Venture capitalists need to have thick skin, deep domain knowledge and a high tolerance for risk if they plan to invest in organisations that could burn through millions in cash before ever having anything to show for it. This is the nature of the biotech industry, where many startups are looking to conduct groundbreaking, never-done-before research.
Of course, with great risk can come great reward. Venture capitalists have made billions in the biotech industry by carefully investigating the organisations they invest in. They look at the leadership, the market, the product or service and round it out with a robust risk assessment. At LongeVC, this process is centred around finding the best talent in the field, rapid execution, proof of concept and early industrial validation.
Biotech companies hold immense promise, but nothing is ever a sure thing. That’s why there are certain things to keep in mind when you consider pouring capital into a biotech startup.
What Does Early-Stage Biotech Mean?
It can be easy to confuse biotech with similar fields due to the areas they cover. In its broadest definition, biotech means using biological systems or living organisms to develop new products. Biotech firms often focus on breakthrough advancements in treating different health conditions. Due to the research-intensive nature of biotech ventures, investors need a high tolerance for risk. LongeVC chooses to work in the biotech space due to its incredible potential to shape life around us. Our portfolio companies include basepaws, Insilico Medicine, Longenesis and more. As an early-stage VC, we look for biotechs producing breakthrough treatments that have the potential to shape lives but first need validation and approval. Most VCs do not typically invest in pharmaceutical companies that make already-approved drugs.
The Regulators Rule
There are numerous legal guidelines to consider when dealing with health, particularly human health. Administrative authorities over food and drug approvals can ultimately determine the fate of a treatment or drug. Breakthroughs don’t always result in approvals.
In the United States, the Food and Drug Administration (FDA) has the final say on what makes it to market. Protocols approved elsewhere in the world aren’t always approved in the U.S.; FDA approval makes all the difference in the world. The same is true for Europe, where the regulating authority is the European Medicines Agency (EMA). Regulatory approval can differ between countries due to differences in trial protocols and approved ingredients. However, treatments may never make it out of the lab and into the market without that final stamp of approval.
We cannot overstate the importance of following regulatory updates when selecting a biotech VC. Legal decisions from the above organisations not only determine whether a specific treatment has approval but can also shape the direction of the entire industry. Take, for example, the case of Biogen’s new drug, aducanumab. As the first proposed treatment for Alzheimer’s in 17 years, Biogen asserts that the drug will slow Alzheimer’s progression and treat cognitive decline. Aducanumab has shown promising results in early studies and attracted significant support from affected individuals and advocacy groups but has not received FDA approval due to a lack of “supporting evidence.” Many believe that the FDA’s decision sets a dangerous precedent for the biotech space. If new and innovative drugs are slowed due to arduous approval processes, this can significantly impact how the industry proceeds with developing new treatments. Staying informed is an important part of determining the potential of a treatment to reach the market.
How Big Is the Pipeline?
A biotech startup focused on a single treatment, drug, or protocol can be lucrative. The opportunity to expand that research to other areas is a “safer” bet. Having multiple chances to “hit” with different diseases or applications can extend the dominance of a brand or business and generate revenue for years to come. This is why comprehensive platform solutions can be a safer bet. That said, in early stages, focus is always key. The company should be able to pick a clear lead program and stick to its validation, at least in the early stages of the journey, where focus and company value growth are a priority.
The Disease Matters
It may sound callous, but not every disease is valued equally. Cures for cancer would be priceless, but there are so many drugs and treatment protocols on the market that it is difficult to crack that crowded field. Any development needs to be a true game-changer. But that’s what biotech is all about.
It’s also why some biotechs focus on rarer conditions that may affect less than 100,000 people. Those 100,000 people may be willing to pay a premium to treat their condition. The success of drugs to treat conditions like restless-leg syndrome is just one example of a condition that affects a few. However, the revenue generated for drugs to treat that condition is substantial. They are also granted accelerated approval via an “orphan” indication.
Of course, a rewarding part of investing in biotech is knowing that you are contributing to making a difference in people’s lives. Whether a disease affects 100 people or 100 million, safer, more affordable and readily available treatments can be the difference between life and death for those affected.
Review the Philosophy
Many biotech companies are only interested in developing their cures or treatments and then selling them to a larger company before moving to the next project. That is great for those who like knowing there will be a chance to cash out relatively soon. Others want to develop their own sales force and own their treatments, taking them directly to consumers. That provides the potential for higher revenue, but it is also riskier. Keep that in mind.
At LongeVC, we take an ecosystemic approach to funding and seek that quality in our portfolio companies as well. In an industry where breakthroughs can directly impact human lives, a collaborative mindset is an underrated quality in founders. We aim to build a community of companies where knowledge sharing is the norm by investing in companies in the same sectors.
The Trial of Trials
You probably want to stay away from organisations that constantly ask for capital. Getting treatment to market is expensive, but having the elements in place — management, market share, proof of concept — can lead to significant early-stage funding. That funding should be enough to get an organisation into its trial phases. Any organisation that burns through cash before it can get approved for testing is probably one to avoid. We seek adequate cost structures where the founders are realistic about the funds needed to reach the next development milestone. Underestimated budgets are even deadlier than inflated ones. In the first scenario, the company risks running out of funds before reaching its next value inflation point, being left unable to raise.
With our overview of how to get started with biotech investing and this post on how to identify a promising startup, we hope to have shed light on the diverse factors we consider when supporting a biotech startup. Check out our news page for further insights on our portfolio companies, the biotech industry and updates from our partners.