By Fred Olds, contributing editor
Larry Lasky, Ph.D., partner at US Venture Partners, will tell you it’s hard to get venture capital to fund a project. Then, he will tell you it’s not hard if you have good data. By “not hard,” he means to make it easy for VCs to see a compelling plan backed by data and directed by a team that inspires confidence. Preparation and timing are critical. It’s hard enough to get in to present a plan. He says make sure your plan
is good enough to get you taken seriously. Getting it right requires expertise.
Lasky is a biotech pioneer. In 1981 he was a founding scientist in Genetics Institute, one of the first biotech start-ups. In the following 30 years, he conducted research at Genentech in its highest scientific position, Genentech Fellow. In 2002 he moved to venture capital, where he launched a number of successful companies. He also teaches a course in biotech start-ups at UC Berkley. Here are his observations on the state of biotech and venture capital and some advice on approaching the start-up process.
The Darwinian Environment
Founders frequently blame venture capital for turning down so many plans. Lasky agrees that venture capitalists are very risk-averse. “The current environment is Darwinian,” he says, but he disputes that the fault lies with the VC. “Most proposals are turned down because they should be.” The blame for failure lies most often with a plan that lacks the scientific foundation or business understanding to warrant support.
“It’s very ‘squishy’ stuff,” says Lasky in describing the biotech start-up process. “There are lots of components to it, and I think it’s hard to teach.” It’s challenging to lay out precise instructions for founders to follow to get noticed, sell their ideas, and set up shop. Nonetheless, he says it’s easy to identify a plan that might work. You know it when you see it. He says it’s fairly easy to read a proposal and tell very quickly whether it should get further consideration by the amount of scientific backing and the details of the plan. Lasky offers this formula to get consideration: “It’s about a good team, a compelling plan, and interesting science. That’s how a company gets started.”
“What will catch a scientist’s attention,” says Lasky, “is a novel target in a hot area of medicine.” Novel doesn’t mean a new, isolated discovery. It means a target that hasn’t been commercialized. It’s a target backed by scores of papers supporting its importance in human disease. He says too often researchers get excited about the science. The real issue is its relevance to humans.
“The problem with novel targets is eponymous,” warns Lasky. They are inherently very risky, but the rewards could be very high, as well. Founders have to mitigate those risks with solid evidence. They have to provide research demonstrating a positive effect in an important human disease. They will need to identify the sets and subsets of patients they feel will benefit from the compound. Next, they have to develop assays to measure those effects. Most importantly, they have to propose how all of this can be translated into a compound that can be administered safely to humans and make a difference.
Lasky’s particular “hot area of medicine” is oncology. He feels it’s a field in which he can help the most people, but there are other hot areas. He suggests carefully selecting VCs with an experienced scientist on staff who will understand the esoterica of the founders’ research. He warns that there is naïveté on both sides of the VC equation. Usually, scientists don’t appreciate how important and difficult the business aspects are to the venture. The funding partners are likely to lack the scientific expertise in cellular and molecular biology and pathology. They may have a young Ph.D. on staff who can explain the science, but who lacks the experience. “It’s not the same thing. Biotech is much more complex than other ventures,” says Lasky.
The Business Plan
The business plan has to persuade VCs that the founders can return value on the investors’ capital. The plan should be about the business of making the science a commercial success. Lasky says all too often the founders get caught up in their excitement over the science, and they forget that the VC is focused on business.
He says, “My best advice is to talk to someone else who’s done it before.” There are just too few opportunities to get an audience and too many possibilities to stumble. Rely on a mentor for sober advice and introductions in the community. Get an introduction to a potential mentor the same way you will to VCs. Search for someone with success in biotech start-ups and with the clinical expertise to understand your science. It becomes an exercise in networking. Begin to work for introductions to VCs, as well, but don’t pitch your work too soon. Get to know investors as you build the evidence for the research. Put out feelers. Describe the science, and ask if they might be interested at a later date.
The starting point for the plan is the exit point for the company. Lasky says virtually all biotech companies exit with a buyout from big pharma as the compound is in or heading to the clinic, “It’s just too expensive and too long a timeline to try to launch a commercial operation.” Plan the company backwards from the exit. Visualize what the patient population is, how many will be needed for clinical trials, what assays need to be designed, what statistical models are needed to measure outcomes with significance, what the desired endpoint of trials is, how the target will be translated into a compound for human administration, what preclinical studies need to be conducted, what space and equipment will be required, who has to be on the team, how the basic research is to be presented to show it’s a good candidate for commercialization, and to whom the company should be pitched. Finally, ask, “What will this cost?” Designing the plan, then, is a matter of explaining how the team will direct the company to that end.
Lasky advises, “Try to get all the funds you think you will need to get to the clinic. Leaders underestimate the time they will spend trying to get series funding.” He says getting it all from the beginning will require a consortium of some sort to aggregate enough funds. The team will have to plan for series funding and valuation. Determining funding out to 18 months is generally feasible. Beyond that requires some extrapolation and comparisons to other ventures. The important issue is that just like the business plan, the team must project with some confidence an ever-increasing line of valuation over time. Valuation has to be optimized so that at every tranche the company returns value to the previous investors while promising future value to new VCs. A level or losing series demoralizes the investors and makes any future series of funding nearly impossible.
Finally, the presentation is about and for the investors. It’s the founders’ opportunity to instill confidence in the VCs. The team has to convince investors that the company leadership is competent and resourceful enough to be trusted with the investors’ money. Founders can’t view and act as though the presentation is getting their ticket punched on their way to success. Show how the founders can make everyone — investors, partners, staff — successful.
Also, expect to fail often. There can be a lot of reasons for rejection, and it’s critical to understand each one. Use the feedback to improve your plan.
The team and the reputation of each member will influence the decision of an investor. Lasky says scientists from top research institutions as well as company officers with prior successful experience will improve chances for funding. While they may not conduct background checks on the suitors, VCs may conduct inquiries as to the team members’ ability to get along and work congenially in a team.
The team should be science-heavy. Lasky explains that about 95% of the operation is research-based initially. It’s important to have a CEO who knows the science as well as the business. Additionally, investors may look for flexibility, synergy, and complementary skillsets among the team. A start-up comes with the unexpected, and whatever needs to be done is in everyone’s job description. Resourcefulness is imperative. The place to show this is in the presentation. Each team member should have time in front of the investors to give them a sense that the team is knowledgeable and competent.
Lasky says the biotech industry is always dealing with the new and interesting. You have the opportunity to make a drug that saves someone’s life. Keep that in mind, because perseverance is a necessary ingredient to do it. Founders have to be steeled for rejection. However, Lasky believes good ideas have lasting power and will bubble to the top. He says Proteolix was a huge success in the end, but was a tremendous struggle to get off the ground. “It’s like anything else that’s important. If it’s good, you just can’t give up.”