BUILDING A BUSINESS

The view beyond

Dennis Ford & Barbara Nelsen Fundraising is an integral part of almost every young biotech’s business strategy, yet many entrepreneurs do not have a systematic approach for identifying and prioritizing potential —many of whom work outside of traditional venture capital.

re you a researcher looking to start a Why and how did the funding landscape During the downturns, it quickly became Anew venture around a discovery made change? apparent that entrusting capital to third-party in your laboratory? Perhaps you have already The big changes in the life science alternative fund managers was no longer an raised some from your friends landscape start with the venture capitalist effective strategy, and investors began to with- and family and are now seeking funds to sus- (VC). In the past, venture capital funds were draw capital. The main reason for the with- tain and expand your startup. In the past, the typically capitalized by large institutional drawal (especially from VCs in the early-stage next step on your road to commercialization investors that consisted of pensions, endow- life science space) was generally meager returns would doubtless have been to seek funding ments, foundations and large family offices across the asset class; despite the high risk and from angels and venture capital funds; today, with $100 million to $1 billion in capital long lockup periods that investors accepted in however, the environment for financing an under management. Traditionally, the major- return for a promise of premium performance, early-stage life science venture looks strik- ity of these institutions maintained a low-risk, VCs were often not returning any more capital ingly different from that familiar landscape low-return portfolio of stocks and bonds that than investors would have earned by making of past decades. offered predictable and stable returns. A few more liquid in the public small Following the economic downturns of decades ago, fund managers adopted a strategy caps market. Returns from venture capital 2008 and 2011, the profiles of those invest- of putting a small portion of the assets under funds have not outperformed the public mar- ing directly in biotech startups have changed; management into higher-risk, higher-return kets since the late 1990s (ref. 1). A second rea- many traditional investors have curtailed vehicles, such as hedge funds, son was that returns earned by investing in VCs their mandates and reduced their alloca- funds and venture capital funds. This generally were offset by substantial costs; fund managers © 2013 Nature America, Inc. All rights reserved. America, Inc. © 2013 Nature tions to early-stage life science companies, worked well until the 2008 and 2011 economic typically charged a 2% on the and new types of entities have downturns. money they received. This of course is palatable emerged in their stead. Entrepreneurs also npg have to come to grips with the shifting regu- latory environment that defines how private Box 1 State and federal fundraising regulations in flux capital is raised, who can serve as liaisons between entrepreneurs and investors and The US National Institutes of Health has redefined who can qualify for Small Business the type of individuals who can participate Innovation Research (SBIR) loans, opening the program up to companies who have venture in financing a startup (Box 1). capital investors, which was formerly a barrier to qualification. In addition, the passing of If you are seeking funds for a startup, you the Jumpstart Our Business Startups (JOBS) Act has added complexity to the regulatory environment surrounding financings, with Title II of the Act allowing companies to raise need to be aware of the range of investors capital through general solicitation of accredited investors and Title III allowing companies and investment vehicles available, as well to crowdfund equity investments from unaccredited investors. Federal and state laws have as the pros and cons of each route. In this heavily enforced regulation on exactly who can invest—only those above a certain income article, we provide a brief primer to help you and net worth can be deemed an . Currently, these two new exceptions navigate your through the new inves- created by the JOBS Act cannot be used together as part of the same fundraising round, tor landscape and find the right investment which leaves startup companies in a contradictory legal landscape. partners for your company. In addition, the Financial Regulatory Authority and the Securities and Exchange Commission have clearly stipulated that any person or entity representing buyers and sellers of securities must be licensed to do so. As an aspiring entrepreneur in the life science arena, Dennis Ford is founder and CEO of Life Science you will encounter a myriad of finders of capital, professional deal sourcers, third-party Nation, Boston, Massachusetts, USA. Barbara marketers, broker dealers and investment banks all aiming to connect you with capital. Nelsen is founder of Nelsen Biomedical, St. Paul, The important take-home message is caveat emptor, or buyer beware. The gray space Minnesota, USA. surrounding the legal environment is in flux, and thus the viability of the entities involved in e-mail: [email protected] or the raising of capital must be vetted and understood when entering into agreements. [email protected].

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ab Acquisition or Startup & Series D+ or strategic Startup & Series D+ or seed Series A–C Series B–D Series C–E acquisition partnership seed Series A–C Series B–D Series C–E acquisition

Large pharmaceutical/biotech companies Large pharmaceutical/biotech companies/corporate venture

Private equity Private equity & hedge funds

Foundations Family of!ces/foundations/venture philanthropy/patient groups

Venture capital Venture capital*

Angels Angels *Though many venture firms claim

Investor type Investor type 'active' status at the early stage, Family/friends Family/friends research suggests that few are actually engaging in deals.

R&D Preclinical Phase I Phase II Phase III On market R&D Preclinical Phase I Phase II Phase III On market

Product development phase Product development phase

Figure 1 The life science investor landscape. (a) The traditional landscape. (b) What the new landscape looks like.

