Funding Emerging Medtech Ventures

Transcription

1 { Funding Emerging } Medtech Ventures Jonathan Wyler SV Life Sciences 10 May 2012

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4 Entrepreneurship is the pursuit of opportunity without regard to resources currently controlled." - Howard Stevenson, Harvard Business School, c.1980 Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 4

5 Agenda 1. Sources of Financing 2. The VC Ecosystem 3. Developing the Pitch 4. Navigating Fundraising 5. Deal-Making Essentials Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 5

6 { Sources of Financing }

7 log ( Cumulative Invested Capital ) Investor Types Map to Company Stage Returns Driven, Financially Based Deal Growth Equity Royalty & Debt Funds Buyout Returns Driven, Strategy & Expertise Early Stage Venture Capital Corporate Investment Later Stage Venture Capital Grant & Non-Dilutive Angel Investors Friend & Family Various Mandates, Less Economic Sensitivity Concept, Plan & IP Develop Product FIM & Pilot Studies Pivotal Trial & OUS Approval & Launch Revenue Growth Expand to Profitability Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 7

8 Number of Deals Amount Invested ($ billions) Medtech Investment by Stage Startup/Seed Early Stage Expansion Later Stage $1.20 $1.00 $0.80 $0.60 $0.40 $0.20 $ Q Source: PriceWaterhouseCoopers MoneyTree Report data. Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 8

9 Considerations for Selecting Investors Financial Funding Requirements Economics & Deal Terms Reliability & Persistence Syndicate Development Resources Technical Expertise Interim Leadership Facilities & Services Company Network Strategic Market Intelligence Environmental Perspective Acquirer Relationships Company Strategy Influence Corporate Governance Executive Recruiting Promotion & Visibility Facilitation of Exits Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 9

10 Friends, Family, & Individuals Description Typically several $100K for planning, patent filing, prototyping. Often debt convertible into next round Examples Relatives, wealthy friends, former colleagues, other entrepreneurs, profession investors investing personally Advantages Ease of access, less valuation sensitivity, established confidence, share success, potential mentorship Disadvantages Limited capital, personal relationship risks, managing and communicating to many non-expert investors Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 10

11 Angel Investors & Groups Description Several $100K to over $1 MM for product development and early feasibility studies. Often convertible debt. Trend to larger rounds & syndication. Advantages Invest early, less valuation sensitive, potential mentoring, venture capital relationships Examples Life Science Angels, Band of Angels, Angels Forum, Mass Medical Angels, Life Science Angel Network, etc. Disadvantages Limited capital, management of large number of investors, may not desirable to future VCs Refer to resources from the Angel Capital Association for help identifying regional angel investor groups. Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 11

12 Grants & Non-Dilutive Description Broad range of disparate (and often difficult to navigate) structured funding sources, often for specific stages or activities. Amounts can range from $100K to multiple $MM. Advantages Often non-dilutive, not financial-returns based, potential visibility and network Examples Research (NIH, NCI, DOD), business (SBIR, state funds), life science specific (M2D2, BioEnterprise), foundations (Gates, disease-specific), OUS initiatives (esp. in Asia) Disadvantages Application demands, long review times, limits of research or reporting requirements Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 12

13 Incubators & Accelerators Description Not investment source, per se but a potential path to funding and support via proven process and proven people Advantages Professional management, expertise & experience, facilities & project staffing, investor & KOL access Examples Coridea, Intersect Partners, The Innovation Factory, The Foundry, Incept, Synecor, Exploramed, Denali, Inceptus Disadvantages Give up considerable ownership and control, incubators still must secure funding, allocated resources Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 13

14 Early Stage Venture Capital Description Institutional investment in technology development startups, seeking to generate high risk-adjusted returns Advantages Expertise & strategic input, credibility validation, broad valuable networks, exit help Examples Hundreds of firms ranging in fund size ($30m to $1b), scope (generalist vs. healthcare vs. medtech), stage, philosophy Disadvantages Valuation sensitivity, fund lifecycle dynamics, protections & control, environmental factors Refer to resources from the National Venture Capital Association for help identifying venture capital firms. Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 14

15 { The VC Ecosystem }

16 The Role of Venture Capital Venture Capital firms exist to generate compelling riskadjusted returns for their fund investors by making the businesses in which they invest more valuable and liquid. Value generation is based upon strategies to mitigate risk, validate opportunity and solution via evidence generation, creation of enduring value by overcoming barriers, and positioning of companies attractively to potential acquirers. These goals are met through the aforementioned financial, strategic, resource, and influence added value dimensions. Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 16

