How to finance your life science venture. Thanks to Kevin Smith, CEO of www.cid4.com

1. How Are Life Science Companies Funded
Presentation for Building Biotechnology Course
Spring 2014

2. Agenda – Financing your discovery
 Environment for funding life science entities
 State of Colorado initiatives
 Friends
 Angels
 Venture Capital
 What do investors really want
 One group’s viewpoint
 Attributes of Success

3. Why is this guy here?
Kevin M. Smith, President and CEO
Colorado Institute for Drug, Device and Diagnostic Development
Former President of Gambro Inc., the US Holding company of Gambro AB
– a publicly-traded, Swedish multinational, medical device and
healthcare services company
 Strategy, acquisition analysis, integration, investor relations
Partner in Ernst & Young; initiated the Colorado Life Science Practice and
started the Colorado Entrepreneur of the Year program
 VC and IPO financings, new business formation, managing
entrepreneurs,
Serves on NFP and commercial Boards; seen success and failure;
believe that helping patients is laudable and can be profitable

4. What is a CID4?
CID4 is a 501(c)(3) not-for-profit organization whose mission is to:
Accelerate Colorado bioscience company and job growth
via select capital infusions and active management designed to
bridge the gap between life science discovery and product
commercialization

6. CID4 Mission
CID4
$
Economic Development through Innovation Advancement
CID4
Sponsors
Funders
Project-directed philanthropy
IP
Economic Development through Innovation Advancement

7. The Need
• Research dollars are becoming scarce
• Cost to bring life science products to market is getting
higher
• Regulatory
• Intellectual property protection
• Angel investors are oriented to later stage
developments – expansion capital
• Colorado venture capital is very limited

8. The Need

9. The Solution
State is trying to fill part of the VC gap
• “Valley of Death” between discovery & commercialization is
widening!
• State of Colorado created BDEG (Bioscience Discovery
Evaluation Grant) Program
• ~ $5 million per year, 2006 – 2018, must be matched
• Non-fixed asset infrastructure
GRANT GRANTEE # FUNDED
PER YEAR
MAX GRANT
BUDGET
Proof of
Concept
Research
institutions
20-25 $200k
Early Stage
Company
Early stage
companies
8-10 $500k

10. Colorado is encouraging entrepreneurism
• Bioscience Discovery Evaluation Grant Program
(Approx. $5.5 million per year from 2006 – 2024; must
be matched):
• $1.65 million in POC grants to research institutions;
funds 15-20 projects per year; maximum $200k
• $1.65 million in Early Stage Company grants; funds
6-8 start-up companies per year; maximum $500K
• $2.2 million in Bioscience Infrastructure grants to
address pre- and post-POC research, development,
entrepreneurship and management gaps

11. CID4: Helping to Grow the BioScience Sector
• Accelerate discovery-to-commercialization process
• Work with research institutions & private businesses
• Bridge the Valley-of-Death financially
• Connect companies with potential partners/investors (BIO, C21,
GUST, „open our rolodex‟)
• Access to FreeMind (non-dilutive funding), oHours, etc
• Fine-tune business plans, financial models, regulatory strategy,
budgets, etc
• Actively manage or bring in management - People, people and
people
• Catalyze high-quality job growth
• Save money - No allocation of resources to physical infrastructure

12. CID4 Team
• Kevin M. Smith, President and CEO
• Partner, Ernst and Young
• President, Gambro (medical device)
• Focus: Medical devices and operations
• Richard C. Duke, Ph.D., Founder and CSO
• Tenured in Medical Oncology at UC-SOM (Immunology & Apoptosis)
• Serial Entrepreneur: Seven companies in Colorado (GlobeImmune;
Newellink; Sierra; ApopLogic; PeptiVir; MenoGeniX; Aurora Oncology)
• Focus: Cancer therapeutics, infectious disease vaccines and diagnostics
• Lauren Costantini, Ph.D., VP-Therapeutics & Device
Development
• Former Harvard faculty (Neurosciences)
• Executive with several biotech companies (Titan; Accera; Sierra)
• Focus: Product development, clinical trials, regulatory across platforms

13. CID4 History
 Founded in late 2009
 Initial funding
 State
 Local
 Federal

14. Governance
 Board of Directors
 Technical and Business Advisory Committee
• Individuals with relative industry experience:
 Venture capitalists; serial entrepreneurs; pharmaceutical company
scouts, medical device company executives, regulatory consultants;
reimbursement consultants
• Advisory role on investment selection
• Specific domain-expertise on an as needed basis

