Think Like an Investor to Get the Capital You Need

Early-stage and emerging-growth companies seeking funding beyond the initial seed money from friends, family, and angel investors enter a highly competitive arena where innovative ideas are more numerous than interested investors. Because of this, securing an initial “professional” investor meeting – and advancing beyond the initial meeting to serious discussions – may prove a challenge, particularly for management teams not previously associated with a successful start-up. Thinking like an investor, and refining your business strategy and investor materials accordingly, improves the chances of attracting investors and securing funding.

Below, we explain four best practice principles for securing that initial “professional” investor meeting. And, though these principles can be followed regardless of industry sector, we have specifically focused on how we have experienced them being applied within the emerging-growth pharmaceutical company sector.

• Focusing on the indication most likely to succeed. Lead compounds and clinical candidates often have the potential to address multiple indications. Often, management believes that focusing on multiple indications equates to a larger market and more investor interest. However, a development strategy that targets a focused, substantiated, and attractice commercial market with a differentiated product is often more interesting and valuable to investors. Focused opportunities are easier to quantify, assess, and envision a pathway for monetizing the science (i.e. partners, licensors, acquirers, follow-on funding sources, etc.). Just as important, is striking the balance between a target’s indication and an assessment of clinical risk and estimated development costs. For, if a development team can successfully advance the initial indication or indications through the clinical phase with currently available funds, follow-on capital for subsequent indications and/or assets can be pursued with a “step-up” in a company’s valuation.
• Investing in the business strategy. Preparing and continually updating the business and financial models reflecting the commercial market, go-to-market strategy, projected net sales, and income of the company needs to be an unyielding discipline within an early-stage venture. As such, the model’s underlying assumptions need to be supported by current and updated facts and data. Investing in professional market research reports for the target product, performing provider surveys and other market intelligence, and polling the investor community are all inputs necessary to fully assess the most commercially viable business strategy. When properly analyzed, this intelligence provides strong support for finalizing the indication (or indications) and preparing the financial projections. Also, this discipline allows the company to evaluate and pursue those indications and assets with the commercial viability that is attractive to investors. Granted, conducting this analysis requires spending money on both experts and outside research; however, this should be viewed as both a necessary and an expected use of seed capital.
• Preparing top-notch investor materials. Whether it is a one-page introduction to the company, an investor presentation, or summary of your business plan, these materials are typically your earliest formal communications with potential new investors. Getting the content and level of detail right in each section requires development, commercial, and financial expertise. Be prepared, initial investor meetings are generally 30-60 minutes. Though you may want to fully address the science, such an abbreviated presentation format requires anticipating your audience. A focus on presenting management’s execution track-record, an opportunity’s financial model, and multiple exit strategies, in addition to an overview of the science–all succinctly and compellingly communicated–will allow you to pass through the initial gate stage with potential investors.
• Understanding typical early-stage, emerging-growth company funding transaction terms. The investor community has developed a fairly standard range of early-stage investment terms. While the specifics vary and are negotiated from opportunity to opportunity, sometimes management has expectations that are significantly different from the terms investors will accept. This expectation gap can hinder management and may result in missed funding opportunities. Having an advisor with significant capital markets transaction experience, along with competent legal counsel, can guide management and avoid many potential pitfalls.

The articles co-authors, Vincent “Vince” Morgus and Jonathan Kelley, have extensive experience working with emerging-growth and small-to-middle market companies – specifically in the life science, pharmaceutical, and technology sectors. Vince and Jonathan are part of The Fahrenheit Group’s Carolinas’ practice, and they are both based in Research Triangle Park, NC. If your management team is exploring securing outside growth capital, Vince and Jonathan welcome the opportunity to assist in your evaluation, preparation, and process. Vince can be reached at vmorgus@fahrenheitadvisors.com and Jonathan can be reached at jkelley@fahrenheitadvisors.com.

The Fahrenheit Group provides seasoned, strategic finance leaders to emerging-growth and small-to-middle market companies on an as-needed basis. Our professionals understand your industry, your challenges, and have extensive experience advising and leading companies through buy-side and sell-side capital market transactions. If your organization is in need of a finance advisor who has “been there and done that” and is not yet at the stage where a full-time resource is justified, or you are in need of interim or transitional leadership, don’t hesitate to contact us.