17 Venture Capital Fund Structure (Public pension funds, corporate pension funds, insurance companies, wealthy individuals, endowments, foundations, sovereign wealth funds, funds-of-funds, etc.) General Partnership (Firm) Limited Partner (Investor) Limited Partner (Investor) Limited Partner (Investor) Limited Partner (Investor) Fund Mgmt Fees & Carry Investment & Returns Limited Partnership (Fund) 10 to 14 year life Investment & Returns Portfolio Company (Investment) Portfolio Company (Investment) Portfolio Company (Investment) Portfolio Company (Investment) Each investment typically has a 2 to 10 year life (average 7 years to exit for medtech) Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 17

18 Venture Capital Investing Process Identification of new investment opportunities of the highest quality Evaluation, selection, and researching of opportunities Conception, mechanics, and implementation of deal structure Critical active involvement in early stage companies Opportunity Sourcing Screening & Diligence Transaction Execution Oversight & Support Relationships Incubators Investment banks Other VCs Conferences Press & Media Cold contacts First pass screen Technical diligence Market research MD interviews Financial analysis Mmgt references Site visits Valuation Term sheet Negotiation Form syndicate Legal documents IP diligence Closing Board seats Financial oversight Develop strategy Exec recruiting Advise / consult Future financing Facilitating exit ~400 leads > ~25 diligence > ~3 term sheets > ~2 investments Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 18

19 Becoming Deal Flow Just as entrepreneurs must search for investors, investors are constantly and actively searching for the best deals Entrepreneur & physician relationships Interaction with executives in portfolio companies Involvement in university & community programs Presentations & presence at conferences & events Part-time venture partners tangentially involved Introduction & syndication with other VC firms Each setting provides an avenue to meet and engage investors Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 19

20 Current Environmental Themes Shift Toward Healthcare IT & Services Later-stage companies International (OUS) strategies Earlier syndication & tranching Corporate venture capital Shift Away From Medtech & Biotech Earlier stage companies Regulatory (FDA) risk Unreimbursed products Crowded product spaces Factors Having the Highest Impact on VC Investment NVCA & MedIC survey of VC firms investing in healthcare Regulatory Challenges (FDA) Reimbursement Concerns Availability of Capital Capital Requirements Clinical Trial Issues Firm or LP Changes Lack of Tax Incentives Investment Attributes Firm Level Considerations 0% 10% 20% 30% 40% 50% 60% 70% Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 20

21 { Developing the Pitch }

22 Objectives & Format Presentation Goals Generate initial interest (hook) Sell the concept, sell the team Articulate unique value model Set process expectations Assess chemistry & philosophy Test & evaluate investors Get to NO quickly Investor Perspective Quick first-pass opportunity filter Assess content at high level Evaluate team capabilities & style Test thought process & reactions Identify key questions to address An effective presentation is concise, thoughtful, and thought-provoking. Essential Contents 1. Clearly defined need & solution 2. Assessment of market opportunity 3. Technical development program 4. Competition and IP position 5. Risk mitigation & performance validation strategy (proof) 6.Team members, capabilities, and company advocates (e.g. KOLs) 7. Plan, milestones, & budget 8.Exit outlook (who, when, why, $) Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 22

23 Valuation Value Generation Framework Series E EXIT Series D Milestone Series C Milestone Series A Series B Milestone Milestone Milestone A compelling business plan must make a credible case for capital requirements, value generation of activities, and favorable economics for investors at future phases. Time Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 23

24 The Five M s of New Business Ventures Market Management Method Money Metrics Addressable Size Vision Business Model Financial Strategy Patent Status Growth Potential Experience Value Proposition Capital Needs Product Specs Concentration Education Technology Structure Efficacy Data Economics Track Record Differentiation Valuation Safety Profile Customers Capacity Validation Tranching Trial Enrollment Segmentation Breadth Promotion Use of Proceeds Expense Proj. Competitors Relationships Production Deal Terms COGS & Margins Public Policy Reputation Distribution Comparables Case Volume Accountability Team Fit Growth Strategy Liquidity Path Revenue Proj. Barriers to Entry Chemistry Partnerships Control Cash Flows Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 24

