Biotech Focus

Best Practices
Calling All Startups
Top 5
Things
You Need
to Know
to Grow
| By Joyce Drohan and Jason Low
12 BIOTECHNOLOGY FOCUS February/March 2016
T
he current economic downturn has
driven investor and government fo-
cus toward knowledge-based indus-
tries such as life sciences. The rising
demand for improving patient outcomes
through effective healthcare discoveries,
changing demographics, and advancements
in scientific/technological innovations create
an opportunistic environment for life science
startups. How will Canadian life science
startups beat the odds and transform their
scientific discoveries into commercial success?
How can these startups create the conditions
that will support their successful and sustain-
able growth? Lack of understanding of these
important aspects of your business puts you
at risk of failing very early on.
The answer is not just access to capital but
for startups to think like investors and to see
their business as others do.
1Assembling a First-Class
Team
Startups have challenges recruiting, attract-
ing, and retaining top talent to grow their
company with limited resources for salaries.
Most biotech companies rightly focus on the
scientists who are the ones to first develop
their innovations. Where biotech startups of-
ten fail is in devaluing the business aspects of
growing their startup and failing to obtain the
appropriate skills and expertise to bring their
product to the next stage of development
and overcome the challenges of regulatory
issues, licensing, strategy, finance, marketing,
and sales. Startups are generally composed
of quality scientists and are understaffed in
most other aspects. This usually means that
the founding scientists are operating outside
their expertise by working on business plans,
protecting their intellectual property (IP),
regulatory filings, finance, marketing, and
investor relations which are all activities that
divert their core focus.
To be successful you will need to hire the
right experience and a level of quality exper-
tise to start building your business. Generally,
you will not need a full-time Chief Execu-
tive Officer (CEO) at the very start of your
company development. You may be able to

Best Practices
February/March 2016 BIOTECHNOLOGY FOCUS 13
attract a skilled executive on a part-time ba-
sis in exchange for shares in your company
(to reduce cash outflow and increase their
buy-in to the company’s continued success).
Other aspects of the business can be managed
through your interim CEO who can also man-
age contractors and advisors, as needed, to
complete work on raising capital, legal issues,
regulatory affairs, finances, and taxes. If you
plan for your company to go public, it would
be important to have a CEO who has already
taken a company public before and is familiar
with the initial public offering (IPO) process.
The critical end goal is to develop and/or
obtain a quality management team (which
includes a business executive) to secure fund-
ing/investment as this adds to the credibility
of your company and establishes trust with
any future investors and partners.
2Developing
a Great Business Plan
You know you have a great product/service
but do you have a completed detailed busi-
ness plan? Nothing kills a startup faster than
an innovation with no clear plan to commer-
cialize. Your business plan must be able to
robustly answer the following key questions:
• What problem does your product solve?
• How is it unique?
• What advantages does it have over the
currently available treatments or over the
competition?
• Who is your customer?
• How will you attract, retain, and grow your
customer base?
• How much is each customer worth?
• What is your business model?
• What is your product lifecycle?
• What funding will you need to get to your
milestones?
• How will your investors make money?
Knowing how your product is unique and
different from existing products is one of
your biggest considerations in bringing your
product to market. You will need to prove
that your product is backed by credible and
compelling science with a real opportunity
to have positive impacts on patients. Support
and provide detail on the science behind your
product claims with high quality, reproduc-
ible, and reliable data to convincingly attract
partnerships and investment… and put this in
your business plan.
It is essential for you to develop a com-
prehensive business plan backed by market
research and market data on how you will
attract, maintain, and grow a dedicated cus-
tomer base in order to generate a return on
investment. Customer acquisition costs and
overall customer lifecycle costs will need to
be considered and will inform the segments
that you should target. You will need to de-
fine your value proposition for each targeted
customer segment(s) and clearly indicate why
customers will buy from you and not from
your competitors.
Biotech and life sciences startups have
inherently more risk attached to them due to
the risky nature of research and development
(R&D) to bring a product to market. Your
business plan needs to articulate a thought-
ful understanding of how to mitigate risk
with a defined timeline as your product goes
through the various phases of development
in order to align with your investors’ and
partners’ expectations.
