Is Bigger Better?

Tim Harris, Venture Partner, SV Health Investors

Tim Harris, Venture Partner, SV Health Investors

You could argue that Biotechnology came of age financially when Genentech went public in the fall of 1980 followed by Cetus in early 1981. Few Biotechnology companies existed before that. In 1981 owing to the development of both recombinant DNA technology and the ability to make monoclonal antibodies, many small companies exploiting these technologies were set up. Most of them were financed with relatively small amounts of capital by rather few venture capital firms,to get them going. More money was invested as they met their milestones. Many of them obtained strategic alliances with pharmaceutical companies.The pattern was to go public after a couple of rounds of venture funding plus a strategic alliance. This was a financial template and the road map for the Industry.

Fast forward to now.

There are still the traditional start ups in Biotech where Founders with good ideas and good technology will raise small amounts of seed money from certain VCs or angel investors and develop their company from there. Success is dependent not only on the science that is done and the meeting of the goals, but also on the quality of the people and the management teams they attract. Adhering to proposed timelines and budgets is table stakes for continuation of these companies.

"Success is dependent not only on the science that is done and the meeting of the goals, but also on the quality of the people and the management teams they attract."

But there is also a new model that has developed over recent years which is the province of some of the larger VCs investing in Biotech such as Flagship Pioneeringand Third Rock Ventures in Boston, and ARCH ventures in Seattle.Flagship Pioneering last year closed a $3.4 B fund and Third Rock ventures announced a new $1.1B fund in June of 2022.In this newer model companies with different technologies and approaches to new medicines are incubated internally within the VC firm in ‘stealth mode’ for up to two years or more. They assemble the team from within and collect the appropriate experts from academia and then come outof stealth mode (sometimes glamorously as in a debutante ball) with as much as many hundreds of millions of dollars already earmarked for the company. The money is designed to take them to a large value creation step such as a drug in the clinic with proof of concept and not to just drug candidates or INDs.

Whether this is a successful strategy or not, depends on much the same things as the small step wise approach: experienced management teams, great science, great technology and a bit of luck thrown in for good measure. The external market for IPOs and the sentiment of investors for the Biotech space, which is not very high just now, can also affect the outcome.But it is clearly better to have more money rather than less. The discipline that goes with not having direct access to very much money may help the smaller companies in the longer run. The Boards of these companies have an obligation to help management to view the risk in the appropriate way, to make the right decisions andto manage the company budget accordingly. The ability to raise money even in a down round which is dilutive for the original shareholders, is better than going out of business. This I was taught was what was called‘terminally dilutive’.

Given what Biotech has done for healthcare over the last 50 years, one hopes that that the prevailing market changes soon and that those companies financed with small amounts of money stepped up over time can continue to co-exist along-side those set up with large amounts of money from the get go.