Finance

Published online: 22 May 2006, doi:10.1038/bioent908

Trendspotting: betting strong but playing safe

*Marcia H. Anderegg, Joshua M. Thayer and Kathleen M. Williams are partners at Edwards Angell Palmer & Dodge, 111 Huntington Avenue, Boston, Massachusetts 02199, USA. manderegg@eapdlaw.com; jthayer@eapdlaw.com

Financing myths debunked

1. IPOs are exit strategies for life science venture capitalists. IPOs are financing events for life science companies. VCs are often required to invest alongside the institutional investors to support the IPO and choose to continue to serve on the company's board of directors for years after the IPO to monitor their continuing investment.
2. Life science companies can go public only during 'IPO windows.' In the biotech IPO market, the focus is on the quality of the issuer, not on general market conditions. Windows will never open for weak companies, and will not slam shut for strong companies.
3. Corporate partnering deals are nondilutive financings if they do not entail the issuance of equity. Some biotech companies are doing licensing deals sooner than they should and are giving up too much of their potential upside in product development and commercialization. Unless a biotech can retain significant rights to its platform technology and drug candidates, it risks giving away too much value to its partner.
4. Convergent startups combine the upside of biotech companies with the shorter product development cycle of medical device companies. Although this may ultimately prove true, VCs are still very cautions about investments in true convergent startups, which accounted for only 6% of life science venture capital investments in 2005.
5. 'Series A Preferred,' 'Series B Preferred' and 'Series C Preferred' financings equate to the first, second and third rounds of financing of venture-backed biotech companies. Names can be misleading, and optics can be everything. Especially in down-round financings, later-round investors are insisting that earlier rounds be reclassified so that their investment appears to be early-stage rather than mid- or late-stage. For example, rather than invest in a Series D Preferred round, a VC may require that the existing Series A Preferred, Series B Preferred and Series C Preferred be reclassified as Series A-1, Series A-2 and Series A-3, respectively, so that they can purchase a Series B Preferred and appear to be participating in the second round of financing.