Your business plan needs to be well struc-
tured and show a solid case for why you need
capital, who you will get funding from, when
you need to receive the funds, what you will
do with the capital, and how much you need
to grow your business and create value for
shareholders. You will likely need advice on
how to structure your company’s rounds of
funding.
If you don’t know how to create a proper
business plan that describes how to success-
fully develop your company, get professional
help – skilled business executives, consul-
tants, universities, and government organiza-
tions are great places to start. There are also
many online services available to support you
in developing your plan.
3Obtaining Investment
Capital
The single most important question in the
PricewaterhouseCoopers LLP
Partnering
with the Right
Companies
Finding the
Right Advisors
Obtaining
Investment
Capital
Developing a
Great Business
Plan
Assembling a
First-Class
Team
1 2 3 4 5
• Who is your
customer?
• What is your value
proposition to your
customer?
• How are you going
to commercialize
and deliver your
product/service?
• How will your
business make
money and deliver
value to
shareholders?
• What type of
resources will you
need to hire?
• What type of skills
and expertise do
you need?
• How are you going
to recruit, attract,
and retain top
talent?
• Do you need to
have a CEO?
• What advisors do
you need?
• How do you
develop a business
plan?
• How do you claim
tax credits?
• How do you
maximize cash
flow?
• How do you set up
the governance
structure?
• What regulatory/
legal issues do you
need to consider?
• Where can you get
investment capital
from?
• How can you
access funding?
• How much funding
is available?
• What are the
different
characteristics of
various funding
sources?
• What business
partners do you
need?
• When do you enter
into a strategic
partnership?
• How do you choose
the right strategic
partner?
• How do you
structure the
agreement?
GuidingQuestionstoConsider

Best Practices
14 BIOTECHNOLOGY FOCUS February/March 2016
startup community is how and where to raise
investment capital? This is an even more im-
portant consideration in life sciences because
life science startups tend to be more capital-
intensive than other startups due to higher
R&D costs.
There are four main sources (government-
funded programs, family and friends, angel
investors, and venture capital) of investment
capital for life science startups and the ones
you choose will be dependent on factors such
as: timing, amount of capital required, amount
of company control you are willing to give
up, and level of expertise required. Note that
private equity (PE) has not been included as
typical PE firms buy mature companies and
will take 100% ownership and control of the
company. Also not included is crowdfunding,
which is growing in popularity for technology
startups but has not been a significant source
of capital for biotech startups.
The first place startups typically go to for
financial support is government-funded
programs that are mandated to support the
growth of Canadian life sciences companies
and researchers. One such place is the Busi-
ness Development Bank of Canada (BDC), a
federal Crown corporation that is solely fund-
ed by the Government of Canada. The BDC
has a mandate to support entrepreneurs in all
industries and in all stages of development,
with a focus on small to medium-sized com-
panies. Specific to life sciences, BDC operates
the Healthcare Venture Fund that “invests in
transformative Canadian companies that will
dramatically increase healthcare productivity
by reducing healthcare costs while improving
patient health”.1
This fund is specifically look-
ing to invest in devices, drugs diagnostics, and
digital health sectors.
Family and friends are usually the next
place to go as trusted resources you may
turn to for funds to get your company off the
ground. They are easy to access and already
have an established relationship with you.
Although this may work initially, the amount
of available funding is generally low, typi-
cally between $1k and $20k. It also becomes
exceedingly difficult to raise sufficient capital
using this method as both your company and
capital requirements grow.
Angel investors are usually wealthy and well-
connected individuals who can provide startup
capital similar to venture capital (VC) funds but
do not necessarily have the same restrictions.
Angels can invest in smaller increments, do not
require lengthy due diligence processes, and
typically take a hands-off approach to man-
agement and will not control the operations of
your company.2
The downside is that many life
science startups would greatly benefit from a
more hands-on approach to help facilitate and
guide them to the next stage in their company’s
life cycle. Both VCs and angel investors will
look for an appropriate and realistic valuation
of your company based on sound analysis.
