A 7-Step Guide To Finding The Right Strategic Investor For Your Start-Up

By Emily Welsch, consultant, Halloran Consulting Group

While institutional VC has been the traditional funding route for many start-ups, entrepreneurs are now more often turning to life sciences industry corporate venture capital (CVC) partners for financial and development support.

This source of strategic partnership offers a synergistic relationship that combines monetary and functional resources, capabilities, and core competencies for the purpose of technology commercialization. Entrepreneurs who are looking to accelerate the growth of their businesses often realize they can capture a greater bang for their buck when they collaborate with CVCs who offer value beyond the dollar.

As a life science management consultant who aids in facilitating these types of relationships, I am frequently asked by entrepreneurs how they can find these strategic partners. I discussed this topic with Marian Nakada, VP of pharmaceutical venture investments at Johnson & Johnson Development Corp., and Jason Hafler, director of investments at Sanofi-Genzyme Bioventures, and they provided some valuable insight from a CVC perspective.

Life sciences start-ups considering a strategic investment can benefit from checking their progress and development against a series of partnership measures laid out in the steps that follow.

STEP 1: KNOW YOUR COMPANY
The first step in this process is to conduct an internal assessment of your start-up. Please note that these criteria are subjective to the individual investor; however, every entrepreneur should be prepared to provide justifications for each.

• Significant Market Need: Does the technology apply to an indication for which there is a significant unmet need?
• Transformational vs. Incremental Technology Advantage: Does the technology demonstrate a clear differentiation from the competition and the standard of care by providing efficacy where there is none today, rather than a modification to a current treatment option?
• Patent Ownership: Does the start-up own the IP rights to the technology, or does the start-up have a clear path to strong IP?
• Strong Team: Do the start-up team members have proven capabilities in their areas of expertise? Keep in mind that a first-time entrepreneur can compensate for a lack of experience in a particular area by building a strong advisory board.
• Product Development And Commercialization Strategy: Does the start-up have a realistic product development plan? Does the start-up understand how much capital will be necessary to reach the development milestones?
• Regulatory Environment: Does the start-up understand how to navigate the regulatory environment?

STEP 2: ESTABLISH DEVELOPMENT PLAN AND SHARED PARTNERSHIP GOALS
While the industry partner may be interested in financial returns or strategic growth opportunities from equity investments in the start-up, the start-up may be looking to gain access to capital, in-house development resources, vendor connections, market validation, exposure to and expertise with international markets, and assistance with manufacturing, distribution, pricing, and/or reimbursement. Regardless of what the goals of the partnership are, there must be an established and fair balance that is agreed upon by all parties involved. Put simply, every partnership should be mutually beneficial.

Not every investor is the right fit for every start-up. Identifying the appropriate strategic partner and evaluating the potential relationship prior to engagement is a critical component in becoming partnership- ready. The start-up should begin by identifying what it is aiming to gain from the collaboration and which partners would be able to meet these needs.

• Required Resources: What resources are needed? What kind and how much support will the start-up require to reach its development goals? What are the major milestones? How will the support be used to reach each milestone? This information can be extracted from a refined product development plan.
• Capital Efficiency: How will the start-up illustrate its ability to be capital-efficient? How has the start-up proven its capital efficiency in the past?
• Time Efficiency: How has the startup proven that it is able to meet milestone deadlines on time? Proving that the start-up can stick to deadlines also helps illustrate capital efficiency because, after all, time is money.
• Identification Of Partners: Who is strategically investing in the start-up’s therapeutic area? Information on strategic interests of partners can be found on most of the CVC firm websites.
• Identification of Capabilities: Does the partner have the level and quality of resources that the start-up requires to reach its development goals?

