When is a biotech research project ready for VC investment?
By John Kurek, Peter Devine and Sam Harley
Many debilitating diseases that inflict great suffering on individuals in our communities currently do not have adequate or any therapeutics to treat them. Academic researchers contribute to fighting these diseases by seeking to discover how these diseases work and developing new therapeutics against them. In order to translate their research into a new therapeutic, some researchers seek to commercialise their research through creating a start-up company and raising funds from venture capital investors (VCs). However, researchers who are walking this journey for the first time are often unsure when their research project is ready to be incorporated into a start-up and pitched to venture capital investors.
At Uniseed, we have a proud history of supporting researchers and investing in biotech startups born from their research. Of note, we have successfully exited our investments in Fibrotech, Spinifex and Hatchtech in deals worth up to US$575 million, US$700 million and US$200 million respectively. Here, we will provide you with our perspective on when a biotech research project is ready for VC investment in the context of the standard drug development process. However, note that other VCs may invest later or earlier in the process. If you are unfamiliar with the stages of drug development, check out Pacific BioLabs learning centre for an excellent overview.
To understand when a biotech research project is ready for VC investment, it is useful to first understand what factors a VC considers when making decisions about which startups to invest in. Here, we will discuss three core factors that dictate when in the drug development process a VC can invest.
Risk vs Reward
A fundamental factor VCs consider is risk versus reward. A poor-quality investment opportunity is one that is high risk, low reward and a good-quality one is low risk, high reward. For an investment to be viable, with increasing risk the potential reward must also increase. VCs invest in high risk opportunities. However, the amount of risk a VC is willing to take is not infinite; VC’s will accept risk, but need to understand it.
So, what is the level of risk in drug development? Very high.
The cumulative probability of a drug at Phase 3 successfully launching into the market is 62%, whilst Phase 2 to launch is 15% and Phase 1 to launch is just 7% (1). The likelihood of success during pre-clinical development is even lower. As demonstrated by these statistics, the risk of failure decreases with progress in the drug development process (Figure 1). Hence, the earlier in the process, the higher the risk of failure and the less likely a VC will be willing to invest.
Given the high risk of failure, the drug being developed must be addressing an unmet medical need in a growing, large and definable market to provide a high enough potential reward.
Time to Exit
VCs also consider the time it could take to exit from an investment. VC funds generally have a limited time-frame of 10 years, with most investments made in the first 3–5 years. As a result, the VC must exit the investment before the 10-year period is complete.
The time required to progress through drug development is lengthy.
For example, it takes 11 years on average from the “lead optimisation” stage of pre-clinical drug development to market launch (2). These time-frames place a constraint on how early a VC can invest and how long they can hold the investment along the drug development process. Many VC’s will only invest in later stage de-risked opportunities that are approaching or are in the clinic so they can achieve an exit in the 10-year window of the fund. For those investing at the pre-clinical development stage, the exit route of choice is acquisition by a large pharmaceutical company after a Phase 1 or 2 clinical trial.
Protection from Competitors
As discussed above, risk and reward are an important consideration to a VC. In order to reduce risk and protect the potential reward, VCs seek out investments that have barriers in place to inhibit competitors taking market share or copying the product/service a startup offers. In the context of drug development, these barriers are patents that protect the method of use and composition of a drug. Since drug targets are not patentable subject matter, VCs are unlikely to invest in a startup at the “target identification” stage in the drug development process, as no patentable asset exists
When does Uniseed Invest?
Uniseed generally likes to invest at or after the “lead optimisation” stage during preclinical drug development. We believe that investment prior to this can be challenging because of a lack of data, the risk of failure is too high, time to a Phase 1 or 2 exit too long and patent protection may be limited, if not, non-existent. To invest we ideally want to see:
1. A novel lead molecule.
2. Patent filed for the composition of matter.
3. Efficacy data in a relevant disease model that is considered clinically predictive.
4. Pharmacokinetics and pharmacodynamics data.
5. Target engagement data and/or a strategy to obtain that data.
Most early stage biotech research projects we see have gaps in their data and in some cases, we provide funding to close these gaps. While each project is assessed on its merits, at a minimum we generally want to see initial proof of concept data in vitro and in vivo.
Whilst the journey of translating a research discovery into a novel therapeutic is a long and challenging one, it is possible and being able to provide patients who suffer from a debilitating disease a therapeutic is highly rewarding. If you are a researcher at one of our research partners (Universities of Sydney, NSW, Melbourne and Queensland or CSIRO) and are interested in translating your biotech research project into a therapeutic through a start-up, visit uniseed.com to contact us directly.
