Want Better Odds? Get a Pharma Corporate VC to Invest

Posted May 22nd, 2012 in Uncategorized

Pharma corporate venture was back in the biotech news today with the release of Burrill & Company’s June 2012 report.  An interesting article by Vinay Singh evaluated the impact of Pharma corporate venture capital (CVC) investing, and the key takeaway is that CVC-backed companies have a higher rate of overall success than those without their involvement.

While a similar takeway has been published before by Windhover’s StartUp about a year ago, these data suggests a fairly robust effect from a large dataset.  The analysis includes 2907 therapeutics companies that raised venture capital dollars between 2000-2010 across 5100 rounds of financing.  Corporate VCs were investors in about 10% of companies, and this pool of 286 companies had what appears to be a markedly higher hit rate: a ~60% higher rate of licensing deals, M&As and IPOs.  The figure from the article is pasted below:

As an aside, its interesting to note that the “CVC participation rate” in biotechs of ~10% over the decade reported in this Burrill article supports the perceived uptick in corporate venture activity today when compared to more recent cohorts of data.  A recent report published by NVCA/PWC in their MoneyTree earlier this year suggested that 18% of all biotech deals had CVC involvement in 2010-2011.  My guess is this rate of 1-out-of-6 biotechs with CVC involvement today probably holds for the aggregate biotech funding rate across all company stages.  However, while I don’t have the data breakdown by stage, from what I can tell the rate of involvement in Series A rounds is probably closer to one-third, at least in the Boston biotech cluster.  As I’ve written about before, Atlas’ recent portfolio of new Series A-stage startups has a participation rate with pharma corporate VCs of 70% or more.

So these new data from Burrill are entirely all consistent with pharma corporate VC playing an important role in the ecosystem, and that they seem to get involved in good companies that possess better than average probabilities of success.

But the killer question is whether corporate VCs are just good company pickers because they look for things their Pharma  R&D organizations may want, or if they actually help shape a better outcome once they get involved either through the value-added “stamp” of Pharma validation or through active deal management contributions.  I’ve certainly seen lots of evidence of the latter, so am biased to that answer – but it’s a chicken and egg type of question.

A big caveat to all of these generalizations is worth mentioning: if there are different styles among independent early stage venture capital firms, then its fair to say there are different species amongst corporate venture capital firms.  The two ends of the spectrum:

  • Standalone CVCs:  These firms behave as quasi-independent venture groups, driven foremost by financial metrics but relevant strategically – like SR One, Novartis Ventures, Lilly Ventures, Medimmune.  These firms typically function more like traditional VCs: they lead/co-lead rounds, drive a pricing process, and typically take on Board seats.  They also tend to maintain high walls of confidentiality from their corporate R&D groups.  Lastly, and importantly, they only recuse themselves from Board discussions in a portfolio company if it involves a strategic process with their parent company; otherwise, they are active and often vocal contributors to a BD debate.
  • Purely Strategic CVCs.  Other firms have a more explicitly strategic mandate, including firms like Amgen, Shire, Abbott, BI, Baxter, etc…   These firms tend to join existing syndicates in companies focused on areas of deep franchise interest.  They rarely lead the negotiation to price a new round, and most often only take on Observer roles on Boards.  During BD discussions, the representatives of these firms typically leave the Boardroom.

The Burrill dataset may be large enough to explore which of these CVC species has contributed to the outperformance suggested by the data.  But it would be complicated, as many corporate VCs have morphed their strategies over time.  For instance, in the early 2000s, SR One and Novartis didn’t typically lead rounds, they were followers in most syndicates; today, my guess is they lead or co-lead everything they do.

Even if we don’t have performance data broken down distinctly, it is fair to say that the contributions these divergent CVC strategies can bring to an early stage biotech company are very different.  Strategic CVCs may plug a company into their R&D organization much more deliberately and bring the capabilities of the parent to bear more explicitly.  On the flip side, standalone CVCs bring Pharma insight, smart company-building capital, and a strong governance role – in some ways filling the vacancy left by the shrinkage of the traditional venture firm.

