Module 6 - Early-Stage Life Science Financing: Venture Capital and Investments

Question 1

What are the fundamental for a successful life science ecosystem according to Stephan?

Answer 1

Science driven industry: Strong Science and research is essential

Complex and highly specialized industry –> Requires access to diverse and specialized talent

Medical innovation is costly. Funding required for:
1) Basic research – Scientific discoveries
2) Applied and translational research
3) Product Development and company funding

Professional funding and investors essential to drive success

Question 2

How is the nordics in regards to life science innovation?

Answer 2

EU Innovation scoreboard: nr. 3!

The Nordics provide a large and increasing number of life science investment opportunities for Eir Ventures

The number of projects and companies with projects in clinical development is increasing in Denmark, Sweden and throughout the region

Question 3

What is bootstrapping?

Answer 3

“Bootstrapping”
- Cut development costs – underfunding vs. cost efficiency
- Delay development
- Reduce “engagement” with international expertise/CRO’s
- Lack of international engagement –> lack of funding instills a local focus

Question 4

What is the issue with the nordic ecosystem?

Answer 4

Lack of funding

Only few (6) Dedicated Life science investors exist in the Nordics

Lack of Capital a severe constraint for development of the ecosytem

Question 5

How can companies navigate this lack of funding?

Answer 5

1) Bootstrapping
2) Alternative funding sources like:
- Funding from public markets –> Stockholm is by far the biggest IPO market in Europe. Smaller markets (i.e. Spotlight) caters to ‘micro-financings’
- Business angels and non specialist investors
- Soft funding/grants
- Crowd funding ?

Question 6

What is a Venture Capital Fund?

Answer 6

1) Venture Funds invest capital provided by Limited Partners

2) Managed by investment professionals/partners (=general partner)

3) Specializes in specific sectors and business models

Question 7

What type of venture funds are there?

Answer 7

Types of funds:
1) Closed end fund (10 year)
2) Evergreen fund
3) Strategic venture fund

Question 8

How does the structure of a VC look?

Answer 8

Limited Partners –> VC Fund + VC Firm.

VC Firm + Limited Partners –> VC Fund

VC Fund –> Investments

Question 9

How does the General Partners get payed?

Answer 9

General partners paid by management fee + carry

Question 10

What level of return does VC seek?

Answer 10

Venture funds seek high returns (typically >3x), but accept that some investments will fail

Question 11

What are general partners?

Answer 11

The investments professionals in the VC Firm, that handles the money from the Limited Partners (Investors)

Question 12

Why does it matter to have local venture?

Answer 12

Can engage with local biotech ecosystems

Play a key role in building opportunities to international standards

Act as local cornerstone investor

Question 13

What does early-life science funds require?

Answer 13

Early-stage life science financing requires:
1) Compelling, novel and innovative science
2) Address real unmet medical need
3) Good team and advisors
4) International perspective

Question 14

What is syndication and why is it good?

Answer 14

A key to success is early syndication. Companies with international syndicates have much higher success rate

Syndication requires a local corner stone investor

Question 15

What is the role of a specialized VC fund (like one within life science like Eir)?

Answer 15

1) Thorough diligence of science, plans and rationale
2) Challenge Founders, Plans, Management
3) Access to international network
4) Commercial acumen and understanding

Question 16

What does the Nordic Investor base look like?

Answer 16

Six dedicated specialized Life Science investors based in the Nordics are actively investing

Number of life science investors have declined over the past two decades

Additional investors typically fall in other categories
1) Business Angels
2) Regional Funds
3) Non-specialized investors

Question 17

What does investors look for?

Answer 17

1) Unique ideas/products addressing unmet needs backed by strong scientific rational and data
2) Reliable pre-clinical models and feasible clinical development path to PoC in human
3) Market accessibility and competitive differentiation
4) Strong patents or patent possibilities
5) Exit potential, e.g. attractiveness for the pharma industry after Ph1 or Ph2
6) Motivated and focused team
7) A plan!

Question 18

Project/case one - was about? Did it have the requirements for investment?

Answer 18

• Galectin-3/galecto

Checklist:
- Experts in the field (invest in the humans/motivated/focused team)/high caliber management
- Unmet need in cancer + fibrotic disease (like liver, kidney, lung and myocardial) adressed in pre-clinical studies!

Cons:
- Acts upstreams, full modality not understood.
- Unknown if best for cancer or fibrosis

Eir invested in this (now we are at IPO for 100M USD)

Question 19

Project/case two was about? Did it have the requirements for investment?Area

Answer 19

• Epigenetics/Epitherapeutics - histone de-methylases (KDMs)

Checklist:
- Experts in the field of research
- Big promise in many TA, mostly oncogenes (cancer)
- More of a technology platform than a product (=maybe harder for exit)
- World class science

Cons:
- Undefined team yet, unconcrete utilization of the technology/vaguely defined clinical indication.
- Few KDMs were structurally defined.
- “Drugability of targets, unknown
- Academic founder team without commercial experience (CEO, commercial collaborators and contracts with uni must be found/made)

Novo Seeds invested here, later bought by Gilead for 65Million USD (strong syndicate made for successful funding journey, got a strong management and international advisor team)

Question 20

Why is syndication important?

