For the last 15 or 16 years I have been spinning life science companies out of academic institutions and one of the biggest challenges I saw 15 years ago and I still see now is funding the early stage companies on spin-out — James Shaw
In the May issue of Biotech & Money’s Drugs & Dealers magazine, our co-founder James Shaw talked to the magazine about the state of the fundraising market in the UK and the firm’s role as one of the leading legal advisers in this sector.
Here are some great excerpts from the article:
Drugs & Dealers: Perhaps you could tell us from your experience what you feel are the success factors to a VC investment? Talking here from a legal point of view.
James Shaw: I often refer to venture transactions as a marriage, and by contrast an M&A deal is more a separation. This affects the way in which lawyers approach the transaction documents. Documenting transactions is a balance of risk – in venture, it’s often about valuations versus downside protection. Founders always want to negotiate a fantastic value for the company, whereas investors are looking for a more aggressive value with room for value creation for the next round and/or exit.
If founders settle on less aggressive valuations investors tend to ease on overly aggressive downside protection, and it is this downside protection that can make management nervous and take their minds off the job in hand. By contrast, if founders push hard for higher valuations, there is a greater chance of more aggressive downside protection for the investor. So a successful investment has balanced terms, it does not push founders into a corner, and the investor is willing to share some pain with the founder going forward, but nevertheless shares in (and perhaps has a preference on) the upside.
Drug & Dealers: What about the perennial ‘valley of death’ in funding? What’s your experience of the best way for early stage companies to cross it?
James Shaw: My take-home message here is to be creative.
We’re seeing a move in the tech sector where there is a lot of angel money looking to invest into EIS eligible business hoping they will of course become the next Just-Eat/Deliveroo/Facebook etc. The money needs to be quick and easy and – returning to my point above – companies should identify a credible lead investor to allow the more generalist investors to follow.
The same applies to bridge rounds as it does to the “valley of death” and so let me use an example here. A tech example, then I will bring it around to the life sciences. We represent a company called JustPark – a phenomenal tech company and an Index Ventures portfolio company. JustPark closed an early stage funding round, then decided to raise the next round on a Crowdfunding platform. It raised over 4 million GBP and was the highest amount raised on a crowd funding platform in the UK in 2015. And so why was that? After all, it’s just one of multiple companies on crowdfunding platforms at any one time.
I think one of the key reasons for this success is that retail investors were offered an opportunity to invest alongside one of the most influential European VCs in the community. If it’s good for Index, then it’s definitely something we should be supporting. The Woodford Effect.
One of our life science companies also underwent an EIS-qualifying angel bridge round which raised roughly 4 million GBP. This was private and off-market, but the reasons for such a significant raise were similar to JustPark – these angels don’t often get a chance to sit alongside reputable VCs such as Amadeus Capital Partners.
Bringing this to the “valley of death” – my view is the credible lead will give angels something to follow. Find someone who can validate the science technology in the market and part with some cash and more money should follow. We’ve also been recently working with some tax experts to create a new HMRC-approved EIS-compliant convertible equity instrument – which is proving very popular in the tech sector when raising “valley of death” money before institutions wish to commit. This instrument (an ASA or Advanced Subscription Agreement) is like a convertible loan, but importantly is not debt, and follows a trend in the US to allow angel to support very early stage companies quickly and cheaply. Although they are very high risk.