An excessive valuation indicates that you may
have overvalued your startup.
In order to obtain additional capital, many
startups will try and access venture capital
funding. Venture Capital funding comes in
many shapes and sizes, with some special-
izing in very specific disease areas and others
in general life science investments. Generally
VCs can provide significant value to life sci-
ence startups by not only providing capital,
but by also providing hands-on expertise in
building and maturing the company. VC firms
also have due diligence criteria used to assess
the viability of investing in startup compa-
nies. This due diligence process takes time
and may mean that there is a time lag before
funds are distributed, and many VC firms will
also have minimum deal size thresholds. For
example, they may not invest in amounts
smaller than several million dollars. Lastly,
VC firms will typically sit on the board of
directors at your company to monitor the per-
formance and capability of the management
team to protect their investment.
Access to VC funding is oftentimes a critical
factor in determining a startup’s eventual suc-
cess or demise. Fortunately, the availability of
venture capital in Canada is increasing ($2.4B
in 2014) and is now eclipsing pre-recession
levels from 2008; there is a significant oppor-
tunity for life science startups to capitalize on
this momentum.
Although the magnitude of VC funding in
Canada is not nearly as high as in other coun-
tries such as the United States, Canadian VC
funding is growing in the early stage of com-
pany development (54% growth from $392M
in 2013 to $602M in 2014) which signals that
VC investors are placing increased emphasis
on startups. VC investment in the life science
sector is also showing good growth with
an increase of 78% in 2014 to $451M (from
$253M in 2013).3
4Finding the Right
Advisors
It is oftentimes difficult for you to grow and
sustain your startup without tapping into a
Requirement
Government
Programs
Family and
Friends
Venture
Capital
Angel
Investors
Amount of capital available High Low High Medium/High
Minimum capital
investment
Low (<$50k) Low (<$20k)
Medium/High
(millions)
Low (<$100k)
Hands-on management
expertise provided
Yes/No No Yes No
Turnaround time for funds
to be distributed
Long Short Long Short
Company control required No No Yes No
The following table provides a brief summary of the typical characteristics of
various funding sources:

Best Practices
February/March 2016 BIOTECHNOLOGY FOCUS 15
broader mix of expertise. Use of external ad-
visors (business, financial, peer, legal, and tax)
will allow you to obtain specialist advice on
how your company can improve and grow.
Business advisors function to help provide
strategic advice and drive the development/
refinement of all aspects of your business plan
(including marketing, organizational structure,
operations, etc.). We have seen many life sci-
ence startups fail at this critical point because
they are heavily focused on research and
product development and not as focused on
the commercialization aspect of their busi-
ness. The business advisor helps you to take
your product/service and bring it to market.
You need to value business advice equally as
important as your scientific innovation/R&D to
balance commercial growth for your startup.
An important consideration for life sciences
startups is the composition of their board of
directors. The board should be comprised
of individuals with experience that will aid
the company (e.g., a clinical stage company
will want someone who has previously run
clinical trials and understands the trial design
and clinical operations). A board composi-
tion should also be created based on the
company’s future intention to remain private
or go public.
Financial advisors serve the important role
of helping you to manage your financial plan-
ning in order to achieve short and long-term
financial goals. Their knowledge of financial
laws and legal restrictions will help you in
securing funding and identifying investment
opportunities. Financial advisors will also as-
sist you in assessing the performance of your
company through financial analysis and help
you in refining your budgets/forecasts.
Peer advisors are individuals that are simi-
lar to you, entrepreneurs who operate in a
comparable environment, and have a shared
purpose of growing and developing the life
sciences sector. The value of peer advisors
is through shared experiences and the un-
derstanding of each other’s growing pains.
A mentor/mentee relationship is an effective
and common way of structuring this type of
advisory relationship. You can find these advi-
sors at universities, venture capital meetings,
and through online forums.
