Avid Radiopharmaceuticals is a promising life sciences firm backed by venture lenders. In the fall of 2008, a venture capitalist is contemplating granting a loan to Avid. Cristy Barnes reviews her proposal and noted the firm's characteristics and their difference from other investments. They look into the advantages as well as the disadvantages of going forward with the loan considering the uncertain economic environment.
Matthew Rhodes-Kropf; Ann Leamon
Harvard Business Review (810054-PDF-ENG)
September 23, 2009
Case questions answered:
- As one of Cristy’s colleagues, what argument would you make against lending to Avid Radiopharmaceuticals? Why might you support doing so?
- How does Lighthouse – and the venture debt industry in general – mitigate the risks inherent in lending to companies with few assets and negative cash flow? Does this seem like a sustainable business model?
- What sort of conflicts might arise among the goals of management, the strategics, the late-stage investors, and the seed investors? How would you resolve them?
- Should Dan take the venture debt? Why or why not? How have the arguments about taking the debt changed since the market’s unrest?
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Avid Radiopharmaceuticals and Lighthouse Capital Partners Case Answers
This case solution includes an Excel file with calculations.
As one of Cristy’s colleagues, what argument would you make against lending to Avid Radiopharmaceuticals? Why might you support doing so?
There are numerous reasons against lending to Avid Radiopharmaceuticals: although Avid has been offering innovative technology to detect certain diseases earlier, it might struggle to still serve all of them since the collapse of the financial market in late 2008. By narrowing down its product portfolio by focusing solely on Alzheimer’s, Avid will become a less attractive company than it has been before.
In addition, Lighthouse usually prefers to invest before a Series C funding, which Avid has, however, already passed. Moreover, it has almost exhausted the money raised in its Series C. This creates another negative aspect for Lighthouse, as their preferred approach entails investing right after a company has successfully raised money to ensure a sufficient cash balance in the company that allows meeting interest and principal payments.
Avid Radiopharmaceuticals’ less known seed-stage and VC investors – apart from Alliance Bernstein – on the one hand, represent another anomaly with Lighthouse’s usual investment approach, as Lighthouse prefers to collaborate with well-known top-tier VC firms. On the other hand, lacking well-known investors showcases a profound risk in lending to Avid.
An overall uncertainty whether Avid actually needs Lighthouse’s venture debt additionally constitutes to a poor bargaining position for Lighthouse and to a questionable successful deal outcome. If such an outcome is indeed unlikely from the beginning, Lighthouse might rather use its efforts, that it would now utilize for Avid, to focus on alternative investments right away.
Nevertheless, Avid still demonstrates significant strengths. The early detection of Alzheimer’s ultimately leads to better prevention and hence better curing possibilities of the disease. As previously described, its innovative technology eventually benefits many stakeholders due to considerable cost savings. Additionally, the biomarkers increase the chance that more positively-tested cases are detected and treated.
As none of the above aspects are currently accomplished by competitors, it can be concluded that Avid’s value proposition is indeed unique. Besides that, Avid, by keeping deadlines and doing so under budget, has proven to be a reliable partner, which is a vital aspect in the VC industry and at the same time raises the probability of Avid Radiopharmaceuticals paying the debt back without complications and in due time.
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