You find yourself at a juncture where you believe you have an innovative ophthalmic product on your hands, one that could be of significant value to stakeholders (patients, physicians, payors). You have sought input from experts and they agree you have something; the concept is solid, the data is supportive, the medical and market needs are clear. Now, however, you realize that to advance the concept requires large amounts of money and additional expertise. So now what? You’ve resolved to seek investors. What considerations are there for financing?

What’s the Plan?
Before approaching investors, it’s critical to have thought through your business plan. This will include the company profile and operational structure, the Target Product Profile, or TPP (see March 2013 column, “ Begin with the End in Mind). Specifically: its features and benefits beyond existing offerings; the development plan and requirements to support the TPP; the competitive landscape (both commercial and development pipeline); determining who is going to pay for your product and why (how the differential profile will support reimbursement, will patients pay out of pocket etc.); and importantly, the financial requirements. Plotting out when you can reasonably achieve value inflection points, including but not limited to preclinical and clinical proof of concept, and achieving regulatory feedback that supports the TPP will significantly affect how and when you plan to raise money.

It’s important to acknowledge that your investors are looking for promising businesses, not science fairs. In considering the investor perspective, mapping out key development milestones as value inflection points will allow you to model realistic financing scenarios and focus on activities that provide step-ups in value. This will provide a road map that supports successive rounds of fundraising, ensuring you have enough runway capital to support the company during fundraising windows while being as lean and capital-efficient as possible. Development milestones that support significant step-ups in value will provide prospective investors the incentive to invest in your program based on the potential return at each value inflection point. Generally speaking, in their financial models, venture capitalists typically target an approximate 100 percent internal rate of return, which translates to three to four times over a couple of years, and approximately 10 times over four years. Now let’s profile what the different investors can do to advance your product concept.

Funding: Family, Friends, Angels & VCs
Since 2008, venture capital investment is increasingly difficult to secure due to the contraction in both the number of Life Science VC firms and the total capital allocated to them by their limited partners. Generally, VCs have shifted away from investing in early-stage programs due to the high risk associated with them, coupled with a lack of historical returns.

Most life science exits are realized via company purchase (merger & acquisition) or a licensing/option deal before your product generates a single dollar of sales. Alternatively, investors may exit via the company accessing the public markets, but only recently has the initial public offering window opened. As an ophthalmic innovator, your goal is to advance your program towards commercialization while optimizing the potential return on investment for founders, employees and investors. It’s necessary to have a well thought-out development plan with clear milestones in place to maximize ROI and appropriately frame an investment for investors. It will guide you towards securing follow-on financing rounds via realistic company valuations achieved at predefined value inflection points (such as achieving first human proof-of-concept).

The estimated 756,000 Angel Investors, wealthy individuals who maintain a net-worth over $1 million, are a good place to start your fundraising campaign.  Angel investors typically provide seed capital for projects to reach an initial inflection point. Angel groups may co-invest with institutional investors, making them an ideal target for early-stage life science financing. Not surprisingly, the last quarter of 2012 and first quarter of 2013 saw a spike in angel dollars allocated to health-care deals compared to the first quarter of 2012.  Active syndicates of angel investors include Sand Hill Angels, Golden Seeds, New York Angels and Tech Coast Angels.

Occasionally, validated product concepts can avoid the family and friends (F&F) round and receive a series A or angel round. That said, it is common to turn to friends and family for the initial capital required to advance your product concept towards an investment from a VC or an angel group. Typically, F&F financing rounds occur in the seed stage before professional investors are willing to invest. The advantage of starting with F&F is that these investors are typically low-information investors who will not drive aggressive term sheets. While F&F rounds will typically have more company-favorable terms vs. institutional investment, these rounds consist of dozens of individual investors in order to raise enough money to move the project to a value inflection point. The downside of F&F is that this group is likely to get significantly diluted in future rounds of fundraising, as they may not have the resources to participate. Managing expectations with these large groups can be time intensive and challenges can arise where one has to balance follow-on round valuation and dilution issues.