Legal advisors are critical in the early stages
of your company and you should consider
lawyers with specific expertise in the life sci-
ences sector and that have previously worked
with startups. Quality legal advice will help
you structure your company and set up your
company correctly to fit your business model
(from your business plan). Services include
providing advice on IP, filing patents, drafting
licensing agreements, developing company
share structures, advising on entering the IPO
market, etc. Many credible firms will offer
heavily discounted advice during the early
stages of a startup and increase their fees as
your company grows. Don’t just use your
friend who just graduated from law school for
some free advice.
Tax advisors are critically important to life
science startups who have significant R&D
expenses. The federal and provincial govern-
ments currently allow significant tax incen-
tives/credits for qualifying expenditures under
the Scientific Research and Experimental
Development (SR&ED) program. Recent leg-
islation in 2013 has changed the way SR&ED
credits are calculated by making capital prop-
erty ineligible for deduction.4
Tax advisors will
be able to assist you in reviewing and filing
your SR&ED claims and helping to maximize
after-tax cash flows with appropriate tax
planning. Tax advisors with experience in life
sciences can be found at accounting firms that
have special divisions specializing in biotech
startups and often have startup programs
and other services to support your company.
Same as the legal advice, don’t use your friend
who just received his accounting designation
for tax advice. It will not be sufficient.
5Partnering with the
Right Companies
Determining the right partners with whom to
develop formal business alliances could help
drive and grow your startup through exper-
tise, access, and the ability to scale your in-
novation. There are three types of partners for
you to consider: licensing partners, full col-
laboration partners on R&D and commercial-
ization, and limited partners with agreements
such as sales and marketing (co-promotion).
Keep in mind that the goal of the partner-
ship is a two-way, participative relationship
and for each partner to help one another in
order to further the interests of the partner-
ship. All three types of partnerships could,
for example, be achieved by partnering with
a large pharmaceutical company to develop
and commercialize your innovation. The
number of these collaborations is growing as
pharmaceutical companies look to rationalize
their R&D functions and de-risk their pipe-
lines by forming partnerships with more es-
tablished startups who have already invested
in phase 2 clinical trials.
Partnerships are significant management
decisions and key issues to consider when
thinking about strategic partnerships are:
When do you enter into a strategic
partnership?
You need to do your homework to under-
stand the value of your company and enter
a strategic partnership at an appropriate
point in time. Your company will not be as
highly valued if you enter the partnership
too early without a solid foundation or too
late when you may have used up all of your
cash and don’t want to go it alone. You
must balance the business risk and funding
requirements of developing the startup on
your own against what you could gain or
lose in a partnership agreement.
How do you choose the right strategic
partner?
Research will need to be done to find the right
strategic partner. Will they understand and
share your vision? Do they understand the
market that your product will compete in? Do
they have the capability and capacity to act as
your partner? And will they be able to deliver
on the benefits you are looking to gain from
a strategic partnership?
How do you structure the agreement?
Obtain specialist legal advice to structure an
agreement that protects your IP, delivers on
the expected partnership benefits on both
sides, and clearly defines the level of control
you have over your company and IP moving
forward.
Finally…
Be passionate and enthusiastic about your
company. Be able to tell potential inves-
tors and partners about your vision for your
company. Be able to describe the science
and how your innovation will impact patient
outcomes or patient experience. People and
companies will want to work with you if you
have an exciting discovery to share with the
world. Good luck.
References:
1. https://www.bdc.ca/en/bdc-capital/
venture-capital/strategic-approach/
pages/health-venture-fund.aspx
2. http://www.businessinsider.com/
how-angel-investing-is-different-than-
venture-capital-2010-3
3. https://www.ic.gc.ca/eic/site/061.
nsf/vwapj/VCMonitor-MoniteurCR_Q4-
T4_2014_eng.pdf/$FILE/VCMonitor-
MoniteurCR_Q4-T4_2014_eng.pdf
4. http://www.cra-arc.gc.ca/txcrdt/
sred-rsde/clmng/cptlxpndtrs-eng.html
JoyceDrohanisaConsultingDirectorforHealth-
care and Pharma Life Sciences for PwC
Jason Low is a Senior Consultant in Financial
Operations for PwC
To see this story online visit
www.biotechnologyfocus.ca/calling-all-start-
ups-top-5-things-you-need-to-know-to-grow/

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