An Insider’s View on Raising Money from Life Sciences VCs
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a material adverse event in the company’s operations, general negative findings during the final diligence process or an inability to reach common ground on the detailed terms of the investment.
If all parties do agree to the term sheet, we will finalize our due diligence to include detailed intellectual property and manufacturing examination. We then wait to receive the necessary approvals to consummate the transaction, and begin to build a syndicate of other venture investors.
Building a syndicate is one of the most important parts of the process. The VCs, the management team and the Board of Directors must be aligned on the strategy going forward. Do the other potential investors have experience in the particular therapeutic areas of interest? Will they be a value-added investor? Do they share the vision of the future, and that of the board and management team? Will they be constructive when we inevitably hit a “bump in the road?” Do they have enough capital available for follow-on investments? Have we had a positive experience with them as co-investors on previous transactions?
Finally, as the closing process begins, we set a timetable for the actual consummation of the transaction, and begin to involve legal representation from both parties to the transaction. They work to put together a comprehensive stock purchase agreement which is the binding document for “closing the deal.” Once the closing process begins, it takes approximately two weeks to complete the transaction.
Investing in a company is a serious commitment of our limited partners’ capital and only the first step in the process. We must now help to insure that our investment brings the company through a critical stage of development and leads to a profitable exit and ultimate positive returns to our limited partners. As such, we must now carefully assess the ways in which we can be a value-added investor with the goal of helping the company achieve its strategic objectives.
A key issue for the management team is what to expect from the venture capitalist after the initial investment is made. The management team needs to understand how involved the VC plans to be in the operation of the company. Depending on the size of the investors’ commitment, a member of the investing VC fund will generally either hold a board seat or become an observer on the board. The VC aim is not to micromanage the management team, but rather to insure the proper management team is in place, set goals for the team, help resolve strategic issues, and use their experience and contacts to bring appropriate additional expertise to the table.
An increasingly important part of our business is determining how much to keep in reserve for our investments. Given the recent lackluster IPO market, we are often required to fund our companies for a longer period of time. Investors who are either unwilling or unable to participate in further rounds of funding are often subject to draconian forms of dilution, such as being converted into common stock.
As venture capital investors, our primary responsibility is to provide a positive return on investment to our limited partners. So at some point, we need to become focused on exiting our positions. We try to do this while at the same time positioning our companies and their technologies to continue to evolve after we are no longer involved. After all, we are all motivated by the innovations and cures provided by the companies of this industry that lead to improving health.
Our exits generally come in three forms: an IPO, a merger or acquisition, or a capital-raising that’s large enough to independently sustain a company over a longer period of time until an acquisition or IPO. The IPO of a venture capital-backed company used to be the end of venture involvement, but now is only a further step in the evolution of a company. Likewise, in the past, most acquisitions were cash-based deals with the larger company taking control of the ongoing activities. Today, most transactions are tranched based on milestones that are predetermined so that risk is shared going forward. Lastly, because of increasing financial and regulatory requirements, the ability to become a stand-alone self sustaining entity has become much harder to achieve.
In conclusion, working in the life sciences industry and developing successful companies and therapies to make a difference in human health is both challenging and fulfilling. There are many different aspects involved in building a successful company. In addition to the scientific underpinnings, the ability of managements and boards to navigate a difficult path, including financing their endeavors, will hopefully lead to better outcomes for patients.