By John Kinzell, Timothy Sullivan, Douglas Baum & Saretta Ramdial
Texas is often deemed the “State of Big.” Big cities, big ranches, big hats, big BBQ and big attitude. This is especially true when it comes to money. With its vast natural resources, a storied history of entrepreneurship, burgeoning research institutions, and a strong stance on low taxes and moderate regulations, Texas’ reputation as the best state to do business in is well-deserved and expanding. Throughout the economic chaos of the past several years, there have been numerous examples of company relocations to Texas from states with long histories of technology start-up cultures such as California. However, the same cannot be said for early-stage life science companies looking to raise funds and continue product development in Texas. In fact, these companies face distinct challenges requiring flexibility and resiliency at levels far beyond other industries.
Investors drawn to the life science industry must have a tolerance for a long time to market (on average 9-12 years for new drugs), incredibly large amounts of risk capital to get the product through clinical trials, and a daunting regulatory process for approval and commercialization. Texas has not traditionally been a biotechnology hub or cluster, there are arguably less savvy biotechnology investors that lead to many high net worth individuals (angels) shying away from life science deals. Indeed, most investors view companies beholden to the Federal Drug Administration (FDA) and its approval process creates high levels of uncertainty and risk. It is important to note, however, that exits (either product licensing or company acquisition) do not necessarily require FDA approval of a product and can occur long before FDA scrutiny.
For life science CEOs in Texas, the unique combination of the seemingly significant availability of capital but limited access to it, begs creative solutions and persistence. The majority of Texas investors focus on technology deals where companies rely on a traditional funding model comprised of family, friends, angels and angel groups, followed by venture capital. In contrast, life science start-ups in Texas typically scout out very specific funding sources that often include family offices (wealthy members of families that invest collectively) and angel groups (organized groups of individual investors that share diligence efforts on deals).
Since the 2008 collapse of the traditional private equity markets (venture capital), government research dollars in the form of Small Business Innovation and Research (SBIR) grants through agencies such as the National Institutes of Health have become an increasingly important funding source for early-stage life science companies. The advantage of SBIR grants along with funding partnerships with non-profit research organizations, foundations, and patient advocacy groups looking for specific disease treatments is that they can often offer non-dilutive financing along with validation of a company’s platform or product. Examples of non-dilutive federal government funding are SBIR and Small Business Technology transfer grants through the Department of Defense (DoD), broad agency announcements (BAAs) for basic and applied research through the Defense Advanced Research Projects Agency (DARPA), and research grants through the Homeland Security Advanced Research Projects Agency (HSARPA), part of the Department of Homeland Security (DHS).
At the state level, the Texas State Legislature created the Texas Emerging Technology Fund (TETF) in 2005, allocating approximately $200 million to technology commercialization and the Cancer Prevention and Research Institute of Texas (CPRIT), authorizing $3 billion in 2007. Both funds are highly competitive resources for early-stage life science companies. The TETF, managed by the Office of the Governor, has awarded funding to more than 60 biotechnology and life science companies. The future of the TETF remains uncertain given the budget hurdles that the Texas State Legislature will likely face during the 2013 Legislative Session. While these opportunities are not entirely non-dilutive, they are less constraining than traditional VC funding models which often require board membership and significant equity in the company.
In addition to government and research funding opportunities, funding solutions in the early stages often include seeking out investors with personal motivations for advancing technology and finding treatment or cure for a specific disease. These investors are high net worth individuals or family offices that may have a friend or relative affected by a particular disease that becomes the focus of some percentage of their investment decisions. Family offices and angel networks with biotechnology expertise, or those with access to experts on a specific disease, are also more adept at vetting and consequently investing in life science deals.
It is essential for life science companies in Texas to have a creative funding strategy that takes into account the Texas funding “climate,” incorporating advisors and executives who know how to tap into these atypical funding streams. Family offices are often invisible to life science companies looking for capital, unless they have purposely named their office with recognizable words like fund, ventures, or capital. Therefore, finding the majority of family offices requires a substantial network that can avail a company of this increasingly important source of early-stage funding. As a result, it may take engaging a professional “Finder,” an individual whose business is assisting companies to identify sources of capital for a fee. Such individuals typically have spent years and substantial resources developing their investor contact list and know what space, individual investors, or investor groups prefer – medical device, diagnostics, or therapeutics, for example.
Success stories and anecdotes from life science CEOs suggest that fundraising in Texas still relies on many of the fundraising basics for start-ups in other industries. However, the distinct difference is that CEOs and their management teams must be more flexible, creative, and able to identify unconventional and often non-dilutive funding opportunities more so than their technology start-up counterparts. Persistence and the ability to tell a good story are essential as is giving a clear explanation of what the company is going to do with the proceeds and how it is managing risks. This is especially important given the regulatory burden of life science product development cycles. Luckily, for most life science companies there is a compelling story that can be told about the innovation. Communicating in a persuasive way how useful the product will be to the patient population and how it is different from the current standard of care will drive thoughtful investor conversations. Ensuring investors that leaders and managers with knowledge and experience in the life science space are at the helm in this unique environment is also key to meeting the difficult, but not impossible challenges in Texas’ life science space.
John Kinzell, PhD., is President and CEO of Xeris Pharmaceuticals, Inc.; Timothy Sullivan is President and CEO of Mystic Pharmaceuticals, Inc.; Doug Baum is COO of MacuCLEAR, Inc.; and Saretta Ramdial is Manager, Corporate Affairs of Xeris Pharmaceuticals, Inc.
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