54 NATURE BIOTECHNOLOGY VOLUME 16 SUPPLEMENT 1998

FINANCE

One of the questions most frequently asked byentrepreneurs is, “How do you attract theattention of a potential venture capitalinvestor?” The starting point is a good busi-ness plan. The bookstores are full of how-tobooks on writing business plans, althoughfew, if any, are directly helpful on the subjectof raising money for a new biotechnologycompany. Here is a field guide to what worksand what doesn’t.

Show how the project will make moneyWhile most biotechnology business plans gointo depth about the technology behind thecompany, few go to the same effort to explainhow this technology will be used to makemoney. Often, venture capitalists wind uptossing these business plans on the pile of “bigscience” projects—basic research that is bestfunded in an academic setting by corporate orgovernment sponsors.

To avoid this fate, you need to spell out yourstrategy for creating commercial value. If youare a product company, create a timeline thatcharts out the regulatory and product launchstrategy as well as the process of obtainingreimbursement—and then explain how youwill get there. If you are a platform company,describe a business model for how your tool ortarget can generate revenues. In addition,include a strategy for handling the “down-sides” of your business model. For example,since databases run the risk of becoming publicgoods—with consequent low margins—explain how your business will avoid that trap.

Avoid detailed projectionsHaving stated that it is important to demon-strate you can make money, it may seem adirect contradiction to advise that projectionsof earnings be avoided. However, a swift wayto undermine your credibility is to presentquarterly or even annual projections of oper-ating results for a biotechnology business notscheduled to earn revenue for some time.

It is far better to focus on identifying whothe customers for the product/service will be,

how many of them there are, and why the pro-posed deliverable will address a current need.Let the venture fund do its own projections. Ifthe venture capitalist doing due diligence onyour plan wishes to use the power of exponen-tial growth to graphically depict a billion dol-lar business in a few years, more power to him!

Say what you don’t intend to doIt is important to be realistic about what youcan achieve and what must be obtained fromcorporate partners. Emphasizing what finan-cial and other resources can be obtainedcheaply from big pharma will make it easierfor venture capitalists to receive the messagethat a billion dollar opportunity can beaccessed through an upfront expenditure of,well, $50 million. Although this is a drop inthe bucket in relative terms, it is still a lot ofmoney. Far better for most of it to come froma corporate investor who needn’t worry aboutgenerating a 30% internal rate of return (IRR)to his limited partners over a three- to five-year period, the normal liquidity horizon forventure capitalists.

State upfront who is on the teamA venture capitalist I know begins his due dili-gence with one question, “Who is the entre-preneur?” To start with, it’s not anyone on thethree-page list of scientific advisers, each ofwhom is involved with multiple companiesand has agreed to lend his name to the projectin exchange for a grant of stock options. It’snot, for the most part, anyone on the board ofdirectors, which is typically populated withsuch part-time advisers as investmentbankers, consultants, attorneys, and other fee-for-service providers. The entrepreneur(s) arethose people who are committing all or a sig-nificant portion of their time to the project.

Whether the business opportunity is in thebiotechnology field or elsewhere, venture cap-italists uniformly believe that the team is moreimportant than the technology.

Keep it short and send it to the chosen fewLike all of us, venture capitalists have limitedtime to focus on a new project. The best way toget their attention is to prepare a two- to three-page nonconfidential executive summary, andsend it only to venture capitalists who “qualify.”

What should be the criteria for making thisshort list? First, it must be a fund that is likelyto understand the technology. Second, thegroup must have money to invest: Venturefunds run out of money every few years, andthen must spend a year or so raising a newfund. Third, they should not have invested in apotential competitor to your business: Youdon’t want to give your future competition ablueprint for success. Fourth, both the fundand the person to whom you send the planmust have industry-wide credibility: Yourchampion will need to sell the plan internallyand to other funds who will form the investingsyndicate for your company. Finally, the fundmust offer more than money: “Value-added”resources such as contacts with potential cor-porate partners, access to people who can fillgaps in the management team, and even incu-bator space at the outset will help your busi-ness to grow rapidly.

Funds that receive your executive summa-ry will appreciate knowing that the opportu-nity you are offering them has not been“shopped around,” and are therefore morelikely to pay attention. Be prepared to followup with a full business plan of approximatelytwenty to thirty pages if they are interested.Detailed due diligence by the venture fundwill follow, delving into all relevant aspects ofthe proposed business opportunity.

ConclusionsWhile there is no guarantee that a venture cap-italist will invest, a solid, well-written explana-tion of the business opportunity is the firststep to realizing your dreams. Perhaps the bestadvice for writing this plan is to keep in mindtwo questions a venture capitalist told me heseeks to answer in reviewing every new oppor-tunity: “Does it work, and who cares?” ///

Snaring a venture capitalinvestmentA field guide to biotechnology business plan writing.

Michael Lytton

Michael Lytton is a partner and chairman ofthe technology group at Palmer & Dodge, One Beacon Street, Boston, MA 02108-3190(mlytton@palmerdodge.com).

Funds that receive yourexecutive summary willappreciate knowing that theopportunity you are offeringthem has not been “shoppedaround,” and are thereforemore likely to pay attention.

© 1999 Nature America Inc. • http://biotech.nature.com©

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