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Risk Management: A Critical Component of Your Life Science Exit Strategy

Jan 16, 2020 Decorative image

When you started your life science company, you likely had two primary goals. The first was to develop the product, the drug, the technology or whatever idea led you to start your own company. The second was to capture the financial rewards you and the investors who have confidence in your idea deserve for taking the risk.

Whether your eventual exit strategy involves an initial public offering (IPO) of stock or being acquired by a global life science giant, there are steps you should take today to achieve the highest valuation possible when you’re ready to make your move. Many of these steps involve identifying and mitigating the potential risks that could derail your goals or diminish the value of your company or your ideas.

Start by Asking Four Simple Questions

Risk management for a life science startup can be complex, but it all boils down to four simple questions:

1. What could go wrong?
2. Who would be upset with us if it did?
3. What would be the financial cost of their being upset with us?
4. How could this prevent us from achieving the exit we have in mind?

Risk management is all about reducing the risk of those things happening. After all, your goal is to put your company in a position to earn the highest possible return on the time and energy you’ve invested and the capital your investors have entrusted to you.

Anticipate Risk Management Expectations

Life science startups typically sell to large public companies that are always looking for new technologies that will allow them to capture more market share. Under constant pressure to increase revenue and keep shareholders happy, the leaders of those companies are always watching for the newest innovators. They draw upon a network of experts who report on what’s happening and call their attention to promising new developments. Whether the source is someone in the venture capital universe, a researcher or a law firm, they know which companies are likely targets.

In the same way, the leaders of startups should have a good sense of which companies are likely acquirers, based on their current activities, how well the innovations complement what those companies are already doing, and any previous acquisitions. If you can surmise who will eventually make that offer you’ve hoped for, you should also understand their expectations.

Take steps to show them that you’ve properly aligned every aspect of your operations and that you’ve identified and addressed your risks. The more well-prepared your company is, the better the valuation you’re likely to see.

If your goal is an IPO, count on Wall Street to have similar expectations. When analysts can check all the right boxes, they won’t hesitate to give you a green light.

Develop a Targeted Plan

If this kind of risk management sounds complex or intrusive, it isn’t. It’s a normal element of due diligence, and the right partners can guide you through it.

Hylant has a wealth of experience with life science risk management. Having worked with other companies in the sector, we know who buys companies and what they expect to see. We develop risk management plans targeted to a company’s desired outcome. If your goal is to be purchased by Company X in a three-year time frame, we’ll develop understandable concepts and realistic strategies for your consideration and help you manage every step of the process.

Of course, you don’t have to apply this level of thought to your company’s life cycle, hoping that the market will pay top dollar for your innovation when you’re ready. But if a subcontractor’s finances collapse, a storm levels a supplier’s production facility or a jury returns a surprise malpractice verdict against your product, everything you’ve worked for can disappear. At the very least, you’ll watch that expected valuation evaporate.

Your company’s life cycle involves plenty of uncertainty as it is. Take control wherever you can to reduce those uncertainties and significantly increase the potential for achieving the exit you’ve dreamed about since day one.

To learn more about how risk changes as your company develops, read more here.

The above information does not constitute advice. Always contact your insurance broker or trusted adviser for insurance-related questions.

Author Mike Cremeans