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.
