One of the primary hurdles faced by pre-revenue healthcare, life sciences, and biotechnology companies—even more so than most start-ups—is the need for a substantial amount of capital to go through the product development cycle. Many companies are struggling to get enough financial support for their research and development (R&D) efforts. Competition for available funds is fierce.


In a conversation with Strategic Finance, Ozan Pamir, CFO of 180 Life Sciences, and Thyagarajan Ramachandran, CFO of Healthcare Triangle, talk about finance leaders’ key role in building start-ups, the importance of vetting potential financial services partners and building banking relationships, and how to leverage financing to fund R&D and achieve strategic objectives.


SF: What tips can you provide CFOs of pre-revenue companies to navigate challenges?


Ramachandran: Using technology in strategic financial planning is critical in preparing for various scenarios, including building impact of clinical trial results, regulatory approval timelines, cost overrun in R&D, and having a contingency plan to adapt to unforeseen business outcomes. Finance professionals must regularly update financial planning and analysis, prioritize cash flows from multiple sources, and implement cost monitoring and controls without impacting research efforts.


In addition, finance professionals should keep exploring government grants, research assistance, and tax incentives on R&D spends to manage the cost of innovation prudently. This can improve financial resilience in start-ups and increase their chances for success in these highly competitive and regulated industries.


Pamir: Gaining a deep understanding of your industry, competitors, expenses, competing priorities, and scientific milestones is critical. Armed with this knowledge, finance professionals can then create robust financial models and rolling financial forecasts where the information is updated in real time.


In the challenging funding landscape, managing cash flow should always be a top priority. Ensure your business has a sufficiently long cash runway to withstand extended downturns. This necessitates regularly reviewing and adjusting budgets and significant capital expenditures proactively, rather than waiting for difficulties to arise.


An effective way to implement these practices is by fostering collaboration between your finance team and the scientific team. Involving the scientific team in the budgeting process not only helps you better understand their requirements, but also allows you to communicate any financial constraints you’re dealing with. Since the priorities and financial needs of the scientific team may evolve over time, this collaborative approach leads to more efficient business operations.


When facing external financial challenges, it’s essential to build strong relationships within the financial industry. This includes maintaining open lines of communication with bankers, lenders, and investors. Keeping them informed about your organization’s financial health and plans is key. Additionally, exploring potential credit lines or financing options can ensure you have access to capital when needed.


SF: How should CFOs conduct research and do their due diligence when choosing an investment banking partner to secure funding?


Ramachandran: Research the banker’s reputation and past deals that the firm has worked on within the last 12 to 18 months, and do an impact assessment of the success of these deals. It’s also important to assess the banker’s experience in managing deal sizes and industry experience. Investment bankers bring a lot of value by being familiar with the business, industry-specific valuations, and connections to strategic buyers. Capital raising is a time-consuming process; therefore, it’s essential for finance teams to assess resource strength and the banker’s ability to provide a committed, personal experience and have full trust with the banker in the fundraising journey.


Pamir: Many companies initiate their research into potential investment banking partners through warm introductions, and while this is a good starting point, it’s essential to delve deeper. Expanding your search beyond your immediate network is crucial. Consider exploring the networks of your legal counsel and board of directors to identify potential contacts. While your personal connections and warm introductions can yield promising candidates, they might inadvertently exclude some suitable options. To avoid this limitation, another effective starting point is to examine league tables, which rank investment banks based on the number of completed deals and the funds raised, providing a foundation for your research.


However, it’s important to recognize that league tables offer only one perspective. Scrutinize the details of the deals themselves. Not all closed deals are successful. If you notice a pattern where a company’s stock experiences significant downward pressure just before a deal announcement, followed by a flurry of activity at the deal’s closing, exercise caution when considering such banks.


Additionally, it’s vital to assess deals that never reached completion—a topic often left unspoken. Reach out to the CEOs or CFOs of these companies for candid feedback and insights into why these deals were canceled and whether they’re contemplating future collaborations with the same investment bank.


During your evaluation process, it’s necessary to identify what each potential investment banking partner brings to the table. Specialized banks with industry expertise can be more advantageous than generalist banks. Access to reputable equity analysts has become a pivotal aspect of an investment bank’s offerings, as any coverage by their analyst will play a vital role in measuring deal success after the financing has closed.


Understanding the motivations and dynamics of investment banks is pivotal for your success. Bankers are primarily motivated by fees, and it’s imperative to recognize that you aren’t their sole client—investors also contribute significantly to their revenue. This understanding forms the foundation of every investment banking relationship and emphasizes the importance of selecting an honest and transparent banker to lead your transaction.


When reviewing various engagement letters, try to stay away from ongoing obligations such as rights of first refusal or extended periods of tail fees, both of which will handcuff you to a certain extent to the banker you’re using. My preference would be to work with a banker confident in their abilities, without such terms in their engagement letter. Their performance should be the sole reason for continued collaboration. It’s also essential to negotiate competitive success fees, cap legal expenses, and meticulously review termination clauses.


