Financial investors generally buy debt and equity securities, while strategic investors generally buy equity or sign research funding agreements. The major error of private companies is raising too little money. Undercapitalizing frequently backs private companies into a corner so that they must resort to desperation financings at poor valuations. Biotech companies generally have significant business or technology complexity. To balance these risks, Brown recommends a simple financial vehicle.
Valuation generally decreases with greater capital structure complexity.
The best safeguards for achieving a good valuation are generating competition among investors, starting the process with a healthy cash balance, and having existing investors with sustained enthusiasm and deep pockets. It generally takes 3-6 months to raise money. For biotech companies, convertible preferred is still the preferred security, with straightforward anti-dilution provision and no nested warrants. There s no shame in being private. You should plan your capital structure.