Target ROI for a late stage investment in a biotech startup

May 16, 2008 1:10 PM

How much ROI would a VC be looking for in a late-stage biotechnology startup?

A late-stage biotechnology startup just closed a final round of private financing and is now talking about an IPO at the end of this year or early 2009. The IPO hinges on positive results from a phase-2 drug trial that is currently underway. This calendar would have been known to the investors in the final round.

If this last round of investment was at $5/share, what ballpark IPO price would the final investors have been hoping for? This would be a pretty quick return (12 to 18 months), and on the scale of biotech startups it is a lower risk investment than most. But it is still a biotech startup.

I know that ultimately the answer is, "as much as possible," or "at least $5/share," but I'm hoping for something more specific than that. What prospect would the company need to show to close the deal? A reasonable possibility of a 20% return? 50% return? 100% return?

posted by alms to work & money (4 comments total)

5X to 10X for early investors, maybe 3X for later stage investors.
posted by M.C. Lo-Carb! at 1:22 PM on May 16, 2008

The VCs that I have relationships with tend to look for a 900-1000%+ return, before the (usual) 10-year lifespan of the fund runs out and the fund is cashed out (5 or so years after the typical investment). Given those numbers, your VC would be likely to sell their shares at $50 or more, assuming the fund has got enough runway left.

The later-stage investors I've talked to are looking for a shorter turnaround, lower risk, lower return... something that roughly doubles every year for at least the first two years. So, $5 today, $10 in a year, $20 in two.

That does not necessarily mean they're looking for an IPO or first day of trading price in that range. Many funds have held onto pre-IPO shares when a company goes public (Softbank comes to mind).
posted by toxic at 1:34 PM on May 16, 2008 [1 favorite has favorites]

Thanks, this is very helpful.
posted by alms at 8:13 PM on May 16, 2008

3-7X return for late stage with an IPO. Recognize in this market an IPO is extremely unlikely; be looking for sales opportunity to sell the company. A sale will likely have a lower return.
posted by zia at 10:40 AM on May 17, 2008