How to Build a Leadership Team that Attracts Venture Capital
July 23, 2019
If you attended any of the events, conferences and panel discussions in the BioHealth Capital Region this year you probably would have picked up on a consistent theme. Whether it was at the ISPE Chesapeake Bay Area Chapter’s MAST Showcase, the BioHealth Capital Region Forum held at AstraZeneca in April or the more recent NCI Tech Transfer Showcase, talent and capital were hot button topics discussed intensely during the sessions, over lunch and while networking at each event.
This intense focus on talent and capital stems from a regional biotech industry that is expanding in all facets, but particularly for start-up and growth-stage companies. For startup life science companies who operate with limited resources, acquiring the right talent and securing capital are inextricably linked, vexing challenges.
It doesn’t matter whether your venture is a spin-out from a prestigious research university or an independent startup launched from your own novel innovation, you’ll more than likely confront the same Catch-22: It’s very challenging to secure Venture Capital (VC) without an experienced executive team and it’s a struggle to acquire experienced talent without additional capital.
Great ideas and innovative technologies are obviously critical to becoming a successful company. However, “Contrary to popular belief, VCs aren’t always looking for the next big thing. They’re looking for the next big team,” as Forbes’ guest writer Tx Zhuo put it in his recent story “5 Qualities VCs Look for In Your Startup Team.”
So how do startups overcome this chicken and egg conundrum?
Well, startup CEOs need to get creative, leverage their industry network, understand what venture capital firms want and ask for help whenever possible.
It’s likely that biotech startups build and sustain their initial leadership teams with investments from Angel groups or TEDCO’s Maryland Innovation Initiative (MII) Fund or non-dilutive grants from the TEDCO’s Maryland Stem Cell Research Fund, or the Federally funded National Institutes of Health (NIH) Small Business Innovative Research (SBIR) and Small Business Tech Transfer (STTR) programs. Angel investment and grant programs are enormously valuable to startups, as they provide initial funding to launch and often act as gateways to additional seed capital from VCs. By securing angel investment and grants, a startup builds its resume, can achieve important early milestones and generally de-risk their investment profile in the eyes of potential investors.
But this funding only goes so far.
To obtain seed or Series A funding from VCs, startups enter into a hyper-competitive, global market that requires both an emerging track record of success (angel investment, pre-seed funding, grants and milestone achievements) and an experienced team that differentiates it from other similar competitors in the market.
Given this highly competitive VC market, how does a startup build an executive team that has “done it before” (the next “big team” in the eyes of key VC firms) without the capital to do it?
Here are some suggestions vetted by the very investors you want to attract.
Create a Balanced Advisory Board
Startups don’t yet have a formal Board of Directors and they can’t typically afford to hire a well-balanced executive leadership team until they receive the necessary VC funding. A way that startup CEOs can enhance their company’s investment profile is by creating an advisory board.
The advisory board can include past mentors, respected members of your network and recognized thought leaders in your startup’s area of expertise. Interactions with your advisory board can be ad hoc or held at regular intervals, but it is important to make the advisory board real. In other words, your advisors can’t just look good on paper; you and your team must actually work with them on a regular basis for it to impress a VC firm.
“Having a well-rounded board, with some members being experienced at, and knowledgeable about, different phases of the company’s product commercialization will be favorably received by investors,” shared Charles Andres, Ph.D, RAC an Associate at Wilson Sonsini Goodrich & Rosati (WSGR). “Chemistry is also important. The CEO and leadership team should have good chemistry with the board, and this should extend to working with the VC, who in many instances will have a board or observer seat.”
The advisory board should be balanced—meaning key functions and subject matter expertise are fully represented—and highly experienced in your field and in building businesses.
Advisory board members typically don’t advise your startup for free, but they are not full time, salaried employees. Often, advisors can be paid on a per meeting basis, or, in many cases, will get compensated via equity in your company.
The key is acquiring that “big team” that will help your company succeed while impressing VC firms without significant, immediate impacts to your budget. Assembling your company’s dream team of advisors and mentors is mission-critical, as is ensuring this dream team can actually work well together to get things done.
Be Willing to Put the Right Person In Charge
Recognizing that the technology inventor, founder or co-founder is not the right person to lead your company can be very difficult. Acting on this revelation can be even harder, particularly if you are that person.
Looking yourself in the mirror, understanding your own strengths and weaknesses and being painfully honest with your ability (or another’s) to be an effective CEO can save your company.