Strategic Investors/Partnerships
Corporate Venture Capital has grown dramatically in the last decade to fill the void as traditional venture has contracted and moved away from early stage, higher-risk investments. Importantly, these firms help provide big pharma and device companies the opportunity to avoid an innovation gap and thus provide products needed to supplement product development pipelines. This has also been valuable to offset pharma’s business-development groups who have moved towards licensing and acquiring later-stage development programs that are significantly de-risked via costly clinical efficacy studies. Many early stage Series A and Series B rounds of financing have CVC in the investor syndicate. Pharma understands corporate venture activity is essential to the health of the early-stage ecosystem that the industry relies on for future product innovation.

Pharmaceutical companies are not the only strategic investors. Clinical service organization (CROs), and Payors & Providers may also provide investment into your development program. CROs represent an increasingly valuable source of capital for product innovators. A recent case study includes a small start-up company developing a new product for an ophthalmic indication. The company approached and selected Ora Inc. to work with them and partner on the regulatory filings, Phase II trial, business strategy, and support for positioning to potential pharma partners. Following Phase II, the road show resulted in a non-dilutive upfront payment from a pharma partner in exchange for an exclusive global option to that pharma for the product. The up-front option, non-dilutive payment supports the costs of the later-stage clinical trial. This example shows how a VC-backed, small start-up, a strategic CRO partner that is expert in the space, and pharmaceutical exit partner can work together to take a product through Phase II, and then support development through Phase III.

Transferring an equity stake or milestone and royalty payments in exchange for a reduced cost for preclinical development, clinical trial and consulting services will advance product concepts that would be unable to proceed due to the rate-limiting cost of clinical trials. A reduced clinical trial cost will decrease founder dilution and make your life as an ophthalmic innovator easier due to the reduced amount of capital required to reach value inflection points and subsequent step-ups in your program’s valuation.

Non-Traditional Sources
Foundations provide grants that represent non-dilutive seed capital to conduct initial research and advance product concepts towards human clinical studies. While some foundations will fund clinical trials, grants are typically designed to cover costs for translational research and investigational new drug-enabling studies.

Ophthalmic-specific foundations such as Foundation Fighting Blindness, the National Neurovision Research Institute and the Glaucoma Research Foundation look to fund novel research to treat ophthalmic diseases and subsequently translate that research into the clinic. Federal grants can provide funding to academics and innovators to advance their programs. In addition, universities have created innovation centers that provide lab space for innovators to conduct research and/or commercialize their findings. Additionally, research incubators are another resource that can help your development program reach a value inflection point in a capital efficient manner.

The current life-science funding landscape is analogous to the Bermuda triangle in that many ophthalmic innovators try to navigate through it and never reach shore. Before setting sail, be sure you have vetted a plan that will guide you to successful milestone achievements. As you work to secure the necessary capital to advance your program to the next value inflection point, this will support the next round of financing.
There are a multitude of target investor options, and each has its own has pros and cons. For example, VCs and angel investors can provide capital to fund your program but their investment will significantly dilute your ownership stake. In addition, they often demand some form of control via board seats to manage their investment. While foundations and grants do not typically dilute your equity stake or demand control of your program/company, the time line to secure funds can be long, the evaluation process uncertain and they often fund very early stage research exclusively. The time it takes to raise funds through grants and foundations may be well-suited to academic innovators who understand the process, have a track record of securing grants and have a day job.

Corporate venture and strategic investors, including CROs and service providers, have grown in prominence and are increasingly providing sources of the necessary capital to support early stage innovation.

In this way, they are ensuring commercial entities have exposure and access to product pipelines and the next generation of ophthalmic products will be there to improve patient care, preserve precious vision and bring sight to the blind.

Mr. Chapin, Dr. Campion and Mr. Sandwick are from the corporate development group at Ora Inc. Ora provides a comprehensive range of product development services and strategic support in ophthalmology.