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Quadrant 1, Squad 51, this is Rampart.

July 27, 2012

As I said yesterday on Twitter, I especially liked this post, More Than Half of Biotech Venture Financings Are Early Stage Deals, by Bruce.

He’s right, the definition of “early stage” matters.  I continually see reports in the media and from state economic development entities that purport to be talking about the same thing, but when you look at the numbers, they don’t jive.  In part that’s because you can pretty much make numbers tell whatever story you want them to tell, if you are crafty.  But it’s also definitional, I think.

Hi, my name is Andrew, and I’m a Quadrant 1 guy.  As Bruce defines it, “Quadrant 1 is a classic biotech startup – typically roll-up-your-sleeves venture creation around academic science or a whiteboard concept.”

Lots of good stuff to discuss further in this post.  But for now, this exchange is what got me going:

Bruce Booth Bruce Booth@LifeSciVC
@MartinEglitis 1st off, funds are 10-12 years so horizon is longer. 2ndly, many Quad1’s sell early. Avila, Amira, Calistoga – all 5 yrs.

“…many Quad1’s sell early.”

A former Quadrant 1 colleague–who I appreciate very much–used to say, “You gotta build in your out. Build in an out.”  Of course he also said he invented the Internet and wrote songs for Kurt Cobain when he lived in Seattle.  And, I quote, “All women love sea bass.”  But I think he’s on to something when he says build in your out.  And in today’s economic climate, I think it’s an especially attractive concept.  Maybe in the past it would pejoratively be labeled “defined liquidity.”  Today I think if you can show at least a path to possible liquidity, by building in an out within 5 years, you’ve done something of value.

What do I mean by building in an out?  Getting a potential bigger strategic collaborator around the table early.  Like a supplier of a component, or a strategic reseller.  A company that in the future might say, “hmm, I think I’d like to just buy this,” because they see you as accretive or a fit in their strategic plans.  Or getting a strategic investor–and this is perhaps similar–in early.  A company that invests to get a seat at the table and watch as things develop.  And if you hit milestones and start to look like you have traction, decide to take you out.

I can’t say we’ve always been successful in doing that.  We were in one case, and the “out” went out.  Of that particular business.  But it’s worth trying.  In the one exit I’ve been involved in, we almost built in an out.  Almost in that we had a large strategic partner at the table.  And while we were in the process of putting together our Series A, another strategic partner got interested, found out we were talking to another company, and offered a decent step-up to the Series A premoney to just acquire the company outright.  The founders took the deal.  So, that one kind of worked.

Build in an out.  It may not always make sense.  But I think it does in many cases.  Sell a Quad1 early!

And I just realized that Bruce shows up in my blog posts more than anyone.  Even more than Paramedic John Gage from Emergency!


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