Investing in biotech: how to make a financial success of the venture

In the cold current climate of fundraising ­ what does the dedicated biotech investor look for? Thomas Tscherning and Jesper Zeuthen report.

The rising demand for both high-quality fundamentals ­ good products under development, for example and fair valuations for biotech investment cases ­ has in turn put extra pressure on the biotech entrepreneur, who has to live up to a certain standard in order to receive financing.

What does a dedicated biotech investor look for in a project? Key points are:

* Focused R&D on products for human therapy (not selling ainformatics' or provide services).

* Proof-of-principle in several animal experiments. Significance levels and prognosis of model for later human trials should be addressed.

* A strong intellectual property position (freedom-to-operate, utility, uniqueness).

* A market (aunfulfilled need') easily quantified and addressed/serviced. u A competitive edge over other players (positioning).

* Development and risk is quantifiable and can be handled by small, incremental steps in a reasonable timescale at reasonable expense. Are fall-back options identified if projects fail. Can projects be out-licensed at many different phases (diversifies risk).

* Step-up in valuation of the entity through time is fair and modest ­ then it is feasable to raise finance in the future in a sustained fashion. Does both the current owners and the future investors receive the same comparable return over time and adjusted for risk?

* The most important: management has built successful companies before ­ and will do it again. Competencies needed are identified and connected to identified people (who does what and when with what degree of responsability/accountability).

Venture investors live in a competitive world just like the entrepreneurs. The investor must therefore become value-adding himself to be able to invest in the best biotech projects. The essential characteristics of a competent venture investor are multi-faceted and a non-comprehensive list follows. He or she:

* Builds operational milestones ­ in cooperation with the entrepreneur ­ that are achievable and will increase the value of the project in the eyes of other dedicated biotech investors.

* Establishes strategic plans for each step of growth of the company (considers: patents, animal and clinical trials, licensing, exits).

* Identifies and recruits competent board and management members.

* Identifies and establishes financing syndicates for later financing.

* Monitors the competition.

* Makes introductions to technologycollaboration partners through network.

All of the above is done at cost to the biotech venture investor but is performed to increase and leverage the value of a project. Thus, before an entrepreneur meets a possible biotech venture investor, the entrepreneur realistically identifies areas of weakness. And this is the opportunity for the investor to help in specific areas (other than just allocating capital).

The Zeuthen-plan

To bring together needs and resources, BBV invented (by the initiative of Professor Jesper Zeuthen) an instrument to a) focus the goals of the biotech project, b) give the entrepreneurs value when milestones were met, and c) lower the risk of the biotech venture investor. This instrument is called the Zeuthen-plan (alternatively the option/milestone-plan) and has its source in an idea by Professor Roger Fisher of Harvard Business School which was to negotiate on the merits. Instead of head-to.head negotiations about price, the discussions are focused on how to grow the project into a large company with products on the market.

The Zeuthen plan is best described by a simple example (Fig. 1). The entrepreneur needs cash and a detailed plan for developing value in the company without diluting his ownership to an unacceptable level. The biotech venture investor needs return on the invested capital through time. The Zeuthen-plan brings these two issues together by initially letting the biotech investor invest a large sum at a small value of the project (the so-called pre-money value).

But as time (and work) goes by, the entrepreneur can increase ownership by reaching milestones (using the financial resources and leveraging his own capabilities) thereby increasing the pre-money valuation as the aproof-of-value' is presented. The crucial issues are therefore the milestones. In the Zeuthen-plan, each milestone (typically 10 ­ encompassing all of a companies key R&D programs and corporate activities) is mutually agreed upon before the investment is done. To be able to build these milestones and connect them to value (ownership) an exquisite know-how is needed. And this can only be found in a merit-based discussion between the biotech entrepreneur and venture investor about the project and financial climate at hand.

Possible areas from which milestones can be identified in a start-up biotech venture are as follows:

* Affinity studies and in vitro cell experiments.

* Animal model (in several species) proof-of-principle.

* ADMET data achieved.

* Competent management recruited.

* Financing from third party (large dedicated investor).

* Development/marketing agreement achieved with large pharmaceutical company entailing up-front milestones.

How to approach a biotech venture investor

How should a biotech entrepreneur behave when meeting a biotech venture investor? There are no simple answers, but after reviewing 380 biotech projects during the past four years some advice can be given. These include:

* Before any meeting with the investor, ask the investor what he believes is value in a biotech project ­ and then incorporate/address this in the business plan and presentation.

* After one week ask the investor if you could present the company during one hour only (you should be able to do it the way of the aSilicon Valley elevator pitch'). Send handouts of the presentation to the investor at least one week before the presentation takes place.

* Show that you know each critical development stage for the company over the next three years ­ ie have a list of 10 crucial milestones ready.

* List all competitors and describe why the project has a chance to succeed despite these threats (make a SWOT analysis).

* Break down and show the value of the company ­ why is it worth EXm (pre-money value).

* Discuss the future financing of the project ­ not only this round of financing. Be careful to describe exits (eg name potential acquirors).


A biotech entrepreneur should use the biotech venture investor as his personal management consultant to achieve the highest possible value in the shortest possible time for the project. This will only be achieved if truly value-adding products are being developed. To secure this, an intimate cooperation between the parties will have to be established and must be based on the merits of the project instead of focusing on the value alone.

Enquiry No 95

Thomas Tscherning and Jesper Zeuthen are with BankInvest Biomedical Venture, Copenhagen, Denmark.

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