Red (and Green) Flags To Look for With Biotech’s Buyside Investors
As Warren Buffett once pointed out, companies get the investors they deserve.
Observations by the oracle-from-Omaha are hard to dispute, but how does that translate into practice if you’re a biotech company going through the IPO process and trying to read the signs in a whole new landscape of investors known as “the buyside”?
Many people blog about raising capital from VCs, but there seems to be much less about understanding and assessing public investors. What are the signals that an investor sends about who they are, both red and green flags? There are talented people who help with this (bankers, IR professionals, etc) but it’s the company that actually has the relationship with its investors and needs to understand who owns their stock.
Luke Timmerman & David Sable each wrote recently on “red flags” for biotechs—warning signs that a company has hidden issues (and “green flags”, a nice additional piece from David. They were insightful. Perspectives from thoughtful people outside of companies help.
But inevitably…it also made me think of some of my personal experiences at Avila Therapeutics as we talked to crossover and public investors and at Adnexus Therapeutics where we had filed our S-1 but were acquired before completing an IPO. I also checked with a few of my fellow CEOs and CFOs, to ask about their experiences as they began to engage with public market investors.
Red flags (signs of caution, aka, this investor’s interests may not be aligned with the company’s interests)
1) The break-the-rules ask. The investor asks you to tell them non-public info. And when you politely decline, they either get irritated or just repeat the question over and over (and over). While most of the red flag experiences are relatively uncommon, this one isn’t. Nearly every CEO & CFO has this experience regularly.
2) No true interest. Investors who only meet to pump the company for information about the competitive landscape. Often this is because they have a big position (long or short) on someone else in the field. This person is 100 percent not interested in investing in your company (and, BTW, it’s obvious when someone thinks this). There are other ways for an investor to do their research. No one likes feeling used.
3) “Hi honey, who’s presenting?” and other forms of disrespectful behavior. Any comments or behavior that is patronizing, sexist, racist, homophobic, or otherwise disrespectful. Fortunately this is reasonably rare, and I think at least sometimes it’s more of a blind spot than intentional, but it’s non-zero and tends to emerge in work-social settings (the industry cocktail party and such). Many investors never behave this way, so for those who still make this mistake, they’re risking investment opportunities. A variant on this: I once had an investor say to me at our first meeting “I never trust management, all biotech CEOs lie.” Certainly trust must be earned, continually, but this was a red flag; what would it be like to have this person as an investor?
4) “I want to grill you on this 15-year old research paper”. This came up a few times as I surveyed my colleagues, and it’s primarily a question of focus. Biotech investors are generally very smart and well-informed, but sometimes they can delve a bit too much in the weeds or get stuck on minutia that may be dated or not really relevant to the programs at hand. Alternatively, when learning about new company, the junior analyst tasked to figure out the science can become overwhelmed. They’re under pressure to learn it so that they can explain it internally yet may lack the experience to know where to focus their efforts (hence questions on a 15-year old paper). Often this person doesn’t listen well, which is challenging because the company can actually provide the needed scientific roadmap. Tough, critical questions are always welcome; arbitrary or tangential ones aren’t a good use of time.
5) “I just want to help you be successful”. This is the sentiment from those investors who want to help the company design clinical trials or identify the best indications to pursue or basically tell the team how to manage the company. Good management teams value input and ideas, but it is their job to run the company. Justifying every decision to investors either means that the investor doesn’t trust management (in which case they probably shouldn’t invest) or that they really want to be in an operating company (in which case they should join an operating company).
6) Very short-term interests. There are likely many versions of this, but certain types of behavior telegraph that an investor’s interests are very short-term. For example, during an IPO, an investor only asks how the road show is going and what the interest level is. This is a flag that they may only be a flipper, not someone with long-term interests. Or when a discussion concentrates only on upcoming milestones to see whether it’s safe to short the stock.
1) Investors Who Prepare. There’s a reason this is #1. Green flags go up when an investor has read the S-1 and marked it up with questions and comments, has read background papers, has probably talked to some experts, has thought about it, and is ready to make the most of your time and theirs. To share an experience of a colleague: “We met with most of the eventual IPO buyers several times. That said, one of our best experiences was with an investor that we met for the first time on the IPO roadshow. They had read our S-1 and our key papers, which we highlight for easy access on our website. This investor asked about five truly salient questions from a science-meets-business point of view. The meeting was relatively short, maybe 30 minutes. What’s the lesson? Good investors invest the time and effort to THINK about the company and the investment. It leads to a much better roadshow interaction and more importantly to an effective long-term relationship.”
2) Positive comments from fellow CEOs & CFOs. You know we talk to each other, right?
3) Constructive Feedback. As a small private company matures and raises capital from new kinds of investors, there’s a learning curve. Private companies approaching public investors need to understand how different kinds of investors think, and direct, critical feedback from them is invaluable. It’s a green flag when an investor tells you their concerns as well as how the investor views the competitive landscape for products and for investments. It gives the company a better opportunity to try to address those concerns.
4) The LaGuardia meeting. The poster session meeting. You run into an investor at the airport, your flights are delayed, and you end up poring over data together. You run into an investor at a competitor’s poster presentation at a scientific conference like the American Society of Hematology and the three of you talk about the science and what it means. These kind of investors really want to understand their investments.
5) Focus on relationship-building. Biotech will inevitably have ups and downs, and an investor isn’t in the midst of the decision-making about how to handle those events. The management team is. It’s a sign that an investor has a long-term view when they are interested in understanding who’s running the companies they invest in and having an effective relationship with those people. This does take time, but investors thinking about long-term value get that.
6) Track record. Perhaps as with anything in life, past behavior says a lot. Those investors with a track record of success investing in companies that are similar to mine in both challenges and opportunities are more likely to be a good match for my company.
7) Excited about the mission. An investor’s job is to earn a return on the capital they invest, but there are infinite ways to do that. An investor who also recognizes and cares about the consequences of investment decisions in biotech— the potential to help patients—definitely gets a green flag.