15. Our Reach
• Portfolio Companies
• Client Companies
• Introductions to investors/partners; pitch at BIO;
fine tuning programs, bus plan, financial models,
regulatory strategy, executives in residence
• Collaborations
• Rockies Venture Club –angel network
• oHours –provides unique one-on-one setting
to ‘dig into the details’ (20-min slots over 2
hours
• Formal – RMI, TTOs (CU; CSU; Mines)
• “Informal collaborations” with CBSA, Innovation
Center of the Rockies, other angel groups

16. CID4 Organizational Progression
Dates Events
Spring 2009 Formation/Submission of BDEGP grant
February 2010 First Technology Solicitation
July 2010 First and second project fundings
Summer 2011 Second solicitation/third and fourth project
fundings
May 2012 Third solicitation/fifth project funding
Summer 2012 Sophono raises $7M; CID4 repaid $350k
Summer 2012 Fourth Technology Solicitation
Fall/Winter 2012 Sixth company funding
Summer 2013 Seventh company funding as part of a $2 million
total
Fall 2013 CID4 receives follow on grant from State
Spring 2014 Actively soliciting newest technology

17. The Results
Since commencing operations in November 2009
Over 85 direct jobs created as a result of CID4’s investment of time and
money
Follow on
funding
>$25,000,000
CID4 Project
funding
commitment
- $2,500,000
Screened
~120
technologies,
selected eight

18. The Results
THE RESULTS
8 Portfolio companies created/funded
$6.4M Annual revenues of current Portfolio companies
85 New or retained jobs
4 Number of companies that have raised significant follow
on capital
$25M Total capital raised by portfolio companies
$12.6M Portfolio companies spend in calendar 2013

19. Investment Activities – 2010
• PeptiVir: Company created by CID4 and
UC-Denver-AMC inventors. Novel vaccine
platform for unmet viral indications:
universal influenza; RSV; SARS-CoV;
parainfluenza; HIV; Ebola.
In lock-up: $15M A round
• Sophono: Private company. Non-
percutaneous bone conduction hearing
device. FDA clearance and CE mark. Product
on the market in U.S., Europe, Latin America
and Africa.
Graduation Date: Aug. 2012, $7M

20. Investment Activities – 2011
• VetDC: Company created by CSU Ventures.
Repositioning in-licensed human drugs for
companion animals. Seeking FDA MUMS
approval for canine oncology product
Graduation Date: November 2012, $3M
• Flashback Technologies: Company created
by faculty from CU-Boulder and Children’s
Hospital. Software algorithms and machine-
learning techniques to analyze large sets of
complex physiological data; first product is
platform technology for the real-time
analysis of human vital signs
Graduation Date: January 2013, $1M

21. Investment Activities – 2012
• KromaTiD: Company created by CSU
ventures, advancing knowledge of
genetic abnormalities and diseases by
developing the next generation of
molecular cytogenetics assays,
reagents and kits for use in research
and clinical laboratories. First product
launched in 2013.
• Aurora Oncology: Company created
by CID4 and UC-Denver-AMC faculty
inventors. Novel therapeutics for
bladder cancer entering clinical
development in 2014.

22. Investment Activities – 2013
• AktiVax: All-in-one vaccine and drug
delivery device that is highly useful
for biologic products. Working with
several corporate entities.
Syndicated Investment with High
Country Venture - $800K
• Fitbionic: Prosthetic foot company
and life style management targeting
diabetic amputees
Syndicated Deal with multiple
investors - $2M

23. The Process
• Rolling solicitation
• Rigorous review process & advisory panel (TBAC)
• Deep due diligence and development plan
• Final decision to BOD
• Select promising post-proof-of-concept CO
technologies from research institutions and startups
• Technologies MUST have clear pathway to commercialization – we
do not fund research
GOAL:
Augment the value of these innovations,
and position our companies to attract Series A
financing and/or partners

24. State of Venture Capital
• 2012 performance was better than 2011
• Up rounds – 52% (47%);
• Down rounds – 17% (25%)
• Round to round increases up 23% vs 14%
• Medical devices outperformed bio pharma
• However, the trend for life sciences continues
downward
• VC fundraising allocated to life sciences was
down to 12.5% from 19% in 2009
• Actual dollar decrease is substantial
• 2008 funds - $7.8 billion
• 2012 funds - $2.5 billion
Source – Fenwick & West LLP report

25. Implications of Funding Crisis
• VCs making fewer investments with less
technology/development risk and which
requre less capital to commercialize - i.e.
later stage, device, digital health
• Large established life science companies are
looking for new technology – increases in
JVs; licenses
• IPOs are making a comeback – but generally
below their initial pricing range
• All players are looking for earlier exit
strategies than in the past

26. Capital Sources in Colorado
• BioScience Discovery Evaluation Grant
Program
• Proof of Concept
• Emerging Company
• Infrastructure
• OEDIT Advanced Industries Initiative–
expanded program; significant changes to
BDGEP
• Angels – Rockies Venture Club; independent
investment groups
• Venture capital funds – High Country
Ventures; Boulder Ventures; ???

