The current economic downturn has driven investor and government focus toward knowledge-based industries such as life sciences. The rising demand for improving patient outcomes through effective healthcare discoveries, changing demographics, and advancements in scientific/technological innovations create an opportunistic environment for life science startups. How will Canadian life science startups beat the odds and transform their scientific discoveries into commercial success? How can these startups create the conditions that will support their successful and sustainable growth? Lack of understanding of these important aspects of your business puts you at risk of failing very early on.
The answer is not just access to capital but for startups to think like investors and to see their business as others do.
1. Assembling a First-Class Team
Startups have challenges recruiting, attracting and retaining top talent to grow their company with limited resources for salaries. Most biotech companies rightly focus on the scientists who are the ones to first develop their innovations. Where biotech startups often fail is in devaluing the business aspects of growing their startup and failing to obtain the appropriate skills and expertise to bring their product to the next stage of development. They also have to overcome the challenges of regulatory issues, licensing, strategy, finance, marketing, and sales. Startups are generally composed of quality scientists and are understaffed in most other aspects. This usually means that the founding scientists are operating outside their expertise by working on business plans, protecting their intellectual property (IP), regulatory filings, finance, marketing, and investor relations which are all activities that divert their core focus.
To be successful you will need to hire the right experience and a level of quality expertise to start building your business. Generally, you will not need a full-time Chief Executive Officer (CEO) at the very start of your company development. You may be able to attract a skilled executive on a part-time basis in exchange for shares in your company (to reduce cash outflow and increase their buy-in to the company’s continued success).
Other aspects of the business can be managed through your interim CEO, who can also manage contractors and advisors, as needed, to complete work on raising capital, legal issues, regulatory affairs, finances, and taxes. If you plan for your company to go public, it would be important to have a CEO who has already taken a company public before and is familiar with the initial public offering (IPO) process.
The critical end goal is to develop and/or obtain a quality management team (which includes a business executive) to secure funding/investment as this adds to the credibility of your company and establishes trust with any future investors and partners.
2. Developing a Great Business Plan
You know you have a great product/service but do you have a completed detailed business plan? Nothing kills a startup faster than an innovation with no clear plan to commercialize. Your business plan must be able to robustly answer the following key questions:
- What problem does your product solve?
- How is it unique?
- What advantages does it have over the currently available treatments or over the competition?
- Who is your customer?
- How will you attract, retain, and grow your customer base?
- How much is each customer worth?
- What is your business model?
- What is your product lifecycle?
- What funding will you need to get to your milestones?
- How will your investors make money?
Knowing how your product is unique and different from existing products is one of your biggest considerations in bringing your product to market. You will need to prove that your product is backed by credible and compelling science with a real opportunity to have positive impacts on patients. Support and provide detail on the science behind your product claims with high quality, reproducible, and reliable data to convincingly attract partnerships and investment… and put this in your business plan.
It is essential for you to develop a comprehensive business plan backed by market research and market data on how you will attract, maintain, and grow a dedicated customer base in order to generate a return on investment. Customer acquisition and overall customer lifecycle costs will need to be considered and will inform the segments that you should target. You will need to define your value proposition for each targeted customer segment(s) and clearly indicate why customers will buy from you and not from your competitors.
Biotech and life sciences startups have inherently more risk attached to them due to the risky nature of research and development (R&D) to bring a product to market. Your business plan needs to articulate a thoughtful understanding of how to mitigate risk with a defined timeline as your product goes through the various phases of development in order to align with your investors’ and partners’ expectations.
Your business plan needs to be well structured and show a solid case for why you need capital, who you will get funding from, when you need to receive the funds, what you will do with the capital, and how much you need to grow your business and create value for shareholders. You will likely need advice on how to structure your company’s rounds of funding.
If you don’t know how to create a proper business plan that describes how to successfully develop your company, get professional help – skilled business executives, consultants, universities, and government organizations are great places to start. There are also many online services available to support you in developing your plan.
3. Obtaining Investment Capital
The single most important question in the startup community is how and where to raise investment capital? This is an even more important consideration in life sciences because life science startups tend to be more capital-intensive than other startups due to higher R&D costs.
