I recently spoke with several corporate venture capital investors (CVCs) when I moderated a panel at the 2014 RESI Conference. The discussion gave definition about the distinctions among CVCs – and similarities. Here are some takeaways from that engaging discussion that life science startups should heed.
Breakthrough science and innovative ideas attract investment. The panelists stressed the importance of novel science – new pathways, new targets in disease pathways. There was no interest in “me too” technologies and therapeutics; no repurposing or modifications of existing drugs. Speedy clinical validation continues to be valued, as well; according to BIVF’s Heidecker, “a platform technology where you can start in an orphan disease to prove it quickly in clinical trials and then expand is attractive.” Moore added, “ The number of patients and how they are organized [e.g., the existence of a patient advocacy group] is important.” SGBV, while continuing to focus on therapeutics, is beginning to diversify into integrated health opportunities (devices, digital health, etc.).
An experienced CEO isn’t always a critical selection criterion. Because of the emphasis on scientific innovation, these CVCs didn’t necessarily ascribe to the traditional maxim that investors fund experienced management teams who have “done it before”. Heidecker says BIVF, for one, is willing to fund a first-time CEO. When CVCs recognize potential scientific winners, they’ll provide mentoring or the necessary management expertise. Even among traditional VC firms such as Abingworth, I’ve heard this sentiment being echoed.
Location matters. The CV funds whose offices are primarily located on the East and West Coasts rarely look to the country’s midsection for investment opportunities. One obvious reason is that there’s plenty of companies to look at right in their own back yard. In a biotech hub like Boston, competition for funding is stiff and so there’s the perception, at least, that inferior prospects have already been weeded out. And though not stated by this panel, others have told me that the need to get on a plane to see a portfolio company is certainly a factor in an investment decision.
But as with any rule, there are exceptions. Start-ups that have a close affiliation with a renowned research institution and key scientific leaders will capture a CVC’s attention. And companies in locations, like Canada, that provide lucrative financial incentives which lower the cost of capital can be especially attractive to CVCs.
The panelists varied in the extent to which they would invest in companies aligned with their parent companies’ strategic focus, as Atlas Ventures’ Bruce Booth reported previously. On one end of the spectrum, SR One’s mandate is to generate a financial return for GSK, and the firm will consider any investment opportunities that “address the fundaments of lifespan, quality of life, and cost of healthcare,” according to Goyal. Similarly, Heidecker commented that while BIVF’s strategic objective is to “provide options to our company in the future, we focus on maximizing value, with no strings attached to the funding.”
On the other hand, Davitian says that SGBV “is a core strategic vehicle for Sanofi. We invest in order to build relationships with today’s innovators who can provide access to innovative product opportunities in the future.” According to MPH’s Moore, the parent pharma saves money when it invests in early-stage companies, by not doing the R&D in-house. Investing buys innovation and flexibility and spreads cost and risk by placing little bets on high-risk deals, especially through a syndicate. It can be more attractive than licensing, which can be costly both in terms of the license itself and the internal cost of development.
The measure of success is not what you might think. Many panelists said the measure of their success is the number of companies they invest in that are subsequently acquired by the parent pharma. Davitian commented that at SGBV, “our main success metric is the return on products, i.e. a mid- to long-term metric measured by the number of innovative products in the pipeline originating from a venture investment.” The parent pharmas aren’t as excited about exits with good financial returns, as these are viewed as money that could have gone into an opportunity that would fill the pharma’s pipeline. At the heart of it, this approach reflects the underlying driver behind pharma corporate venture funds: they use their cash to invest in start-ups as a risk-spreading strategy to fill their pipelines. SR One was an exception; says Goyal: “Our corporate mandate is to generate a financial return for GSK.”
Our advice to start-ups. Consider corporate venture funds whose strategic priorities are likely to be a good fit. A number of biopharmaceutical companies feature a corporate venture fund – the “top 20” are described here. There are various ways to approach them. SR One sponsors the OneStart business plan competition in collaboration with the Oxbridge Biotech Roundtable. Referrals or “warm introductions” provide a big advantage. Goyal favors “introductions from other investors who are looking to syndicate, as they know us and our focus, so rarely would it be a bad fit.” Davitian commented that 80% of SGBV’s new investments came from their biotech and VC network. Work to become part of the 80%! Suggestions for how to become an effective networker can be found in our recent Nature Biotechnology article, and in our recent blog post here. And remember that the funds’ websites will provide you with the key information you need to build successful relationships for future funding needs.