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Venturing into Startup Life

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It might not have been a "eureka!" moment that sent you flying out of the bathtub, but if you think that you've made something that could change how drugs or medical devices are made or otherwise alter how research is conducted, you could embrace your inner capitalist and develop your technology for the commercial market.
That's where a venture capitalist comes in. A VC can provide money to invest in a promising idea, technology, or patent. Academic researchers, while well-versed in their specific field, don't look at a technology with the same focus as a venture capitalist would. These funding specialists see the field in terms of supply and demand and getting that next great product onto the market. If you accept VC money to improve upon and seed your idea, they will also provide input to shape the future of your fledgling company.

Over the last few years, investing in the life sciences has changed. Just a few years ago, Index Ventures' Francesco De Rubertis recalls, it was enough to have intellectual property on a gene or a new method to form a company. These days, that no longer passes muster, especially as venture funds try to find ways to lessen risk in a less certain market.

"The last few years have been pretty strange for life science. There's been a big movement away from funding academic innovation, since a lot of venture funds have been pursuing lower-risk approaches such as the spin-out drugs from pharma companies," says Daphne Zohar, founder and managing partner of PureTech Ventures.

Despite these changes and a volatile economy, venture capitalists are still looking for the next great idea. In 2007, the life sciences attracted $9.1 billion of venture capital, well over 2006's $7.6 billion. As long as investors have a way of getting their money out — that's called an exit strategy —  interest will continue, Zohar says. "I think that the IPO market's been pretty bad, but the M&A market is really interesting — that provides an exit opportunity," she says. In the first quarter of 2008, four venture-backed life sciences companies went public, compared to seven in the same quarter of 2007. Also in the first quarter of '07, five life science companies were acquired by or merged with another company.

Douglas Fambrough, a general partner at Oxford Biosciences, is still cautious. "The pharmaceutical and medical device industries continue to acquire smaller companies and are paying pretty strong prices for them. There's a question about how long that will continue. At least for the time being, that's doing pretty well. If it starts to drop off, then there's really rough times ahead for the biotech industry," he says.

The VC viewpoint

Despite their caution, venture capitalists are always on the lookout for new ideas. "You're going after big ideas, not incremental approaches," Zohar says.
Polaris Ventures' Amir Nashat agrees. "It's got to really open a new way of thinking about a problem," he says, adding that when DeCode Genetics formed, which his company invested in, it had a fresh approach to being a biopharmaceutical company. As another example, he points to another company his firm invested in, called Momenta, that formed around the idea of defining sugars, as well as their structures and nucleic acids. Momenta, now a public company, is researching sugar-based drug candidates — a field with a few challenges still left to overcome. "It's OK if it's risky, it just has to be very bold," Nashat says.

Once you've got your daring idea or technology, for a VC to be interested, that idea has to be able to be covered by intellectual property rights so you and your investors can recoup, and hopefully expand upon, the funds put into creating the product. "You want a technology that the company can protect. If somebody else wants to use the technology, they [have] to work with the company. Usually, that means patents," says Fambrough. There, too, venture capitalists can help out.

When De Rubertis and his colleagues at Index Ventures seeded $300,000 to ParAllele Biosciences, started out of a Stanford University group, Index helped the scientists gather the different pieces of intellectual property they needed — even negotiating with a Swedish university that held a necessary patent they needed to commercialize their product.

If your company is already in the fledging stage, investors will scrutinize not only the technology, but also the people involved in the enterprise. "We certainly look at the strength of the management team. You want a lot of energy and creativity and skill in the management team," says Fambrough. Some VC firms, though, will come into the picture before the management team is in place and will set one up.

Hunting new ideas

Each venture capital firm has a different personality and approach to how it uncovers new ideas and technologies. Some look at business plans as they flow in, some scour the literature for the newest best idea, and others maintain good contacts to hear about interesting results soon after they are recorded in a lab. Most have a mix-and-match approach — the investors are out there looking for ideas, but certainly won't say no if a good one comes in through the mail.

Oxford Biosciences usually steps in at the early days of a company's formation. Consequently, the team spends time thinking about what sort of company it would want to invest in so it can more easily spot the right one when meeting people out in the community or as part of a startup that comes its way.

Sometimes, the investors actually come to you. Polaris' Nashat once kicked off a company after reading an article in a journal. He liked the paper, so he called up the researchers and met them for dinner. That informal meeting grew into Fate Therapeutics, a stem cell therapeutics company. "For the raw academic stuff, we tend to go out into the community, go to conferences," Nashat says. "We'll start with basically just an idea, just a patent out of a university, some guys we met, an interesting result in a laboratory. We've been very successful doing that."