when a manager is returning great profits but is as patient groups and philanthropic venture relationships that can create outsized returns. not such a strong proposition during a period funds have entered the space formerly occupied They aim to maximize capital efficiency and of consistent losses. Yet another reason for the by underperforming VCs. create a lean portfolio of high-quality assets withdrawal, and the most troubling, was that a Corporate pharmaceutical companies are primed for market entry. general lack of transparency and long lockup also undergoing drastic strategic changes. periods turned many funds into ‘capital traps’ Facing aging portfolios of on-the-market Focused investor mandates versus from which investors could not withdraw and drugs and an impending patent cliff, big opportunistic investors were unable to influence the decisions of the pharma must restock the pipeline with inno- Two investment strategies dominate in today’s managers. vative assets, and many companies are turning investor environment. One is based on using Many VCs failed to prove to institutional to academic research collaborations, licensing, traditional market analysis and creating a struc- capital managers that they were capable of investment—through corporate venture capi- tured mandate to invest in a particular sector’s identifying and vetting winners in the life sci- tal—and as an alter- products and/or services. Typical considerations ence sector despite being paid handsomely to native to in-house R&D at the early stage. This include determining which key indication areas do just that. That said, of course there remains a cherry-picking strategy of plucking innovation or phases of development will bring the greatest subset of early-stage VCs who consistently pick emerging from academia has become a ubiq- return on investment. This type of ‘deep dive’ winners and have outperformed through these uitous strategy among the top pharmaceutical market analysis will consider major epidemio- tough times, but these well-known firms are in firms globally. Big pharma not only offers a logical, macroeconomic, demographic, regula- © 2013 Nature America, Inc. All rights reserved. America, Inc. © 2013 Nature a distinct minority. Lack of returns and steep huge source of capital for early-stage companies tory and reimbursement shifts. The result is a management fees became a bone of contention but also provides access to distribution chan- so-called investment mandate. The investor has that prompted a lot of institutional investors to nels for the market, discovery and development predetermined what sector, indication and stage npg withdraw their capital from the fund manag- expertise and many other resources. of development they wish to pursue and formal- ers and instead do their own alternative invest- In addition, across the space, many of the ized the resulting research data into a specific set ing. Thus, VCs lost a valuable funding source remaining active VCs, new virtual pharma- of criteria for investment. Remember, investing (a Kaufmann Foundation report details one ceutical firms (for example, Eli Lilly’s Chorus in an early-stage venture means getting in for institution’s reflections on backing away from Group, based in Indianapolis; Karolinska less capital and more risk, and these two factors VC investments)2 and, as a result, institutional Development, based in Stockholm; Accelerator are all part of the bet. The goal of any life sci- investors and large single- and multi-family Corp., based in Seattle; Apple Tree Partners, ence entrepreneur is to find an investor that is a offices often do direct — based in Princeton, New Jersey; and Velocity fit. Matching an investment mandate with your essentially, taking a similar percentage of their Pharmaceutical Development, based in San company’s offering is one tried-and-true way to funds and investing in early-stage opportunities Francisco) and mid-level private equity enti- be considered for funding. with the same potential for high returns but in ties (for example, Hercules Technology Growth On the other end of the spectrum are oppor- which the institution maintains control rather Capital, based in Palo Alto, ; Burrill tunistic investors—ones that do not limit their than ceding oversight to a VC. These invest- & Co., based in ; Omnes Capital, investment mandates to a particular sector or ments can occupy anywhere from 2–10% of based in Paris; and Auxo Management, based indication (for example, small molecule or gene their . in Mississauga, Ontario, Canada) are executing therapy, or diabetes or oncology). Rather than This change in tactical investment technique a business model of buying assets low, devel- betting on a specific technology, disease, devel- coincides with a growing trend for passion, oping them through early-stage clinical tri- opment phase or service, an opportunistic inves- philanthropic and social investment as part of als and then selling them high. These entities tor wants to play in the entire life science arena, an investor’s criteria. This is especially so in the essentially institute a strategy of aggregating and they believe that creating a specific man- life science sector, in which the social impact low-cost, early-stage assets around particular date would limit the rest of the market outside of investment dollars can be huge. New, more indications, outsourcing the clinical process that mandate; they prefer to pick and choose engaged and informed investment vehicles such and then developing or redefining channel anything interesting and exciting that surfaces.

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This could be the latest groundbreaking medical research. Not only do you need to identify and the corresponding figures had decreased to 149 device, a new dynamic therapeutic or a next- approach the right funding bodies (and ascer- rounds and 12.8%. In fact, 2012 saw the lowest generation diagnostic capability; all are fair tain that you are eligible and understand how level of first-round venture capital financings game to an opportunistic investor. Oftentimes, much money is available) but also you need to of life science companies since 1995 (ref. 3). A these are ‘gut’ investors who are driven by a appreciate what specific areas of research are recent evaluation of deals by the online newslet- belief in the technology and/or management ‘hot’, what the application guidelines are and ter Xconomy cites only 32 venture capital firms team, and they make judgments on a one-off how to tailor your application to best appeal investing in early-stage life science companies basis regarding whether or not to allocate. to evaluators and showcase your research so in the past few years4. Financial database pro- This dual dynamic of specific mandate ver- you have the best chance of getting an award. vider PitchBook, based in Seattle, recently sus opportunistic investment strategy perme- Beyond turning to the people who know you published a report that documents the decline ates all the categories of life science investors, best and already have cause to believe in you in volume of VC deals while showing that the and indeed each has its upsides and downsides. (friends and family), the key to fundraising median valuation of companies receiving ven- Because there are experts in both strategies with success is identifying the right pool of poten- ture capital funding has been rising5—a sure capital to invest, a fundraising entrepreneur tial investors for you (Box 2). Some of these indication that VCs are backing away from risky must be aware of this dynamic. are traditional funders of early-stage ventures early-stage projects and are instead putting their You will hear opinions from all over the life who will doubtless be familiar to you but whose shrunken supply of dry powder into less risky, science universe about how to find investors attitudes toward investing are changing; oth- more developed companies. and create a dialog with them. Life Science ers are new players in the space or new entities One additional wrinkle on the early- Nation (LSN), based in Boston and for which entirely. stage investment landscape is that many Dennis Ford is CEO, distributes a weekly venture capital firms, such as Atlas, Third newsletter that covers and frames current Venture capital. Historically, venture capital Rock and Flagship, all based in Cambridge, perspectives on life science investment (http:// has been a primary source of funding for startup Massachusetts, now create companies in- blog.lifesciencenation.com/). and growth companies, but in recent years the house and are not typically conduits for fund- The investor landscape has changed, life science space has witnessed a contraction of ing external startups. They rely heavily on and the old and new categories of inves- venture capital funds, with many active funds their own internal networks of key opinion tors are morphing as the life science market moving investments to later-stage companies. leaders and entrepreneur insiders for these changes and moves forward (Fig. 1). Let us First-round funding has especially fallen off. ventures. Kevin Starr, a partner at Third Rock, take a fresh look at the current lineup of life Data from the National Venture Capital said recently, “Last year, we saw 982 outside science investors. Association in Arlington, Virginia, and media plans. We invested in zero”6. and information firm Thomson in The good news is that Third Rock and oth- Getting started show that in 2006, 294 first-round ers are looking for transformative platforms and Raising funds for a venture is a process not allocations were placed into life science com- technologies to build new companies. If you wholly unlike that of obtaining grants for panies, representing 23% of the total; by 2012, are thinking of starting a company, you should

