Convincing Investors to Write a Check

David H. Crean, the Managing Partner for Cardiff Advisory, discusses how to attract and acquire a portion of VCs record amount of dry powder.

Venture capital (VC) investors accelerated their healthcare fundraising in 2022, beating the record pace of 2021. Despite a slowdown in the second half of 2022, venture funds raised nearly $22B to invest in healthcare companies, marking the second-biggest fundraising year ever. With over $50B raised over the last two years, investors now have a record amount of capital ready to deploy into new healthcare portfolio companies (source: Pitchbook and Silicon Valley Bank, 2022).?

According to these sources, venture healthcare fundraising will likely decline to about $15B in 2023, as Limited Partners (LPs) may be dealing with over-allocation into venture healthcare after two record years of funding into this sector. They expect the slower investment pace to continue in 2023, allowing investors to extend the time frame between fundraises. Despite these predictions, there is still an unprecedented amount of dedicated venture healthcare capital to be deployed, so the top companies will continue to climb to high valuations and foster intense competition among new investors.

With plenty of capital in the market to tap into, how do companies attract interest? What is your compelling investment thesis that will compel investors to write a check, especially since the average VC receives?500+ pitch decks a year, perhaps more? Why will your “teaser” deck stand out and capture the attention and interest of a certain investment group? How do you rise above the noise?

Get a Warm Introduction to Investors

Investors are busy people, especially institutional investors such as VCs. As I mentioned above, these investors receive on average 1-2 pitch decks per day. Ask any investment professional in the ecosystem, "what is the best way to get meetings with investors?" The majority of respondents will state, "get a warm introduction." VCs, corporate venture, nontraditional investors, sovereign wealth, angels, and high-net-worth investors are infamous for being adamant about warm intros. Warm introductions help you start your relationship with investors on the right foot. It accelerates your fundraising efforts and increases the odds of getting funded with the right investors. Cold call emails and outreach rarely work. I estimate that the hit rate with a cold approach is no greater than 5%, and this may be on the high side.

If you don't have a list of target investors — build it. This is essential if you want to run a tight fundraising process.

Your initial goal is to identify a referral source to introduce you to an investor. The referral source should be someone an investor knows, trusts, and respects. Some of the top referral sources include portfolio company founders (i.e., founders who raised money from the investor) and your investors/advisors/board members (i.e., people that know you and your story).

Provide a Compelling Vision and Story

Presenting yourself and your company to investors, corporate partners, and interested buyers is a critical step to attracting interest, business support, and financing success. Do you know how to present your company and proprietary technologies in a way that makes it jump out, come alive, and be differentiated from the multitude of other investment opportunities they have in the industry so that investors want to write you a check? Do you captivate people’s attention when you speak? Many entrepreneurs believe that their technology and big market opportunities speak for themselves such that the potential should be obvious to investors. Don't assume such a position.

The reality is that when you stand up in front of the room and start talking, investors will be assessing you (and your team) more than the details of the business.

People invest in people, first and foremost

It's your opportunity to build trust and their confidence in you in creating a compelling vision for the company and how you plan to execute your plans. How investors perceive you will heavily influence their decision to listen further and move forward with you to the next stage or to have them say "thanks but no thanks." If you don’t inspire investors to want to know more, you may never get the chance to show off the technology you believe in, its related data, patents, or technical team.?

My guidance to life sciences and healthcare clients involves the steps of building and conveying your messaging in a compelling manner that highlights several important components and elements of your business strategy and plans. Key elements should be included in any document, presentations, or have as discussion points with financial investors, strategic companies, and potential buyers.

Executive summary/investment thesis

This section must be stellar. If the business plan is a biography of your business, then the executive summary is your business’ CV. The executive summary is likely to be the first (and sometimes only) section to be read and is, therefore, your chance to grab readers' attention. Seek to achieve a “wow” impression or face the real chance of having your business plan end up in the “reject” pile. The ideal executive summary is a concise and strong synopsis of the entire business plan. Limit to 1-2 pages or slides. This represents the?investment thesis?for your pitch.??

What's the company’s goal?

Clearly state what your company’s mission, vision, and objectives are, as it is what unites your Management team in their pursuit of excellence. It inspires others to follow. I always love to a start a conversation with BHAG's (big, hairy audacious goals). Go big, or go home!

What is the technology and problem that you are trying to solve?

What is the significance and impact of the technology? What problem are you trying to solve? Is there a demonstrated proof of relevance or concept? What gives you hope that you have something? Provide numbers and references for every claim that you make and avoid overly broad assumptions as it can erode credibility.

"What problem are we trying to solve?"

What's the unique selling proposition (USP)? Many investors will be looking for disruptive technology or a major improvement of currently available technology, not just incremental. Innovation is the keyword. However, to show that your proposition is superior, it is important to clearly describe what the current state-of-the-art is. Subsequently, show how your product solves the need. Highlight the preliminary data and the results seen to date.

How does your solution impact the basis of competition?

Is there a market opportunity and what is the need? It is important to identify the clear unmet need for your solution to a particular problem. There must be either no solution currently available, or your product must be highly superior to the current state-of-the-art. Consider pursuing the blue ocean strategy, capture the uncontested market and differentiate yourself. A "me too" strategy is not compelling to most investors.

"What makes you so special?"

