If you’re an entrepreneur in the middle of raising funds for your new project, and it’s in the conceptual stages or in preclinical testing, you’re likely meeting with a wide range of investors. You may be speaking with pharma companies and institutional venture funds, of course, but chances are you’re also having conversations with “family offices” (private wealth management advisory firms that serve ultra-high-net-worth individuals or families) and individual investors. These last two sources are starting to appear more often in the funding of new technologies, since the ability to secure funding from large institutional venture funds and pharmaceutical companies in general tends to come later in many cases.
This early group of investors may be individual angel investors, patients, established family offices that operate like a venture fund but are new to the field, and individual investors who are new to the field of ophthalmology or health care in general. In this month’s column, we’ll look at a few key considerations when speaking with this group of early investors.
Most people have experienced (directly or through someone they know) some form of vision-related illness or condition, such as dry eye, which almost everyone experiences from time to time; allergies, which are on the rise; cataracts; presbyopia; macular degeneration; or even inherited retinal diseases. This experience makes investing in ophthalmology personal for many people, and they become what’s known as an “emotional investor.” In general, these investors tend to be smaller, and may not even be very focused on biotech. As such, they may need extra education on several fronts, including ophthalmology, but also on biotech investments and pharmaceutical development, as well as how to mitigate the risks involved with these particular investments.
To help educate these early investors, it helps to emphasize what makes investing in ophthalmology, specifically, so unique. Outlining the following key areas as the overall “reason to believe” for ophthalmology typically resonates with investors new to the space:
• Ophthalmology is an active space. In ophthalmology, there’s a healthy volume of transactions, initial public offerings and deals with pharma that represent exits for the investors. Its always good to have at least an appendix in your slide deck that highlights and puts into context examples of key deals in the industry and the investment returns they provided.
• Exit partners and pathways. There’s a range of potential exit pharma partners—from the large multinational pharma companies to smaller ones. In this market niche, a commercial organization can usually be built around targeting the top group of physicians. As we’ve seen for years, development companies can make the jump from having an investigational drug or device to hiring a sales force once a product is approved or cleared, and then launching the product and building value. Thus, exit to pharma isn’t the only endgame. This shows investors that they have options.
In your pitch, show examples of both exit deals to pharma as well as examples of companies that went public and commercialized. This helps set the stage for you to outline various exit scenarios: Is the plan to exit after the Phase II or Phase III trials, or is it to go the distance to an IPO and commercialization? What’s the expected interest from pharma for your specific program and drug indication at different stages of development as an aquisition? Or is a license deal with back-end royalties realistic?
As the range of investors broadens, you may find that some investors new to the space prefer a quicker return on their investment and don’t have the appetite or the capital to carry a product through to approval, even if approval will lead to a larger valuation and a greater return for them in the end. It’s important to be clear what the plan is, show them the options and ensure alignment.
Here are some aspects of ophthalmic drug development that you can emphasize when trying to convince someone to invest in your program:
• Opportunity to spread risk, time/cost and return. If possible, it may be attractive to have multiple products in development. Companies with multiple products can mitigate risk, maximize the use of their time and spread costs over multiple programs. For example, you could fill an unmet clinical and market need for an anterior segment indication with a topical eyedrop while you also work on your longer-term retina programs.
By diversifying your array of products in development, you can better answer the common question: “What happens if your lead program’s study fails?” which may be a question on the minds of investors new to the space who are more risk averse. It’s helpful for potential investors to see that your team has the ability to develop alternatives and adapt as needed, to mitigate what otherwise may be “binomial” (pass/fail) risk after a single clinical trial. In other words, be ready with a plan for a “second shot on goal,” either in parallel with your trial or following it. One form this second shot might take would be different uses for the same product in other patient populations or study designs—even if they are more niche markets—with lower risks of failure.
• Benefits of local delivery of drugs. The fact that many products in ophthalmology are delivered locally means that, in general, there’s less systemic absorption and therefore a lower likelihood of systemic side effects. This lets you emphasize safety to investors new to the space. Also, in many cases, there are more streamlined requirements for such things as systemic toxicology for locally-administered ophthalmic drugs, compared to systemic agents.