Box 2 A glossary of investors © 2013 Nature America, Inc. All rights reserved. America, Inc. © 2013 Nature Angels. High–net worth individuals usually with an interest in a venture investing principles to speed the development of drugs in particular type of product, service or industry. Many are successful their areas of interest and return capital for the fund’s future work. entrepreneurs themselves. (For an inventory of these groups, see http://train.fastercures.org/ npg Corporate venture capital. Large pharmaceutical and biotech TRAINInventory/). companies’ investment arms. For these strategic funds, Federal government. In the , federal funds are investments are driven not only by financial returns but also by the available from the Small Business Innovation Research Program development of relationships that could lead to future strategic (SBIR), the Small Business Technology Transfer Program (STTR) collaborations and product opportunities. and the US National Institutes of Health, in addition to other Family and friends. These personal contacts typically provide capital government departments that have an interest in some specific life for products that are in the earliest phase and are drawn to invest on science projects, such as the Department of Defense or Department account of a close connection to the founders of the company. As of Agriculture. they are not professional investors and may lack familiarity with the Regional economic development agencies. Economic development life science industry, they may not have realistic expectations for the groups provide resources to start companies locally. These can take development of the venture. Using these personal bonds as a source many forms such as job growth incentive tax credits, the Strategic of capital runs the risk of straining them. Cash Fund Incentive, enterprise zone tax credits, local government Family offices and/or private wealth. Family offices and/or private initiatives, state college spin-out funds and venture capital wealth firms represent the collective estate and assets of ultra- funds seeded by regional governments. Visit your local and state high–net worth individuals. They have large amounts of capital, economic development agencies to learn the variety of resources a sophisticated institutional approach toward investments and a available to you. long-term outlook, and many also have an interest in philanthropy. Super angels. Large groups of angels that increase the Foundations, nonprofits and patient advocacy groups. Often effectiveness of angel dollars. These investors have organized grouped under the heading of venture philanthropy, these groups themselves into regional or national networks to increase the size of not only provide grants for basic academic research but also use their investment pool and develop new strategies.

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participating in multiple rounds of financ- Table 1 Venture and hybrid funds for institutional inventions and startups ing. This makes these groups a viable form of Fund name Website financing your startup through an exit, depend- 5AM Venture Management http://5amventures.com/ ing on the capital needs and time horizon of Allied Minds http://www.alliedminds.com/ your venture. The top ten groups in terms of http://www.atlasventure.com/ activity are shown in Table 2. To find compre- BioMotiv http://www.biomotiv.com/ hensive information about angel investment Canaan Partners http://www.canaan.com/ funds, who and where they are, what they invest Connecticut Innovations http://www.ctinnovations.com/ in and the best way to set up a meeting with Domain Associates http://domainvc.com/ them, visit the Angel Resource Institute website Flagship Ventures http://www.flagshipventures.com/ and the Angel Capital Association website. Illinois Ventures http://www.illinoisventures.com/ Remember that you may be getting more Caufield & Byers http://www.kpcb.com/ than money when an angel fund invests in Lilly Ventures http://www.lillyventures.com/ your company. An angel group can be a source Novartis Option Fund http://www.venturefund.novartis.com/ of deep expertise and connections that pro- Polaris Partners http://www.polarispartners.com/ vides more value in growing the company than PureTech Ventures http://www.puretechventures.com/ the capital itself. Many life science angels are T1D Innovations http://jdrf.org/ themselves successful entrepreneurs in the field Third Rock Ventures http://www.thirdrockventures.com/ and may offer you access to the resources and Sofinnova Ventures http://www.sofinnova.com/ partnerships that supported their own success. You should put just as much effort into your State venture capital funds http://www.treasury.gov/resource-center/sb- programs/Documents/VC%20Report.pdf business plan and investor pitch as you would SV Life Sciences http://www.svlsa.com/ when approaching a typical venture capital http://www.venrock.com/ firm.