Answer 20

• Spreading risk and ownership with the network and skills associated

Question 21

What is an option deal?

Answer 21

Developing a project to a certain milestone where a venture fund can buy the company or project with a pre-defined deal. Can include a signing fee (to develop the project). Less than half of option-deals are exercised.

Question 22

What is carry?

Answer 22

That the investment fund has to return the market standard return (8%). Anything above this, the funds get 80% and the venture capital firm get the remaining 20% (often distributed to the general partners - GPs).

Question 23

Closed funds often have what kind of phases?

Answer 23

An investment phase of around 4-5 years where you can’t invest further afterwards, or have the limit raised.

Question 24

What is a venture capital fund?

Answer 24

Partners get money from investors with the goal of investing in companies and exiting with a profit.

Management fee to find and manage the portfolio companies. Often see this in sector that are complicated, as you need the expertise from the team.

Question 25

What is a strategic venture fund?

Answer 25

A fund associated with a specific pharma company (investing towards the strategic eye of the mother company)

Question 26

What issue do we have in the Nordics in the eco system?

Answer 26

Average early stage VC funding is less than in EU, USA and China

Question 27

How much venture funding does female founders get in the US?

Answer 27

2% of all VC funding despite owning 38% of businesses.

Question 28

What kind of questions do male entrepreneurs get?

Answer 28

A promotion orientation style: when quizzing male entrepreneurs, which means they focused on hopes, achievements, advancement, and ideals

Question 29

What kind of questions do female entrepreneurs get?

Answer 29

A prevention orientation, which is concerned with safety, responsibility, security, and vigilance

Question 30

An example of a promotion vs. prevention orientation question is?

Answer 30

A promotion question would look into customer acquisition,
whereas a prevention question would inquire about customer retention

Question 31

What is the issue?

Answer 31

1) Preventive orientation questioned entrepreneurs get less funding.
2) Entrepreneurs answered in the same orientation - perpetuates the cycle of bias.

Fortunately, there’s an actionable silver lining to our findings: If entrepreneurs change how they respond to prevention questions, they may be able to raise more funds

Question 32

What are typical sources for capital for a startup?

Answer 32

1) Personal Capital
2) Friends and Family
3) Angel Investors
4) Foundations
5) Venture Capital
6) Partnerships

Question 33

What are VC characteristics?

Answer 33

1) Usually not very early stage investments
2) Substantial capital amounts for substantial ownership
3) Active role in management and development
4) Often specialized
5) Pre-defined investment horizons (driven by funding cycles)
6) Often syndicates

Question 34

What are corporate VC characteristics?

Answer 34

1) Large established companies making a VC unit
2) Financial and strategic objectives of accessing technologies, markets and exploiting synergies
3) More passive
4) Often offers operational support, access to partners and resources

Question 35

What is a term sheet?

Answer 35

A summary of the key terms and conditions of an investment.

Question 36

What does a term sheet contain?

Answer 36

1) Capital structure of the company
2) Governance
3) Mechanisms of the transaction

Question 37

What are examples of Capital structures of the company

Answer 37

1) Convertible preferred stock: A stock that converts into common stock at a fixed price. Will get dividends before common stock.
2) Dividends: Dividends/payments at certain thresholds or events
3) Liquidation preferences: That preferred stock owners will be paid + accumulated dividends at a merger/aquisition/sale,dissolution etc.

Question 38

What are examples of Governance in a term sheet

Answer 38

1) Stockholder rights
- Right of refusal
- Tag along right
- Drag along right
2) Protective provisions

Question 39

What are examples of Mechanisms of the transaction in a term sheet

Answer 39

1) Binding, or non-binding
2) Closing conditions

Question 40

You often end up with what as a biotech owner?

Answer 40

A small part of a very big cake

Question 41

What are the stages of venture financing in a biotech company?

Answer 41

1) Start-up or Pre-Seed (Discovery)
2) Seed Capital (Discovery)
3) Early Stage / Series A/B (Pre-clinical/Phase I)
4) Mid-Stage / Development Stage / Series C/D (Phase II/III)
5) Later Stage / Expansion Capital / Series E/F / Outlicencing or acquisition (Phase III)
6) IPO or Acquisition; Exit (NDA/Market) (Phase I/II/III clinical trials and FDA)

Can also utilize bridge financing if in dire need of cash, often expensive though.

Question 42

Valuation can be done how?

Answer 42

1) Valuation by Market Cap
2) Sunk Cost
3) Comparison based (benchmark)
4) Cash flow based (NPV)