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The Secret Life of a VC

As our sister publication GenomeWeb Daily News reported yesterday, VC funding is tough to come by these days for life science startups — second-quarter VC funding fell by 39 percent year over year, marking the fourth consecutive quarter in which life science investment fell.

But Dennis Purcell, senior managing partner of Aisling Capital, thinks that a bit of knowledge can help life science companies improve their chances. In a post for Xconomy, he provides a helpful primer on "the inner workings of a venture capital firm" in hopes that "an understanding of the entire funding mechanism will better help entrepreneurs understand what to expect, the types of information the venture capital fund will request, and how long the process will take."

Competition for VC cash is steep. Purcell writes that his firm can receive between 500 and 700 proposals per year, which it winnows down to about 150 proposals whose authors score interviews in which they are expected to highlight the benefits and risks of the potential investment. These presentations "should include details about the management team, the investment proposition, the clinical trial plan, the FDA and reimbursement risk of the product, as well as what the competitive landscape and relevant commercial strategies might be."

That group is then culled down to around 40 or 50 for whom the VC firm performs due diligence. "This process further analyzes the scientific and business proposition of the company, and includes detailed conversations with third parties, such as scientific and clinical advisors, lawyers and reimbursement and regulatory experts, other potential investors, as well as further dialogue with the management team and board of directors," Purcell says.

Once a deal is closed, life science startups need to know what to expect from their new benefactors. For example, a member of the investing firm will usually join the company's board.

And of course, the ultimate goal of any investor is to secure a return on investment through an exit. This can come from an IPO, a merger or acquisition, or a capital infusion that is "large enough to independently sustain a company over a longer period of time until an acquisition or IPO."

Purcell warns, however, that all three of these exit options are much harder to achieve than they used to be.

Joshua Phillips, a managing partner at Catalyst Health Ventures, agrees. He tells GenomeWeb Daily News that "exits are far and few between" for life science firms, "so it's a very difficult space to go out in a very traditional manner."

In the genomics sector, "2012 has seen a moribund IPO market," GWDN reports, with not one company in the 'omics or molecular diagnostic space completing an IPO so far this year.

M&A activity has also been "sluggish," according to GWDN. Through the first half of 2012, "acquisitions were off almost 30 percent compared to a year ago."