An Insider’s View on Raising Money from Life Sciences VCs
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contemplated financial goals. We might receive anywhere from 500 to 700 such summaries per year. A majority of these do not fit with the mandate of the fund for such reasons as the therapeutic area being developed, the maturity of the company, or its financing needs.
If the opportunity does fit into our investment strategy, we invite the management team to present to us in more detail on a non-confidential basis either at our office or an investment conference. We then assemble as many members of our investment team as possible and meet in person with the presenting company for an hour-long session.
During this hour, we look for the presenters to explain the benefits and risks of the potential transaction. This should include details about the management team, the investment proposition, the clinical trial plan, the FDA and reimbursement risk of the product, as well as what the competitive landscape and relevant commercial strategies might be. We may have 150 of these meetings a year.
Many management teams ask how their interactions with the venture community can be optimized. We suggest that companies come and visit even when they are not actively raising capital, so we can assess the progress of the company and strategic vision in a more relaxed atmosphere. We would also suggest that companies understand the nature and investment philosophy of our firm, what other types of investments we have made and our backgrounds.
We view a successful meeting as one where we come away from the initial meeting with the answers to three basic questions: Do we understand the value proposition of the investment and the appropriateness of the timing? Has the management team developed and do they have a clear vision of strategy and goals? Do we understand not only the potential upside of the investment, but all the risks and concerns surrounding the deal?
Based on this meeting, we will then make our preliminary determination: either the investment does not fit and we will pass on the opportunity; the investment does not fit currently and we will follow the progress of the company over a period of time; or the investment may fit and we will begin to perform more advanced due diligence. These decisions are discussed and arrived at during our weekly meetings, which involve all investment professionals, even those not present at the initial meeting with the company. We attempt to relay these results to the management team in a timely basis.
Once we decide to perform additional due diligence on the company (approximately 40 to 50 per year), two or three investment professionals from our team will be assigned to do extensive analysis of the opportunity. This process further analyzes the scientific and business proposition of the company, and includes detailed conversations with third parties, such as scientific and clinical advisors, lawyers and reimbursement and regulatory experts, other potential investors, as well as further dialogue with the management team and board of directors. If a management team is wondering how the diligence is progressing, they can often look to signs such as whether they have been asked to make additional presentations to a broader group of the VC team and whether the VC firm is reaching out to other interested parties, such as Board members of the company. We try to keep the management team appraised of how the due diligence process is progressing.
VC funds also perform due diligence in different ways. Some put more emphasis on outside consultants, some focus more on the financial terms, and some put emphasis on a comprehensive memo which serves as the guidepost for the investment going forward.
Once the due diligence is complete, the transaction team distributes an internal investment memorandum, which summarizes their findings. After review by the entire VC team, a vote is taken to determine if a non-binding term sheet should be submitted to the company. If the vote is in favor, the deal team will put together a term sheet, which outlines the relevant terms and conditions by which we would be willing to invest. This will include valuation, liquidation preferences, anti-dilution rights, composition of the board (generally there is one board seat for each VC firm), and other customary governance terms.
It is important to note here that some transactions do not get consummated even after the term sheet is signed. Occasionally, this is the result of … Next Page »