Diligence Deep Dives: How to Avoid Pitfalls During Investor Diligence

A few key takeaways

This article offers insights into common mistakes made by biotech founders and provides actionable steps to mitigate these issues during the investor diligence process. Key lessons include:

• Balancing scientific depth with clear business strategy.
• Presenting accurate market analyses and competitive positioning.
• Confidently present achievements without underselling yourself or your team

Common Mistakes Founders Make During the Investor Diligence Process and How to Avoid Them

This list draws strong inspiration from three pieces written by Morgan Cheatham, Tom Blomfield, and Mark Zipkin.

Not Clearly Communicating Vision and Value Proposition

Mistake: Failing to articulate the company’s long-term vision, strategic planning, and how the investment will be used, leading to unclear goals and expectations.

Actionable Steps:

• Present a clear and compelling vision for the company’s future, including strategic plans and specific milestones.
• Outline how the investment will impact growth and success, and provide a roadmap for achieving these goals.
• Be transparent about risks and your strategies for mitigating them.

Inaccurately Estimating your Addressable Market

Mistake: Overestimating or underestimating the size of your addressable market, leading to unrealistic growth projections and potential mistrust from investors.

Actionable Steps:

• Conduct thorough market research to obtain accurate data on your target market size.
• Utilise reliable (bottom-up) methodologies to estimate your addressable market.
• Present a realistic and well-supported market size that aligns with your business model and growth strategy.

Ignoring the Competitive Landscape

Mistake: Failing to acknowledge or understand the competition, leading to a lack of investor confidence.

Actionable Steps:

• Provide a comprehensive analysis of the competitive landscape.
• Clearly articulate how your company is differentiated from competitors.
• Be honest about the competition and your company’s unique advantages.

Presenting Incomplete or Non-Standard Data Analyse

Mistake: Using non-standard or incomplete data presentations that confuse investors.

Actionable Steps:

• Stick to standard formats for financial statements and other key data.
• Use unconventional analyses only when they serve a specific, nuanced purpose.
• Ensure your data presentations are complete and easy to understand.

Providing Too Much Data

Mistake: Yes, you can include too much data: both in your overall pitch and within your data room. This is particularly common when focusing excessively on detailed scientific or technical information at the expense of strategic insights.

Actionable Steps:

• Focus on key performance indicators and other critical metrics that affect the business's current or future health.
• Customize your presentation to address the specific interests and concerns of your investors and highlight the most pertinent information.
• Limit the number of slides filled with data; focus on strategic insights and vision.

Hiding Detailed Operational and Financial Data

Mistake: Hiding detailed financial and operational data or not clearly differentiating between fixed and variable expenses. By obfuscating this data, you undermine your credibility by suggesting that you don’t know or understand the key risks of your business.

Actionable Steps:

• Provide detailed breakdowns of key financials, including contributing expenses for Cost of Goods Sold and Operational Expenses.
• Clearly differentiate between fixed and variable costs.
• Be transparent about all aspects of your business, including risks and challenges.

Low Data-to-Ink Ratio

Mistake: The data-to-ink ratio is the amount of “data-ink” divided by the total ink required to produce a graphic. Using graphics which are difficult to interpret or cannot be understood without detailed explanation will distract from your messaging.

Actionable Steps:

• Use simple, clean visuals that highlight key data points.
• Avoid cluttered graphics and focus on high data-to-ink ratio visuals.
• Use data tables where they are more effective than charts or graphs.

Underselling Yourself

Mistake: Downplaying your achievements and potential, which diminishes the credibility of your leadership team and the perceived growth potential of your company.

Actionable Steps:

• Reject the scientific ethos of downplaying your accolades.
• Confidently present your achievements, industry connections, and relevant experiences.
• Highlight your team’s strengths and how they contribute to the company’s growth potential.

Underselling and Underutilising Your Team

Mistake: Not involving functional leaders in follow-up meetings with investors.

Actionable Steps:

• Include key team members, such as CXOs and VPs, in investor meetings.
• Showcase the expertise and commitment of your team.
• Help investors understand the company culture and dynamics.

Overreliance on Synchronous Communication

Mistake: Depending exclusively on real-time meetings, which can delay responses and extend the diligence process due to scheduling constraints and lack of planned communication.

Actionable Steps:

• Use asynchronous communication tools for video responses and email for follow-up questions.
• Encourage investors to send questions via email and respond promptly.
• Balance asynchronous communication with necessary synchronous meetings to build relationships.

Not Valuing Feedback and Transparency

Mistake: Being closed off to feedback or hiding potential issues.

Actionable Steps:

• Be open to investor feedback and suggestions.
• Transparently address potential issues and how you plan to mitigate them.
• Demonstrate a willingness to listen and adapt based on feedback.

Sources:

The Anatomy of the Data Room (Morgan Cheatham)

How to Pitch Your Biotech Startup to a Life Sciences Investor (Mark Zipkin)

Taking Risk (Tom Blomfield)

Diligence Deep Dives

• Part 1: Demystifying the Due Diligence Process in Biotech
• Part 2: Vetting New Biotech Products
• Part 3: How To Avoid Pitfalls During Investor Diligence
• Part 4: Essential Questions to Vet Your Investors