27 Oct Local biotech startups must compete nationally for investors’ attention
Madison, Wis. — Angel and venture capitalists looking for sound biotechnology investment opportunities in Wisconsin are focusing on a few business strategies that make some life-sciences companies stand out from the crowd, according to a panel of experts who spoke at the Wisconsin Biotechnology & Medical Device Association Conference on October 26. The trade association attracted 300 industry representatives to the day-long event.
As with most companies, financiers will look at traditional indicators of success before making investments: management, time to market, and total funding needs. But biotechnology and health-care companies have a different risk profile than other companies, said Peter Shagory, a panelist who oversees the health-care and life-sciences investment activities for Baird Venture Partners of Chicago. He said that the science behind the company has to be the “best in class” nationally, not just regionally.
“The robustness of the science must compete on a national stage,” he said.
Most of the panel said they look for quality not only in the science behind the product, but in its management team as well. John Neis, co-founder and senior partner of Venture Investors of Madison, assesses whether the company is able to generate superior margins, usually accomplished by managers who are leaders in their fields.
“They must understand their core competencies and have a desire to build an excellent team,” he said. “They’re not afraid to hire people who are smarter than they are.”
Neis said they are also looking for growth potential of 10- to 15-fold, possibly more. The management team, besides having the vision and passion to follow through, must have the expertise in solving problems and getting their product to market.
Wisconsin’s biotech market has expanded in recent years, and most of the panel agreed thatthe major hurdles for the area’s life sciences companies are infrastructure problems such as capital funding and management expertise. Lauren Flanagan, chair and CEO of Scio Corp. in Reno, Nevada, said the area needs more consulting firms for biotech startups who are just learning the ropes of management and finding venture capitalists.
“People tend to hire people like themselves … then wrong choices are made.” she said. “Making mistakes on people and cash, that can kill you.”
Another potential snag investors look for is that many young companies are so focused on their technology they fail to analyze the sizes of their markets. Peter Zaballos, vice president of Frazier Technology Ventures in Madison, asks his potential clients, “Where is the absolute screaming need for that technology?” Answering this question, he says, will determine pricing of the product and potential markets. He adds that he looks for companies that never stop listening to their customers. Their ability to adjust to changing market conditions is a hallmark of smaller companies ready to respond to any need—speed boats rather than ocean liners.
Another piece of advice to companies: Don’t take too much money too early. Plan for the long haul.
In another seminar on venture capital, the Wisconsin model of integrating venture capital was discussed from both the entrepreneur’s perspective and the venture capitalist’s perspective. From an investor’s perspective, competition is always national, although entrepreneurs tend to compare locally or regionally. Sector trends additionally influence market and stage of financing decisions. Entrepreneurs in the Badger State have found limited access to capital, also a national trend in recent years as financiers take a more conservative approach to bankrolling high tech companies.
However, in the past several years, biotech companies are getting a closer look from investors than health-care and IT companies, Shagory said. Later-stage companies are also more popular with investors than early stage companies. Only about 10 percent of all venture capital is invested in the Midwest, with most going towards the coasts, he added. Wisconsin ranks 23rd for risk capital investment, which is still in the top 50 percent of all states. The state ranks 17th for research funding.
Although Wisconsin is facing challenges, the state is “poised for some great growth” with world-class science companies that are able to compete nationally, panelists said.
The Wisconsin model, bootstrap growth that is linked to the premise of limited capital, does not always work for high-growth potential biotech companies, warned Tim Mathison, vice president of Baird Venture Partners. Companies that are too conservative in their market assessment are at a competitive disadvantage on a national scale, he said. He advises companies to “think big” and understand actual capital requirements.
Financing constraints may be overcome in part by a new state law that will give tax incentives for investors targeting early stage companies. Act 255 also will create a statewide entrepreneur technology center for startups. Through tax credits, grants and loans, the law will provide growth opportunities for both entrepreneurs and investors. The early-stage companies must be headquartered in Wisconsin and employ less than 100 people, 51 percent of which are located in the state.
Christine Javid is a Madison-based freelance writer for WTN and can be reached at email@example.com
Mike Klein contributed reporting from the conference.