27. Advanced Industries Initiative
 Bill passed in 2013 session
 Repealed BDEG, but bioscience industry will have a $5.5
MM per annum funding carve out.
 The significant changes are reflected below
The amounts are not subject to the indicated caps if the award is to a project
that bridges multiple industries/organizations
BDEGP AI BDEGP AI BDEGP AI
Percent allocation 30% 15% 30% 15% 40% 15%
Amount $150,000 $150,000 $250,000 $250,000 N/A $500,000
Match 1 to 1 1 to 3 1 to 1 2 to 1 None 2 to 1
Proof of Concept EmergingCompany Infrastructure

28. Why are you watching this video?
• Believe that the entrepreneurial path
may be yours?
• Desire to make a difference in the
health of patients?
• Expect that increased knowledge
improves the odds of success?
• Want to get rich?

29. Are you Ready?
• Stage of Technology
• Stage of Business Plan
• Status of Management Team

30. Are you Realistic?
• Who will invest in your project?
• Philanthropy – science grants
• Philanthropy – economic development
grants
• Friends and family
• Angels
• Venture Capital
• Strategic Partner
• How much to you really need?
• What do you think your business is
worth?

31. Crowdfunding – The Good News
• Globally raised $2.7 billion in 2012; up from
$1.5 billion in 2011 and headed towards $5.1
billion in 2013 *
• There are a growing number of websites to
assist entrepreneurs in raising funds
• Investors can make very small investments –
increase in the number of potential investors
• Early trends – charities; creative projects;
consumer products
• Kaufmann Foundation cites a study
estimating the market for equity crowdfunding
at $4 billion* Source – Massolution 4/8/13 per Life Science Nation

32. Crowdfunding – The Bad News
• Life science technologies are complex and
will be difficult to tell to an inexperienced
investor group
• The amounts available are limited – $1 million
is not enough to get to the finish line
• The complex capital structures that result will
be detriments to ongoing angel or venture
rounds.
• The SEC still has not formulated the
regulations needed for equity fundraising –
maybe 2014?
• Summary – Crowdfunding will not solve the
ongoing capital challenges of life science

33. Angel Investors – A Starting Point
• Entrepreneur
• Intellectual Property
• Needs cash
• Has equity to sell
• Angel Investor
• Has money to burn
• Likes the idea
• Wants ROI

34. Starting Point – Alignment
• Entrepreneur
• Extremely Valuable Intellectual Property
• Desperately Needs cash
• Has equity to sell but it‟s “my baby”
• LIKES TO BE IN CHARGE
• Angel Investor
• Has money to burn but it‟s my money
• Likes the idea but not all angels are
“angels”
• Wants ROI
• LIKES TO BE IN CHARGE

35. The deal should be pretty
straightforward
• How much money does the
entrepreneur want to raise?
• How much equity is the entrepreneur
willing to give up?
• Who is going to control the company
after the investment is made?

36. The Basic Deal
• Amount of financing being
sought
• Valuation
• Control

37. The Basic Deal
• Amount of financing being sought
• Entrepreneur vs. investor
• How much money do you need to get
to the next milestone if things don‟t go
smoothly?
• How much do you need in the next
round?
• Can your investors fund the next
round
• It‟s all about mitigating risk?

38. The Basic Deal
• Valuation
• Who are the investors?
• Family vs. friends vs. angels vs.
professionals
• Individuals vs. syndicates or clubs
• Type of security
• Common
• Preferred stock
• Convertible debt

39. Preparing for Armageddon
•Common stock (low transaction costs)
•We‟re all in the boat and there are no life
preservers
•Convertible Debt (low transaction costs)
•Let the next investors be the bad guys
•Preferred Shares (high transaction costs)
•We need a pre-nuptial agreement
•Dividends
•Liquidation Preference
•Reverse Vesting
•Voting Rights
•Anti-dilution
•Drag along rights

40. Preparing for the Negotiation
• Dilution of company ownership
• Loss of managerial control
• Adequacy of financing
• Future capital requirements
• Alliance with investors that have helpful
industry connections
• Get help to close the deal
• Don‟t be afraid to ask dumb questions.
They‟re easier to handle than dumb
mistakes.

