What Is the Role VCs Play In Partnering With Small Biotech?
By Rob Wright, Chief Editor, Life Science Leader
Follow Me On Twitter @RfwrightLSL
When Peter Young began planning his session proposal for this year’s BIO International Conference, the executive-in-residence with AM Pappas & Associates, like many submitters hoping to serve as 2015 BIO change agents, wanted to create a session worthy of your time. While I am sure you will find the session he will be moderating fascinating (Inventing Your Own Hub: Evolving Institutional Models for Translational Medicine, June 16, 3:30 PM – 4:45 PM, Room 105AB), Young, a 35-year veteran of the biopharmaceutical industry, took some time to provide additional industry insights — ones you are not likely to gather by only attending his session.
Life Science Leader (LSL): Explain the role VCs play in partnering with small companies, to help them go public or get acquired.
Peter Young (PY): That’s what’s called an exit! The exit, as the word implies, is the end of the process, or at least a major watershed event, from the small company’s perspective. What this reflects is the process of moving a technology along in its development to get to a successive point where there’s a significant step in the value development that the technology represents. As we all know, that’s a very involved, protracted, expensive, and risky phenomenon. The outcome — when the technology triggers that exit and attracts the support of the public market or a company acquisition by a larger firm — is really the culmination of what is often a decade or two of work, struggles, investments, and trial and error in too many cases.. The role of the VC, when it’s at its most effective, is to help to cultivate those companies. To be able to navigate this lengthy process you need a lot of capital, but you also need significant amounts of experience and discipline around the development activities that you want to progress. Nearly 100 percent of the time, small companies lack some of the requisite expertise – hence the trial and costly error. A VC brings capital to the table, but also expertise, development, and investment discipline. In addition, there’s an economic dimension that is particularly challenging in such a highly regulated environment. Finally, VCs bring a wider industry relationship network from which companies can benefit.
LSL: You have a broad base of international and business experience, while perhaps some of your clients may have had a much more narrow focus. How do you go about getting those people up to speed in a way that helps them without offending them?
Young: There are genotypes and phenotypes. One scientific genotype is the scientist who thinks he or she knows everything and believes that anything that they don’t already know can’t be that important or that complicated. That can be a difficult genotype to work with. Sometimes those people are absolutely brilliant, and sometimes their innovation or their invention is really compelling. But having a genotype that can negatively affect the relationship dimension in this process is not good. Face it, even big, established, and very successful pharma companies can get development or commercialization decisions wrong. This is a complicated business, and you can have the smartest people at the table, but you need them to be able to pool their knowledge, kick things around, and struggle with the variables and trade-offs to get to the best possible decisions. International experience, which can be an important dimension, usually comes into play somewhat further downstream during rollout of the development and commercialization process. What is more complicated is the development process itself, which typically takes a decade or two. At any given point in time you have to integrate all these variables, all the complexities, from all the different functional perspectives that make up an effective life sciences company and industry. You have to do this longitudinally, over time, and keep things on track. It’s an extraordinarily high-risk proposition, and it’s one of the reasons why, when a venture firm helps move a company from one point in its development to the next, there are such significant step-ups in value. If you think back to when that inventor may have been spinning their technology out of an academic setting, it may have been worth very little. Fast forward to when that technology is getting into clinical or late-stage trials, where it might be able to support an IPO or an acquisition. Then, you can have a 20-, 50-, or 100-fold increase in value. I try to help these inventors accumulate the information that supports these increases in value, while de-risking the asset to a considerable degree. The best way to do this is by embedding that inventor into a mix of relationships over time to fill in the gaps in their knowledge and experience. They may know the technology better than anybody else, but they’re just one person. This is why I say relationships are the third pillar in what enables successful development. There’s also a positive scientific founder phenotype that is curious and recognizes that, compared to their own experience, there’s much more to a new medical innovation that’s actually going to make it into the clinic. Even where that’s not the phenotype, sometimes you can still upregulate it to be collaborative, open-minded, and create a willingness to work with the other forms of necessary expertise. With a hardcore scientist, one successful strategy is to approach the conversation as a data-driven discussion, where the experience required to move things forward is a function of a collective accumulation of the data required. That’s true in a literal sense in terms of the regulatory information you’re going to have to compile. It’s also true in a figurative sense, referring to this body of collective experience that you need to bring to bear.
The second part of this four-part series of interviews with Young — “Are You Ready For A Grant-funding QA Audit?”