Funding for Life-Science Ventures: Accelerating Innovation in Tools and Services
As a cofounder of Wave Biotech (now a division of GE Healthcare*), my partners and I often struggled with critical choices regarding partnering and funding opportunities. Every new, attractive, and potentially disruptive technology will court attention once it experiences some modest adoption and acceptance, even while attempting to “fly under the radar” of major players. The challenge for life-science entrepreneurs is how best to navigate those decisions and select the right path as company founders. Weighing and evaluating potential partners and funding sources is a common cause of stress among our entrepreneurial colleagues.
In our case at Wave, we debated whether we were ready to work hand in hand with a venture capital (VC) partner. In the early 2000s, there was a lack of VC and private equity (PE) investors possessing a deep understanding of the life-sciences tools and services (LSTS) sector. With nearly all potential VC partners considered, we would have been one of the few LSTS plays in their portfolios — or even the only one. Most funds were focused on therapeutics, medical devices, diagnostics, or a combination thereof. And we felt that did not bode well for us in terms of continuing to make the best decisions on behalf of our customers.
At the time, monoclonal antibodies (mAbs) and fusion proteins were just starting to enjoy early successes and offer a lot of promise. But with a fair amount of uncertainty remaining in the LSTS space, you might argue that such realities may have been the reasons for a lack of focus on the tools and technologies that support manufacturing. Small-molecule products were more prevalent before the turn of the century, and they comprised the majority of pharma revenues overall. The tools and technologies related to such traditional pharmaceutical manufacturing were very commoditized and lacked innovation. That could have contributed to a lack of focus on LSTS then, perhaps because of a general lack of understanding of the potential value generated by new tools for bioprocessing.
However, we were also short-sighted in choosing to “go it alone.” I believe that we could have achieved much more through raising capital. Strategic moves that we had contemplated, such as shoring up some of our operational capabilities and even acquiring a critical vendor in our supply chain, would have added significant value through vertical integration, extension of product lines, and security of supply. If the correct partners with domain knowledge had existed at the time, we could have had better guidance during our decision-making process. And that would have added a valuable additional dimension to our business immediately, while the bioprocessing market was still nascent.
So we concluded then that most VC or PE fund managers had little domain knowledge. In addition to capital, we were searching for value-added operational and strategic support. And we were concerned that we might not find the right balance of support and freedom to make decisions as domain experts. Most of all, we would be a very small fish in any large portfolio. So at the end of the day, we decided to go it alone for as long as possible and build enterprise value independently — until our exit to GE Healthcare in 2007.
Capital Considerations
What do entrepreneurs need to know about growth and decisions associated with raising capital? Having faced such choices alone, and now supporting partners facing the same decision points, I offer a few things to keep in mind.
Introspection Is Key: Know yourself, your company’s culture, and its capabilities. This is probably the most significant factor in your decision regarding how to grow and how to raise capital. Are you the type of individual to seek out advice and counsel from experts and people more experienced than you? Or are you less open to guidance and more prescriptive in guiding the direction of your company? Do you cringe at the idea of having to work alongside investors? Take a very honest look at yourself and your organization to determine where the strengths are as well as the support you will need to be more successful. Whether you need help in strategy, focus, commercial execution, or engineering rigor, identify what is missing to propel your company further.
Clearly Articulate Your Vision for Growth: Markets change, and strategies evolve over time, but it helps to start with a clear sense of the trajectory (or potential trajectories) that you have in mind. Do you want to achieve a minimally viable product and exit very early on at a lower value, or do you anticipate an exit to a strategic acquirer after reaching significant market share and tens of millions in annual revenue? Understanding your potential exit pathways and potential acquirers will help align expectations with your sources of funding, whether they are angel investors or institutional capital programs.
Know Your Capital Provider: Gain a deeper understanding of each potential capital provider beyond its track record: what drives its managers, what they are passionate about, whether your interests are aligned, and what the fund’s investors expect. Those are just a few questions to think through when attempting to find a compatible VC/PE partner. You will be entering into a long-term relationship, so it is critical to do so with someone you respect — not just someone with deep pockets. Take your time in learning about your potential funding partners. It is paramount to understand whether you are looking for strictly capital or a combination of capital, knowledge, network, and so on.
Never Jump at the First Opportunity: You will regret moving too fast. Take your time in making these assessments of possible funding sources, and seek out a relationship that will add value to the growth of your business. Even when you are not actively raising capital for your company, keep networking with possible funding sources, working to understand the landscape, and learning the nuances of each group for the right time.
At Wave Biotech, we faced the choice of raising capital for funding growth, finding a potential acquirer, continuing on our own, or aligning with a strategic partner. We did pursue discussions with several groups, all of whom were very sharp investment professionals but lacked the domain knowledge and actual experience and perspective gained from operating in the life-sciences sector. In addition, most VC/PE fund managers lacked entrepreneurial experience of their own. Even fewer of them combined that with corporate life-science experience enough to understand the types of deals that would be attractive to leading companies in the LSTS space.
