The crossover round has become a rite of passage to any biotech company intending to tap the public markets, whether it be to fund specific clinical programs that will lead to long-term value creation in the public markets or serve as a quality or diligence check to more generalist investors or a higher step-up multiple on the IPO valuation. Ultimately, every biotech company is constantly chasing funding, and, for many, the crossover round is a necessity.
Why Do Crossovers Matter?
While an influx of capital is always a positive, from a company’s perspective, a crossover round in which public market investors participate not only sends a strong signal to the rest of the public market but can also de-risk the future IPO. It’s no secret that companies who build a successful crossover syndicate have more robust IPO order books and are more likely to trade well when they become public. In many ways, a crossover can serve as a backstop to the future IPO, especially when the “openness” of the IPO window is called into question.
From an investor’s perspective, the level of diligence one conducts during an IPO or follow-on roadshow pales in comparison to that of a crossover round. When public paper offerings take place, funds may only have an hour long one-on-one with the executive team before having to arrive at an investment decision. While participation in a crossover obviously limits liquidity in the short-term, the ability to conduct a deeper dive into the company’s technology or asset can prove to be invaluable in the long run. For investors that have confidence in a company, participation in the crossover round as well as the IPO can ensure a more preferred share count when the IPO shares are allocated.
Here are three important considerations for executive teams considering a crossover financing.
While it’s easy to plan a process around best case scenarios, the unfortunate reality is that companies often lose momentum in their fundraising process. A loss of momentum can occur for many reasons, such as clinical data being more murky than clear or the story not quite resonating with funds. While roadblocks are understandably frustrating for management teams, completing a successful crossover while simultaneously preparing for life as a public company is a daunting task. It’s completely normal to feel a sense of frustration, but by approaching setbacks pragmatically with the help of credible advisors, management teams can persevere and push towards the finish line. However, it is imperative that companies are opportunistic when positive catalysts occur, whether it be identifying a lead investor, a clinical program’s readout, or even a competitor’s validation of a less understood area.
Groundwork in Place
From a purely logistical standpoint, companies must have their affairs in order before beginning to socialize the idea of a crossover round with the Street. A few of the must-haves before formerly kicking off the process include:
- A well-positioned investment opportunity that clearly articulates the thesis and highlights the credibility of management to execute on projected timelines and milestones.
- A data room with all the preclinical and clinical data generated possible, corporate documents, audited financials and more.
- A thought-out target list comprised of the most active groups that lead and follow, as well as funds that may be “lower profile” but are particularly active in a certain disease area or class of therapeutics.
A Trusted Advisor
For management teams that are actively preparing for life as a public company, the time required to just prepare, let alone actively manage a crossover process, can be daunting. There are many directions management teams can go when looking for an advisor with knowledge of the current landscape and best practices when considering a crossover financing. Management teams can always lean on IPO syndicate members – after all, the assistance that they provide in a crossover financing can only make execution of the IPO easier.
Having a well-defined process in place for the crossover round that clearly tracks investor interaction and level of engagement throughout the fundraising can also add tremendous value to both the crossover and the IPO process. An investor relations team is uniquely positioned in the ecosystem to add value to executive teams in the fundraising activities. In the normal course of business, investor relations firms provide their extensive relationships with Wall Street, corporate strategy and positioning, meeting logistics or fund intel, and the ability to provide sound judgement during an ever-evolving corporate lifecycle. Perhaps no service is more valuable than actively managing the process of a crossover round in a financial advisor role. These services can prove invaluable as a company navigates the critical time that is crossover financing.
The Gilmartin team is well-versed in optimizing crossover round processes. For more information on crossover financings or what we are seeing in the markets, contact us.
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Nick Colangelo, Associate