When Dr. Frederick “Rick” Jones was on the operating side — he was an internal medicine physician before holding a variety of roles in startup and midsize biotech companies — he went through some very lean years in terms of the types and amount of funding available to companies in the biotech space.
“You might have gotten a few million dollars and you have to set your sights on relatively near-term goals,” Jones says.
In the last few years, more money has come into the space. That’s being driven in part by some good news coming out of the early-stage biotech market.
“The IPO window now for biotech has been open for an extraordinarily long period of time — four or five years now — and that's made the returns to investors that much more attractive,” Jones says. “And you had people like Bruce Booth up in Boston who really spent a lot of time comparing returns by venture investing to returns from tech investing and making a pretty good case for biotech.”
However, when we talked with Jones, now a partner at the VC firm BioAdvance, he offered cautionary advice to investors who would let dollar signs block a more practical insight into biotech investing.
Finding the fit
Some investors, Jones says, are looking at early-stage biotech companies from a primarily financial perspective. While that’s certainly part of the equation, there’s a lot more to understanding the value in a biotech deal.
“The way I tend to look at things goes back to my general internal medicine days where I was managing patients from a very high-level perspective,” Jones says. “I tend to look at these projects from (the) perspective: Does it make sense at a global level, and how will this be implemented at the patient-physician interface?”
The pragmatics of an innovation have all kinds of implications, not just in terms of utility or efficacy or success rates, but whether a new development could fit into the standard of care. Jones says that’s the hardest part for most investors to grasp.
“There are lots of solutions which people come up with which don't make any sense because you would have to totally reorganize the way care is delivered, and sometimes that's hard for investors, and for the companies for that matter, to understand,” he says.
Investors tend to emphasize exercises such as determining the target product profile, the reimbursement pathway, the hurdles towards getting the product adopted and preparing for commercialization into the drug development programs. Those are all meaningful considerations. But, Jones says, just like most other investing, the people in the deal are a critical factor.
“It's been said many times before that it's probably better to invest in a team that’s been there, done that and been successful that has a technology that's maybe second-tier, than investing in a first-tier technology that has a team that's totally inexperienced,” he says. “The team that's been successful in the past knows what has to be done. They can speak the language of investors. They know what has to be done to keep them on board and to succeed in that world. Experience is a huge factor.”
Biotech is a sector that requires many disciplines to make any project successful, Jones says. So investors may also want to surround the founders with people who can handle all that a company needs to successfully bring the project forward.
“You need somebody who knows something about not just the basic science, but how to develop a molecule under a regulatory regimen that includes toxicology and pharmacology, somebody who knows about manufacturing, somebody who knows about regulatory, etc.,” he says.
Investment decisions should take into consideration whether an investor has the time and knows the right people to make a project successful.
“Sometimes you love the science,” he says, “but there's just not the team to take it forward.”
Know the competition
To be fair, Jones says, it’s not just investors who sometimes fail to see the bigger picture. There are at least equal misconceptions on the part of the entrepreneurs and the founders of these companies when it comes to understanding how to get investors interested in their business.
“The biggest thing by far is understanding that there are a lot of people that could potentially compete with them,” Jones says. “Everybody tends to feel that their invention stands by itself and nobody else is working in the space. Most typically, because we've seen a lot of things, we know that there's at least a dozen other things that are in the same space. People don't do enough homework in that regard.
“And they don't understand the concept of value-added, so they're not raising money to bring their project to a more valuable, more interesting stage for other investors. Instead, they're raising money to pay their bills for the next year or two.”