Fundraising: Best Practices in a Challenging Environment

You can review the first article in this series, The Biotech Industry Today: What Leaders Need to Know, and the second article, Planning: Why It’s Worth the Time for Biotech Companies.

How is fundraising connected to the key role of planning for biotech companies?

Joris: Fundraising and planning are connected by the issue of trust. Investors have to trust you if they’re going to put money into your company. You can earn that trust by showing them your plans, demonstrating that you are clear on where you want to go and the steps you will take to get there. That’s reassuring for an investor and will help you to arrive at a common understanding of the goal. You’ll usually need several meetings to convince an investor, and over that time they can see that whatever you’ve planned, you’re actually doing. They also want to know that you’ll create value with the money they’re going to put into your company. Your plan should show, in detail, how the funds will be used to get to the next value inflection point. So planning is absolutely key to fundraising because it’s the way to show investors that they can trust you.

What are the major fundraising challenges today?

Dan: Obviously, the environment that we’re in today is challenging from a macroeconomics standpoint. High interest rates mean that it’s more difficult for venture capital firms to make new equity investments right now. Instead, they’re putting their money to work in existing portfolio companies, supporting them through this difficult time.

Joris: Agreed. Circling back to the need to establish trust with a new investor, this is always challenging regardless of the economic environment because building trust is a long-term process. But you probably need the money soon! There’s a tension between the time it takes to earn an investor’s trust and the point at which you have access to funds.

Another ever-present fundraising challenge is that we’re working in healthcare, and biology is complex. The science is constantly evolving and the available information is always growing. The problem for company leaders is how to present a complex biological element in a 30-minute pitch to investors.

Dan: To build on that idea, the management team has to tell their story effectively. Investors are slammed with pitches; they are literally reviewing hundreds at any given time. You need to understand that you’re speaking into a crowded space, and you must clearly communicate your value proposition to get in front of an investment committee. And your message must be easily repeatable by investors so they can pitch it internally as a better idea than others that the committee is hearing.

Funders are not just investing in the science, they’re investing in the people. They’re going to partner with your team for the next several years, rather than writing a check and vanishing, and they’re looking to add value. You want them to feel that they can engage and work with you.

Joris: I’ll add that it is possible to differentiate yourself, but a problem we frequently see is that companies chase too many things at the same time. Their story is not homogenous and their assumptions and topics are disconnected. Everyone on your team needs to speak with one voice and tell one story. That’s not easy because each person comes from a different background and has their own point of view. They may avoid confrontation as well as the hard work it takes to get everyone aligned. When we work with companies in preparation for capital raises, we often must work to align the team around one strong story.

How is fundraising different in the US versus the EU?

Dan: The US has a well-structured innovation and venture ecosystem that is typically willing to take on more risk and help spur innovation. Advanced accelerator and incubator programs are ubiquitous, and not just based in universities, but also in municipalities that are trying to build out their innovation centers. So there’s a great support network here. Alira Health is involved in the network and in mentoring early-stage biotech companies, as we are in Europe.

Joris: Certain regions in the EU are fostering innovation, and many organizations, such as Biocat in Catalonia, Spain, are providing support to biotech companies. So I would say that while the ecosystem is not as developed as it is in the US, it is definitely growing. For EU start-ups, we recommend that you work with these organizations to benefit from their assistance. We also advise that while you need to play in the US because it’s the largest healthcare market in the world, and at some point in your trajectory you will need US investors to be close to that market and gain credibility, you should start with local investors, where it’s easier to establish trust. You can then go to the US to raise funds at a later stage.

I’ll also add that you should be aware of the cultural differences between the two regions. In the US, you need to talk about your ambition and be assertive about where you are going, while in the EU, your presentation should be more data-driven around what you can demonstrate today, rather on what you’ll have in the future.

How has fundraising evolved in recent years?

Dan: Today, we’re in a very different environment than we were a few years ago. The low interest rates then spurred enormous investment in biotech, with an incredible number of companies raising money at early stages and many going public. That era of easy money is over. We’re going through a valuation correction that is truly a reversion to the mean. But companies that have the best and most compelling science in the best and most compelling therapeutic areas are succeeding and will continue to succeed.

Joris: You’re right, only the very best startups are being financed today. The risk is that some great innovations are not progressing, or not progressing as fast as they could. If you must move more slowly during this tough environment, that’s okay. Ultimately, we believe that good products that create medical value will always get funding.

What advice would you give to a biotech looking to raise funds?

Dan: Be realistic about your valuation expectations right now. Don’t go to investors with a lofty idea and find that you can’t raise capital because you’re clinging to a number that just isn’t possible. Also, be capital-efficient in how you’re going to deploy your proceeds. That may mean having a smaller round than you were anticipating. A primary concern for investors is what you’re going to do with the money, especially in this tight economic environment.

Joris: I would also say that you should consider all your financing options and understand the pluses and minuses, whether it’s VCs, family offices, or convertible notes.

Dan: I agree. We’re seeing more convertible notes these days, which can be expensive for the founders, but can make investors more comfortable. We’re also seeing increased preferences attached to the money, such as elaborate liquidation preferences to better position the investor if something goes wrong. The downside is that as you go forward with future fundraising rounds, your subsequent investors will want similar preferences.

Joris: My final tip is about anticipation. We spoke about the tension between the time it takes to earn trust and when you need the money. The only solution is to anticipate when you’re going to need the money and start having conversations with investors long before that point. You’ll be under less pressure in those meetings, and you can build and nurture a network of potential funders, keeping them apprised of your progress. And make sure you have a cash runway that’s longer than the next few months. Create and continuously update a plan that includes development milestones and also maps your financing needs and exit points.

Once again, we return to planning, which is clearly the key to successful fundraising, which enables biotech start-ups to execute their plans. We’ll talk about execution in the next article.

Keep Reading – Articles in this Series

• The Biotech Industry Today: What Leaders Need to Know
• Planning: Why It’s Worth the Time for Biotech Companies
• Execution: How Biotechs Can Plan and Run Successful Clinical Trials

Fundraising is a key element, enabled by planning, that makes execution of your drug development possible.

We help biotechs along the journey to create an innovative product that brings medical value for patients, structuring the drug development process into a series of clear and reachable value inflection points. Our experts can help you with the vital planning process that enables you to successfully proceed with funding and execution.