Government agencies. This is a very broad consider developing relationships with these provide several different funding sources for category ranging from funds within research funds and their partners now. All have scientific emerging companies. This fundamental busi- institutions to local economic development advisory boards, and all use scientific domain ness change is creating more opportunities for initiatives to national and international entities. experts to evaluate opportunities. Let them startups to engage with the pharmaceutical The level of Small Business Innovation Research know who you are, your area of expertise and giants, which offers great possibilities for a (SBIR) funding is set to grow in the next year. why you are interested in working with them. new entrepreneur. If you have not already considered applying for Recently, several pharmaceutical firms have SBIR or Small Business Technology Transfer Corporate venture capital. The corporate VC launched innovative fund concepts targeting (STTR) grants, you should do so immediately. is distinct from a traditional VC on many levels. life science entrepreneurs. For example, both A concise overview on how to apply for these Corporate VCs are largely the product of pro- the Novartis Option Fund and the Boehringer funds was published in Nature Biotechnology9. © 2013 Nature America, Inc. All rights reserved. America, Inc. © 2013 Nature found shifts among large pharmaceutical and Ingelheim Venture Fund, which recently The US National Institutes of Health has biotech companies. As mentioned previously, opened in Cambridge, Massachusetts, provide many funding options available for entre- an aging marketable drug portfolio among seed capital to highly innovative ventures, and preneurs and young companies, particularly npg the top pharmaceutical companies has led to Lilly Ventures funds external molecule devel- for those conducting clinical or translational a scramble for assets to feed dry pipelines. In opment7. More information about pharma- research. The total dollar value awarded for the past, such pipeline gaps would be filled by ceutical venture funds specifically focused on clinical research at the NIH reached more than the work of in-house pharmaceutical R&D, but university inventions and spin-outs is provided $10 billion in 2012, and in 2013 it was larger in recent years this internal research has been in Table 1, and information on databases can be than the total awarded to any other specific cut from big pharma’s budgets. Instead, com- found in Box 3. field or stage of research10. Eighty percent of panies have been finding it more cost effective National Institutes of Health funding opportu- to outsource the risks of early-stage research Angels. In addition to family and friends, nities are not part of the request-for-proposal by acquiring emerging assets from third par- angels and ‘super angels’ typically provide capi- process, so you will need to work directly with ties and by making use of virtual development tal for companies that are in the earliest phase. program directors to apply. This may seem services. In 2012, angels invested a total of $1.1 billion daunting, but direct outreach to the agencies Entrepreneurs and scientific founders need in 783 deals (primarily in first funding), with or to those who assist in developing nondilutive to appreciate the distinction between corpo- 27% of that invested in the healthcare and life funding (for example, the FreeMind Group) is rate development and corporate venture. science sector8. National chapters, syndications the best route11. Corporate venture capital invests in compa- with other angel funds and single-source online Many local and regional government agency nies developing breakthrough technologies application platforms (for example, http://gust. funds also exist for innovation and start- that the firm believes have long-term dis- com/) have made it easier for a bioentrepreneur ups in the life science area. The most visible ruptive potential; corporate development to gain access and visibility with angel inves- of these are in states, such as Massachusetts seeks to make tactical partnerships to fill tors. Angels are now part of larger investment and California, that have mounted large ini- near-term pipeline requirements by pur- pools and have the ability to execute sophisti- tiatives to grow sectors of the life science chasing or licensing an asset. Because of this cated investment strategies and provide fund- industry. In Massachusetts, the $1 billion Life distinction, pharmaceutical companies often ing at higher levels than in the past, perhaps Sciences Initiative provides funding in multiple

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(see http://www.angelcapitalassociation.org/ Box 3 Databases and other resources to start your search for public-policy/existing-state-policy/). Get investors more information from your local or state economic development agency about options You will need to find the database providers producing the most relevant and up-to-date available in your area. Do not underestimate information to help you in your search for investors. In choosing a source, you will want their desire to keep you local and grow the to understand how the database aggregates information. Some of these vendors collect data by amassing publicly available content such as press releases. Others follow websites local economy. We have seen cases in which that cover licensing deals or financings that have been made public, or they consolidate economic development groups put together articles from certain publications. The databases with the most up-to-date information new funding mechanisms to keep break- leverage a team of researchers to collect data through one-on-one interviews with through technology in-state for company investors. The fresher the data, the more effective and efficient you can be in fundraising. formation. To help start your search, we provide a list of starting points for a search in Table 5 below. New sources of funding for startups Table 5 Advisors and/or database providers that can help your search for early-stage With reduced resources and less appetite life science investors for risk, VCs are moving away from high- Database Website risk, early-stage companies. Fortunately for Angel Capital Association http://www.angelcapitalassociation.org/ entrepreneurs, other classes of investors are Angel Resource Institute http://www.angelresourceinstitute.org/ coming to the fore to take advantage of the BioCentury http://www.biocentury.com/ VC retreat. These include patient advocacy groups and foundations, big biotech and Biotechgate http://www.biotechgate.com/ pharmaceutical companies, and venture phi- FasterCures http://www.fastercures.org/ lanthropists. FreeMind http://freemindconsultants.com/ Table 3 represents the results of a search we Life Science Nation http://lifesciencenation.com/ did in the Life Science Nation investor database. Massinvestor http://www.massinvestor.com/ The goal was to ask a simple yet compelling National Venture Capital Association http://www.nvca.org/ question: How many investors and what investor Thomson Reuters http://www.recap.com/ category are presently interested in investing in early-stage therapeutics from preclinical discovery all the way to phase 1 trials? ways, including up to $750,000 for new life facilities. Representative examples include There are thousands of VCs globally. Of science companies to help leverage additional Connecticut Innovations in Rocky Hill, those that Life Science Network has researched sources of capital. The California Institute for Connecticut; the Kentucky Seed Fund in or interviewed, 572 claim that they are invest- Regenerative Medicine (CIRM), based in San Louisville, Kentucky; the Maine Technology ing in early stage life sciences. However, stated Francisco, still has $1.8 billion in unearmarked Institute in Brunswick, Maine; and Illinois activity does not necessarily reflect actual activ- funds to invest in stem cell and regenerative Ventures in Chicago. Many such funds exist; ity, as published metrics do not sup- medicine, and it funds companies at every in the United States, there are currently port these claims on a total basis. It is common © 2013 Nature America, Inc. All rights reserved. America, Inc. © 2013 Nature stage provided they have a substantial presence 36 state-run venture funds in 30 states12. for investors to claim that they are active to ‘stay in California. As with all funding sources dis- Economic development groups also provide in the game’, even when they are not investing. cussed in this article, substantial research may resources to start companies locally. These npg be required to find these funds, identify their can many forms, including convertible debt, Patient advocacy groups and foundations. criteria for investment and determine how to equity investment, infrastructure support, Foundations, nonprofits and venture philan- apply for them. But it is well worth the time and shared resources and tax credits, refunds and thropists have traditionally been more focused energy; these groups are committed to the suc- incentives. Many states also encourage inno- on funding academic research. Indeed, col- cess of life science startups in their region and, vation by providing tax credits for angel inves- lectively these entities provide more than half in addition to funding, will offer you access to a tors. To date, 27 states provide such credits a billion dollars in biomedical research grants wealth of local resources and industry expertise. Do not be discouraged if you are not in a funding hub such as Massachusetts or Table 2 Angels at work California. The large number of angel funds, 2012 rank by number of deals Group Location innovation centers and venture capital firms 1 New York in these locations come with an equally high 2 Southern California level of competition for these resources. For 3 Launchpad Venture Group Boston entrepreneurs outside of these clusters, there 4 Central Texas Angel Network Austin, Texas are many other government and economic 5 Golden Seeds New York, Boston and San Francisco development initiatives that can be tapped. 6 Sand Hill Angels Sunnyvale, California These most often take the form of seed- 7 Investors’ Circle National stage investment funds whose mandate is to 8 Alliance of Angels Seattle facilitate startup activity from local institu- 9 Common Angels Boston tions (particularly state universities) and to 10 Maine Angels Portland, Maine recruit companies to the region by offering 2013 Halo Report, Angel Resource Institute. relocation grants and access to biocluster

