While getting funding from a star investor can be great for business, many biotech entrepreneurs dread the possibility of investors taking control in a situation that eerily resembles a hostile takeover. But it needn’t be that way at all.
Biotech founders often complain that investors, especially VCs, demand too much control over company operations. This happens particularly at the early stages of development, and companies in these situations tend to become more independent as they mature, for example, at the point of doing an IPO.
Many investment firms push for placing one of its partners on the company’s board. Others also place an entrepreneur-in-residence as a representative in their portfolio companies. An example is Boston-based Third Rock and Arch Ventures, which often builds companies from scratch, pitching business ideas to scientists even before the prospective founders have fully articulated them themselves.
On the opposite side of the spectrum are business angels and family offices, who typically will not interfere with operations at all. The catch is that they won’t offer much help, either. Active investors come with much more than investments: they bring operational expertise, powerful networks, and additional pairs of eyes to stress-test any key step, communication, or clinical trial design.
Most VCs fall somewhere in between these extremes, often stretched thin between fundraising and supporting the companies in their investment portfolio. This is the case for Eir Ventures, a life sciences VC firm named after the old Norse goddess of health and medicine. Its managing partner, Stephan Christgau, explained that, although some jokingly dub Eir as “Entrepreneur-in-residence” Ventures, the firm usually refrains from direct control in its portfolio companies and limits its role to sourcing candidates for executive roles.
Indeed, amid a global pandemic that has brought unprecedented challenges and opportunities to the biotech sector, many VCs say that they neither wish nor have the spare resources to micromanage operations or build many companies from scratch.
So it’s essential to research your prospective investors well. It’s not just money. It’s a complex matching of visions, leadership styles, and business philosophies that really does the trick, a chemistry no less delicate than hitting the right target with the right molecule.
Find the investors who have a proven record of creating or working with the type of company you want to create, says Christgau. Even before that: figure out what you want. Running a successful biotech is no part-time job. Practically every new entrepreneur runs into the challenge of balancing work with a personal life, and all those priorities need to be carefully weighed before going around investor-shopping; else the investors you find may try to take those decisions for you.
“Let’s say you don’t see yourself as someone who really becomes a CEO and runs the show, you may want to secure the best possible home for your projects,” Christgau said. “Then you need to find an anchor investor, a cornerstone investor who really has demonstrated company-creation capabilities.”
Ideally, you will start a conversation with different types of investors well before you ask them for money. “Listen to your investors’ advice even before they become your investors,” says Peter Heinrich, the chairman of the SME Platform of industry group EuropaBio.
“Their insight can help you identify opportunities and refine your strategic thinking. Find out what their investment interests are and in which space they usually participate. This will help you spin your story appropriately in terms of specific application, amount to ask for and your use of the funds.”
There is another reason why starting the conversation with investors early may increase your chances of success. Persevering and pursuing one’s vision consistently and methodically are values that underlie VC culture.
“It’s how I and the team succeeded in raising €200M as a first closing for [our] fund, because you need to go back, and go back, and go back again,” says Rafaèle Tordjman, the CEO of Jeito Capital, a Paris-based life sciences VC. “We don’t have time, you need to come back and come back. Obviously be professional, but I would say, don’t wait. Meet the maximum number of people — investors but also other stakeholders.”
Those conversations will also help founders clarify their vision of how much operational involvement in their businesses they want and how to best go about materializing that vision.
“Speak also to other CEOs,” adds Tordjman. “In tech, they share a lot… in biotech, they don’t share so much among themselves, and that’s a pity because it can be a big added value.”
Once the goal of becoming a full-time entrepreneur is set, the classic tension between entrepreneurial and management skills kicks in. One way around it is to hire a CEO; the problem is that most CEOs you hire at an early stage will be inexperienced, says Tordjman. This is where having the right investors with the right expertise and contacts can be key.
VCs are typically eager to assist, but most will ask for a board seat, at least. This is where tensions can spring up.
“If you take venture money, the VC will have some demands for control, but of course, the more assertively you can take that leading role, and the more credible the project you are providing is for the investors, the more possible it is to maintain the leading role,” says Christgau.
“I would advise building a syndicate of three to four like-minded investors that can support your activities so you are not so critically dependent on any one single investor.”
Strong academic teams that focus on entire platforms that spin out different projects typically call for less investor involvement than companies that are asset-centric, but there are many variations and nuances, Christgau adds. He points to Galecto Biotech, a Swedish company built in 2011 around the study of a group of molecules that play a part in fibrosis and other inflammation processes as an example of the former.
“[Galecto Biotech] has academic founders with a clear insight and reflection that they want to retain their academic positions, but they want to support their startup. There is an entrepreneurial operational founder who is currently still the CEO, so he has built the company and taken it, with the help of the founders, to the place where it is right now,” he explains.
Typically, early-stage investment often comes with more involvement on the part of investors compared to later-stage investment, but there are exceptions as well.
“Venture capital investors will look at your whole team and judge the people behind your company,” says Heinrich. “Create a solid team that will stand the test of time, filled with people with proven credibility.”
Cover illustration by Anastasiia Slynko