The Life Science Start-up…Funding—How Much is Enough?
Please read the following case study in advance of watching the above video, which is the case being discussed by a panel of life sciences and venture capital experts at the BioStrategy Partners Conference - First Sightings 2007: Resources for Emerging Life Science Companies.
Joseph Smith is a talented scientist with a Ph.D. in biomedical engineering, currently 57 years old. After a post-doc and a number of years as a professor, he spent 13 years at a Fortune 1000 company where he invented several new technologies that were the basis of a number of new products that have generated hundreds of millions of dollars of sales. In 1998-2000 he was involved in a venture capital funded start up that did not work out, and from 2000 to late 2003 he worked for a small public company, Xerstat.
He accumulated some stock at the Fortune 1000 company, but while he was there, that company did not award significant stock options to its employees. He did start a IRA. He did not accumulate any wealth from his time at the venture backed company. As a senior scientist at Xerstat, his benefits include a 401(k) and stock option grants. Happily, Xerstat’s stock did well, and the options grew in value.
Early in 2005, Dr. Smith decides he wanted to start his own company—which he names Neurxx—to pursue applications for a novel neurosurgical device he has conceived of. Happily, Xerstat has no interest in the technology, and he works out terms where they release all rights to him.
At the time that he stops working for Xerstat, his Xerstat options are worth $150,000, his Fortune 1000 company stock is worth $100,000, and he has a 401k and IRAs worth about $275,000.
His first year is spent developing and refining the technology and working on patent applications. He works with a colleague from the medical school who functions as an informal regulatory affairs officer, helping on the 510(k) clearance for the initial product, which is obtained in early 2007.
Dr. Smith has been funding this on his own although he has known from the beginning that it would be necessary to raise outside capital to get his company off the ground. When Dr. Smith left Xerstat, he had anticipated starting the fund raising process in early 2006, but with unanticipated delays in developing the technology he is way behind schedule.
Dr. Smith has never raised capital before and he has few contacts in the venture capital community. The approach he always had in mind was to find a partner who would be the front man/woman in this process, someone who had raised money before and who had connections. Dr. Smith believed that until his technology was close to be able to be launched it would make little sense to seek out this partner.
In the fall of 2006 he resolved that he must start searching for a partner, but after working on this for a few weeks, he realized this is going to be a slow process. In late October, his lawyers introduced him to a good prospect and they had several meetings, but at Thanksgiving, the prospect told him that he has found an opportunity to which he could not say no. Dr. Smith met a number of people through the fall and early winter, but none seemed right. In late December 2006, he attended a BioStrategy Partners conference and met David Armstrong, who was the CEO of a company that was in the process of being sold.
Dr. Smith felt very good about Mr. Armstrong after their initial in depth meeting, but Mr. Armstrong said he would not be able to focus on this for several months. Right after St. Patrick’s day, almost three months after their first meeting, Mr. Armstrong called Dr. Smith, saying that during the intervening time he had done some due diligence and had concluded that the market opportunities for Neurxx really were as good as Dr. Smith had said they were.
Dr. Smith was eager to get Mr. Armstrong involved, and they soon struck a deal where Mr. Armstrong would be CEO, with his first job being to raise the money needed to launch Neurxx’s initial product and where they would have a 50-50 “partnership” (with both owning the same amount of stock).
The first thing Mr. Armstrong did was to rewrite Neurxx’s business plan. He and Dr. Smith concluded that they need to raise $1.5 million to launch into the initial product, to be quickly followed by a $3.5 million raise, which they believed will allow Neurxx to become cash flow positive by 2008 Q4. Neurxx’s projections are attached.
Although Dr. Smith is very satisfied with the business plan that Mr. Armstrong rewrote, the money raising process seems to be going slowly and Dr. Smith is feeling a lot of anxiety. As of March 26, 2007, Dr. Smith has invested more than $140,000 of his own cash into this project and has not taken a salary for more than 2 years, living off of and using proceeds from the Fortune 1000 stock, the Xerstat options, and drawing on his retirement accounts, which are down to $230,000. He has not set aside any money to pay taxes due on April 15 from selling stock. Also, he started financing the project with credit cards, and he has put more than $35,000 of Neurxx expenses on high interest rate credit cards. His wife is starting to lose patience, and Dr. Smith is beginning to think that if the money isn’t raised soon, he going to have to take a job.
To date, Dr. Smith has not asked Mr. Armstrong to invest any money into Neurxx although he has been very transparent with Mr. Armstrong about the money problems. He is now thinking that he should ask Mr. Armstrong to make funds available to address the credit card debt.
Mr. Armstrong has set up a number of meetings with angel investors and others and says that he believes it will take 4 months to raise the initial $1.5 million.
At this point, what should Dr. Smith do to better position Neurxx to raise funding?
Discussion
No comments for “The Life Science Start-up…Funding—How Much is Enough?”
Post a comment