The Entrepreneurial Diaspora Enabled By Biotech M&A

Posted in Biotech investment themes, Boston Cluster, General Venture Capital, VC-backed Biotech Returns

The recycling of equity capital through realized returns is a critically important element of biotech investing.  When public biotech companies get bought, like Genentech by Roche, or smaller deals like Cougar by J&J, a large number of biotech-focused equity funds have fresh capital to put to work in new biotech stories.  This is a big source of fund flows into smaller cap names each year.

The same holds true in early stage venture capital; distributing realizations from M&A deals to Limited Partners enables the raising of future funds, which keeps the innovation cycle going and well funded.  We obviously need more of this in the venture arena: as has been reported by others, life science venture funds have struggled to convince LP’s in today’s environment and the sector is consolidating around a new mix of players.

But beyond the importance of recycling capital, there’s an equally important dimension to consider: M&A deals help to recycle talented teams so they can spend their time on new emerging startups.  Seasoned biotech executives who have been a part of prior M&A deals are highly sought after.  These are the “been-there, done-that” management teams who’ve been through the challenges of building biotechs, but importantly have also seen what success looks like.  Knowing the hallmarks of success – product, culture, team, Board, process – is a big factor in helping guide younger companies down the right path.

A quick review of our biotech portfolio suggests that roughly 45% of the CEOs were prior executives in successful M&A exits.  Adding in the senior leadership teams, I’m sure much of our portfolio has exposure to these veterans.  This is obviously of great value to our companies, and we actively recruit and cultivate relationships with serial executives to help us build successful companies.

More importantly, this recycling of talent is of huge value to the ecosystem.  This diaspora of biotech executives into the local environment helps disseminate the learnings and nuances around what success looks like, how to run a BD process, how to avoid pitfalls, etc…  This creates the virtuous cycle that reinforces the importance of biotech clusters like Boston, San Francisco, or San Diego.

Take a few case examples.

Avila was a 2012 exit for us, and some of leadership team is moving on to new things.  CBO Nagesh Mahanthappa is the founder and CEO of a new startup called Scholar Rock, CFO Andrew Hirsch is now at BIND, and Executive Chair Dan Lynch is now in a similar role at both Nimbus Discovery and RaNA Therapeutics, among others.  And I’d guess that CEO Katrine Bosley won’t be unemployed for long.  In aggregate, that leadership team will be involved in 6-8 biotechs in Boston within a year of the closing of the acquisition by Celgene.

A less recent example highlights the post-M&A effect: Adnexus’ leadership team went all over. Katrine to Avila, former CSO Eric Furfine is now CSO at Eleven Biotherapeutics, former COO John Edwards is Executive Chair of our bispecifics play F-star as well as Permeon Biologics, former CMO Marty Freed is founder and CMO of Civitas Therapeutics,  and former CEO John Mendlein has served as Executive Chair of aTyr Pharma and Fate Therapeutics.

Other biotech clusters are also good at recycling their successful teams: Amira’s leadership has now set up several startups: Peppi Prasit set up Inception, and Jilly Evans and her colleagues have founded PharmAria with Celgene.  Anadys’ former CEO Steve Worland is starting a new company eFFECTOR, and Calistoga’s former CEO Carol Gallagher is the Chairman.   Intellikine’s former CEO Troy Wilson has started a new entity called Wellspring Biosciences.

So if each successful exit sends out a diaspora of leadership team veterans to settle into half a dozen or more other biotechs, including both new startups and existing companies, the impact on a local ecosystem can be profound.  These veterans become the mentors of the next wave of biotech leadership teams, helping coach and cultivate the real insights around success.  Importantly, they help first-time C-level executives navigate the trials and tribulations of those roles.  It is this flow of entrepreneurs and executives, and the learning loops around them, becomes the lifeblood of a tight biotech community.

In less established biotech clusters, the lack of this “success diaspora” is a serious limitation.  Not only does it impact the current biotechs, but it prevents the inter-company transfer of the hallmarks of success that help shape the winners of tomorrow.  Figuring out how to access these insights is an imperative for clusters that don’t have a steady flow of deal-enabled entrepreneurial movement.

More M&A does far more than just generate returns: it liberates talent to keep the early stage biotech ecosystem vibrant.

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  • http://twitter.com/SENGLAITAN Seng-Lai Tan, Ph.D.

    Great, thought-provoking post. Do you think the same applies to big pharmas which are either closing their sites or exiting from a disease space? My colleagues and I are forming a NewCo based on assets we were able to acquire from our former company.

  • Joshua Anderson

    Great topic and insights Bruce! This is an aspect of mergers and acquisitions that is often overlooked by people outside of the startup sphere. The money always grabs the headlines, and what happens to the executive team sometimes gets lost. I’ve heard some people lament that when a small biotech gets bought out, the larger company destroys the smaller company’s culture of innovation. However, looking at it from the perspective you offer, it might be more accurate to say that the culture of the acquired company gets spread out to several new companies as the executive team finds new companies to lead!

  • Suleman

    Please could you send some entrepreneurs across the Atlantic to Europe and particularly the UK. We have lots of bright people and brilliant academic research, but not enough mature experienced heads that have had some success in running a biotech research company and so are able to do the ‘long play’ which is required more and more. Now that quick exits are no longer possible we need people who can keep investors and researchers happy through the crests and the dips, and in a funding environment which is much more difficult than the US. We don’t seem to have enough of them in the UK, and so I read your article with a little bit of envy.

  • Bombo

    Not sure I agree. It is the reluctance of biotech VCs to accept anyone new that is largely killing the biotech vc industry. If you look at say technology, the top leaders are 20+ year old kids with no experience.(Zuckerberg, Founders of Instagram, Zappos,…) And they have produced returns way better than biotech, even if returns are normalized for industry characteristics ( biotech is more regulated, needs larger capital infrastructure etc.) I think this is largely because VCs are ready to give them a chance.

    What you’re saying has a self reinforcing fallacy. Biotech has lousy returns because VCs invest in only the conservative. Capital is shrinking because of lousy returns. So the only exits are to wait long and sell to conservative pharma. Who will only buy from people who know how to sell to them from before. Hence you’ll only fund people who have sold to the before. A good strategy that will eventually lead to a shrinking in your capital inputs ( which we are evidencing)

    The only VCs who are thinking differently are the sfo VCs who dare to fund self quant companies like Genomera, started by newbies with a desire to blow up the existing mess in healthcare.