There is usually a big disparity between investors and entrepreneurs regarding the valuation of an early-stage biotech company. How can both sides navigate this negotiation and reach a fair agreement?
Many entrepreneurs in biotech might be puzzled when they get a low pre-money valuation for a product with high potential. Even when a product in development can potentially tap into a million-dollar market, most investors rather focus on their returns. Consequently, they price the company to maximize returns and take a controlling stake.
Faced with this situation, how can an entrepreneur negotiate a fair price?
Let’s start with an example. Take an immuno-oncology company with an intrinsic value of €90M that expects to raise €10M from investors in Series A soon. It’s unlikely that the new investors accept such a high valuation. If they did, the post-money valuation would be €100M and their stake would be 10%. Most funds won’t invest with such a low ownership stake, though of course some may, with certain conditions. On the other hand, the pre-money valuation might not be correct if the management of young companies fails to perform a consistency check.
Challenging the forecast of entrepreneurs
Here is a real-world example. The management of a company with €6M revenues expects to have two commercialize two products in the pipeline.