There was a nice line at the UK government’s venture investment conference last week from a venture capitalist saying that most of the returns from healthcare deals it had done came between 15 and 25 years after the portfolio company had been founded.
The point by Tim Haines, partner at venture capital (VC) firm Abingworth, was that this was long after most VC funds have had to sell their interests. (Most venture funds last 10 years but can be extended.)
The Big Deal this week, therefore, is more a look at a classic venture challenge – when to invest to reap rewards without leaving the majority of returns on the table for others to pick.
In healthcare, perhaps the best-known example is Genentech, which effectively created the biotech industry when it formed in 1976 with backing from venture capital firm Kleiner Perkins Caufield & Byers.
While Kleiner Perkins reaped great returns when Switzerland-based drugs group Roche took a chunk and a call option on Genentech in 1990 at a $2.1bn valuation. A series of deals later, on which Roche was a big winner, and Roche finally agreed to buy out Genentech for $46.8bn in 2009.
As Herbert Boyer, founder of Genentech, said earlier this year: “The Swiss know how to make money.”
For Abingworth, an Anglo-American VC fund, knowing how to make money involves changing the definition of venture to include structured financing and private investments in public equities.
Since Abingworth has just made a first close of its latest fund and now has $1.5bn under management, the strategy has been successful but relies on trade sales rather than initial public offerings (IPOs) for its portfolio comapnies.
Abingworth has struck nine deals with pharmaceutical corporate venturing units in the past three years and sold three companies to biotechs but as the venture industry shrinks the key, or ‘c’, word becomes collaboration, according to Terry McGuire, partner at VC firm Polaris that invest across technology and life sciences.
He said: “While technology venture investing is about the other c word: ‘competition,’ to get into the best deals. In life sciences it is ‘collaboration’ as pharma companies are supporting early stage and universities are becoming more aware of commercialisation as much as doing pure research.”
Haines said social capital, such as foundations and charities, and government’s role was in helping bridge the so-called valley of death between early-stage healthcare and the later stages were financially-orientated venture investors had greater chance of making returns.
Dave Tapolczay, chief executive of MRC Technology, the commercialisation fund for the UK’s Medical Research Council, added: “Public-private partnerships mean there is a role for public funds to be used to support the development of the biotech ecosystem.”
But he warned that unless there was a way to commercialise research governments would start thinking more carefully about who reaps the benefits and pointed to the need for biotech start-ups to co-locate with big pharma that were increasingly looking externally for product.
David Philips, European head of corporate venturing at drugs group GlaxoSmithKline, said the UK-based parent was using a venture model for research and development by creating small units of people on projects funded by results.
By using its corporate venturing unit, SR One, and academic liaison team alongside internal R&D on strategic areas, GSK becomes ambivalent about the source of the next potential drug to sell and creates competition to find the answer rather than worry about where it might come from.
It is also more holistic in supporting healthcare’s early-stage innovation while hoping to reap the larger rewards later down the track, as Roche did with Genentech.
This model has worked in life sciences but its success is more mixed in information technology. IBM and Cisco have utilised the same approach to buying out VC-backed portfolio companies and turning them from $100m in revenues to $1bn+ product lines while other groups’ record of paying large amounts for early-stage businesses – OMGPOP’s (parent of game Draw Something) purchase by Zynga and Instagram by Facebook leap to mind – means there might be a reevaluation in this sector, too.