Venture capital is the lifeblood of biotechnology advancement and has been for much of the industry’s rapid growth over the past 20 years. The cutting-edge advancements rely on the support of firms willing to invest time, capital and other resources in sometimes risky areas such as drug discovery and cell therapy.
Getting a product to market requires significant research and support. Biotech firms build upon what are essentially hypotheses to satisfy unmet or under-met medical needs, which will lead to market demand. Yet, less than 20% of these ventures ever yield results. When they do, however, the payoff can be astounding.
That’s why venture capitalists conduct exhaustive examinations of any firm before investing thousands, or even millions, of dollars in funding. There’s never a guaranteed return on investment in any field, but the purpose of any extensive due diligence exercise is to mitigate risk.
At LongeVC, our approach to due diligence includes:
- Deep evaluation of company capabilities,
- Review of the market attractiveness for their product, and
- Competitive landscape.
Of these three areas, the most rigorous is probably the review of company capabilities. This can also be called technical due diligence. Investors will evaluate the potential asset and the risk mitigation strategy the founders have developed. Meticulous and comprehensive analysis is conducted by subject matter experts representing the investors. They want to ensure the business can do what it says it will do.
Another key component of this is the company makeup. Our team and advisors have more than 50 years of experience in the biotech and longevity spaces and have exited several biotech companies. They know what it takes to be a successful founder and lead a team to a successful market entry. This is also true in the companies we found - many of our start-up founders have previous experience in the industry and the scientific background needed to support their products.
However, the skills needed to succeed in a massive pharmaceutical company compared to a small startup are vastly different. Start-up founders need to have a visionary outlook and belief that their product will change the world. We look for both the technical and business know-how when evaluating teams.
Other considerations include the rigour of the science, the status of protection for the intellectual property, and the business plan. Depending on the investors, the review may be technically demanding. Others may be more concerned with the business strategy and protection of intellectual property.
Other elements of our due diligence can include:
- Data analysis and verification — Calling in experts to make sure data were collected in the proper settings.
- Industry validation — Receive confirmation from at least two sources confirming scientific soundness. Early partnerships and support are also promising signs.
- Technology evaluation — If everything looks good from a proof-of-concept standpoint, this evaluation will focus on whether it can be practically applied.
- Safety assessment — It can include safety analysis as it applies to early-stage testing.
- Scope for scale — Can this technology be formulated in a way so it can be easily scaled up for mass application?
- Intellectual property review: When it comes to intellectual property protections, investors want assurances that no one can come in and replicate what’s being done. Having a competitive advantage is vital when it comes to new technologies. All agreements need to be ironclad to protect that advantage. That includes founders’ agreements, employment agreements, confidentiality agreements and any agreements with scientific boards.
Due diligence, especially in biotech, is not a short process. However, it is vital to ensure the viability (and soundness) of such a significant investment.
If you are interested in learning more about investing in biotech companies or the due diligence process we follow here at LongeVC, please reach out to us at hq@longevc.com.