I’ve been to a number of panel discussions with biotech investors.  Although much of the advice is similar, some bears repeating.  Also, this particular panel focused on early stage investing in biotech startups in the tools and platform space.  Some insights are more directed to these areas.

First, an overview of the panel that spoke at the event “Key Insights into Building a Successful Life Science Tools Company” hosted at WSGR’s SOMA office.

Moderator Shubhra Jain – Senior associate Cota Capital

Nola Masterson– Lead investor for Portfolia FemTech Fund

Faran Nouri – Managing Director Lam Capital

Shahram Seyedin-Noor – General Partner Civilization Ventures

Shaun Holt – CFO, Berkeley Lights

Next, let’s go to the observations that were more tailored for biotech tools companies.

Platform + product

A tools-focused company often starts with a platform technology such as a new technique for sorting and assaying single cells, a method for production of high levels of proteins or a new technology for nucleic acid sequencing. The platform may have the potential to be quite powerful, but as a starting point for hooking investors it may not be enough.  Many investors want to see some application of the platform, for instance one that will generate a therapeutic drug, that will be advanced in-house using the platform.  In this manner, the start-up has a platform that it may offer to others for discovery, but also has its sights on a defined product.

The biology:tech balance

Many tools companies lean heavily on the tech side.  The mainstay of the platform can often draw on engineering and software expertise.  While those talents are of key importance, the tool is aimed at life sciences and more particularly, in many cases at integrating into the healthcare space.  The balance of input into company direction, design and market fit should pull from the biology side as well.  And more importantly, these 2 sides must talk, and beyond just talk, synergize to bring the best of both talents to bear on the company’s development.  This is a challenge (and an opportunity) for leadership to rise above what sometimes may seem as partisan divides.

Where will initial revenue come from?

Revenue generation from tools-based companies can come through several avenues.  The company may sell a service.  Alternatively, the company may sell the equipment to run the workflow. Another option is the sale of reagents that provide some advantage or new use to a tool already available from another source.

The latter possibility (reagents) seems to be the least favored.  The reasoning being that the fledgling company is dependent on the existence of another company and the viability of its product to generate revenue.  From my point of view, it would seem like reagents might make more of a licensing play – i.e., develop and out license to the other company, rather than start a stand-alone company on one reagent.

The more intriguing discussion on revenue centered on customers and customer-development. Tools can be used for research and for commercial development.  On the research side, this can be academia, but it also can be other companies, like big pharma.  Berkeley Lights explained ow they started with big pharma as a target and then looked at academic collaborators.  Others have taken the inverse approach, getting academic researchers to use the technology and then widening its visibility through the publications from these academic labs.  One note to consider here.  While big pharma likely has more money to put toward expensive hardware and assays, commercial entities are less enthusiastic about research publications, often wanting to keep the data generated from pilot studies to themselves and away from prying eyes.  So depending on how you are going to “spread the word” about your tool and balance the need for revenue, the commercial versus research customer target choice may play out differently.

These considerations also flow into the sales process.  Is your tool a high-end expensive hardware set-up?  This may demand more hand-holding from the get-go.  Berkeley Lights CFO explained that their workflow system comes with a hefty price tag and most early adopters required a pilot to demonstrate the platform’s efficacy before signing on the dotted line.  Other technologies with a lower investment point may find customers willing to give it a try without needing a collaborative project as an incentive.

So what other advice came out?  The more general, but always useful pointers about what investors look at in the early stages.

The Team both individuals and dynamic between them always makes the top of the list.  Have the founders worked together before?  Do they have a relationship that clearly denotes who will make the final decisions?  Track records of founders also is a beneficial feature.  Past performance with another startup or within the field can be an attractive feature.

The vision and the path ahead can showcase how a platform will develop the technology, find its place in the market and gain traction.  Setting out clear milestones can communicate to investors both what has been achieved to date, as well as the stepping stones to move ahead.

Realism about investment potential.  Don’t overhype the company’s technology and the potential of the technology platform.  This can be come back to haunt the company.  Be realistic about the company’s valuation.  An overly-high valuation can create trouble in later investment rounds.  Understand that getting to revenue and then to profitability can be a long path.

There are many of these investor panel events.  They are excellent opportunities to hear it from “the horse’s mouth” as to what particular funds find attractive (and also what sends them in the opposite direction).  These events also give start-ups some face time with the investors.  Each of the panelists here took the time to answer audience questions and then to meet with interested individuals in the networking time that followed.  So, startups if you are looking to see which funds might be a good fit for your offering and get some easy one-on-one time – these are your events!