Furthermore, some additional features to consider in an investment bank include their ability to host specialized industry conferences and, if you’re public, facilitate connections with new investors who may support your stock in the open market—a valuable bonus in your partnership.


SF: What questions do CFOs need to ask potential banking/financial services partners?


Pamir: As the CFO, it’s your duty to have an in-depth understanding of your company, business goals, scientific objectives, and how they align with the overall business. You need to work collaboratively with your scientific team to understand their goals and align with the long-term business objectives. Develop a deep understanding of your company’s capital needs and assess your options in obtaining this capital while working within the boundaries of the company’s risk tolerance, especially when it comes to debt financing.


Financial partners, including your investment banking team, must possess in-house expertise to grasp the same business goals and the scientific foundation of your company. This is where the equity research department plays a pivotal role. Many investment banks rely on the vetting conducted by their equity research department, underscoring the importance of the executive team having a strong grasp of the business and effectively conveying it to financial partners.


Being transparent and forthright with your inquiries when evaluating potential investment banks is highly beneficial. Inquire about their track record and experience in handling transactions of similar size and complexity within your industry. Request references and introductions to other team members from equity research to capital markets to assess the overall cultural fit. Additionally, seek information about their preferred investors and the nature of their relationships with them. Most importantly, request references from other executives who have worked with the bank in the past but may not be on the reference list to gain insights into their experiences.


Your choice of a partner isn’t only valuable for financing transactions but also for their industry expertise and network when pursuing other strategic initiatives such as M&A [mergers and acquisitions] deals and licensing agreements. Your investment banking partner should be capable of supporting you in achieving these strategic objectives.


Lastly, when dealing with specific investors and investment banks, it’s crucial to thoroughly comprehend the terms they propose. Some banks offer unfavorable financing terms, and your company should endeavor to avoid these when possible.


Ramachandran: CFOs play a critical role in navigating and effectively managing capital-raising objectives of a company. The financial objectives should be aligned to the overall corporate objectives; thus, the CFO must evaluate a potential banker with a comprehensive understanding of the company’s long-term vision, capital structure, and risk tolerance. The banker must be evaluated based on past track record, industry experience, and reputation of successful deal closure.


It’s equally important to discuss investment philosophy with the banker, risk management, and metrics for performance evaluation. The fees’ structure must also be discussed, and any performance-linked fees must be transparently evaluated. Risk mitigation by developing a contingency plan is critical if, for any reason, the banker encounters challenges in capital raising.


SF: What are M&A best practices and pitfalls to avoid?


Pamir: The M&A process commences by assessing the overall condition and objectives of the business. Depending on your goals, you must identify a merger or acquisition target or seek a buyer. Conducting a competitive process pays dividends. When considering acquisition, merger, or sale, engage with multiple parties.


The selection of the right advisory team also plays a vital role in this process. Your advisory team comprises investment bankers, legal advisors, and accountants. You should also create a comprehensive financial model that forecasts the potential impact of the transaction under various scenarios. This aids in identifying potential synergies and prompts discussions on integration strategies. Early integration planning is imperative. Failing to follow these steps and complete thorough due diligence with the available resources may lead to unexpected post-acquisition issues.


During the transaction, a continued due diligence process typically occurs. Collaborative, transparent, and communicative interactions among all parties are essential for an effective process. Ensure that integration planning is completed, and orchestrate the elements for a successful execution during the transaction process. Maintaining open lines of communication with existing and prospective shareholders is necessary. Following the M&A transaction, diligent performance monitoring and integration execution are vital to realizing the anticipated synergies discovered early in the process.


In 2019, we embarked on comprehensive strategic planning and due diligence processes, culminating in the merger of three companies that birthed 180 Life Sciences. Following the identification of potential merger benefits, teams focused on integration planning. This encompassed decisions about organizational structure, key personnel selection, and operational streamlining to eliminate redundancies and boost efficiency. Meticulous planning was essential for ensuring a smooth transition and minimizing disruptions.


As the CFO of the combined entity, I assumed a critical role in assessing the financial health of the merged organization and comprehending the financial implications of the merger. I spearheaded efforts to secure essential funding through private financing rounds. Additionally, I took charge of communicating with both existing and new investors throughout the merger process.


Transparent and clear communication with investors is paramount to garnering their support during such transactions. Post-merger completion, my focus shifted to integration efforts, including the consolidation of financial infrastructure, realization of planned efficiencies, alignment of research and development activities, and resource optimization to drive growth and achieve milestones.


Ramachandran: M&A transactions are time-consuming and complex in nature; it’s therefore crucial to develop an M&A strategy that aligns with the organization’s overall business objectives. Evaluate any potential M&A through comprehensive due diligence covering the financials, key employees, intellectual property, customer contracts, legal obligations, and cultural fit.


During the M&A process, it’s important to maintain transparent communication with employees, board members, and investors to build trust. Monitor customer project risks during the M&A to ensure that these are adequately mitigated.


Post-merger, assess the progress of the integration and monitor financial performance vs. initial plans. It’s crucial to motivate and retain key talent to ensure that they’re integrated as part of the new org structure. Keep communicating with the board and investors on progress and benefits from the merger.

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