Compensation for Management at Startups

If your interested in the compensation for executives for life sciences/medical device startups, check out the 2008 Compensation and Entrepreneurship Report in Life Sciences at Altgate. The survey provides data about cash and equity compensation split by a variety of parameters (e.g. position, geography, biopharmaceutical vs. medical device company, etc.). For example, the average base salary for a CEO at a company with one or less financing round ranged from $220,000 to $325,000. Equity owned by the same CEO ranged from 4.9% to 7%. As the company raises additional rounds of financing, the CEO base salary would generally increase, but equity would become diluted. If the CEO was a founder, he/she would usually have considerably more equity in the company but a lower base salary. Total cash compensation (base and bonus) for CEOs at biopharmaceutical companies was a little better than for their counterparts at medical device companies, $410,000 vs. $371,000, but equity holdings were slightly better for medical device CEOs, 6.04% vs. 5.12%.

Pitching to Investors: Become a PUA

Certain rules should be followed when making a pitch to VCs. I'm a big fan of Presentation Zen for its minimalist philosophy on presentations. Jason Mendelson, of Ask the VC, recently posted some common sense advice from communications consultant Matt Eventoff about pitching to investors. Carin Canale, President of Porter Novelli Life Sciences, recently wrote a more specific article in Nature Biotechnology about how to organize your slide presentation. It's worth saying over and over again that a clear message is critical when presenting to investors. While different VCs will focus on different risks (e.g. market, management, technology, financing, etc.), if the value proposition isn't clear, these other issues won't matter. I often hear pitches that focus mostly on technology but never really address how the technology solves a problem. Pitching to investors is kind of like trying to pick up someone at a bar - someone that gets a lot of suitors. The initial few minutes are critical to make a good impression, and you better show some value. That being said, don't be too disheartened if you get rejected. As in the dating world, becoming a PUA (pick up artist) takes practice. If you have time, read The Game.

Update on PIPEs

A little while ago, I wrote a post on the attractiveness of PIPEs to some VCs due to valuations. The PIPEs Report released a first quarter review of PIPE transactions in April. Despite a decrease in the overall number of PIPE deals (35% decrease in the total number of deals completed and over 75% decrease in total value), biopharma PIPEs increased. There were 43 biopharma PIPEs out of a total of 101 in Q1. For the same quarter last year, biopharma deals only accounted for 15% of all PIPEs vs. 23% this year. Biopharma companies raised over $600M this quarter on PIPE transactions. It's hard to say whether the attraction of PIPEs will continue or whether VCs will return to more traditional private placements. There is evidence that VCs do add value to public companies that they invest in. It will be interesting to see how these biopharma PIPEs perform in the next year or so.

David and Goliath

VCs often tell entrepreneurs that they're looking for "game-changing" technology and a solid management team. It's become a cliché, but investors believe that having the right management team is even more important than the technology. A great article in The New Yorker by Malcolm Gladwell, author of Tipping Point, Blink, and Outliers, reinforces why the two investment criteria mentioned above are so important to VCs. Gladwell's article talks about how basketball teams that are smaller and have less athletic ability can beat much better teams. He also gives an example of how a small military force with fewer resources can overcome a larger army, as in the case of Lawrence of Arabia against the Turkish army. Again and again, throughout history, Davids beat Goliaths. What the Davids often have in common are two things: unrelenting effort/persistence and an unconventional strategy. For health care startups to succeed, the same can be said. Genentech and Amgen are good examples. These companies developed innovative technologies at the time, and management had the insight to recognize markets that were overlooked by Big Pharma. Management also had the dedication to overcome many years of setbacks and challenges. Becoming a successful startup is much more complicated than just working really hard and having technology, but one can see why it's necessary to start with them.

Asset Bubbles

Easy credit, in addition to other factors, contributed to the real estate bubble. I believe that venture capital also benefited from cheap money. I looked at the amount of venture capital invested in biotechnology and medical devices (from Thomson Reuters, NVCA Yearbook 2009) and compared it to the Case-Shiller Home Price Index (from Standard & Poor's). As the chart below shows, VC investments in biotechnology and medical devices (bars) have followed a similar path to that of home prices (line). While there shouldn't necessarily be any correlation between the two, the abundance of cheap money seems to have helped over inflate a number of assets. If you believe that real estate is overpriced and that the correlation to hold, VC investments still has a ways to fall.

The Entrepreneur's Guide to a Biotech Startup

Being a former scientist, I find entrepreneurs' passion and intelligence inspiring. They are part of the reason why I enjoy working in venture capital so much, and I have the utmost respect for entrepreneurs. It is extremely difficult to raise venture capital, and very few entrepreneurs/scientists are successful at it. Unfortunately, the developing a drug therapy is capital intensive. Some people, such as Johnny Stine, are developing drugs without any VC funding - he's pretty amazing, and I hope he's successful. Johnny Stine is a great example of doing research on a shoestring budget, and he exemplifies the entrepreneurial spirit. For most entrepreneurs however, raising money is a necessity. Entrepreneurs/scientists that have never had to raise before need to be prepared and understand what investors are looking for - especially now, since it will be more difficult to find capital. I usually refer people to The Entrepreneur's Guide to a Biotech Startup, Fourth Edition, by Peter Kolchinsky. It's available for download for free at Evelexa.com. Although it's a bit dated - it hasn't been updated since 2004 - it remains a great resource for scientists thinking about taking the plunge into entrepreneurship. Even to this day, I use it as a reference every once in a while.