Understanding health-tech

— insights and lessons from Christian Schneider from Vesalius Biocapital

Companies around the world are racing to find treatments for the coronavirus and vaccinations against this disease. While the WHO acknowledges the “unprecedented worldwide collaboration, cooperation, and sharing of data,” Dr. Christian Schneider, a Managing Partner at Vesalius Biocapital, believes that most of the companies in this race will not see their days of glory. During our recent conversation, we talked about this phenomenon, best practices in investing in life-sciences startups, and how Christian’s childhood dream to become a forest warden impacted his career path.

Christian predicted, “the Corona pandemic will be relatively short-lived. Currently, there are more than 260 pharma, biotech, and diagnostic companies trying to find a cure for the coronavirus. This number is constantly growing, but only a handful of these firms will eventually make some money.” As a person with 20 years of VC experience in life sciences and former professional involvement in diagnostics and therapeutics, Christian is aware of the challenges that these companies are facing. “There might be a lucky few who will get huge orders from the governments, but all the other companies who will not be able to finish their research on time will lose their investments,” he explained. I was curious to understand his reasoning.

Common coronaviruses come and go in waves — I’ve learned over the course of our discussion — and Christian deems that it might also be the case for COVID-19. Furthermore, if this virus does not reappear on a seasonal basis, but rather continues with limited circulation or even disappears completely, it is likely that plenty of companies will not be able to finish their clinical trials due to a dwindling number of patients. “First clinical trials in China already had to be stopped since there are no patients anymore. This is one of the reasons why there is, for example, no SARS nor MERS vaccine or drug out there yet,” he added.

What Christian said may well sound controversial, but in healthcare, everything takes time, and usually, a lot of money. We can see this problem clearly in the current pandemic. Even though governments and companies are putting millions of dollars into research on new drugs and vaccines, we can’t be sure that the results will arrive this or even next year. Strict and complicated regulation, long research and development cycles, are only a few of the problems most health-tech startups have to face every day.

“This is why in life sciences, smart venture capitalists invest only one-third of the planned money in the first round and keep the rest in reserve. These rules apply to every single health-tech startup,” he said. Then added, “often med-tech companies show us their near-term revenue projections, but in our planning, we scratch the numbers for the first two years and we assume that their revenues will be equal to zero. Then we add this number to the amount of additional investment they will need in the future.”

Developing healthcare solutions is not only costly and time-consuming, but also often does not follow deductive reasoning. “Many entrepreneurs start with the solution, not with the problem,” Christian said. He feels that engineers and entrepreneurs who have no experience in the medical field frequently misinterpret the needs and realities of healthcare problems and systems.

“I have recently looked at a company in the oncology field. They run on the paradigm that early detection of cancer will lead to a better outcome for the patient. Yet in the case of prostate cancer, early diagnosis and the subsequent over-treatment often results only in the deterioration of the patient’s quality of life. There are plenty of old men dying with prostate cancer, not because of it.”

For this reason, many venture capitalists require that the health-tech startups have people with medical experience on board, ideally from the very start of the project.

Just like in any other VC investments, even with thorough due diligence, unforeseeable difficulties can lead to a failure of a health-tech startup.“One of my former colleagues used to joke that we should first invest in the write-offs of the fund, so we get over them quickly. Unfortunately, you can’t do this, as every company looks great when you invest in it. It’s only after two or three years that you realize that they could be a failure,” Christian said.

Christian started investing in life science companies when the market was still fairly young. “The challenge was that you had to work with cowboys not only in portfolio companies, but also in your own organization. Many VCs back then were dominated by one founder- the Godfather in Chief,” he chuckled.

“Today the VC business sometimes feels more like working in a bank — it is regulated and assesses all the risks. There are a lot more professionals in the field and not many cowboys left.”

Christian said that his becoming a venture capitalist was a happenstance, but in his journey, you can clearly see the dots connecting. Inspired by a multi-generation history of forest wardens and professional hunters in his family, he chose veterinary medicine as his field of studies. “It was the next best thing to becoming a forest warden,” Christian explained. He did plenty of internships worldwide, among others in Namibia, where he worked with a flying veterinarian. “We flew out every day to the farms. It was quite exciting,” Christian reminisced. However, he soon realized that being a vet was not enough for him.

During his internship in the German Health Office in Berlin, Christian got fascinated by the latest antibody-based diagnostic technologies that they were using and decided to pursue his doctoral thesis in that direction. In 1992 he joined Boehringer Mannheim (later acquired by Roche) and developed the first fully automated test for a new prostate cancer marker, free PSA, which is being sold worldwide by the company to this day. After finishing his Ph.D. Christian moved to the United States where he worked for Centocor (now part of Johnson & Johnson) in diagnostics and therapeutics. Ultimately, in 2000, he officially joined the venture capital scene. Looking back Christian laughed at his choice to steer away from the family tradition, “when you’re a forest warden you can’t really move things, … except for wood logs.”

As a person with decades of experience in the VC field, Christian recognizes that to make a good venture capitalist you need knowledge and experience. “It is time for me to give back,” he said and shared a piece of advice to other venture capitalists:

• Never invest in couples, independent of their sex!

In tough situations, when you are dealing with a well-functioning couple, most often you need to handle not one but two enemies. It creates incredible turmoil and often people’s feelings get hurt. Never do that. This rule also applies to any close relationship, including family.

• Keep enough powder dry — there’s always more money needed!

“The Rule of Eight!”: It takes twice as long, it costs twice as much and there’s always yet another reason why to double everything.

• Understand the business well, be persistent and be patient, not to forget, be humble, too.

You need to understand what your startup’s customers are thinking, so make sure to be knowledgeable in the field that you invest in. Be patient with your current investments — it’s a journey and it takes time. I speak with every portfolio company on a regular basis, and in times of crisis every day, sometimes even multiple times a day.

Investment in life science has its own rules and risks. Yet, without a doubt, there is a high demand for innovative products and solutions in this field, and it will continue to rise. As Christian described it, “it is intellectually challenging, ever-changing, and never boring. It brings me in contact with the best and brightest in the field, and it is rewarding, since we do something good for mankind, literally! As I always say, ultimately a new knee is worth more to a person than a new smartphone.”