Magazine Article | March 28, 2012

The Evolution Of Biotech VC Funding

Source: Life Science Leader

By Suzanne Elvidge

Zohar’s career as an entrepreneur started at 16 with her first start-up company and continued through graduate school where she created two companies. One, with a classmate who later became her business partner and husband, manufactured and sold olive oil and other health-promoting foods and managed to take a large percentage of the Israeli market. After graduation, she created an equine veterinary care company, EQ. Through PureTech, which was launched in 2004, she has been involved in founding 16 start-ups that are now at varying states of maturity, and she is currently on the boards of Enlight Biosciences, Follica Inc., Vedanta Bioscience, Mandara Sciences, Karuna Pharmaceuticals, Tal Medical, and Satori Pharmaceuticals. This catalog of experience has given Zohar an almost unique perspective on the entrepreneurial process, from both the side of the entrepreneur and that of the investor.

The Current Role Of VC funding
According to PriceWaterhouseCoopers, in the first three quarters of 2011, life sciences (biotechnology and medical devices) saw declines related to the dollar value of venture capital investments and the number of deals, as well as a shift from early-stage and seed deals toward later-stage deals.
“The VC industry has been going through tremendous change and attrition over the past few years. While there are still funds with capital, assuming a fund has cash available is no longer a given, as many venture funds have not raised a new fund since 2008 or before and are therefore primarily in the position to support their existing companies,” says Zohar. This leaves a funding gap for all biotech companies, particularly for the very early-stage companies. PureTech Ventures aims to provide funding and support in order to fill this gap, at least to some degree.

“The VC model is changing, and there seems to be a movement to a closer relationship with strategic partners, with flexible models for new companies, and more capital-efficient approaches to building companies. This is the polar opposite of the perspective of the VC industry a few years ago and is all very much aligned with our model — we have been thinking this way from the beginning,” says Zohar.

A Different Type Of VC Model
Rather than just providing funding to already-established companies, PureTech Ventures works with scientists to create companies from the ground up: from establishing a leadership team through to creating syndicates for later-stage financing rounds. The company’s portfolio includes companies in the preclinical to early clinical space developing devices, drugs, and diagnostics, as well as research technologies, with a focus on major unmet medical needs. One example is Gelesis, which focuses on obesity and other related comorbidities.
“I believe our approach is unique because we proactively form companies with scientific leaders where most VCs primarily invest in companies that someone else (an entrepreneur) has already formed. We are therefore more of an ‘institutional founder’ or entrepreneur, where a VC is more of an ‘institutional funder’ of companies.”

There are other players that are involved in supporting early-stage new companies, such as incubators and accelerators, university technology transfer offices, seed and early-stage venture funds, and corporate incubators. But, Zohar sees PureTech Ventures’ approach as rather different — as being the entrepreneur, rather than just supporting an entrepreneurial individual. “What we are doing more closely mirrors what an individual entrepreneur does but with the benefit of the breadth and scale of an organization,” says Zohar.

The Role Of Translational Medicine
Translational medicine is the transfer between academic research and the clinic, often described as moving research from bench to bedside, but it is traditionally difficult to fund, particularly from VCs. The gap between the concept and the market is where many technologies face obstacles and ideas fail, often known as the “valley of death.”

“Traditional VCs generally prefer to be part of a syndicate investing tens of millions and backing an entrepreneur/management team that they know and trust. VCs are primarily structured to invest capital and provide some guidance and mentorship, but they are not set up to found and manage newly formed companies, particularly if those new companies require only a small amount of money initially. This step requires a significant amount of human resources. In contrast, we are not confined by the same restrictions,” says Zohar.

Filling the “valley of death” gap allows PureTech Ventures the opportunity to invest in new research. “We are doing a lot in areas that some VCs have written off due to past failures, such as obesity and metabolic disease, which are both areas of major unmet need and are growing markets and a focus for interesting, breakthrough science. We also tend to do things where several technology areas converge. Some examples include the interface between the immune system and the microbiome, and noninvasive devices and new media influencing cognition and CNS disorders,” says Zohar.

Though she does not have an academic science background, as the daughter of a researcher at Massachusetts General Hospital, medical laboratories have always been a familiar place for her, and she has built a team of top-tier scientists and advisers at the company, vital for the transition between bench science and the market. “While my background focuses on business and entrepreneurship, most of the team that we have built at PureTech Ventures have strong scientific training. When we form a new company, we also make sure that we work closely with the leading experts in the relevant field,” says Zohar.