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annually. Most such groups are focused on nering with commercial biotech companies13. dollars were drying up in the blood cancer area, curing one specific disease, so qualifying for Partnerships can span all stages of research and there was insufficient funding going into funding from them requires a clear connec- and development, from discovery through preclinical and clinical research. So strategically, tion between your innovation and their mis- clinical trials. More than one-third of these LLS made a shift to fund this gap.” sion. Beyond the well-known groups, such as entities have supported at least one clinical trial. In this next fiscal year, close to 30% of LLS’s the Michael J. Fox Foundation in New York, Indeed, Todd Sherer, CEO of the Michael J. Fox funding allocation will be invested in new thera- the Juvenile Diabetes Research Foundation Foundation has said, “We are definitely seeing pies and companies that are making a difference in New York, Susan G. Komen for the Cure the need for foundations to support companies to patients. And this strategic shift also brings in Dallas and the Leukemia and Lymphoma even through a phase 2 clinical trial.” success to the companies in which LLS invests. Society (LLS) in White Plains, New York, there LLS provides a clear example of how the work Currently, LLS is actively shepherding 15 assets are many less prominent nonprofits that also of foundations is changing. This foundation has through its Therapy Acceleration Pipeline fund research, such as the Bluefield Project in been in existence for 60 years, but up until 6 program, which seeks to bring blood cancer San Francisco, which funds research on treat- years ago, it funded only academic or institu- therapies to market. These assets range from ments and cures for frontotemporal dementia. tional research. When funding began to migrate preclinical to phase 3, and LLS has successfully Although these groups are historically best away from early-stage, LLS’s leadership decided brought several of its Therapy Acceleration known for supporting academic research, the to change direction. According to John Walter, Pipeline companies toward the market vast majority—90%—will now consider part- the foundation’s CEO, “We saw that venture with great speed. This is accomplished by

Table 3 Active investors in seed/venture stage seeking discovery through phase I therapeutics Disease area Number of investments by type of investor (number of investors) Corporate Family Institutional Venture venture Endowments/ office/pri- Government alternative Big pharma/ Private capitalist capitalist foundations vate wealth organization Hedge fund investor biotech equity Total Angel (83) (572) (50) (108) (59) (77) (12) (54) (46) (386) (1,447) Neoplasms/cancer/ 29 136 26 42 17 37 2 22 19 63 393 oncology Infectious and 37 176 26 21 18 35 3 9 15 51 391 parasitic Nervous system 26 165 29 29 15 37 1 18 18 52 390 Cardiovascular 29 158 30 16 9 26 1 14 13 59 355 Endocrine and 27 141 29 22 11 33 3 14 16 46 342 metabolic Blood and immune 28 149 27 18 10 24 1 14 16 38 325 Digestive system 20 115 20 7 9 21 1 8 8 36 245 Eye 16 121 18 6 10 18 0 6 11 32 238 Genitourinary 20 115 16 6 9 17 0 6 13 34 236

© 2013 Nature America, Inc. All rights reserved. America, Inc. © 2013 Nature system Mental and behav- 18 105 20 13 6 18 2 7 10 29 228 ioral Congenital defor- 11 92 12 9 5 14 0 5 5 21 174 npg mity and chromo- somal defects External causes 15 92 13 5 5 16 0 4 4 16 170 morbidity and mortality Ear 13 91 12 5 5 13 0 2 4 15 160 Prenatal 11 86 12 3 5 13 0 3 3 15 151 Respiratory 9 56 13 10 5 13 0 12 8 25 151 Musculoskeletal 11 33 8 12 2 11 1 13 8 18 117 and connective tissue Skin and subcuta- 6 40 4 7 2 9 0 11 7 21 107 neous tissue Pain and inflam- 4 7 8 1 1 3 0 0 2 8 34 mation Physical injury/ 0 10 2 1 0 6 0 1 3 5 28 poisoning Pregnancy, child- 1 8 2 2 0 0 0 1 2 0 16 birth and puerpe- rium Opportunistica 17 219 5 9 14 6 5 14 13 218 520 aInvestors willing to consider diseases across areas. Source: Life Science Network investor database.