There are four main sources (governmentfunded programs, family and friends, angel investors, and venture capital) of investment capital for life science startups and the ones you choose will be dependent on factors such as: timing, amount of capital required, amount of company control you are willing to give up, and level of expertise required. Note that private equity (PE) has not been included as typical PE firms buy mature companies and will take 100 per cent ownership and control of the company. Also, not included is crowdfunding, which is growing in popularity for technology startups but has not been a significant source of capital for biotech startups.
The first place startups typically go to for financial support is government-funded programs that are mandated to support the growth of Canadian life sciences companies and researchers. One such place is the Business Development Bank of Canada (BDC), a federal Crown corporation that is solely funded by the Government of Canada. The BDC has a mandate to support entrepreneurs in all industries and in all stages of development, with a focus on small to medium-sized companies. Specific to life sciences, BDC operates the Healthcare Venture Fund that
“invests in transformative Canadian companies that will dramatically increase healthcare productivity by reducing healthcare costs while improving patient health”.1 This fund is specifically looking to invest in devices, drugs diagnostics, and digital health sectors.
Family and friends are usually the next place to go as trusted resources you may turn to for funds to get your company off the ground. They are easy to access and already have an established relationship with you. Although this may work initially, the amount of available funding is generally low, typically between $1k and $20k. It also becomes exceedingly difficult to raise sufficient capital using this method as both your company and capital requirements grow.
Angel investors are usually wealthy and well-connected individuals who can provide startup capital similar to venture capital (VC) funds, but do not necessarily have the same restrictions. Angels can invest in smaller increments, do not require lengthy due diligence processes, and typically take a hands-off approach to management and will not control the operations of your company.2 The downside is that many life science startups would greatly benefit from a more hands-on approach to help facilitate and guide them to the next stage in their company’s life cycle. Both VCs and angel investors will look for an appropriate and realistic valuation of your company based on sound analysis. An excessive valuation indicates that you may have overvalued your startup.
In order to obtain additional capital, many startups will try and access venture capital funding. Venture Capital funding comes in many shapes and sizes, with some specializing in very specific disease areas and others in general life science investments. Generally VCs can provide significant value to life science startups by not only providing
capital, but by also providing hands-on expertise in building and maturing the company. VC firms also have due diligence criteria used to assess the viability of investing in startup companies. This due diligence process takes time and may mean that there is a time lag before funds are distributed, and many VC firms will also have minimum deal size thresholds. For example, they may not invest in amounts smaller than several million dollars. Lastly, VC firms will typically sit on the board of directors at your company to monitor the performance and capability of the management team to protect their investment.
Access to VC funding is oftentimes a critical factor in determining a startup’s eventual success or demise. Fortunately, the availability of venture capital in Canada is increasing ($2.4B in 2014) and is now eclipsing pre-recession levels from 2008; there is a significant opportunity for life science startups to capitalize on this momentum.
Although the magnitude of VC funding in Canada is not nearly as high as in other countries such as the United States, Canadian VC funding is growing in the early stage of company development (54 per cent growth from $392M in 2013 to $602M in 2014) which signals that VC investors are placing increased emphasis on startups. VC investment in the life science sector is also showing good growth with an increase of 78 per cent in 2014 to $451M (from $253M in 2013).3
4. Finding the Right Advisors
It is oftentimes difficult for you to grow and sustain your startup without tapping into a broader mix of expertise. Use of external advisors (business, financial, peer, legal, and tax) will allow you to obtain specialist advice on how your company can improve and grow.
Business advisors function to help provide strategic advice and drive the development/refinement of all aspects of your business plan (including marketing, organizational structure, operations, etc.). We have seen many life science
startups fail at this critical point because they are heavily focused on research and product development and not as focused on the commercialization aspect of their business. The business advisor helps you to take your product/service and bring it to market. You need to value business advice equally as important as your scientific innovation/R&D to balance commercial growth for your startup.
An important consideration for life sciences startups is the composition of their board of directors. The board should be comprised of individuals with experience that will aid the company (e.g., a clinical stage company will want someone who has previously run clinical trials and understands the trial design and clinical operations). A board composition should also be created based on the company’s future intention to remain private or go public.
