When VCs hand out mega-rounds to Vir and Gossamer, are they betting on the jockey or the horse?
Following a period of unprecedented returns for biopharma investors, flush VCs are sinking bigger and bigger rounds of cash into companies whose pipelines are still in their infancy. Taking this trend to a new level is an increasingly popular move to back biotech executives who are known to be star performers with mega-rounds rising north of $100 million – even if their pipelines lack a star program.
There was a time when a few million bucks would back a promising asset, and then — if the program proved worthwhile — investors would recruit a star team. But backing management before science is a trend that’s picking up steam, according to several investors I met at JP Morgan this year.
Some consider these bets exceedingly risky, as VCs are essentially handing the C-suite cash and hoping they dig up something useful in return. Others argue the move means investors are playing it safe with this strategy. After all, a resolute CEO rooting around for several options to provide a return may be more dependable than the sometimes-finicky science of a one-star program.
“It’s a classic debate in the VC world,” said Canaan’s general partner Nina Kjellson. “Do we invest in the jockey or the horse?”
Companies like ARCH Venture Partners and Flagship Pioneering often bet on the jockeys.
The trend means one thing for certain: investors’ wallets are filled to the brim, and their strategies are changing as a result.
The plan, of course, is to get trusted leaders in positions where they can deliver one (or hopefully many) return. This has evolved into a business model in which an umbrella company finds promising assets to advance, and then spins them out into separate entities to see if the science sinks or swims. That way, one failure doesn’t tank the whole enterprise and the veteran executives can drive on.
When your resume warrants mega-rounds
We saw this recently with the eye-popping financial backing of Vir Biotechnology, which went from launch to raising over a half-billion in seed money in its first year. Investors are banking on a veteran executive team that includes CEO George Scangos, the former boss at Biogen and Exelixis.
Then there was the recent deal with Gossamer Bio, a startup led by two former Receptos executives that emerged earlier this month with $100 million in seed money. The company is being tight-lipped about what assets they already have, but we do know the plan is to snatch up early- and late-stage assets and develop them under spinout entities.
To some degree, Denali fits in this picture, too. The company’s pipeline is chalk-full of preclinical assets, and yet the company raised mega-rounds to get started and then scored a $287 million IPO.
Investors shore up risk by betting on repeat teams
Jay Lichter, managing partner at Avalon Ventures, said he sees this as a risk reduction strategy on the part of the investor.
“It reduces risk a lot when you’re backing a group who’s proven to execute on programs,” Lichter said. “Give them a bunch of money, toss them a few programs, and the chance that all will fail is close to zero. One will turn into a venture return.”
Both Lichter and seed stage investor Walter Moos of ShangPharma agreed that the trend is an indication of investors with heavy pockets.
“This is probably one of the most diverse financial ecosystems I’ve seen in my 35 years in the industry,” Moos said. “[VCs] need to invest more money per asset because they have so much more capital to deploy. There’s a limit on how many companies the partners can handle, so the deal size gets bigger.”
It’s also possible that VC firms are diversifying, Lichter said. Investors might consider veteran-led teams as more mature ventures that deserve private equity-sized deals instead of VC-sized deals.
Big bets or publicity play?
Are mega-rounds for nascent pipelines smart? Kjellson said she’s not a big fan of huge seed rounds, even if the team is experienced.
“I’m a little bit more sober these days to make a bet on a team with a $100 million check versus a $10 million to $15 million check,” Kjellson said.
Of course, many of these deals are milestone gated, she says, and as Moos points out, “like biobucks, lots of that money never shows up.” Moos thinks these mega-sized rounds can sometimes be a play for publicity.
“It can draw more top management, co-investors, or even grab the attention of Big Pharma,” Moos said.
Lichter tends to agree with Kjellson. He says too much money in the bank makes biotechs sluggish as they begin to operate like a “small big pharma, with all the bureaucracy and political structure.”
“I’ve never been a fan of big financing,” Lichter said. “I think it draws you away from what’s great about biotech, which is being nimble. Being close to death. It’s shocking how hard people will work when they have six months of cash and they have to get to work to stay alive.”