Rating a biotech firm: not too high, not too low
<p>Six investors and entrepreneurs that have had some of the most important rounds of funding in the biotechnology sector in Catalonia share their experience in a Lessons Learned session</p>
The technology, the team, the country and the maturity of the project are some of the factors involved in rating a biotechnology company in the early stages. Six investors and entrepreneurs that have had some of the most important rounds of funding in the biotechnology sector in Catalonia talked about it at the session Lessons Learned: Valoració de companyies, més enllà dels números organized by Biocat and the CataloniaBio association of businesses, on 5 July at the Barcelona Science Park.
Jordi Naval, cofounder of Aelix Therapeutics and managing director of Fundació Bosch i Gimpera, who moderated the debate, believes “It is very important to create value for shareholders who are with you from the beginning, as they take on the most risk.” In terms of pre-money negotiations, meaning the initial amount a company is considered to be worth before any new investors join, Naval says it has an impact on future rounds of funding. "Any clause affects the pre-money rating. The investor, however, look at the whole context of the investment that the company will need. The aim is for the end of the road to be positive for both parties," said Lluís Pareras, director of the Healthequity SCR fund.
The experience of Carles Domènech, CEO of Ability Pharmaceuticals, which has raised €6 millions in capital increases and soft loans since the company was started in 2009, has focused more on business development and licensing than on raising funds. His strategy has been based on generating value to minimize dilution of capital from new partners, and believes that ratings in Spain have been lower than those in Europe. “We've carved up the world to sign licensing agreements. For example, we've given only 5% of the global market to SciClone to market our lung-cancer drug in China and other Asian countries. This way, we've added value to our product and saved the bulk for the final deal we'll make with a large pharma or biotech corporation." One of the lessons learned, which they would do again, is committing to a qualified team "because it adds value and credibility.”
“Every time new investors get involved you need an argument to get the desired rating. You think you're worth more and the investors say you're worth less. If they overvalue you, you will be more diluted. We've always waited for the investor to put forward the first number," explained Jordi Carrera, cofounder and CEO of STAT-Diagnostica. Last April, STAT-Diagnostica raised €25 millions, with significant participation from Dutch fund Gilde Healthcare, to take their DiagCORE platform to market. This aeronautical engineer who before becoming an entrepreneur participated in research at NASA's Glenn Research Center and the European Space Agency, recommends not getting ahead of yourself. "Scouting for funds is very intense. It took us nearly a year. Plus, synergies and mutual understanding with the investors are key."
For Alain Garcinuño, business angel and interim CFO of Anaconda BioMed, “There are no rules, nor an exact answer. It depends on the team, the project, the moment…" Garcinuño also highlighted the emotional factors that play into a negotiation and was critical of "companies in Barcelona that say we’re lacking an ecosystem because we can go abroad to look for money." In his case, he spent 10 years working at investment banks in Paris, London and Geneva. The funding issue is ongoing, "and having an interim CFO will help us overcome the different phases the company will go through." This is the commitment of Anaconda Biomed, a start-up founded by Ofir Arad and Marc Ribó, one of the most experienced neurologists in Europe in endovascular treatment of acute ischemic strokes (AIS), who are creating a new generation of catheters to treat AIS.
The investors’ viewpoint came from Daniel Oliver, CEO of the Capital Cell crowdequity platform and an advisor to the European Commission on alternative funding legislation, and Lluís Pareras. "The value of a company is something that changes and risk is what determines the profitability you can expect," explained Oliver, who warns of the risks of a rating that is too high— this can be tied to a down valuation in future rounds, lack of profitability and discontented investors— or too low, "the entrepreneur will work very hard for very little and then we see ecosystems suffering from brain drain and that have trouble attracting companies from abroad," he said.
Pareras is surprised by the fact that "no one ever asks me what I want to do as an investor in their company." In the case of Healthequity, "We value companies by comparing them to comparable ones on the market. We want to be sure and go for the lower bracket," he explained. Finally, rating the company must take into account three types of risk: scientific (Will the treatment reach patients?), management (Will they be able to execute it properly?) and financial (Will they run out of gas halfway through?).
Watch the Lessons Learned video.
The next Lessons Learned session will be on 22 September (to be confirmed) and will discuss the importance of good communication in biotechnology and biomedical companies, regardless of their size. We hope to see you there!
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