Biotech Investors – Where are they?

October 4, 2010 |

Bioenergy PROFITS Principle, Position Only For Growth

by Digest columnist Dr. Rosalie Lober

All companies are scrambling for the small pool of funds that exist in our current economy.  For many in the biofuels industry, the high costs of commercialization include building expensive plants with costly machinery and chemical processes.

How can you prioritize and target what you really need in this economic environment by streamlining your current needs, determining what must be done to stay in business and also attract investors?

Position Only For Growth

Ask penetrating questions

•  Know your company from your customer’s perspective

Take risks that are calculated – not crazy…..Kathie Black, President of Hearst

We are in a risk-averse environment.  Investors do not want creative ideas and possibilities.  They want what will work and produce immediate revenues.  This makes it difficult for a biofuels related company that wants to pursue a range of opportunities.

Ask penetrating questions

  • What do I want to accomplish?
  • What is the current state of my business?
  • What is required for my company to become more profitable?

You will have to take a hard look at your financials.

  • Are profits growing at a minimum of 10% or more annually?
  • How did your investments/assets contribute to specific areas of profit?
  • What other business practices improved profitability?  How?
  • What did not work and why?
  • What percentage of profitability resulted from existing customers?  Are these customers segmented into specific tiers?
  • What percentage of profitability resulted from new customers?  Are these customers segmented into specific tiers?

After you review the cold hard facts, you may have to make some difficult decisions.  For examples, What if your profitability from existing customers decreased over the past year?  What might you do differently?  How will you explain this to potential investors?

Most biotech executives are faced with a dual dilemma: dealing with the regulatory hurdles to win FDA product approval and ensuring a consistent flow of capital to fund the company’s R&D efforts. There are no real shortcuts to navigating the government rigors of scientific scrutiny.

“We primarily look at industry dynamics and use proprietary models to determine the potential peak sales of a biofuels pipeline versus, how a company is currently valued,” notes Bryan Knepper, senior biotechnology analyst at Columbia Management.

Are you willing to step up and speak to the needs of your company’s financial needs and ask for the money?

Are you willing to ‘develop’ the attitude that you need investors and not approach them with hostility and resentment?  For many biofuels executives, attitude can be a serious shortcoming.  It is difficult for many executives to literally turn over control of the company they designed and operate on a daily basis to investors who may know little or have little interest in what the company stands for, its history and evolution.

“Be proactive, contact us directly, and be straightforward about the pros and cons of the development programs during the introductory meeting,” counsels a venture capitalist”.  I especially like companies that do their homework and apply stringent selection criteria to the pipeline candidates in early development, instead of rushing into Phase III to attract financing.”

“Small- and mid-cap companies are best served by having representation at major investor meetings,” advises Knepper. “There are a variety of avenues to allow for both public and private companies to reach the buy-side. Once there, data is the key in our view of whether or not we want to invest in your company.”

Another source of funding to consider are grants. Academics still in the research stages, might qualify for government grants for equipment and staff salaries. There are grants available for academic collaborations with industry to facilitate invention commercialization In the USA, funding from the National Institutes of Health (NIH) comes with certain policies that must be followed. Universities that have recognized the potential of their research programs have organizations to help commercialize the discoveries of their scientists.

Know your company from your customer’s perspective

What are your customers buying?  What is the basis of their choices?  How do you ‘measure up’ to your customer’s standards?  How do customers perceive your products and the way you operate your business?

As small or medium-sized business entrepreneurs, you can also apply this best practice of understanding what you are truly selling from the customer’s perspective to increase your size of the customer wallet.  When you know your customer and what they spend their ‘share of wallet’ on, you will know what else your customers and their customers want to buy to augment what they recently purchased.

One source of funding to explore is the ‘Angel Investor”. These are individuals with money or capital that invest privately in new businesses, and you might be able to get anywhere up to, or over $500K.  A typical Angel Investor will typically demand a large share of the company, which means more control. However, you might actually benefit from their experience and advice. Most ‘angels’ know how to negotiate with you about operating the business and their share of control.

Like Angels, Venture Capitalists will also demand a fair amount of control over your operations and decision-making, but venture capital is a valuable resource, and common source of funding in the biotech industry. The VC will also rally around the business, helping with management, promoting it and providing contacts, to protect their investment, which can often be up to several million dollars. On the other hand, most venture capitalists want things on their terms and view your company as a profit stream for them.

You may also look into loans for new businesses.  Creating a solid business plan is essential when approaching a loan source. It is usually easier to get a small business loan if you already have paying customers. If this is not an option, you can try for a personal loan.  However, if the business fails, you still have to repay the loan. Although the amount of funding may be less than with investors, when you start with “debt” financing (loans, lines of credit and credit cards) you demonstrate to investors that you have faith in the company and are willing to take risks to make it work.

It is important to ask: What do next-gen biofuel companies offer the biotech investor?”

You may have answers that appeal to investors.  Some of the answers you may have are that you offer well known products.  You may provide early revenue and earlier profits with less dilution.  You may offer global opportunities and many future possibilities for continued growth.  These are benefits you will have to carefully demonstrate to investors with concrete financials and other specific information.

Global energy needs are anticipated to rise dramatically over the next decades with the reduction of fossil fuel use and environmental impact.  The next-generation biofuel companies are unlikely to see these major trends reverse anytime soon. Time will tell whether traditional biotech investors will move into these next generation biofuel companies.

Position Only For Growth is one of the seven Bioenergy PROFITS Principles. These Bioenergy PROFITS Principles highlight proven principles to running your business more effectively and are featured in Dr. Lober’s forthcoming book, DELIVERANCE:  From the Valley of Death to Sustainable PROFITS in Bioenergy. (Ascension: 2010).

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