How Does It work?
Within the area of translational medicine, the PureTech Ventures team, along with a group of leading experts in that field, proactively identifies a problem and then scans technologies across a wide range of scientific disciplines that might address the specific problem identified by the scientific experts that have cofounded the company. When scanning through the technologies, PureTech applies a sort of due diligence “shopping list” — looking for novelty, significant unmet need, protectability, and scientific credibility. In order to attract investment and support from PureTech Ventures, the ideas must fulfill these points:
Novelty: Research must be cutting-edge, and technologies must have the potential to yield products that are clearly differentiated from others on the market.

Significant unmet need: Technologies must address clearly defined gaps in the market. This means they must be a “need to have” not just a “nice to have” for the end users, the physicians, and the patients.

Protectability: Technologies must be patented or patentable, and PureTech Ventures is able to get involved even before patents have been filed.

Scientific credibility: PureTech Ventures’ scientific team members and advisers must be confident of the scientific credibility of the scientists and the technologies, and they will review reproducible data, peer-reviewed papers, grants, and even the history of the lab from which the technology originates.

These concepts are then formed into virtual companies, and they are kept virtual for as long as possible, because this increases flexibility and reduces costs. Once the idea is shown to be practical, PureTech Ventures team members act as an interim management team, and employees are hired and advisory boards are put into place.

Finding The Funding
Venture funding isn’t always the answer (or at least the only answer) in the long term, because it puts enormous pressure on a company to produce a financial return and can lead to VC control of company boards, causing a potential conflict of interest between the return on investment for the VC fund investors and what’s best for the start-up and its other (non-VC) investors. The VC board members also don’t always have the specific experience and expertise needed on a technology-based start-up board, where the new company needs both scientific as well as business advice.
“Entrepreneurs need to take a really thoughtful approach to the funding process and not assume that the past approach of raising subsequent series of financing is still relevant to everyone. Venture capital is now just one component of a funding ecosystem necessary to get a company to its key inflection points,” says Zohar.

PureTech Ventures finds its portfolio company funding from a variety of sources, such as grants from nonprofit organizations, investments from angel investors, industry partnerships, as well as from traditional VCs. An example of PureTech Ventures’ partnerships is Enlight Biosciences, founded in 2008, which allows a syndicate of seven leading global pharmaceutical companies to work together (precompetitively) to support new platform technologies from academics and innovators through founding and managing new technology startups. Exits — whether through acquisition and IPO or partnerships — are also tailored to the company. An example of this is Mersana Therapeutics, which signed a deal with Teva Pharmaceuticals worth up to $334 million.

Some Advice About Your Pitch
Through her career, Zohar has heard her share of excellent pitches, as seen by the company’s current portfolio. “The best pitch is one that happens as a result of us proactively reaching out to a scientist or innovator and where they tell us about their work and ideas. For us, the best of these involve a high level of novelty coupled with deep knowledge of a given field. For example, one scientist we are working with has an entirely new perspective on how the immune system functions that could fundamentally alter the field,” says Zohar.

However, with the good comes the bad, and she has seen pitches that clearly have not been very well thought through. “The worst pitch is one that feels generic and is targeted very broadly and is clearly being sent to many people at once. This can result in us being approached by an entrepreneur who clearly has no idea where we are focused. We work in venture creation and seed investments, so when someone comes to us proposing a large Series D round, that signals that they haven’t taken the time to look at what we actually do and that they haven’t really thought through their funding strategy and prospects. These mistakes could reflect on other decisions that they have made or will make in the future. Another thing that can reflect negatively is if someone comes to a venture firm and mentions other venture firms they are talking to by name. For us that is a surefire way to make us lose interest fast, because we pride ourselves on being ahead of other firms. You can also lose a competitive dynamic by telling one venture firm about others you are talking to.”

Throughout this process, she has learned lessons, too — for instance, how much credence to put on gut feelings. “Opportunity analysis is a balance between feeling in your gut that something is a great idea and then validating that gut feeling independently. If you only follow that ‘gut’ excitement, there is a risk of devoting yourself to a project that has flaws. On the other hand, if you are too aggressive in looking for a reason to kill a project, pretty much every project (even great ones) can be snuffed out. Finding that optimal balance is a career-long endeavor,” says Zohar.

Overall, Zohar advises those seeking VC funding to be innovative, to learn to balance gut feelings and validation, to think through the strategy, to do research when creating a pitch, to consider a number of routes for funding, and to keep certain things confidential. Actually, these are probably a wise set of rules by which to run any business, whether start-up or established.