The Art of Selecting The One

We all heard about the bear market, a 50% decrease in valuation, and potential M&A from pharma but, where would you invest if money wasn't an issue? That's the golden question, how to assess the potential, not the value, for a young life science startup taking in consideration that 90% of them will fail? ??

From the investor/partner perspective, It is critical to know about the Technology, Market Fit, Business Development, Financials, or Legal health of the company they are planning to buy or invest in. As technology tends to go faster than ever before, many new products or services will face some hurdles related to market fit, regulatory, and tech maturation. Due diligence (DD) is a vital tool, based on which investors/buyers/partners gauge the effectiveness of corporate governance and make up their mind on investment, merger, or acquisition, after validating whether the assumptions and assertions made by the company are true and fair.

The number of early-stage biotech partnerships is increasing year on year. PwC expects life sciences M&A investments to reach between US$350 billion and $400 billion with continued biotech acquisitions in the $5 billion to $15 billion range as companies look to diversify their business.

Be prepared ??

As more deals are being made every day, there is an increased need for DD, so academics and early-stage biotech companies need to prepare for it. Small biotech companies will reach a stage where they need to consider the prospect of a merger, acquisition, or partnership – or the next investment round. It is never too early to plan ahead and prepare to convince new and existing investors that more funding is advantageous. Since Life Science is capital intensive, companies need to develop a fundraising strategy to better understand, when, how, and how much is needed to get their next milestone.

Moreover, DD is not just a single event. For the completion of one deal, a company may need to undergo up to 10 due diligence by interested parties, so R&D plans, including reports, should be prepared. Raw data should be ready for assessment by external parties. As part of the translation from academic research to biopharmaceutical drug development, programs also need to comply with GxP requirements. Smart start-up companies address these requirements during the set-up of their governance and operational systems.

What is Included? ????

What is included in the due diligence process can vary from business to business and from buyer to buyer. It is depended on not only what the buyer wants and needs, but also what is needed for the bank, broker, investor, lawyer, etc. But here are some of the items that are generally needed in the Biotech industry:

• Team analysis - Who is going to get us to the finish line, do they have the capabilities and the vision needed? The target company’s management team should be a key area of focus of diligence efforts. In early-stage life sciences companies, for example, the founding CEO may be a scientist or an engineer with little experience building or leading a company. Considering whether the company has the right people with the right skill sets to successfully manage the company through every stage—preclinical, clinical, and commercial—is critical to success.
• Company Structure - Where is it based, which is the cap table?
• Technology assessment: TLR state of maturity, external validation, company technology vs state of the art and future prospects
• Intellectual property - How the company is protecting its assets? The strength and security of the IP portfolio are central to investment, or M&A discussion and in some cases will influence the deal outcome and valuation itself. Taking a deep dive into IP is important for reducing risk, but can also be very expensive. Companies should plan their IP diligence strategy around their specific business needs.
• Value proposition: How are you going to solve the problem?
• Market size and dynamics - How big is the market you are getting into TAM/SAM/SOM, Go2Market Strategy, potential reimbursement, and entry barriers
• Business model: How are you going to monetize your product/solution
• Financial?information and performance - If the company has commercial traction, depending on the round

If we can come up with a composite scoring to summarize these variables would be huge. If you know anything like that, please comment below.

What are common pitfalls? ??

As stated before, buying and selling a business is exciting. But that excitement can lead to some errors in the due diligence process. Some common pitfalls include:

• Shortchanging the process: The DD process needs to be as deep as possible to have accurate information to make a decision. Due to the high asymmetry of information on private markets, data-driven decisions are prime here.
• Not involving field experts: If you don′t have the internal capabilities to fully assess a company, you may lose an investment opportunity or take the wrong one. Please contact a 3rd party with knowledge in the field who can assess tech and business value.
• Not assessing a company valuation with the proper methods: Each company is a world and its valuation needs to be assessed properly, if you don′t use the accurate assumption the value will not be reflected.

Lead Investor vs Follow-on investor: I'm not the lead investor, should I perform a deep dive Due diligence? ??

Each investment round has a leader and several followers, so most of the time the lead investor tends to be the one setting the terms and performing the DD, and the followers tend to rely on this DD for their assessment. This is a common mistake, in my opinion, every investor should perform their un DD internally or contract a 3rd party expert. This is due to the fact that all of us need to have accurate information when we deploy our strategy.

Each investment round has a leader and several followers, so most of the time the lead investor tends to be the one setting the terms and performing the DD, and the followers tend to rely on this DD for their assessment. This is a common mistake, in my opinion, every investor should perform their own DD internally or contract a 3rd party expert. This is due to the fact that all of us need to have accurate information to develop the investment strategy, Nobody wants to have another Theranos on their portfolio.

Why it is important?

Angel investors and VCs are the key stakeholders to push new, groundbreaking, and disrupting technologies from Universities to the market. The framework to assess these new technologies is complex, with a lot of information asymmetry mainly due to private business, and a lot of inference that needs to be extrapolated.

It doesn′t matter if you are following a diversification approach or a power law approach, each investor needs to be able to de-risk their investment as much as possible, not only to achieve a ROI but also to fuel great companies which will disrupt industries and help make our world better. A deep dive DD will give you a compass to understand opportunities and how a company can perform in the future if guided properly.

Would love to know more about your experiences and how we can increase the success rate or improve the assessments.

If you want to learn more about the importance of investment in biotech:?https://www.dhirubhai.net/pulse/importance-biotech-investment-2-world-history-adrian-rubstein/?trackingId=Y2iaZPf3RhOLoZpmz9JkDw%3D%3D

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