Are You Using These 5 Tips for Raising Venture Capital?

Raising Venture Capital Series: Volume 1

July 1, 2019

Access to capital has been an ongoing challenge for biohealth companies in the BioHealth Capital Region (BCHR) and throughout the Mid Atlantic, though recent investment data suggests that capital market access is improving. “PwC/CB Insights ranks the region fourth with $944.07 million in 44 deals and Jones Lang Lasalle tallies $1.1 billion, good enough for third,” stated Rich Bendis, CEO of BioHealth Innovation (BHI), in his keynote speech at the recent The National Cancer Institute (NCI) Technology Transfer Showcase. 

Recent deals like the $110M Series A raised by Thrive Early Detection, the largest seed round ever raised by a JHU spin-out, is more of an exception than the norm.

Despite this uptick, securing investment remains a challenge for many startups and growth-stage companies alike. 

Startups and growth-stage companies need to understand that the angel investment ecosystem is very different from the highly competitive global investment capital market they are attempting to penetrate. Startups and growth-stage companies need to approach these opportunities with stronger promotion and market research. This was the insight shared by Martin Rosendale, CEO of the Maryland Tech Council During the “Making Your Company Attractive to Equity Investors” panel that he moderated at the Tech Showcase.

The panel of equity experts included Matthew Miessau, an analyst at Epidarex Capital and advisor to CEOs; Phillip Jung, Director at the Maryland Venture Fund and Stephen Wolpe, an entrepreneur-in-residence with BioHealth Innovation (BHI) and a veteran advisor to CEOs.     

Here are insights and tips they shared for startups and growth-stage companies trying to succeed in the global equity investment market.

Tip #1: Great Tech Isn’t Everything

There is a gap that often exists between the great idea and the market for that idea and between a scientist or team’s enthusiasm for a technology and its ability to generate strong investment returns. 

• Jung offered that venture capital (VC) firms have a fiduciary responsibility to ensure that there is a real market for an idea and that the economics are there behind the technology 
  • He offered that entrepreneurs need to make sure there is a good match between the tech and a specific VC firm’s investment philosophy and approach. A great idea or technology is not always a great investment opportunity. 

• Miessau recommended that presenting data to VCs in advance of kicking off fundraising efforts is key to finding the right match between a technology and a specific investment partner 
  • Laying the groundwork about six months ahead of actual fundraising activities builds stronger relationships and highlights the need for entrepreneurs, startups and growth-stage companies to take a very proactive approach 

• Wolpe put it more bluntly: The biggest mistake Wolpe sees made is when companies started by academics think it’s “all about the science.” On the contrary, Wolpe stated, “You’re no longer a scientist, you’re in sales and need to sell your company. Your company is a black box. VCs view that black box with an arrow going in and an arrow coming out and they want to know that the arrow coming out is bigger than the arrow going in by a multiple…and you need to convince them that people will buy your black box…and you’re going to make a ton of money with my black box…” 
  • Recalibrating the focus from all science to less science and more sales is critical to securing investment, according to Wolpe

Tip #2: Your Leadership Team Is Important

• Wolpe stated that having a fundraising track record is essential. VCs want to know people on your team—be that your CEO, your board or advisory team—have been successful raising capital before 
  • If your team lacks this experience, pursuing Small Business Innovation Research (SBIR) funding can help build this track record in an alternative way

• Jung reinforced Wolpe’s advice, stating that the number one item VCs look for is “team.” VCs want to know your competitive advantage and many times this advantage depends on your leadership team and their collective experience. 
  • He recommended that a company seeking VC funding needs to understand what its team lacks and should attempt to plug these gaps. For instance, if a company is heavy on scientific expertise without any history of successful exits, it’s wise to bring in a commercial or business expert to complement the science. 

• Miessau emphasized “coachability” as a key to VC success. Being realistic about weaknesses or gaps in experience is important so you can build the right team. In other words, your lead scientist or the inventor of your technology might not be the best fit to become CEO. 
  • Being “coachable” around team building—and being self aware enough to step back—could open important fundraising doors for your company

Bringing in strong board members and informal advisors can also help your company become more marketable to VCs. Wolpe cautioned, however, if you have a choice about who is on your board or advisory team, make certain he or she is someone you can work with. 

Tip #3: De-Risk Your Company 

• Miessau stressed that VCs want to make a go-no-go decision or kill point as quickly as possible
  • VCs want to de-risk companies quickly, so it’s critical that a startup or growth-stage company can assure VCs by securing SBIRs, hitting milestones tied to funding releases and developing a diversified portfolio that can handle program failures

• Jung offered that many think of VCs as “risk takers” when in actuality investors are all about reducing as many risks as possible. VCs want to get in right before a company hits that key inflection point. 
  • De-risking includes planning your hiring; VCs want to know that you have the right hires ready to roll once the funding is in the bank; they don’t want to hear “Well, we’ll figure it out once we get your money.”

Tip #4: Be Realistic About Your Valuation

• Wolpe recalled being in the room with a CEO and a number of VCs. When the CEO said the company was worth $300 million several VCs rolled their eyes. He stressed that companies have to be realistic about their valuation or risk losing credibility. 
  • The key is doing research around the market, identifying comparable companies in the same therapeutic area and talking to other experienced business people in the field 

• Jung called valuation more art than science and most companies won’t know what’s accurate until the market provides feedback. Every VC out there has their own approach to valuation and there are many inputs, Jung suggested.

• Miessau wrapped up the valuation topic by saying that young companies need to listen to the valuation feedback from VCs and others. If the gap between your valuation and a VC’s estimate is very large, negotiation is not really an option. That large gap cannot be overcome. 

• Wolpe referenced a recent study that showed that big pharma companies completely missed the market size of their own drugs even six years after launch. He recommended you need a reasonable valuation, but spending huge amounts of time researching the market is counterproductive as very few companies actually get it right. Wolpe suggested doing the homework to achieve a reasonable value approximation but not overdoing it.  

Tip #5: Find Alternate Funding Sources, Network and Ask For Help

• Wolpe mentioned the National Institutes of Health’s (NIH) venture group and BHI opportunities. Once you have an SBIR from NIH that opens the door to other opportunities; the SBIR award can act as a gateway to other funding sources. 

• Jung added that the BHCR is very collegial. He suggested reaching out to colleagues perhaps a few steps ahead of your company for advice. Jung emphasized that you need to ask and network and you’ll find the region is generally very helpful.

• Miessau stressed the value of “warm introductions.” He stated that an intro from someone he knows is very valuable and he’d be more likely to take a call from a “warm intro.” Networking is critical as well.

In closing, Jung gave the audience a sense of how competitive the VC market can be. He stated that he will glance at some 500-600 executive summaries from companies seeking funding every year. The Maryland Venture Fund typically selects about 20 companies a year.

The market for capital is global and extremely competitive. Understanding how to position a startup or growth-stage bioscience company within the VC market is a critical first step to getting your technology to commercialization. 

The NCI Technology Transfer Showcase’s “Making Your Company Attractive to Equity Investors” education session delivered important insights, tips and encouragement to the entrepreneurs in the packed audience, illustrating the event’s stronger balance between highlighting innovative science and delivering entrepreneurial know-how.