• Ability to directly visualize the target tissue. An ophthalmic drug’s efficacy can be seen directly by examining the ocular surface or imaging the retina. If you emphasize this, it gives an investor who’s new to ophthalmology confidence in your ability to measure and assess the endpoints that are crucial to your clinical trial.
• Leveraging known molecular pathways and mechanisms. The eye shares many disease processes and pathways with other systems. This helps your cause with investors, since if a pharmacological pathway has already been clinically validated in disease areas outside of the eye—such as dermatology, allergy, immunology or cancer—there’s less risk of failure than if you were investigating an entirely untried pathway.
An Early-Fundraising Case Study
Here’s a recent example of a development-stage company that just completed its financing, which included non-institutional investors, and dealt with a lot of the considerations mentioned above.
Stuart Therapeutics is a company that recent closed its Series A round of over $11 million to fund development of its platform based on PolyCol, a synthesized polypeptide “collagen mimetic.” The contract research organization I work for, ORA, has been providing the company with advisory and clinical trial services for its drug program.
The company’s lead PolyCol product, ST-100, is a therapeutic that aims to target and repair damaged collagen in the extracellular matrix, return tissue homeostasis and stimulate wound healing. The lead program is a topical dry-eye product, but the technology appears to have a broader application in the eye.
One of the company’s co-founders, Bob Baratta, MD, is an ophthalmologist/entrepreneur; he was joined by other individual key opinion leaders in ophthalmology who came on board as investors and advisors. InFocus Capital Partners, an ophthalmology-focused venture fund, invested in the Series A, and this syndicate brought a high level of credibility to a range of other investors new to the space that were focused on the team, mitigation of risks, time to return/inflection, and the industry dynamics mentioned above.
The CEO, Eric Schlumpf, offers his perspectives on the fundraising process with family offices and individuals that were new to the space: “Seeking funding from family offices and larger-appetite angel investors requires a slightly different approach than that of the typical venture capital investor,” he says. “One key element is to seek out those that have experience and/or appetite for life-science investments. Otherwise, you can get bogged down quickly with folks who are learning the market space, but ultimately will never invest in you. It’s extremely important to have some key endorsements on your side. This was provided by such elements as our well-respected advisory board and partnership with InFocus Capital Partners. These endorsements provided comfort on those due-diligence items that prospective investors new to the field may not be able to cover themselves. Remember that these investors’ experience in the industry, breadth of technical and development knowledge and appetite for health-care investment in general are highly variable, so your team’s domain knowledge, both in execution and in ophthalmology, is critical. Having an ophthalmologist as a co-founder gave us credibility on any clinical questions, and the balance of the team having startup expertise and program-management capabilities convinced a number of investors to commit.”
There’s tremendous growth in the use of individual angel investors and family offices by start-up companies. Especially for pre-clinical and seed-stage opportunities, we see entrepreneurs closing more deals with investors who are relatively new to the field.
One of the main challenges when speaking with these novice investors is they may not have as much formal experience with such things as clinical-regulatory development, disease mechanisms, the use of animal models to put data in context, the FDA’s requirements, reimbursement issues or competition. Though this group of investors that are new to the field will rely on your knowledge, you don’t have to go it alone: The expertise of other investors and syndicate partners will help you build your case for investing in your product. Some investors may rely on the technical assessments from others as far as clinical-regulatory issues and pharmacology are concerned, while they focus on your business pitch, your team, your decision-making process and the ultimate path to exit.
Of course, some individuals and family offices won’t have the same formal fact-finding process as a large institutional investor, so it may take more of an educational effort on your part. However, in the end, if you follow the steps outlined here, you may help your investors see the path to a return on their investment.
Mr. Chapin is a senior vice president of the Asset Development & Partnering Group at Ora, which offers drug, biologic and device consulting, preclinical and clinical research execution, and development strategy and support in an effort to promote new client and partner initiatives.
Review and comments on this column were provided by Aron Shapiro, partner in the same group at Ora. The author welcomes your comments or questions regarding product development.