25 Articulating Value & Risk Profile Stage / Risk Higher Risk Characteristics Risk-Mitigating Characteristics Technical Product Manufacture Clinical Regulatory Adoption Reimbursement Exit Outlook Black box science or new medicine High level of system complexity Heavily patented space, litigation New category or unfamiliar concept Me too solution or no problem Challenging process, tech development Capital intensive, highly specialized Ambiguous, combined endpoints Large placebo effect / weak signal Complex trial enrollment, execution Lack of predicate technologies History of non-approvals, failures Large number of similar entrants Major change in practice required Customer ownership by incumbents Substantially more data needed Value defined by soft benefits No real channel/product fit w/ acquirers Poor exit multiples, unsuccessful exits Well understood mechanism of action Publication in peer reviewed journals Broad claims in published patents Addresses a widely recognized need Clearly differentiated value proposition Easily scalable, low labor, contractable Leveragable as competitive advantage Existing medical experience, data Rapid feedback loop and iteration Smaller, less expensive trials Well defined regulatory requirements Incremental approval strategy possible Advocating, motivated clinician base Clearly established/defined channel Policy, patient, regulatory drivers Existing coding, favorable payment Clear economic value proposition Multiple clear acquirers that are buying Recent history of comparable exits Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 25

26 { Navigating Fundraising }

27 Setting Expectations Fundraising is an iterative evolving process, not an event. Today, top companies with proven leadership are still often spending 6 to 12 months raising a new round of financing. While it used be typical to target only a handful of fitting firms, in the current environment, a CEO may pitch to 25 or more firms. Hence, executives must consider themselves in continuous fundraising mode, and allocate team bandwidth appropriately. Consider initiating informal dialogue with prospective investors as a preview to a formal fundraising process, while at the same time progressing towards operational milestones to support. Find alternative financings sources to bridge to that financing. In other words: talk to future investors sooner rather than later. Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 27

28 Access: Where to Start? 1. Find a fitting, experienced, committed mentor for guidance 2. Interact with other entrepreneurs to share experiences 3. Engage an attorney to advise on process & structure 4. Recruit experts & influencial KOLs for input & support 5. Network, network, network medtech is a small world! 6. Target investors that fit stage, $$$, interests, experience 7. Orchestrate introductions hot is always better than cold! 8. Build credibility through validation by this team & network Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 28

29 Key Elements of Fundraising Strategy 1. Target: Who, How, & When 2. Intro: Leveraging Your Network 3. Reputation: Demonstration of Credibility 4. Plan: Define Milestones & Risk Mitigations 5. Request: Financing Plan, Rationale, Options 6. Diligence: Details, Validation, References 7. Follow-Up: Patience, Persistence, Balance Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 29

30 Fundraising Process Map ( illustrative example case in challenging 2012 environment ) Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Contact / Teaster B-Plan Review Intro Meeting Prelim Diligence Follow-Up Meeting Deep Due Diligence Negotiate Terms Firm Presentation Syndication IP Diligence Draft Deal Docs Final Closing Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 30

31 { Deal-Making Essentials }

32 Advancing the Process Diligence Company value and financing strategy is fundamentally informed by the due diligence process. Physicians & technical experts Execs with domain experience Potential acquirers Reference checks Intellectual property Deal Generally, prospective investors will initiate the deal proposal process based upon inputs. Term Sheet it all starts here! Negotiation process Syndication (optional) Partnership approval Legal documentation Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 32

33 Deal Term Basics Security (Preferred vs. Common Stock) Valuation (Pre- and Post-Money concepts) Control and Voting Provisions Governance (e.g. Board of Directors) Employee Matters (e.g. Option Pool) Tranching, Downside Protection, Pay-to-Play, etc... See the National Venture Capital Association s Model Financing Documents for standardized templates. Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 33

34 Current Environment & Trends Current deal finance trends reflect economic conditions, availability of capital, future financing risk, and returns expectations. Larger rounds fund companies for longer duration, reduce future financing burden & risk Depressed valuations but inherently less variability with a first round of financing Frequent tranching gradual investment of allocated capital Pay-to-play common favorable to encourage continued support First Round Second Round Later Stage $61.5 $47.0 $47.8 $39.7 $40.6 $48.0 $30.2 $37.0 $28.2 $33.9 $28.7 $19.0 $17.2 $18.0 $16.3 $24.4 $14.7 $13.4 $13.0 $7.2 $12.5 $10.0 $5.0 $6.2 $4.2 $5.0 $4.6 $4.9 $5.0 $ Aptiv Medtech Bootcamp Not to be reproduced without permission. 10 May 2012 Slide 34

35 And if all else fails

36 Thank you and good luck! Jonathan Wyler (617)