Due Diligence primer finale, exit strategies
The PhD/Postdoc blog series features scientists at different stages of career development as they explore and plan for their next steps. Over the course of six months, Yeonwoo Lebovitz, Anthony Franchini, Megan Duffy, and Celia Fernandez will give monthly updates on their progress. Check back every Wednesday for new posts.
Current position: Postdoctoral Research Fellow studying Microbial Disease, Immunology, and Toxicology; Fellow at Kerafast, Lead Consultant @CBETHNK
Program start date: July 2014
Institution: University of Rochester
Fittingly, for my last post for the NIHBEST blog, I promised to talk about exit strategies, and here we are. Having an exit strategy is always a good idea, whether it pertains to an investment or something in your personal life like a large family party. I’ve been thinking about exits a lot lately: When is a good time to end my postdoc? How long am I going to wait for something to fall into my lap or am I just going to build my own sandbox? Am I stepping out into the unknown at a good time? Is staying in Rochester the best idea for my long term? What stage are you at, is this a good time in the market, and how pro-active you are for enacting a plan aren’t just good traits on a personal level. Businesses need them too. But before we get to the meat of that conversation, I want to front load this final blog post with a litany of thank yous. First and foremost to the NIHBEST editorial staff who invited me to be a part of this platform for the past six months. I also feel compelled to thank those with whom I work closely with at UR Ventures, CBETHNK wouldn’t be a thing without your guidance and input over the past year. The team at Kerafast has been great during my time as a fellow, and you may just find me sharing my thoughts in their monthly newsletter soon now that this guest spot is over. Lastly, a big thank you to the URBEST program, specifically Tracey Bass, Ph.D., who continues climbing my list of favorite people not only at UR, but in the greater solar system. My entire postdoctoral experience has been radically changed because of her efforts to put together the URBEST program. Without that, I’d not have had the opportunity to do this or most of what I’ve talked about over these past few months. The latest example being able to meet and have lunch with John Nelson, UR alumi and Senior Principal Scientist at GE earlier this week. If you ever want to have a peek behind the curtain at how and why a large, multinational corporation is so successful, talk with John. He is the epitomy of the driven scientist at the foundation of such success. Unfortunately, I had to miss his career story (a touch of lab chaos needed to be dealt with) but was able to have lunch with him. He wrote a blog post for the URBEST program which I highly recommend you give a read.
Exit Strategies: Ok, finally, we can cover the topic at hand. All the data collected during the rest of the due diligence process funnels into this final test. While some people have solely altruistic reasons for investing into a company, the vast majority of investors want to get something out of it: a share of the profit. Profit can come from one of three ways: The initial public offering of stock in the company (IPO), acquisition of the company by another entity, or bringing a product to market and generating profit through revenue. Which of these three options are the most likely as an important factor in determining ones level of investment. Is this company being run by the first time inventor/CEO who wants to take his product all the way to market and will never sell? Or was the company founded as a great idea with strong IP from a serial venture capitalist group? I’d say the former is less attractive, if only because one’s return on investment may take longer to materialize. There certainly is something to be said about experienced CEOs and board members who have a solid track record running companies (see, the Team matters!). Even if the technology is too far away, you may not see a return on your investment until years later. But if you are dealing with a trusted leadership, there is an assumption of less risk involved. This is especially true when you consider the timeline for clinical trials and FDA approval . Other areas, like big data services or software as service (SAS) have a quicker turnaround. Recognizing this timeline and how it fits into the clients plan is important. It is also just as important as the consultant to know if the company has its own timeline. The business world is very interconnected and relationships matter (Team again!). Chances are the board has discussed what their goal is here. They may have already reached out to or been approached by a larger corporation with acquisition in mind. Others investing in the company might also have their own agenda to push the company in one direction or the other. That conversation was probably informal, but when big names like Sanofi or Pfizer or IBM are gobbling up companies in your space, this presents an attractive and quick exit. Similarly, are other smaller companies in this space flailing after a major milestone fails or remove a hard charging competitor from the field? These pressures may drive investors towards a company based on rumors, leaving you boxed out if you don’t get in fast enough! My biotech newsfeed is filled with stories exactly like this. Hype is real factor to consider while investing and mountains of money have been made and lost because of it. Just as a competitor may seek to acquire a company within the same space, it is also possible the product or tech may be better refocused in a different field, and a buyer comes out of left field with an offer the board cannot refuse. Harder to predict, of course, but not uncommon in the business world for sure.
The level of return is also something which factors into the exit strategy. This is a pretty nebulous area for me, and subject to all the wrinkles that make up the valuation, market size, and competition important. Is the market expanding or contracting (Market size)? Have other companies in the space been recently acquired? (Competition) And for how much (based on Value)? If you assume startup X will sell for the median of that group, say 3x its modest valuation, is it attractive enough for you? Or would you prefer to wait for opportunities where success means startup Y sells for 20x its valuation but takes a three or four years longer? Each investment opportunity is its own unique snowflake. Our take: Have a game plan, know your client and their goals, and keep your ears open. But never be afraid to pull out and wait for the best investing opportunity.
And with that, our due diligence primer and my time as a guest blogger here is over. I hope everyone who took the time to follow along found it helpful. Make sure to follow me on twitter (@CBETHNK) or reach out to me directly on LinkedIn or by email if you want to talk more.