BioPharma

Building a biotech without millions in the bank

After ten years leading the underdog startup AxoGen, CEO Karen Zaderej is a treasure trove of lessons for how to creatively persevere through tough financial times, from layoffs to reverse mergers to courting angel investors.

AxoGen karen-headshot-cropped

AxoGen CEO Karen Zaderej

Private investment in biotech has exploded in recent years. Every week, another $50 million startup seems to appear out of nowhere.

While those companies regularly make the news, they aren’t the norm. The path to financial stability and market awareness is usually much longer and far more convoluted. 

AxoGen is a prime example. And as a product of its hurdles, the company is a treasure trove of lessons for how to creatively persevere through tough financial times, from layoffs to reverse mergers to courting angel investors.

CEO Karen Zaderej joined AxoGen as the sixth employee in 2006, after 15 years at Johnson & Johnson.

“I was early on, when the company was, frankly, a rat study and three patent applications,” Zaderej said in a recent phone interview. 

The science tapped into an expansive yet under-served market, peripheral nerve repair. It’s a multi-billion dollar market that continues to pick up steam, but 10 years ago, no one knew about it.

With some modest venture backing, AxoGen enthusiastically dove into the field. By 2007, it had its first clinical implants ready to go.

Then as Zaderej puts it, the team “ran smack into the recession.”

It was a tough time to be raising funds, she recalls, due to the deep uncertainty in the market. A lot of companies in AxoGen’s position went bankrupt. 

“We did lay off a lot of folks and sort of tightened our belts,” Zaderej said. 

The aim was to wait out the recession, using as few resources as possible while still moving forward. Zaderej made the call to keep the clinical work going while whittling the sales team down to a handful of key individuals.

To stay afloat, the company implemented some “creative financing.”

“What happened in the recession was that many high-net-worth individuals started managing their own money,” Zaderej explained, as many investors had been burnt through the collapse of shared funds.

The high-net-worth individuals that believed in AxoGen’s vision committed small but significant sums of money; $100,00 here, $200,000 there. It’s a hard way to raise millions.

“We also did some debt during that time period,” Zaderej said. “And then we found a couple of investors that had some capital and were willing to put it into stressed — I wouldn’t call it distressed — debt, we hadn’t been big enough to be distressed.”

Around 2010-2011, the market was beginning to pick up and AxoGen prepared for a full venture capital round. The company had around $3 million in annual revenue.

The venture round proved much more difficult than anticipated. Through a chance meeting with a public entity, AxoGen instead underwent a reverse merger. Unlike most shell companies, this one had some cash, which is part of what made it a successful move, Zaderej said.

“For us it was a way to raise some money and it put us on the public market as a bulletin board company,” Zaderej said. “So, not a great place to be in the public world, because it’s hard to trade. But we had access to capital that frankly wasn’t there in the private sector at that moment because the VCs had not raised their funds yet.”

Many business executives have since approached Zaderej for advice on reverse mergers, but she cautions them to consider the downsides. While it is “cheaper” on paper, backing into the public market through a shell company misses a lot of the marketing and awareness that goes hand-in-hand with an IPO.

It was a critical financing event for AxoGen, but Zaderej said the company knew it had a huge amount of work to do to make up for the lost publicity. The science and the products would also need to deliver.

Raising awareness was even harder than anticipated. Not only was AxoGen new, Zaderej said the market it targeted didn’t yet exist.

The executive team began meeting investors one-on-one.

“A lot of this has been about education around peripheral nerves and the peripheral nerve market,” Zaderej said. “The story of AxoGen is the second priority.”

By that stage, the company was increasing in size and reaching new financial thresholds. It gained the backing of notable healthcare and medtech investors, which further validated its case.

The company then delivered good sequential quarterly growth, Zaderej said, supporting a steady increase in its share price, market cap, and overall valuation. 

In 2013, AxoGen raised $18 million and uplisted to the NASDAQ for higher profile trading. That same year, it made Deloitte’s Technology Fast 500 list as the 19th fastest growing company in North America.

Investors began to pay attention to AxoGen. Zaderej said many have told her in recent years that the company seemed to appear out of nowhere in 2013.

In reality, it has been a long uphill battle. Her journey as CEO is also notable for another obvious reason. She’s a tall, blond female.

“I don’t actually have a good comparison, but I can say in all honesty, I’ve presented at investor conferences and I’m the only woman I see, other than maybe some people organizing the meeting.”

But that has also made her memorable, as a rare female CEO moving in surgical and investor fields. Her advice for other women is to work with it.

“Women can have a slightly different style and their style is sometimes interpreted differently than a man’s,” Zaderej noted. “So it’s something that you have to be cognizant of — those interpretations, so you know you’re managing for that.”

Photo: AxoGen

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