Things to Think About When Starting a Life Sciences/Healthcare Company
SEED SHOWCASE 2023 RECAP
By Marie Daghlian
Three themes to think about as you go about starting a company—the state of the market and raising capital, alignment, and geography—were covered at a well-attended and wide-ranging panel discussion at the first Seed Showcase during the J.P. Morgan Healthcare Conference week, recently held in San Francisco.
Entrepreneurs launching a company have four main obligations: raise capital, advance the technology, have a story that you can tell investors, and go and get that initial seed money. But how you do that is important, emphasized the panelists.
Ben Johnson, head of early-stage investment at Silicon Valley Bank, moderated a panel that included experts from biotech, pharma, venture, and law in a spirited discussion on the effect of the current markets on planning for seed stage companies, the importance of alignment between founders and investors, and how the paradigm has shifted for locating a startup in a specific region.
Johnson started the discussion by noting that SVB’s Healthcare Investment and Exits data shows that there was record activity in seed funding in life science/healthcare in the first half of 2022, ending the year as having the second highest activity level for deals and dollars for seed and series A behind 2021 despite a significant fall off in activity in the third and fourth quarters of the year.
But the second half of 2021 and all of 2022 marked a difficult environment for biotech companies to access capital, as the era of low interest rates and easy money dried up. A record number of companies had to restructure, prioritize, and downsize to extend runway. Johnson said there are a lot of aspects of availability of funding that influence how a seed stage company goes through the funding progression.
“One of the things we talk about as good news is that valuations have been holding up in the seed and series A stage,” noted Johnson. “We know that valuations are not doing well at the later stage. But then also there’s a lot of discussion about this concept of dry powder [a term for venture capital that has yet to be deployed], and we want to talk about the illusion of dry powder.”
“What it tends to suggest in my mind is a fitness landscape,” said Peer Young, venture partner at Pappas Ventures. “If you think in population biology terms where the environment’s gotten a lot more demanding, it exerts selection pressure on young companies, startups, and people seeking funding to hone their survival skills and their search and acquire, you know, where they’re going to find nutrition, where they’re going to find a peak in the fitness landscape that they can inhabit.”
He sees biotech as “a species that tends to think no more than five years ahead and remember no more than five years back,” and reminded the audience of the times when it felt like an extinction event that was survived.
One thing going for the industry is the accelerating generation of novel technologies. “In a supply/demand context, I think we do have this phenomenal accelerating exponential explosion in biological science. It affects every sector. That means that there’s a rich supply of opportunity, and yet easy money has shrunk. It’s a buyer market. For people seeking seed funding, the question becomes what techniques can I use to distinguish myself, get in the queue. A firm like Pappas is evaluating a thousand opportunities and is going to invest in five. How do I increase my probability of even getting their attention?”
Andrew Strong, a startup lawyer and partner at Hogan and Lovells, based in Houston, Texas, helps form between 15 and 20 new companies every year. From his perspective, the same number of companies are still coming out, but it’s harder for those companies that were out a year ago. They’re still looking for money. “So, it is very key for you, as a founder or CEO, to know that the story has to be solid.” His advice is to use your relationships to find that seed capital and remember that it’s taking a lot longer because there’s a lot more competition.
Strong also noted that in years past when the money was flowing easily, a lot of mistakes were made in terms of the structure of the financings and that have come back to haunt a lot of companies when they are trying to do their next financing, because of the massive dilution that’s happening. “My council is to really think about, even though the money is hard to find, you want the right money,” he said.
Grace Colon, former CEO of InCarda Therapeutics says that the current climate in the public markets has made VCs. Her advice for people who are starting companies is to get feedback very, very early. “I would talk to as many earlier stage investors as possible to know what kind of milestones, what kind of inflection points they’re going to be looking at to come in for the series A and then be incredibly judicious about how you spend that money and how you take that early capital,” she said.
