How can startups de-risk a business to appeal to investors?

There are several strategies and approaches to de-risking a biotech startup’s business, but they vary depending on the technology and where the company is in the development timeline. For instance, having a lead candidate removes some of the risk for investors, while having a development candidate demarks a significant value inflection point, according to Marian Nakada, PhD, vice president of venture investments at Johnson & Johnson Innovation.

Nakada went on to explain that a business can be further de-risked if a development candidate is an investigational new drug that is ready (including it has certain chemistry, manufacturing, and controls in place and good laboratory practices evaluation) and that it has achieved certain scientific milestones, like in vivo efficacy in animal models or a demonstration of a candidate’s mechanism of action.

On the other hand, Andrew Strong, a partner at Hogan Lovells, explained that in the case of less than perfect data (i.e., off-target effects or cross-reactivity), startups should be prepared to pivot toward a predetermined backup plan. Strong noted that the earlier a company identifies its backup plan, the better it fares in terms of attracting investors.

The panel also discussed that there is a certain balance that must be achieved between putting “all your eggs in one basket” with a single lead asset and spreading development and capital too thin with too many programs.

There is a significant cost associated with the time it takes to develop a product, and investing too much time in a candidate that could fail is potentially harmful to the success of an emerging business. For instance, if a company finds a safety signal for an asset in a rare disease population, there is little chance of overcoming the regulatory hurdles, because there are not enough patients. This is something that startups should carefully think through, Nakada suggested. Alternatively, if a startup pursues too many programs, there is a risk that all of them may never hit required investment inflection points, which are required milestones for investor agreements.

For platform technology startups that can churn out a number of candidates, de-risking with a single “well-run experiment, with the right compound and the right indication” should raise the tide and bring additional value, said Michael Davitian, vice president at Health Advances. This approach will also inform the company on how to apply the technology to a broader group of assets and indications.

Should startups associate with accelerators and incubators?

The panelists generally agreed that while it's not required to be successful, it is often beneficial for startups to participate in accelerator and incubator programs. Beyond capital, these programs usually provide an opportunity to join the community and learn from other experienced people, including mentors and alumni companies.

Opportunities vary, but accelerator and incubator programs can provide nondilutive investments, no-strings-attached development arrangements, and even co-creation collaborations, where large pharma companies help startups with the first steps in creating product value. This is a model that Novo Nordisk has taken in some cases, and it is an “immensely interesting model,” according to Tomas Landh, PhD, vice president of innovation sourcing and senior principal scientist, search and evaluation, at Novo Nordisk.

The investment community is interested in co-investing and mutually growing incubators, said Jim Anthony, executive vice president and global head at Parexel Biotech, because these actions increase the value of biotechs seeking further investment partners, and they improve the overall success of startups in the investor search.

Dilution management -- preparing for an exit

For most biotech startup companies, dilution is inevitable. The panel discussed strategies on how founders can let people in and how they can become comfortable with dilution in a prudent and elegant manner, as moderator Ben Johnson, head of early stage life science at Silicon Valley Bank, said.

Strong noted that dilution is always a topic of discussion among investors and founders. Founders should be prepared for dilution and loss of control by thinking about if the technology is ready to advance. They should consider how much money is required to get to a nice return on value inflection points and when they will be ready to let someone else run the business.

There are certain protections that founders can leverage, such as license agreements, management carveouts, and nondilutive funding, but they have to be strategic in their investment approach. For instance, a company’s first management team will likely get options and incentives for performance when dilution occurs, whereas scientific founders need to stay involved in the business (i.e., via a scientific advisory board) to get options.

The panel concluded with a few lightning rounds of questions, where panelists were asked to give brief comments on relevant topics. The first question posed concerned the characteristics panelists look for in a first-time CEO. Panelists responded that they look for passion, humility, flexibility, enthusiasm, and adaptability, to name a few traits.

The second question posed was what is a deal killer? Panelists cited lack of credibility, disappointing data, science without a clear end goal, over-optimistic development timelines, and inflexibility.