Although I believe that our choice not to raise capital represented a missed opportunity for Wave Biotech, it continued atop my mind as I witnessed other deals made in the LSTS sector. This experience taught me a valuable lesson and reinforced in my mind the need for a VC fund that would focus specifically on this sector.
Figure 1: US venture-capital (VC) activity has seen a slight resurgence (left) this year, although dollars invested (right) remain relatively low. For this discussion, life sciences covers pharmaceutical and biotechnology, healthcare devices, and related supplies — as a percentage in red of total VC deals in orange. Source: Tarhuni N. Venture Monitor: 3Q 2016. Pitchbook Data, Inc.: Seattle, WA, 2016
Source: Tarhuni N. Venture Monitor: 3Q 2016. Pitchbook Data, Inc.: Seattle, WA, 2016
Investment in Life-Science Tools and Services
Looking at the performance of the LSTS sector, an investor can clearly perceive the benefits of investing there. It is insulated from most regulatory and commercial-approval risks that accompany therapeutic programs. Transactions in life-science (LS) space are made up of fewer, larger deals. The sector is now seeing a slight uptick in the number of deals, but investments remain in lower dollar values, particularly those in the LSTS subsector (Figure 1). Meanwhile, leading LS players and even newcomers to the sector continue to seek innovative products, services, and solutions — and typically they are seeking to acquire those capabilities.
Partnerships, informal and formal collaborations, and licensing agreements are on the rise, but they can represent a double-edged sword to entrepreneurial groups who may give away too much value when aligning with larger partners. Small organizations sometimes lack the broad market knowledge necessary to understand the fully realizable potential of their technology. Having access to sound data and strategy development helps drive understanding of the total addressable market and potential peripheral markets — and ultimately helps you identify growth possibilities that can be made easier with the help of funding and a knowledgeable venture group.
Another risk comes with aligning goals with a larger company and attempting to commercialize a new technology when time is critical. Some large organizations have a “not-invented-here” syndrome, which surprisingly can sometimes even extend to recent acquisitions. Although some corporate managers may be advocates of the partnership and understand its long-term advantages, others may not see the strategic fit. In the most extreme cases, some consider new technology as competitive to other products in their own portfolios. That can cause internal debate within an organization, slowing down the integration process when time is of the essence.
The idea of fewer but larger deals leaves a gap in the funding environment for smaller groups that seek less funding. They have fewer funding sources to choose from to align with these startups’ goals.
Finding the Smart Money in LSTS
Our experiences and frustrations in terms of the VC life-sciences space are not unique. Many entrepreneurs have voiced similar concerns about the funding landscape and lack of real choices they have in selecting among VC funds that don’t possess specific domain knowledge. Today there may be even more of a need for boutique funds catered to the LSTS segment. The market has broadened and grown considerably more complex since the turn of the century. It has much history involving established players, with many lessons learned from trial and error along the way. It is difficult for any fund without domain expertise to navigate this landscape and make the best investment decisions for its own limited partners.
Another option that some startups consider is an alignment, license, or even infusion of capital from a strategic investor. Some entrepreneurs view this idea as an attractive validation of their technology and mark of credibility enhancing its value. At the same time, many innovators hold a consistent concern that accepting capital from a strategic investor forever marks a company. That is of particular concern when they personally seek to achieve an attractive exit at some point, potentially years later, because it can actually lower potential enterprise value over the long term. Some startup groups also are concerned with an erosion of value from previous alignments that may or may not have been renewed. Therefore, questions arise as to the validity or effectiveness of a given technology even though that may have not been the reason for the lack of renewal.
Challenges facing entrepreneurs today can be summarized as follows:
VC and PE funds lacking domain knowledge with today’s complex landscape of acquisitions and intellectual property sharing
Leading companies seeking market-share expansion and innovation through acquisitions and partnering
Startups needing more than capital, but also guidance, strong networks, operational management, and commercial execution.
A Transformative Mission
We have created a fund that is highly focused on the LSTS market segment, leveraging our decades of experience in this space. It is squarely focused on startups that either offer a unique stand-alone solution or have enormous potential for partnering with the right complimentary technology. Dynamk Capital’s goal is to grow businesses that will shape biomanufacturing, answering the call to reduce cost of goods (CoG) and speed discovery to help biopharmaceutical companies address the global need of access to therapeutics. The mission is to
Seek out technologies and services that specifically address discovery, development, and manufacturing challenges
Provide LSTS entrepreneurs with a new option for smart capital to fuel growth
Leverage a vast network of industry experts to identify targets and pair up technologies
Provide hands-on support and guidance where needed while fostering entrepreneurial thinking.
To Help Shape the Industry: If we can create a network of entrepreneurial leaders in the LSTS space to share experiences, those involved can benefit from collective knowledge and expertise beyond their own personal networks. As fund managers, we hope to inspire innovators to take chances with nascent biotechnologies, bolstering new companies with game-changing technology and giving them necessary support for growth of enterprise value. Over the long term, our vision is to serve as a catalyst for next-generation tools, bringing in outside or adjacent technologies.
*Updated April 2020, GE Healthcare is now Cytiva, a business unit of Danaher Corporation.