Ten key steps to successfully raising life sciences venture capital
In partnership with Merrill DataSite
For a first-time entrepreneur or even a veteran of multiple startups, raising money is one of the hardest tasks to get right. It is enormously time-consuming and it can be a major distraction from executing your business objectives.
However, raising money is often a necessary step in a company’s life cycle to accelerate development, improve sales and realise a successful exit.
A well-executed fundraising process can lead to competitive term sheets, or offers, from venture capital (VC) firms.
Here are ten steps that life sciences companies should follow to successfully raise venture capital.
1. Kickoff meeting and division of responsibilities
Any good process needs a formal beginning and an end. The organisational meeting gets all the people involved with the transaction on the same page.
“While financials are often very speculative, you need to include them”
You should use this meeting to:
1. Sort out all roles and responsibilities
2. Formalise the timeline for the transaction
3. Identify who should be doing what by when.
Who should attend this meeting?
• Company management team
• Banker or placement agent
2. Business plan and management presentation preparation
This is where you lay out your road map. This is often referred to as the private placement memorandum (PPM) – which is a fancy way of saying “business plan”.
In it, you need to describe:
• How the company will make money
• What it will use the money being raised for
• How investors will be rewarded.
You’ll also need to prepare:
• An executive summary – the first document that is sent to prospective investors to draw interest in a management presentation. It is the short, non-confidential version of the business plan or PPM
• A confidential disclosure agreement/non-disclosure agreement, which will need to be signed by any potential investors before you share confidential data with them
Your management presentation, which is tailored to inform potential investors. We’ll cover this in greater detail in step five.
“The three most important terms in fundraising are follow-up, follow-up and follow-up”
3. Due diligence and process preparation
This step is often neglected. It shouldn’t be. The more you prepare for the offering before starting outreach, the quicker and more seamlessly it can go.
It can take several weeks to prepare for due diligence so it is important to start preparing early and efficiently. Using a virtual data room (VDR) can streamline the process of pulling together all relevant documents and make it easy for investors to conduct their due diligence.
A VDR can also secure your company’s important data by ensuring that potential investors cannot print, save or download the documents.
This is where the rubber meets the road. Once all of the materials have been prepared and the VDR is ready, you can begin to reach out to VCs.
Unless your company is using a placement agent, the outreach could be done by:
• Your banker
• The CEO
• The CFO
• Another member of the senior management team.
Before sending your first email or making your first phone call to a VC, you need to customise your pitch. The more you tailor your pitch to a VC, the more likely the VC will be willing to meet you.
At this stage, your primary objective is to get the VC to review your business plan and agree to meet for your management presentation.
“At this stage, your primary objective is to get the VC to review your business plan and agree to meet for your management presentation”
5. Management presentation
So you’ve landed a meeting with a VC. Now you’ll want to roll out that management presentation you prepared in the pre-launch phase (step 3).
Here are some pointers for putting together a solid presentation:
• Your first slide should be a list of investment highlights or an overview of the opportunity
• Don’t beat around the bush. Clearly explain what your business does
• Introduce members of the team early in the presentation
• Venture capitalists prioritise the team above everything else so try to have your team at the pitch
• An outline of the market opportunity should be next and should introduce why there is an opportunity for a new company or product like yours
• Next you should give an overview of the product/service/data. This is where you provide the meat of the presentation
• The commercial opportunity section should explain how you plan to capture revenue and market your product/service
• While financials are often very speculative, you need to include them. Your fundraising plan is almost more important, at least in the short run, than the projected revenues.
6. Investor follow-up and due diligence
The three most important terms in fundraising are follow-up, follow-up and follow-up.
Venture capitalists tend to be very busy people. You need to keep their attention focused on your deal. Be consistent and regular with your follow-up.
In this stage, it’s common for investors to request a site visit or to call your company’s advisers or other key opinion leaders. You should ensure that your team and advisers are all on the same page so you leave a consistent message with investors.
“Often companies will need more money than one venture capitalist’s investment, either in the present round or later in the development cycle”
7. Receipt of term sheets
This is where it all starts to come together. All of the hard work you’ve put in starts to pay off with the first non-binding term sheet.
Term sheets can expire anywhere from 24 hours to 45 days after they’re offered. VCs do this to minimise your ability to ‘shop around’ for a better deal from other investors.
VCs typically don’t like to compete for a deal and they may try to push companies into accepting their term sheet.
If they do this to you now before you have a formal business relationship, imagine how they will act once they have even more control over your future.
8. Negotiation of term sheets and building a syndicate
Now’s your opportunity to get the best deal possible for your company.
The negotiating process is mainly dependent on:
• How badly the company needs the money
• How many term sheets have been received
• What other options are available.
If you’ve received multiple term sheets, you have greater bargaining power with VCs. Getting your banker to lead the negotiation can preserve the relationship with investors while striving for the best possible deal.
Often companies will need more money than one VC’s investment, either in the present round or later in the development cycle. You should be open-minded trying to find other VCs that are able to work with lead investors and the management team.
By this point, assuming all economics for the transaction have been agreed on, the signed term sheet can be ‘shopped’ in search of other investors, if needed.
“The deal is never done until the money has hit the bank”
9. Draft and negotiate legal documents
The legal team should take the lead on this process for both the counsel and company.
While the VC and the management team need to stay involved to negotiate remaining business items, much of the detail gets resolved between attorneys. That said, at least one member of your management team needs to keep a close eye on all terms of the deal.
10. Deal close
This is the fun part. After all documents have been finalised and signed, stay in close contact with your bank to ensure that the funds have arrived. The deal is never done until the money has hit the bank.
A closing dinner to celebrate getting things across the finish line is customary with the investors, management team, bankers and attorneys.
Pat yourself on the back for a job well done. Now you have to deliver on the plan and create value for investors.
Download the complete white paper Ten Key Steps to Successfully Raising Life Sciences Venture Capital.
About the author:
Merrill DataSite, a secure virtual data room (VDR), partnered with Geoff Meyerson, CEO and founder of Evolved Capital Inc., to bring you this post. You can reach Geoff Meyerson at firstname.lastname@example.org.
Merrill DataSite offers electronic document integration, audits and enhanced reporting, Q&,A features, 24/7/365 customer service and rapid implementation within 72 hours. To learn more about how Merrill DataSite can transform your next due diligence process, go to datasite.com/lifesciences.
What are your top tips for life sciences companies looking to raise venture capital?