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collaborative resource sharing, investment and Big biotech and pharma. In the past, large equity funds but which do not accept outside creation of the right industry connections. One pharmaceutical and biotech companies stayed capital; others see direct private placements as notable example was when LLS provided capi- away from investments in very early-stage com- one of a diverse range of assets in which to place tal to Avila Therapeutics, which was based in panies because of the amount of risk involved. the family’s wealth. Family offices have already Cambridge, Massachusetts, to initiate clinical Any involvement in startup companies was played a role in early-stage life science investing, trials of one lead candidate; Avila was subse- through their corporate venture funds. Now, especially in Europe14. quently acquired by Celgene, based in Summit, however, that is changing. Several firms are Beyond the basic distinction between New Jersey, in 2012. Another example came looking for opportunities to fund assets in ear- SFOs and MFOs, family offices can be highly when LLS also committed to provide up to lier stage development, and many of the larger varied. Some family offices combine invest- $7.5 million in milestone-based funding to firms have decided that early-stage direct ment and philanthropic goals, whereas others Epizyme, based in Cambridge, Massachusetts, investment may be a viable alternative to spend- have formed family not-for-profit founda- in 2011, which went to support a phase 1 trial ing funds on traditional in-house R&D. tions that are administered separately from for a mixed-lineage leukemia therapy. One new avenue for big biotech involve- the family’s wealth-preservation activities. These partnerships often focus on funding a ment is the creation of incubators, such as A ’s philanthropic work will be specific project, such as a clinical trial, and may New Brunswick, New Jersey–based Johnson directed by the personal goals of the family; include milestone payments for development & Johnson’s Innovation Centers in California, within the life science sector, this may mean success; in the case of Onconova Therapeutics Boston, London and ; Boston- a focus on a disease that has affected the fam- in Pennington, New Jersey, for example, LLS based Boston Scientific’s center in Shanghai; ily or a high-impact area in which the fam- provided $8 million in funding to pay for a and Leverkusen, Germany–based Bayer’s ily feels it can make a real difference in the phase 3 trial. Foundations also are providing CoLaborator in San Francisco. These centers world. Like other nonprofits in the life science money for seed funding enterprises; for exam- provide early-stage researchers with space, space, family philanthropic foundations may ple, Beats of Laughter in Westport, Connecticut, equipment, operations, business support, have historically focused on basic research a foundation specializing in oncology, provides industry networks and conduits to strategic but are now supporting commercial research tranches of $200,000 for seed investments; the partnering. By working at an innovation center, for much the same reasons; basic research Beyond Batten Disease Foundation in Austin, a startup can enjoy a ‘big-company advantage’ takes a long time to deliver new treatments to Texas, provides funding for ventures as well as that is more robust than what is offered by tra- patients, and wealthy families want to see the research in academic institutions focusing on ditional, stand-alone incubators. social impact of their investments in a shorter the neurological disorder; and Cures Within time frame. As with disease foundations, Reach in Skokie, Illinois, also offers funding Family offices. These entities are entrusted receiving an academic research grant from a (~$100,000) for ventures focusing on unmet with the money of wealthy individuals and family foundation may serve as a gateway to needs. families. There are two types of family office: future startup funding. Applying to a nonprofit or foundation for a single-family offices (SFOs), in which a group Some family offices have created innovative basic research grant in your area of study can be of financial professionals manages capital for business models to transition scientists’ dis- an effective way to gain visibility and credibility one family, and multi-family offices (MFOs), coveries to commercial entities. One example with the organization; building these early con- which invest on behalf of a number of cli- is the Harrington Project in Cleveland, a $250 nections can be of great use for developing and ent families. As maintaining a family office million US initiative to support the discov- © 2013 Nature America, Inc. All rights reserved. America, Inc. © 2013 Nature funding a startup in the future. Much like the is expensive, SFOs tend to be the preserve of ery and development of therapeutic break- other organizations that you are accustomed only the wealthiest; typically, SFOs are only throughs by physician scientists. Created by to applying to for grant funding, these organi- formed by families with a net worth exceeding a family office, the Harrington Project starts npg zations will put out requests for proposals for $100 million. These families are therefore often with a grant-funding phase open to inventors basic research and translational development well known; they either own companies, such nationwide for advancing discoveries through projects, and they have links and program as Andersen Windows in Bayport, Minnesota; an innovation center that supplies hands-on coordinators listed and accessible through Jennie-O Turkey in Austin, Minnesota; and resources and expertise. Then inventions their websites. Many of these groups can be Hormel in Austin, Minnesota, or founded and platforms are moved to an accelerator, accessed through FasterCures, who has The enterprises, such as Fidelity in Boston; Cargill BioMotiv, to create companies. Research Acceleration and Innovation Network in Minneapolis; and Carlson in Minnetonka, Family offices have a reputation for elusive- (TRAIN), which lists profiles for 55 organiza- Minnesota. In addition to managing the vast ness and secrecy, but LSN has discovered that tions that provide $600 million in medical fortunes of these families, family offices also this is ultimately misleading. As with other research grants annually. About half of TRAIN perform other functions, such as generational types of investor, LSN researchers call family groups have supported at least one clinical trial, planning, legal and tax services and preserving offices and conduct interviews regarding their more than half incorporate advocacy efforts the family’s legacy through philanthropic work; investment criteria. These one-on-one inter- into their work in fighting disease and nearly 9 it is these additional functions that distinguish views result in written mandates approved by out of 10 partner with biotech and pharmaceu- MFOs from other multi-client financial advi- the family office, and companies that use LSN tical companies. Foundations that are not able sors or wealth managers. as a fundraising partner can vet themselves to provide you with financing may still wish In the past, family offices have invested in against these mandates to assess whether they to partner with you to share other resources alternative assets, such as VCs and hedge funds are a good fit for the family office’s criteria. (for example, access to their scientific exper- as limited partners. But the poor returns from Like many investors, family offices often tise) and vital research resources (for example, these funds have encouraged family offices have a ‘keep below the radar’ mentality, as tissue samples or registries of patients who to take more control of their own alternative financial confidentiality and protecting pro- may be able to participate in human clinical investments. Some SFOs have formed family prietary strategies are of great importance trials). investment vehicles that invest as VC or private to investors (perhaps more so to SFOs than

