Companies, especially those in the biotech sector, need to be strategic when preparing to target new shareholders. And biotech companies have to do a lot of targeting because developing new drugs and therapies is a long and very expensive process, necessitating frequent rounds of raising capital.
Management teams that go to potential shareholders without a strategic plan are at risk of returning with investors who aren’t an ideal fit — or with nothing at all.
Successful relationships between shareholders and companies require understanding and compatibility. Say you run a promising young biotechnology firm that needs a significant sum of cash and an extended period of time to develop new products or therapies. Signing up new shareholders who subscribe to a short-term investing philosophy may not serve you as well as alternatives who take a more long-term, patient approach.
So let’s take a look at a handful of steps you can take to target and secure good investment matches for your company.
1. Explore the obvious, yes, but don’t stop there. It makes perfect sense to review the list of investors who have taken positions in companies similar to yours, including your rivals. In fact, that’s a solid starting point, but it should not also be your finish line. By focusing exclusively on comparable holders — that is, investors who own names comparable in kind to yours — you might just miss out on more than a few good potential partners. One more thing to consider here: The shareholder information you rely on to distinguish comparable holders from the rest of the pack may not reflect current reality, given that the SEC gives investors a 45-day grace period after a quarter closes to publicly report holdings.
2. Go to the well that others frequent often. If you expect to raise capital on a relatively consistent basis, as many biotech firms do, take a careful look at investors who commonly participate in that kind of financing.
3. Don’t stop thinking about tomorrow. Your company is evolving. While there are likely investors attracted to you just the way you are at this moment, don’t limit your search to this contingent. Also review investors interested in what you are striving to become in the next year or so, if for no other reason than that’s how long it typically takes for investors to conduct due diligence and determine if your company is worthy of their commitment.
4. Hedge funds can be your friends. Many burgeoning companies steer clear of hedge funds, convinced that they are more likely to short your stock or invest for a short time. That’s not necessarily so. Some hedge funds are great long-term investors. There are those who go long on companies just like yours.
5. Small caps: Ignore the giants at your own peril. Many smaller companies don’t even consider going after a giant or two, believing, mistakenly, that not one will have any interest in them. While you might bat for a low average while playing for this end of the market, one single hit could represent a major investment.
6. Keep your eyes wide open. Tunnel vision can set in when targeting investors. Resist it. If you believe growth investors are the most likely candidates to become your new shareholders and therefore exclude value and growth-at-reasonable-price investors for your search, you’re shrinking the field unnecessarily. What is more, and this is very important, the most commonly used source of information regarding investors’ preferences, the Thomson database, is very generalized in this regard. Valuable? Yes. Perfect? You know the answer.
Investor targeting is not a science. But with some strategic planning and a willingness to think unconventionally, you can grow and maintain an appropriate, stable investor base. For more ideas on how to do it, reach out for a longer conversation.