41. Due Diligence – You want what by when?
• Business
• Market
• Financial forecasts
• Capitalization Table
• Scientific
• Research
• Clinical
• Regulatory
• Legal
• Intellectual property protection
• Corporate
• Contracts

42. KMG – Seven Step Process
STEPS DECISION
1. Initial review of the business opportunity and business plan GO – NO GO
2. In-depth presentation by the management team in person GO – NO GO
3. Preliminary validation of the management team and
assessment of key assumptions, market opportunity,
technology/service concept, and the business model
GO – NO GO
4. Preliminary investment case (terms, valuation, and IRR) GO – NO GO
5. Presentation of investment proposal to the company/owners GO – NO GO
6. Final due diligence, including final validation of
management, legal, intellectual property rights, and
validation of the investment case
GO – NO GO
7. Negotiate the final deal and invest GO – NO GO

43. KMG- Investment Assessment
INDUSTRY
• Market size
• Market growth (historic & next five
years)
• Market participants and relative share
• Historical behaviors by market
participants
– Acquisitions
– Innovation
– Price competition
– Promotion activities
• Expected behaviors towards new
entrants
• Vendor concentration
• Customer concentration
• Barriers to entry
• Potential substitutes
STRATEGIC BUSINESS
OBJECTIVES
• Management team’s 4-6 key
strategic objectives
TARGET
MARKET
• Market segments
• Segment size
• Segment growth
• Market shares
• Geographic scope
• Product categories
• Barriers for rapid adoption rate
VALUE
PROPOSITION
• Differentiatedproducts & services
• Disruptive technology
• Intellectual property rights
• Relative cost position
• Superior clinical value
VALUE CHAIN
• Vertical integration
• Strategic partners

44. KMG – InvestmentAssessment
KEY PEOPLE
• Who are they and why
MANAGEMENT
SYSTEMS
• Organization
• Incentive structure
• KPIs
• Cash management controls
• Financial reporting
• Sales reporting
• Manufacturing reporting
• Quality systems & reporting
• Customer satisfaction tracking
• Project management process
• Sales training
• IT systems
MANAGEMENT
TEAM
• Background and experience
• Capabilities
• Team dynamics
• Compensation structure
CRITICAL
CAPABILITIES TO WIN
IN THIS BUSINESS
• Management team’s identification of
key capabilities for competitive
advantage
• Capability GAP analysis
ACCESS TO
CAPITAL
• Capital needs to reach the next value
inflection point
• Ability to attract new investors with
sufficient capital at the right time

45. KMG – Value Drivers
COMPANY
• Market size and growth
• Market penetration
• Sales volume
• ASP
• COGS/unit
• Revenues/Reimbursement
• Revenue Growth
• Gross profit margin %
• R&D expenses
• Sales & marketing expenses
• Operating income margin %
• Working capital % of revenues
• Capital expenditures % of
revenues
INDUSTRY
• Gross profit margin %
• Operating income margin %
• Working capital % of revenues
• Capital expenditures % of
revenues
• Trading P/E ratios
• Acquisition P/E ratios
• Trading EV/EBITDA ratios
• Acquisition EV/EBITDA ratios

46. Attributes of Success
Passion
Perspective
PridePersistence
Patience

47. Passion
 For the product
 Convince others of its value
 Persevere in the face of technical and financial
challenges
 For the journey
 The growth comes from the process; not the destination
 For the people
 It is the team that drives success
 Help others to succeed
 Pay it forward
 For the patients
 The reason you are doing this
 The ones whose lives you are improving
 The creators of your market and therefore all the value
you will get from your product

48. Perspective
 What do others see that I can’t or won’t?
 Why don’t you agree with me?
 How hard could it be?
 Filters

49. Pride
 Wait – isn’t this one of the seven deadly
sins?
 Quality, quality, quality
 Self satisfaction
 Competition

50. Persistence
 Learn from your failures
- There are more of them than successes
 Our industry demands data and
performance
- Accept the challenge and get the answers
 Use Perspective to understand when
Persistence becomes PITA

51. Patience
 Pathway to success is longer than in other
industries
 Be honest with yourself
- Patience versus facing reality
 A sense of urgency is dependent on one’s
Perspective
- Patience versus indifference