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to many firms because their investors are so easily identifiable and have a distinct need Table 4 Budgeting for an outbound fundraising campaign for privacy). However, all investment entities Required commitment need some visibility to attain deal flow. A typi- Time required Estimated cost cal family office might receive a hundred blind Developing marketing materials and content e-mails or cold calls a week, and because many Executive summary, two pages 30–40 h $1,000–$5,000 of these solicitations are poorly matched to the (professionally advised) office, they create a lot of needless noise and Pitchbook Powerpoint presentation, 80–100 h $5,000–$10,000 10–12 pages (professionally advised) wasted time. One way family offices filter their Website (professionally built) 200–250 h $6,000–$15,000 deals is to use trusted networks, such as LSN, which provide a flow of suitable opportunities Investor database a that fit the firm’s mandate. Being a perfect fit Quality investor database – $7,000–$10,000 can be worth more than getting a direct refer- List and task management application – $50–$250 (for example, http://salesforce.com/) ral, as a referral that is a poor fit is still a waste E-mail delivery, tracking and reporting – $100–$600 of a family office investor’s time. application (for example, iContact) Content-developing application (for – Typically free More about seed funds example, Wordpress) BioMotiv, the aforementioned institutional Ongoing e-mail canvassing 40 h Salary dependent startup seed fund, is one of the many new funds Ongoing phone canvassing 150 h Salary dependent and funding models that have arisen to address Roadshow (9–12 months) the funding gap for early-stage technologies. Travel, food and hotels (regional cam- Some funds, such as Allied Minds in Boston, paign) – $40,000–$50,000 appear on the surface to be fairly traditional Travel, food and hotels (global campaign) – $60,000–$80,000 venture capital firms. But they have an unusual TOTAL COST – $60,000–$120,000 (plus salary) mandate—in this fund’s case, commercializing aA quality investor database should provide about 5,000 global investors across 10 categories, allowing you to filter down early-stage, government-owned technologies to to a target list of 300–500 investors that are a fit for your offering. create startup companies from innovations in US universities and federal research institutions. unknown to these advisors, and they may about the major expenses in a money-raising Another example is T1D Innovations. waste a new entrepreneur’s time by perpetrat- campaign (Table 4). Recently created through a partnership ing myths and promoting strategies from an between the Juvenile Diabetes Research outdated playbook. There are plenty of third- Devising a strategy Foundation and PureTech Ventures in party fundraising entities that have updated, Given the challenges and opportunities that this Cambridge, Massachusetts, T1D is focused relevant experience and are indeed good. The article has outlined, how should bioentrepre- on finding promising, transformational ideas good ones have strong connections and a cur- neurs prioritize the options potentially available in the area of type 1 diabetes from research rent Rolodex, but their reach is often regional; for funding their new enterprises? A closer look institutes and developing them from concept the best have a global investor network. at just a few companies who raised money in the © 2013 Nature America, Inc. All rights reserved. America, Inc. © 2013 Nature to company. Beyond the specific therapeu- As an early-stage entrepreneur, you have past year shows a mix of traditional and new tic mission, T1D’s ‘syndicate now’ strategy is to make a fundamental judgment call as to investors participating in a single deal (Fig. 2). unique; the fund has attracted $30 million in whether you should conduct business devel- A review of deals this past year in California and npg funding from other nonprofits and strategic opment and investor outreach activities in- Massachusetts, the two states with the greatest and financial investors and will use the cash house using your existing management team amount of investment in life science, demon- to start eight to ten projects. For those projects or hire one or more experienced fundraisers strates the broad variety of these funding alter- that survive to become new spin-out compa- to do it for you (Box 1). If you decide it is not natives in addition to traditional venture capital. nies, T1D hopes that these companies will go something your team can usefully put their You should thus consider them all. on to find a pharmaceutical partner to help fur- time toward, the alternative is to outsource the Initially, the stage of development of your ther develop their programs, or land a series A process to a third-party fundraising partner. enterprise is a key filter in helping to identify round from traditional venture investors to get It is essentially a matter of matching commit- the types of investors that would likely be a themselves off the ground. ment and ability and knowing what you can fit. Having identified investors compatible and cannot do. If you cannot make outbound with your stage of company development, you Internal or external outbound direct calls and send engaging e-mails to strangers, should then target those whose market focus canvassing then you need to partner with someone who and key investment criteria fit with your firm’s There is a risk that academics and early-stage can. goals and profile. Are you addressing an unmet entrepreneurs will be drawn into a Wild West It costs money to raise money. Creating need for a particular patient population? Does of business coaches, mentors, accelerator pro- effective marketing materials, conducting a your innovation solve a problem that is rele- grams and venture centers that broadcast a targeted campaign and following up on fund- vant to the military or veterans? The answers to flood of ‘expert fundraising advice’ either ing leads demands both a time and financial questions like these will help you identify which from advisors who have not raised money commitment, and fundraising therefore of the various sources of capital described themselves lately or from consultants and requires that you have the necessary dedica- above—angel funds, foundations, nonprofits mentors who have not ever actually raised tion right from the start. or corporate venture funds—are most likely capital. The reality of outbound campaigns To raise money effectively you must think to provide funding to you. Almost all investors and 9–12-month fundraising roadshows is strategically. The place to start is to think have a particular focus, and identifying those