There are more sources of capital than ever now, more sophisticated angel groups, family funds, grants, new geographic sources of capital. “Be very crystal clear about how much do you really need to get, focus on IP, focus on the core things you need to know to get to that inflection point,” said Colon. “People don’t focus enough to have a clearly crystallized application that you’ve analyzed from start to finish. How is your technology, your new target, going to be the linchpin that changes the paradigm. Until you can articulate that in a well thought out way where you thought about regulatory, clinical reimbursement, you’re not going to capture the imagination of the investors.”
Zaki Salanti is the senior director and head of Search & Evaluation at NovoNordisk and constantly on the lookout for new opportunities for the pharma. He recommends “following a path of seeing how this could end up as a product that someone would buy. One idea is to follow a good molecule and a good biology. Another is to find the biology and then in collaboration with us or VCs, figure out where would this fit, how to best develop it to be something that someone would want to buy and take forward.”
The panelists also noted that there is a lot of non-dilutive funding that is available from government and foundation sources that segued into talking about dilution and alignment.
“There’s lots of ways to address this whole dilution concept that will keep the alignment because the investors are requiring so much more today than they required before,” said Strong. “Two recurring, maybe persistent, themes across the development trajectory for startups are valuation and control. As you bring in money that becomes your old money, can you reconcile your old money with the new money you’re ultimately going to need? Now if you only have to raise one round and you can exit, no problem. But that continuity and being able to reconcile a series round of funding, I think, is at the heart of the challenge for financing strategy. And one of the things I think we don’t see enough of from startups is a thoughtful perspective on that.”
Strong suggested the possibility that the first money come from issuing convertible notes, which are non-dilutive, even though note writers are asking for more control.
The panelists also talked about the importance of building relationships and alignment between founders and investors, including adding an independent member to the board of directors. “There’s a longitudinal element to relationships,” says Young. “You may be too early for a particular strategic or business development deal or for a particular VC but certainly at Pappas we like to see things, and then we’ll track their progress. We might say no now, but if we’re building a relationship, we always try to give constructive feedback, and hope to see you again downstream. Maybe you’ll become a portfolio opportunity.” When you have 250 plus meeting requests, you’re more likely to respond to ones where there was a connection of some sort, he added.
Finally, Johnson threw out the question of geography—is it important that a company be started in Cambridge, Massachusetts or Sand Hill Road (Bay Area). There are two schools of thought, says Johnson, the first being that investors are starting to have the upper hand in decision making, and all roads will now lead back to “Sand Hill Road.” The second is that the genie’s out of the bottle. New tools for communication will transform the way we think about relationships and shift us from geo-local to neuro geo agnostic.
Colon said the genie is out of the bottle. There’s no way we’re going back. “I think that’s a good thing because cross fertilization of ideas, of geographies, of more diverse teams can only help the industry,” she said. “So, I’m a firm believer, I don’t think anybody’s going back.”
Although Pappas Venture partner Young feels both ways, he says the question is, “what’s the geographic source of the innovation and are those narrowly concentrated in the main biotech hubs or do they need to migrate there to be able to move forward? I think the pandemic unleashed a completely alternative way to make progress. So, I lean more towards going to stay more geographically diverse, but it comes back to relationships. You have to grow relationships that are going to enable the progress and ultimately an exit.”
While starting a company may have become more difficult than before in the current climate, the panelists agreed that the flow of opportunities actually exceeds investors’ opportunity and ability to capitalize on them. That’s a fundamental dynamic that could keep people interested in early stage.
ABOUT SEED SHOWCASE
Seed Showcase is part of Biotech Showcase, an investor and networking conference devoted to providing private and public biotechnology and life sciences companies with an opportunity to present to, and meet with, investors and pharmaceutical executives in one place. Investors and biopharmaceutical executives from around the world gather at Biotech Showcase during this bellwether week, which sets the tone for the coming year. Now in its 15th year, Biotech Showcase is a well-established, highly respected conference featuring multiple tracks of presenting companies, plenary sessions, workshops, networking, and an opportunity to schedule one-to-one meetings. Demy-Colton and EBD Group produce Biotech Showcase. Both organizations have a long history of making high-quality programs that support the biotechnology and broader life sciences industry.