Financial advisors serve the important role of helping you to manage your financial planning in order to achieve short and long-term financial goals. Their knowledge of financial laws and legal restrictions will help you in securing funding and identifying investment opportunities. Financial advisors will also assist you in assessing the performance of your company through financial analysis and help you in refining your budgets/forecasts.
Peer advisors are individuals that are similar to you, entrepreneurs who operate in a comparable environment, and have a shared purpose of growing and developing the life sciences sector. The value of peer advisors is through shared experiences and the understanding of each other’s growing pains. A mentor/mentee relationship is an effective and common way of structuring this type of advisory relationship. You can find these advisors at universities, venture capital meetings, and through online forums.
Legal advisors are critical in the early stages of your company and you should consider lawyers with specific expertise in the life sciences sector and that have previously worked with startups. Quality legal advice will help
you structure your company and set up your company correctly to fit your business model (from your business plan). Services include providing advice on IP, filing patents, drafting licensing agreements, developing company share structures, advising on entering the IPO market, etc. Many credible firms will offer heavily discounted advice during the early stages of a startup and increase their fees as your company grows. Don’t just use your friend who just graduated from law school for some free advice.
Tax advisors are critically important to life science startups who have significant R&D expenses. The federal and provincial governments currently allow significant tax incentives/credits for qualifying expenditures under the Scientific Research and Experimental Development (SR&ED) program. Recent legislation in 2013 has changed the way SR&ED credits are calculated by making capital property ineligible for deduction.4 Tax advisors will be able to assist you in reviewing and filing your SR&ED claims and helping to maximize after-tax cash flows with appropriate tax planning. Tax advisors with experience in life sciences can be found at accounting firms that have special divisions specializing in biotech startups and often have startup programs and other services to support your company. Same as the legal advice, don’t use your friend who just received his accounting designation for tax advice. It will not be sufficient.
5. Partnering with the Right Companies
Determining the right partners with whom to develop formal business alliances could help drive and grow your startup through expertise, access, and the ability to scale your innovation. There are three types of partners for you to consider: licensing partners, full collaboration partners on R&D and commercialization, and limited partners with agreements such as sales and marketing (co-promotion).
Keep in mind that the goal of the partnership is a two-way, participative relationship and for each partner to help one another in order to further the interests of the partnership. All three types of partnerships could, for example, be achieved by partnering with a large pharmaceutical company to develop and commercialize your innovation. The number of these collaborations is growing as pharmaceutical companies look to rationalize their R&D functions and de-risk their pipelines by forming partnerships with more established startups who have already invested in Phase 2 clinical trials.
Partnerships are significant management decisions and key issues to consider when thinking about strategic partnerships are:
When do you enter into a strategic partnership?
You need to do your homework to understand the value of your company and enter a strategic partnership at an appropriate point in time. Your company will not be as highly valued if you enter the partnership too early without a solid foundation or too late when you may have used up all of your cash and don’t want to go it alone. You must balance the business risk and funding requirements of developing the startup on your own against what you could gain or lose in a partnership agreement.
How do you choose the right strategic partner?
Research will need to be done to find the right strategic partner. Will they understand and share your vision? Do they understand the market that your product will compete in? Do they have the capability and capacity to act as your partner? And will they be able to deliver on the benefits you are looking to gain from a strategic partnership?
How do you structure the agreement?
Obtain specialist legal advice to structure an agreement that protects your IP, delivers on the expected partnership benefits on both sides, and clearly defines the level of control you have over your company and IP moving forward.
Be passionate and enthusiastic about your company. Be able to tell potential investors and partners about your vision for your company. Be able to describe the science and how your innovation will impact patient outcomes or patient experience. People and companies will want to work with you if you have an exciting discovery to share with the world. Good luck.
About the Authors
Joyce Drohan is a Consulting Director for Healthcare and Pharma Life Sciences for PwC
Jason Low is a Senior Consultant in Financial Operations for PwC
For more information on PwC, or to see more PwC content visit www.pwc.com/ca/healthcare