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14 COMPETING FINANCIAL INTERESTS Angel The authors declare no competing financial interests. 1 Government organization 12 1. Mulcahy, D., Weeks, B. & Bradley, H.S. We have met 2 Family of!ce the enemy… and he is us. Ewing Marion Kauffman 10 Institutional alternative investor Foundation, http://www.kauffman.org/~/media/ 2 kauffman_org/research%20reports%20and%20 Corporate venture capitalist 8 1 covers/2012/05/we%20have%20met%20the%20 1 enemy%20and%20he%20is%20us(1).pdf (2012). 6 7 2. Ewing Marion Kauffman Foundation. Institutional 1 limited partners must accept blame for poor long- 1 1 term returns from venture capital, says new Kauffman 4 1 1 1 report. Ewing Marion Kauffman Foundation, http://www. Number of investors 3 1 1 kauffman.org/newsroom/2012/07/institutional-limited- 2 2 1 partners-must-accept-blame-for-poor-longterm-returns- 1 from-venture-capital-says-new-kauffman-report (2012). 0 3. PricewaterhouseCoopers. Life sciences venture capi- CARDIODX Curetis Neurovance Maculogix tal funding drops 14% during 2012, according to the Company MoneyTree report. PricewaterhouseCoopers, http://www. pwc.com/us/en/press-releases/2013/2q-life-sciences- Figure 2 Examples of investor diversity in fundraising for early-stage life science companies. Data from moneytree.jhtml (2013). 4. Timmerman, L. Who’s still active among the early-stage deals closed in the last 12 months. biotech VCs? Xconomy, http://www.xconomy.com/ national/2012/07/02/whos-still-active-among-the-early- stage-biotech-vcs (2012). that match your company will improve your panies need to look toward new, emerging 5. PitchBook. 4Q 2013 Venture Capital Valuations fundraising chances. categories of investors to provide the fund- & Trends Report. PitchBook, http://pitchbook. Lastly, do not forget geography. Are any inves- ing that was historically provided by venture com/4Q2013_VC_Valuations_and_Trends_Report.html (2013). tors a walk, car ride or short plane trip away? capital. Corporate venture funds, angels and 6. Ledford, H. Biotechnology: the start-up engine. Nature This may seem an obvious approach from a angel networks, government agencies, foun- 501, 476–478 (2013). 7. von Krogh, G., Battistini, B., Pachidou, F. & Baschera, P. logistics perspective, but there are multiple rea- dations, patient advocacy nonprofits, fam- The changing face of corporate venturing in biotechnol- sons to look locally. Investors need to be courted ily offices and hybrid funds are all actively ogy. Nat. Biotechnol. 30, 911–915 (2012). over long periods of time. Proximity makes this investing in this sector. 8. Angel Resource Institute & Bank. 2012 Halo report: angel group update year in review. Angel easier, particularly when you are engaging with This pace of change in the investment Resource Institute, http://www.angelresourceinstitute. smaller investment groups that have more lim- landscape now requires, more than ever, org/research/halo-report.aspx#2012HaloReport (2013). ited footprints; most angel networks invest only that entrepreneurs be nimble, informed and 9. Beylin, D., Chrisman, C.J. & Weingarten, M. Granting you success. Nat. Biotechnol. 29, 567–570 (2011). in a particular locality. flexible. Creating a target list of investors 10. US National Institutes of Health. Estimates of funding It is worth considering not only your pres- that includes the newly emerging sources of for various research, condition, and disease categories. U.S. National Institutes of Health, http://report.nih.gov/ ent capital needs but also your company’s pro- capital, and focusing on those with a clear categorical_spending.aspx (2013). jected future needs. If you are developing a drug fit and strong interest in the company’s stage 11. Laursen, L. Grant applications: find me the money. or a medical device, your company will need as and business, will increase the probability of Nature 486, 559–561 (2012). 12. Cromwell Schmisseur LLC. Information and observations much as tens of millions of dollars of exter- fundraising success. on state venture capital programs. U.S. Department of the Treasury, http://www.treasury.gov/resource-center/ nal funding from several capital raises spread ACKNOWLEDGEMENTS © 2013 Nature America, Inc. All rights reserved. America, Inc. © 2013 Nature across a span of years before attaining a revenue sb-programs/Documents/VC%20Report.pdf (2013). The authors are grateful to Maximilian Klietmann, 13. FasterCures. Honest brokers for cures: how venture stream. It is never too soon to think about what Danielle Silva and Lucy Parkinson of Life Science philanthropy groups are changing biomedical research. your company will need further down the line. Nation for research on this article. The authors FasterCures, http://www.fastercures.org/assets/Uploads/ would also like to thank the following individuals PDF/HonestBrokers.pdf (2013). npg Establishing a dialog with later-stage investors for their time and discussions: Vincent Miles, 14. Senior, M. Family offices bolster early-stage financing. early and visiting often streamlines the financ- partner at Abingworth Life Science; Susanna Ling, Nat. Biotechnol. 31, 473–475 (2013). ing of the organization over time, reducing the associate director at the Milken Institute; John amount of effort and resources required for fur- Walter, CEO at the Leukemia and Lymphoma Adapted from Ford, D. Outsourcing your fundraising ther rounds over the organizational life cycle. Society; Melinda Richter, CEO at Prescience efforts: the conundrum for life science CEOs. Life International and head of operations at Janssen Science Nation, http://blog.lifesciencenation. Attempting to identify the appropriate Labs; Todd Sherer, CEO at the Michael J. Fox com/2013/02/20/outsourcing-your-fundraising- investors to contact now and in the future Foundation; and Ram May-Ron, managing partner efforts-the-conundrum-for-life-science-ceos/ can be a challenging endeavor, but there are at FreeMind Group. (2013). many database services that provide infor- mation on the variety of investors avail- able (Box 3 and Table 5). These services First Rounders Podcast: can aid you in developing an outreach strat- Harvey Berger egy tailored to your profile, position and objectives. Berger was the principal founder of Ariad and has served as its chairman and CEO for more than 20 years. Trained initially Conclusions as a physician, he spent time at Centocor before starting up The fundraising landscape for early-stage life Ariad out of his home. Nature Biotechnology spoke to him science companies has changed dramatically about developing Iclusig, the difference between managing over the past several years. Venture capital- a patient’s health and running a company, and how a public ists may not always be the first, or even the entity deals with bad news. http://www.nature.com/nbt/ most attractive, category of investor for your podcast/index.html company. Entrepreneurs and young com-

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