Furthermore, segment the market and find the most appropriate customers to target. When analyzing the market, do not overlook your competitors. Provide a thorough competitor analysis, both direct and indirect. Competitive presence is a good sign of market opportunity. In terms of the basis of competition, are you 1st or a follower strategy? Are you pursuing a collapse of the value chain or competing for existing shares? Provide absolute clarity.

Demonstrate a plan to access the sales channel

How will the Company market, distribute, promote, and sell the technology, product, or service to its customers? Does the Company have access to an existing sales channel or have limited access but navigable factors to a sales channel. Is a commercial partnership model under consideration since commercial capabilities are not your core competencies? What are the requirements to?drive the commercialization of the products and services? Will the sales and marketing plans require the creation of a new sale force or require new access to new prescribers or physicians or healthcare providers or utilize an e-commerce model?

Demonstrate knowledge of the pathway to success

What is the clinical evidence to date? Is the clinical pathway well-defined and is the company following it? Is the regulatory pathway known to the FDA or other Regulatory Agencies? How have you addressed Regulatory hurdles and issues that have been raised by FDA or other during your product development? Who will pay for the technology or product? Will it be cash-pay or reimbursed by third-party payors?

There are four legs to the stool in product development. It is no longer acceptable to just think about safety and efficacy. Who will pay for this and at what price?

You must think about risk/ benefits, clinically-based outcomes, health economics, and payor data. This information feeds your business model.

Understand how buyers and investors view your business???

Who are the players in the space to benefit from the acquisition of the company? Will the company's products and/or services be a great fit for a buyer's current portfolio allowing them to consider synergies or will this be a good add-on to fill a portfolio gap? I find it useful to tier your buyers into categories. It takes much homework?and preparation, but you will need to customize your message for each company in the category. This exercise of tiering and customization holds true for investors you seek and partnerships you plan to pursue as well. Have a clear view of why you wish to reach out to any company or investor. What is in it for them? How will this be of benefit to them?

Align milestone inflections and exit points with investor and company goals

Understand your milestone inflection points (e.g., lead selection, IND enabling studies, IND submission, Phase 1/2 clinical study completion, etc). How will the achievement of the milestones drive valuation? How will it get investors more interested in writing you a check? How will milestone achievement incentivize strategic companies to approach you and start a dialogue?

Who is the investor target and why is it attractive to them?

Is this an institutional venture firm or high net worth individual funding play given either the level of funding needs, stage of development, an appetite for dilution or bringing in notable investor experience to drive commercialization of the technology or service? When do you reach out to Angels? VC? PE? Strategic? Corporate Venture (CVC)? Family Office?

A comprehensive understanding of the investor base and their investment thesis and criteria is critical to maximizing your time and probability of acquiring investor interest. Understand the milestones needed in order to attract certain investor types. Lastly, you will need to understand "LP math" such that limited partners are compelled enough to invest in you.

Gather domain expertise to reduce risk

As entrepreneurs and business owners, risk-taking is in their DNA. It’s why businesses are started and why they forge ahead through challenges and in constant pursuit to change the status quo.

You and what army?

It is important to have domain expertise to help guide business owners on this journey. Gather the necessary Management team, domain experience, Board of Directors, and Advisors. Build a team.

Create an IP pyramid and barriers to entry

Build a wall around your IP base. A general rule is to strive to have your ideas patent-protected. This creates barriers to entry. Make sure you have an IP strategy and how you intend to keep the know-how within the company and away from your competitors. Finally, mention if the Freedom to Operate (FTO) research has been done.

Stages of risk

Are you prepared? How will you make money? Now that you have shown investors that there is an opportunity and you have the solution, it is time to show them that you are aware of the problems that might arise. Be realistic. Therefore, always mention what the risks are and what mitigation strategy you will choose should they become an issue. Keep in mind that risks differ depending on the phase of product development: early stages are high in risk and later stages are lower in risk.

Use of proceeds

What has the company achieved with capital it has raised to date? What are the uses of the next funding and the milestones that will be achieved? What is the total cash effort versus the projected ROI? What is the breakeven point? In terms of financial projections consider providing the base case, upside case, and downside cases. Give a 5- to 10-year forecast based on the market segmentation that you plan to pursue. Having solid financial projections and assumptions will convey to investors that you have a plan and will deliver results.

What's your capital financing strategy? Where will your next round of funding come from?

Are You Ready?

The last two years were record years for venture capital fundraising. VCs?have to deploy the capital they raised — it is their job to do so. Keep in mind that for VCs, the deployment of capital is gating to them raising their next fund. But it may not be at the speed and volume seen during the go-go days of 2021, which may make it feel like the market isn't moving. And as we have seen, economic downturns also usually drive out the generalist tourist investors, adding to the feeling that all the investors have packed their checkbooks away. It is imperative to plan upfront and put your best foot forward in attracting investor capital by identifying the right investors and conveying a compelling story to strategic and financial investors.

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Disclosure

David H. Crean, Ph.D., is Managing Partner for Cardiff Advisory LLC, an M&A investment banking strategic advisory firm focused on the Life Sciences and Healthcare sectors. This article is provided for informational purposes only and does not constitute an offer, invitation, or recommendation to buy, sell, subscribe for or issue any securities.

The principals of Cardiff Advisory LLC are registered representatives of BA Securities, LLC Member FINRA SIPC, located at Four Tower Bridge, 200 Barr Harbor Drive, Suite 400 W. Conshohocken, PA 19428. Cardiff Advisory LLC and BA Securities, LLC are unaffiliated entities. All investment banking services and securities are offered through BA Securities, LLC,?Member FINRA SIPC.