Life science board member and advisor Paul Hartung is back with wise tips on how to fund your biotech startup in these had times. Listen or read below.
Highlights:
Paul Hartung, Experienced Biotech Board Member & Advisor
Paul Hartung Closed a Financing in the Midst of the Last Recession
Seek Out the Right Grant Funding, Watch Expenses
Pitch Contests Don’t Provide Much Money but Can Spotlight Your Startup
Peer-Reviewed Publications Can Raise Visibility of Life Science Startups
Look Outside Your Area, Consider Syndication Across Angel Groups
Watch Out for Funds That Can’t Make Good on Term Sheets – It Happens More than You Think
Be Upfront About Your Future Funding Plans
“The nature of the investors change. For each stage of financing what you want to do is make sure that you identify who the lead investor is. Very important.”
Lead Investors
Summation
About Strategic Investors
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Transcript of “Fund a Biotech Startup in Hard Times”
Guest: Paul Hartung
SAL DAHER: Hey, this is Sal Daher. I'm delighted you found the Angel Invest Boston podcast in which I interview people who know a lot about building technology startups. I now have a Substack about losing and keeping off 100 pounds of body weight in my 60s. It's called Aging Fit, and my goal is to build a community of people interested in keeping fit as they age. Look for Sal Daher on substack.com. Daher, by the way, is spelled Delta, Alpha, hotel, echo, Romeo. Enjoy the podcast.
Paul Hartung, Experienced Biotech Board Member & Advisor
Hey, this is Sal Daher from the Angel Invest Boston podcast. Today I'm chatting with my friend Paul Hartung. Paul's a fellow MIT alum, and he went off and worked in a lot of very interesting biotech startups. He's on the board of some right now, companies in which I've invested. I find that Paul is a very knowledgeable person. What I thought I would do is in this time when it's really, really hard for life science companies to raise money or early-stage companies, I thought I'd ask Paul to give us some thoughts on how to make that process easier. Take it away, Paul.
Paul Hartung Closed a Financing in the Midst of the Last Recession
PAUL HARTUNG: Thank you, Sal. I guess you asked me to do this because I lived through the last recession and actually closed a financing in the middle of it. There are strange economic times right now and it is difficult to raise money for startups. I recommend that entrepreneurs be creative. Seek out any grant funding that's appropriate for the technology you're working on. Sometimes there are grant opportunities that are much faster than something like an SBIR and you have to really research what's going on relative to your field.
Seek Out the Right Grant Funding, Watch Expenses
It's not a time to spend a lot of money, so you need to run frugally as you're raising money because the worst thing to happen is to completely run out of money. I think that the contests are a good place to get some validation. There's not a lot of money associated with them, but it's good practice for your pitch. It's good exposure. If you win something or are a finalist in a pitch contest, you stand out from the crowd a bit.
Pitch Contests Don’t Provide Much Money but Can Spotlight Your Startup
I think in the life sciences, it's important to publish. Having a peer-reviewed publication that's compelling out there differentiates you and opens eyes. In fact, I was lucky enough to have investors come to me based on seeing a publication that happened to be out there at a time when I was raising funding.
Peer-Reviewed Publications Can Raise Visibility of Life Science Startups
Look internationally. Don't limit yourself to the few firms that are in the Boston area, for instance, if you're based in the Boston area. With angel financing, it's more difficult to reach out much beyond your geographical area, but I have had an angel syndicate for early-stage financing international investors. The more you can syndicate and not depend on one group for your financing, it protects you from a situation where an investment firm might go belly up during hard times.
Look Outside Your Area, Consider Syndication Across Angel Groups
Something to watch out for with institutional financing is you have to look at the age of a fund. You might find that actually the people you're trying to raise money from are trying to raise money to be able to invest. Then you end up betting on this other firm being able to raise money just like you're raising money. You don't necessarily want to rule them out, but you don't want to depend on that. You don't want to have a situation where you've got a term sheet and a promise that they may have the money to invest in you in a few months, and then find out that timeframe stretches out and you're at their mercy.
Watch Out for Funds That Can’t Make Good on Term Sheets – It Happens More than You Think
You have to look at your stage of financing. These days, the typical steps are Pre-seed, Seed, and then Series A. Typically these days, the Pre-Seed, and depending on the size of the seed financing, are done with convertible debt. Now, not everybody's happy with that. That's another checkpoint with the firms that you're looking to invest in you.
Be Upfront About Your Future Funding Plans
You need to be honest about the longer-range needs of your company in terms of how much money you're going to need to raise over time because there are some early investors who don't want to have a situation where the value of their stock, might go down significantly in later financings or their voting power in the company go down. You really have to be honest with investors when you're raising a small financing that you recognize that there's going to be a follow-on in order to achieve the development milestones that you need to achieve.
“The nature of the investors change. For each stage of financing what you want to do is make sure that you identify who the lead investor is. Very important.”
The nature of the investors change. For each stage of financing what you want to do is make sure that you identify who the lead investor is. Very important.
Lead Investors
SAL DAHER: Lead investor is so key. 60% of the raise is identifying the lead investor.
PAUL HARTUNG: Right. You may get interested investors, people who are interested in participating, if there is a lead investor that they trust.
SAL DAHER: Once you get the lead, you get a lot of people who follow. Getting the lead is the most difficult part of it, and getting the right lead is really important.
PAUL HARTUNG: Right. The pitch changes once you've identified the lead and you've identified the terms. Because then going to people who are interested in participating, it's more cut-and-dry. You're saying, “Here's the value proposition, and here's the deal. Here's the lead [crosstalk]--
SAL DAHER: It's, "Up or down. Yes or no."
PAUL HARTUNG: It's like, “Are you interested or not?” You don't spend a lot of time. You don't iterate, you don't renegotiate with every investor. You're presenting an opportunity for them to invest, and either it's a fit or it isn't. At one point, once I did an initial close and had a lead investor for my first round of financing with a company, within three weeks, I was able to build a full syndicate to close the financing. Went very quickly.
Summation
Those are my main tips in this time. I think; be flexible Don't put all your eggs in one basket, depending on one investor who's shown interest. Look internationally. Look at, depending on how much money you're raising, angel investors, family offices, VC firms, strategic investors are important. They take different forms. It could be companies that help you with commercialization down the line. It also could be like advocacy groups and health care institutions that may be relevant.
About Strategic Investors
Generally, strategic investors are validating. It's a good thing to have them. Don't be scared of the potential downside of the-- you need to be aware of potential risks of dealing with someone who could be seen as a competitor on some level.
SAL DAHER: Also, don't expect that the strategic is going to be a lead investor. Because the interests of the strategic are very different from the interests of investors. They're interested in understanding the technology and keeping track of what's going on in the market and all these things. Very different from investors who are interested in making money. It's an entirely different approach and it doesn't translate into people following you in a syndicate. Great.
[music]
Paul, I'm very grateful to you for making time to record this brief video because it's such a difficult time. It's really a very tough time. A lot of really interesting companies are having to fold, close shop because money's so hard to come by. We didn't expect this biotech winter to be this long. Believe me, you're not alone if you're struggling to raise money. You're not alone.
Thanks a lot for listening. This is Sal Daher, Angel Invest Boston. Thank you, Paul Hartung, for making this possible.
PAUL HARTUNG: Thank you, Sal.
SAL DAHER: I'm glad you were able to join us. Our engineer is Raul Rosa. Our theme was composed by John McKusick. Our graphic design is by Katharine Woodman-Maynard. Our host is coached by Grace Daher.