We’ve already noted that VCs are often more concerned about “team” than tech. VCs ultimately invest in people and if the leader of your executive team doesn’t have experience running a company or just isn’t the right fit, it elevates investment risk. Bringing in an experienced, seasoned CEO that has a proven track record of launching and developing startups could be the best move your startup can make. If ego gets in the way of pragmatism, if you won’t delegate authority, if you refuse to give up “your baby,” it could be the downfall of your dream.
“Your CEO should, ideally, bring a set of tools and experiences that investors associate with their own past success,” shared Andres. “If the CEO is a previously successful entrepreneur, it is a huge positive and it will immediately get a VC’s attention.”
It may be too early to attract an experienced CEO before you raise capital, but knowing your strengths and communicating your plan to hire in the right CEO or other leadership roles will get you closer to the funding you need.
Have Your Pitch Down
Recruiting top talent to join your mission is very similar to attracting investors. Good talent is going to ask very similar questions, like: Why should they invest their time with you? What makes you and your company special? What’s your company’s position in the market? How is your IP protected? What’s the monetization strategy and path? What’s your long-term goal or exit strategy? If they invest their time in you, how will you utilize them and what will their impact be?
Make sure you have your recruiting elevator pitch down and clearly communicate on role, impact and benefits to potential hires. They’re going to need to believe in you and your vision, and clearly understand how they can help the company grow and succeed. At this stage, you should be willing to give up some equity for the right talent, especially when it comes to securing executive talent. After all, you won’t be able to pay market salaries and you’re asking a potential hire to take a risk by joining a startup. Make sure you consult an advisor and have a strategy on how you’ll attract and compensate your early leaders.
It’s also critically important that before you bring any executive into your company, you need to have all of the tough conversations up-front and make sure they believe in your vision and mission, as well as your goals and timelines. It could cause very big problems downstream if you are not aligned. If everything lines up, you could have yourself a new CxO. If not, perhaps they can still be a consultant for you in the short-term.
Be Ready to Hire Before You Get Funding
According to Arti Santhanam, Executive Director at TEDCO’s Maryland Innovation Initiative, VCs want to know you have executive leadership hires lined up before they agree to fund a seed round or Series A. Often times biotech companies focus only on product development and not on business development. It is important that you use some of your time and pre-seed/seed investment dollars to attract a quality executive team ready to jump in once the Series A is raised.
As you begin to build out your advisory board or executive team, most Biotechs should have members with experience and expertise in the following roles:
- Chief Executive Officer
- Chief Scientific Officer
- Clinical/Medical Director
- Regulatory Affairs Director
- Chief Operations Officer
- Commercial Director
- Chief Financial Officer
Your founders will fill some of these important roles and you can fill any gaps with advisory board members or part-time consultants with past, relevant experience. After seed funding, and if the funding is large enough to do so, replacing consultants with a full-time executive team will position your company well in the eyes of VC firms.
Unlike a typical SAAS startup, biotechs have a lot of moving parts- the science has to continue to show efficacy AND do so under stringent FDA regulations and CMS reimbursement requirements, all while making sure the business model and commercialization plans pan out. “This is a capital intensive, high risk, highly regulated endeavor and without the right team in place no credible investor is going to put that kind of capital into play” says Santhanam. “Who we are investing in is just as important as what we are investing in and we want to know that as part of your initial pitch”.
Use your Network
There are two primary sources from which you can fill your executive team hiring pipeline.
The first is the network of your founders and early employees. Leverage who you know in academia, industry or people you have worked with in the past. Teams with a proven track record of working well together are also attractive to investors. You can also meet potential executives through resources like TEDCO, BioHealth Innovation or the Maryland Tech Council’s Venture Mentoring Service who work with vetted leaders in the field to support and advise startups.
The second source is the VC firms themselves. If a VC firm is interested in funding your company, and you have a strong relationship established in advance of applying for funding, they can help advise you and connect you to the right experts, who could potentially become members of your advisory board or eventually your full-time executive team. This type of arrangement will only work, however, if there’s a serious level of trust between your company and a VC firm. Not being coachable, founders refusing to give up some control and advisory board members too beholden to the VC firm’s interests could mean trouble down the road.
Putting your startup in the best position possible to secure the funding it needs is all about surrounding your technology and founders with complimentary advisors and experts that de-risk your startup for VCs.
The better the team, the lower the perceived investment risk and that’s good for the future of your company, its current and future investment partners and ultimately the patient needs you’re striving to meet by commercializing your technology or treatment.