took the company from a little boutique market—esophageal cancer of 16,000 cases a year—into the lung cancer market of 250,000 cases per year. Later they got into markets of chronic refractory asthma and chronic bronchitis with millions and millions of patients per year.
The lesson learned was that as focused as you have to be to keep things on track and get things done, that laser focus can also be a big blind spot to opportunity.
#5 BE SURE YOU CAN TELL A GOOD STORY
The narrative around what your company has to offer is a critical component to attracting partners and investors. It is not just about the science and how that science addresses an unmet need; it’s about understanding the competition, knowing what commercialization hurdles need to be overcome, understanding what payers do in the marketplace and what potential pharmaceutical partners exist for an exit.
Your business plan should tell a broad and compelling story that resonates both in the scientific field and with investors.
#6 BE SURE TO MANAGE YOUR INVESTORS
Startups commonly start up by raising money from friends and family. We know of a company that got on its feet by getting 80 individual investors to invest anywhere from 2000 to 20,000 dollars. That was a good start, but it also added some complexity. When it came time for a Series A fundraising round, they knew that an incoming investor was not going to deal with 80 other entities or partners. To solve that problem they bundled them all into a voting trust and elected a three-person board. One person on that board was then on the board of the company so that all issues could be channeled through a single person to represent the 80. To attract incoming investors, it was necessary to clean up some of the complexity of the previous investment history of the company.
#7 DON’T GET BORED WITH YOUR BOARD
Healthy communication between the board and the management team is essential for a healthy company. It is especially crucial during partnering and the due diligence process. Everybody wants to see an exit happen, but there is naturally some anxiety that accompanies that process. Being upfront and honest and keeping the board informed of where you are in the process and how it is progressing goes a long way in dispelling that anxiety. Be ready to invest some time and energy into board communications. When an exit is pending, you may find that your job shifts from managing the company to managing the board.
#8 BE SURE TO KEEP YOUR ROOM TIDY
Remember, a good data room is critical both for investors and for pharmaceutical partners when it comes time for an exit. Keep it up to date and keep it organized so that the parties that need to see the information can find it easily.
If there’s a lesson to learn as a startup, it’s to be thinking about the due diligence process from the very beginning. Pull all your references, market research data and IP together and keep it organized so it's accessible when it needs to be.
Building a company is not easy, but it can be incredibly rewarding. Start with the best scientific technology that fulfills an unmet need, build a strong team and find the right investors and non-dilutive funding. Those factors will be key components of achieving the best exit for your company and taking it to the next level.
To learn more about taking a life science company on the journey from founding to exit, download our free white paper, "From Founding to Exit: A Life Science Business Founder's Perspective."