STEP 3: PREPARE FOR ENGAGEMENT WITH INVESTORS
As the saying goes, you never get a second chance at making a good first impression. Therefore, it is crucial to fully prepare for engagement with potential investors. Preparation should include the development of an executive summary and a nonconfidential pitch deck presentation consisting of 8-12 slides that concisely covers a broad overview of investment criteria from steps 1 and 2. The intent of the presentation is not to necessarily explain every aspect of the technology, but rather to explain the value of the technology and how the technology will change the therapeutic landscape. Incorporating the start-up’s product development plan and anticipated budget into these slides can be a great tool to show the partner that the start-up not only understands what needs to be accomplished but also recognizes that the timely completion of the product development milestones builds company value and enhances the potential upside for investors.

STEP 4: GET THE INVESTOR MEETING AND BUILD YOUR BRAND
The number-one way to make contact with a strategic partner is to be introduced through a mutual connection that can vouch for the legitimacy of the startup team. While not every entrepreneur has direct connections to potential partners, there are ways to develop new relationships with these individuals and with others who can offer introductions.

Using social media, such as LinkedIn, to identify network connections to the partnership companies of interest is a great first step. Cold LinkedIn messages or emails will likely not garner a positive response, so instead of using this approach, consider asking shared connections to make introductions to the decision makers or partners of interest. The start-up can also participate in publicity activities including publications (articles, social media or blog posts, white papers, newsletters, scientific literature, and press releases), courses, webinars, angel group events, venture café events, and networking panels.

The start-up should build its brand through speaking opportunities, conferences, and networking events. There are many ways to publicize your company without providing any confidential information, and generating buzz can open the doors for partners to engage with the start-up. Partners will not seek out the start-up if they haven’t had the opportunity to get excited about what the company is doing.

STEP 5: EVALUATE THE PARTNER’S INVESTMENT STRATEGY
At this stage, it is important to assess whether or not the goals of the start-up are aligned with the corporate venture fund of interest. When both parties are working toward synergistic goals, they can easily operate in a mutually beneficial partnership. The following questions are provided to assist the start-up in assessing the appropriateness of the partner prior to final selection.

• What value will the partner add beyond the dollars?
• What are the partner’s development capabilities in the indicated therapeutic area?
• Does the partner have marketing and commercialization capabilities?
• What is the start-up’s expectation for the scope of involvement?
• If the partner syndicates its investments, does it co-invest with top-tier investors?
• What level of interaction will be expected between the partner and the portfolio company? Will the strategic partner interact between board meetings, or are they hands-off in their approach?
• What other investments has the CVC made, and does its investment strategy fit the start-up’s technology and core therapeutic area?
• At what stage does the partner invest?

STEP 6: NEGOTIATING THE PARTNERSHIP AGREEMENT
If the investor is interested in partnering with the start-up, a term sheet will be generated that outlines the goals, milestones, responsible parties, and general terms for the partnership. A lawyer may assist the start-up in negotiating these terms.

Once the terms of the partnership are established, the start-up and partner need to devise strategies to achieve these goals together. The development of these strategies requires input and action by all participants in the partnership. Often a partnership agreement may be drafted to define roles and responsibilities based on the agreed-upon goals and milestones from the term sheet.

STEP 7: MAINTAIN A WORKING PARTNERSHIP
A healthy partnership takes hard work to keep it working smoothly, frequent and effective communication, and a strong personal commitment from both parties. According to Nakada and Hafler, when it comes to functioning partnerships, it’s essential that start-ups stay focused on delivering milestones and are proactive about communicating and confronting any problems immediately.

Finding the right strategic investor can be daunting for life sciences start-ups, but successfully navigating this partnership process can be a beneficial step toward ensuring the start-up’s long-term success. Life sciences start-ups pursuing a partnership with a CVC can find a higher likelihood of success if they follow the measures laid out here, including assessing the startup’s assets and deficiencies, establishing mutual partnership goals and milestones, and maintaining expectations. Developing a start-up beyond the seed stage is challenging. Establishing strategic partnerships with the right partners benefits not only the start-up, which gains access to capital and commercialization expertise, but also the CVC and consumers by bringing transformational new products to market.