Other times, venture capitalists, like those at PureTech and Index, might hear about your work through their contacts and friends working in labs. "We are scientists. I was working as a geneticist myself at MIT. Through our network, we heard about this Stanford group that was thinking about a platform technology," says De Rubertis, referring to the group that formed ParAllele Biosciences, which was acquired by Affymetrix in 2005.

PureTech Ventures acts a little bit differently — the members describe themselves as a hybrid between a group of entrepreneurs and a venture capital firm. Instead of seeing how a technology fulfills an unmet need, they begin with an unmet need and then go hunting for a technology. "Most venture funds will want to fund the company after certain questions have been answered, whereas we'll get involved and help to answer those questions. We're coming in one step before and, in that way, we're like an entrepreneur," says Zohar, adding that they look at ideas that still have a few rough edges that they can then smooth out.

Getting going

Once you've convinced a venture capitalist that your idea or technology is worth investing in, you are off to the races, but the process may take a bit longer than you expect. To get from the nebulous idea of a company to having something in place that needs more VC funds, PureTech estimates it will be about a year and a half. Polaris' Nashat says the first step is to just talk science.

"The process, for months, is really just us learning about science, getting academic," Nashat says. "Their results may be in pain and after talking to them, we'll start asking ourselves, 'What else is hot in pain?' and we'll come up with a bunch of stuff that we'll bring to their attention." The investors may suggest incorporating these other technologies to round out your company's prospects so its success isn't dependent on one technology.

Oxford's Fambrough follows a similar approach. "We usually meet the company and then spend a lot of time educating ourselves, often with the company's help, about the specifics of the technology in excruciating detail [and] the company's prospects as a business and what the company is going to require in order to be successful," he says. The investors build a financial model that tries to take the needs and future plans of the potential customers, often pharmaceutical or medical devices companies, into account. That step helps the investors assess how much funding the company will need.

Next, the concept or mission of the company is molded. VCs, especially ones getting in on the ground level, will brainstorm and test out those ideas with you and take in the scope of the whole field, particularly your competitors. "Although the idea of having a company built entirely around your own work is, I think, very attractive to people, it's often the case that a company really should have a lot of different projects going on that are independent to spread risk, and that's part of thinking bigger about the opportunity," says Fambrough.

The company is going to include more people than just those in your lab. The VCs will find the company a CEO and others to run the business as the investors start to settle themselves into being board members who will advise you along the way. "We'll try to kind of match-make a little bit and recruit people to run the company or help start the company," says Polaris' Nashat.

It might not be quite as you expected, but your company is now up and running — and perhaps on its way to bringing you a tidy sum.

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Best Practices for Your Business Plan

Short of going to back to school for business classes, being able to write a good business plan is an easy way to boost your financial street cred. Venture capitalists offered some tips to combat the mistakes most often made by academics as they cross over into industry. Here's what to keep in mind as you write that all-important business plan.

Be bold

For your company idea, think big — academics who start a company often think too small, says Oxford Biosciences' Douglas Fambrough. Index Ventures' Francesco De Rubertis adds, "It has to be a big thing. It cannot be incremental."

Assemble the best minds

In the management section of your plan, highlight your team, which hopefully includes a few big names. Talk to lots of smart people, advises Polaris Ventures' Amir Nashat. PureTech Venture's Daphne Zohar says getting top people involved in your venture will pay off: "That has a big impact on investors if the leading people in the world are involved in some way."

Think broadly

In the section describing your market and competitive environment, take in the full scope. Fambrough suggests placing yourself in the shoes of your potential customers and thinking about what they would want and where else they can go to fulfill that need. Many startup companies, he says, don't understand their full range of competitors. "The company may have competition from people doing things very different than what they are doing. Yet from the customer's perspective, from the pharmaceutical company's perspective, they are still going to make an either/or choice between one and the other," says Fambrough. Don't define your competition too narrowly, he warns.

Be realistic

When you compare your company to other established and successful companies, don't focus solely on the exceptional successes — not everyone is a Google. "When building their expected future for a startup, people often say, 'The comparable companies in the past are …' and then they'll list the exceptionally successful companies," says Fambrough. "People need to understand what is more likely the average outcome for a company, and build a model based on hitting the average outcome as opposed to hitting the exceptional outcome."

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