Over the first half of 2012, there has been a lot of data and news about how the venture capital industry is doing. I’ve written a few drafts of a post on the topic from a biotech perspective but each one has fallen flat because in my opinion the problems in biotech VC land are more fundamental than whether LPs are doling out cash and the public markets are welcoming. And since VC backs much of the translation from research to products outside of pharma, even those of us innovating without venture dollars should be wondering how the next generation of innovation is going to be funded. The following are some of my thoughts on the challenges, lessons learned and potential steps to get all of us back to thinking about the real goal – building value by helping patients.
Capture Value Along the Way – The main exits for biotech investors have historically been the public markets and mergers & acquisitions by larger companies. For most biotech companies, an IPO now offers another financing rather than an exit and the markets are looking for more mature companies than years past. M&A has picked up some of the slack but the deals are now structured so that return to shareholders is often delayed well beyond the transaction to future milestones. The impact is that biotech venture fund lifecycles draw out and angels are unable to cash out and reinvest in new opportunities. Since the situation seems unlikely to change any time soon, what can be done to capture some of the value that has been created prior to a formal exit? Is there an opportunity to provide partial exits using a publicly traded private equity (firm or fund)? Develop an active private market for biotech opportunities? (A search of SecondMarket for biotechnology gave only seven companies.) With the significant downsizing of R&D in pharma, is there a way to deploy a pool of pharma funds to keep interesting assets in development and allowing capital to go to newer, riskier ideas?
Align Timelines – Another approach could be to search out investors with a longer horizon. There is a lot of discussion about biotech companies raising dollars from advocacy/non-profits and potentially from crowd funding – essentially getting funds from individuals (not necessarily accredited investors), whether for charity or investment. To set the stage for the next sections in terms of scale of dollars invested, biotech VC invested in the second quarter of 2012 alone was $696,770,700 across 90 deals.
Advocacy groups: An example of an advocacy group that has made a large commitment to funding drug development is the Cystic Fibrosis Foundation, which launched its Therapeutics Development Program in 1997 and has developed a strong pipeline of funded projects. CFF invested approximately $75M into a drug developed by Vertex that was recently approved. To get a sense of how much money can be raised in charitable contributions for development of new drugs, I looked at the CFF 2011 Annual Report. Their model is interesting and doesn’t depend solely on public support but also includes net pharmacy services. These dollars support more than just new cystic fibrosis treatments; CFF provides many other valuable services to CF patients. (The Leukemia & Lymphoma Society also has an active program to support drug development. In 2010, the society invested $8M in contracts in their Therapeutic Acceleration Program.)
Crowd Funding (non-equity): The crowd funding site Kickstarter does a great job of providing close to real time stats (table below; as of 31 July 2012). The seven projects with $1M+ raised were in: music (1), games (3), design (2) and comics (1). Petridish is a more recent crowd funding player that is focused on science. Based on the projects listed as Fully Funded, 23 projects have raised $103,080 via Petridish. A variety of other sites are also looking to fill the niche for science crowd funding. While most are too young to evaluate (data as of 31 July 2012), here are the other sites I looked at*:
- iAMscientist – Eight projects: 3 expired and 5 ongoing
- MedStartr – Nine projects: all ongoing.
- Microryza – Twelve projects: 3 funded ($8,770 total), 7 expired and 2 ongoing
- RocketHub – Sixty seven projects with science in search: 20 funded ($59,522 total), 40 expired and 7 ongoing
- #SciFund Challenge – Seventy five scientists raised ~$100,000 in May 2012
A couple of questions come to mind about crowd funding biotech:
- How do the sites establish credibility about the projects, allowing funders to feel there money will be well spent?
- Will the industry need more infrastructure in these sites to meet the large capital needs?
- How creative can the industry have to get to provide funders with first access to the final product and/or access to the creator/artist?
The portals that enable equity based crowd funding that will come online under the JOBS Act will likely encounter similar issues – and many more as companies then have to manage shareholders, etc.
So What Comes Next?
With cooperative funding sources on the rise (angels, corporate venture funds, advocacy groups and various crowd funding approaches) and the challenges in raising new venture funds, now could be a good time to develop a new business model for “translational investors” to fund the next generation of biotechnology innovation.
*Thanks to the folks on Twitter (@eperlste, @steen1969) who helped identify the crowd funding sites. The data is from projects listed on the given websites as of 31 July 2012.