We enjoy working with both, and will continue to.  But for biotech’s thinking about their next financing, knowing what you need from your syndicate and how it maps to these differences is certainly important as you choose your next investor.

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  • Thanks for posting this, Bruce. It’s really useful to have your insights as someone on the “inside” – working shoulder to shoulder with corporate VCs.

    As someone who works with entrepreneurs (but not as a VC), I wrote a blog piece a couple of weeks ago comparing corporate VCs with VC firms, and the importance of investor alignment:

    Your post gives good support for having corporate VCs on board. 

    Question: From your experience, just how financially driven are the “Standalone CVCs” you mention above? My impression from hearing them at conference panels, and in one on one discussions, was they still have an equal (or greater weighting) towards the strategic drivers? Your view appreciated.

  • Interesting analysis – and the data are clear-cut (and you can’t often say that about any post-hoc analysis of VC investment outcomes).

    The key question, as you say Bruce, is why is this?  Are they better placed to pick winning companies because they have access to the “smart customer” capability of their internal R&D team? (in which case you gain no benefit from having a CVC investor – its just a surrogate marker for success). Or do they help create a better outcome by shaping companies into the kind of ‘product’ their company (or others like them) would want to buy? (in which case a CVC investor is a ‘must have’ for a new start-up).

    The answer is probably a bit of both.

    But what is certain is that choosing the right investor(s) for the syndicate assembled around a new start-up is the most critical decision an entrepreneur can make.  And the decision goes well beyond CVC versus independent.  Its about a match of culture and expectation between the investors and management, and about maintaining alignment between the investors within the syndicate.  Get it wrong, and poor choice of investors can hobble and otherwise successful company.

    Its also harder, today, for an entrepreneur to know what a CVC might look like, as hybrid funds spring up.  By hybrid, in this sense, Im thinking of the new Index Ventures life science fund, where GSK and J&J are strategic LPs.  The aim is obviously to get the best of both worlds – insight into what pharma want, but retaining flexible, reactive decision-making for example (here’s Michele Ollier’s exposition of the benefits: http://bit.ly/GCwnsx ).  Will it work?  Its too early to tell – but remember that securing investment in a new start-up is a two-way decision: the entrepreneur and the investors need to choose each other!

  • Been thinking about this some more!

    When people comment on this data, they typically focus on why corporates are better.  But the opposite factor is also in play: the catch-all basket of non-corporate VCs includes a multitude of different investor models.  Although the corporates can roughly be divided into two (those that invest strategically and those that invest purely to make money), the non-corporates are a much more diverse bunch.

    One of my principal bugbears (as a tax-payer) is the appalling performance of most government-backed funds.  Typically, these funds have a lot of money but are hamstrung by some supposed strategic imperative linked to the cash.  For example, to invest in a particular geographical area that doesn’t historically have a tech sector in the hope of creating economic activity there; or investing in some kind of innovation that has a high perceived need but which may be particularly technically demanding (such as green energy).

     Any strictures like these reduce short-term (ten year) financial returns for any number of reasons (you are picking from a smaller pool of ideas and entrepreneurs probably being the key one).  They may or may not deliver strategic gains on a decadal time-scale.  I happen to think they do not – but thats not really the point here.  The point is that all these “quasi-VC” funds tend to be bulked into the ‘non-corporate VC’ heading.

    For that matter, they tend to get bulked in with “proper” private commercially led investors when looking at the return of the sector as a whole.  Few sectors see as much “cash with strings” pumped in as life sciences, and because much of this government cash is invested badly (at least by conventional private fund metrics) they show terrible returns, and weigh down the sector as a whole.

    My point, then, is simply to wonder whether the difference between corporates and non-corporates is due to anything positive at all about the corporate VCs, but rather because the ‘non-corporate’ bucket is polluted with quasi-VCs.  I would contend that quality private VCs (such as Atlas or Index) who invest according to their own model (that is, the model they sold to LPs, rather than a model imposed upon them by outsiders) will do as well – or perhaps even better – than corporate VCs because some, at least, of the corporate VCs also have “strings on their cash” – the need to feed the strategy of their corporate parent.  What do you think?