From The Editor | November 13, 2019

Early-Stage Biopharma Funding Advice From A Leading VC

Matt Pillar

By Matthew Pillar, Editor, BioProcess Online

Closing a VC deal

Pittsburgh-based LifeX Labs hosted some 40 leaders from regional biotech startups this week as part of its Fall 2019 Speaker Series (hosted by Medix). Jason Ruth, Ph.D., Senior Associate at Boston-based 5AM Ventures, was the guest of honor.

There’s nothing misleading about characterizing 5AM Ventures as a leading VC firm. The company boasts $1.5 billion under management among 78 portfolio companies. These are active companies, too, currently engaged in 35 clinical trials. The company’s biologics investment wins include Akouos (gene therapy for hearing disorders), Cidara Therapeutics (anti-infective therapies), Homology Medicines (gene therapies for rare diseases), and Audentes Therapeutics, also a gene therapy company that you can read more intimately about in Rob Wright's Life Science Leader story here.

Ruth gave a 30-or-so minute presentation before graciously, and transparently, answering another half hour of questions from a very engaged audience. Here are the highlights.

Biotech Investment Assessment

Ruth said it’s high times for biotech investments, citing JP Morgan stats that peg 2018 M&A activity in the space at $89 billion, up from $72 billion in 2016. He cited genetic therapies and an accommodating FDA as driving forces behind the active market, pointing out that the FDA approved 59 drug products in 2018, up from 46 in 2016, and that 64 percent of those approvals came via Fast-Track or Breakthrough Designation status. Ruth also pointed to strong IPO activity heading into 2019, though he acknowledged that some macro pressure, including election-year politics and downward price pressure, have contributed to an IPO slowdown this year.

Finesse Your Fund Seeking Formula

What are VC firms like 5AM looking for in the next addition to their portfolios? Here’s the best advice Ruth shared during his talk at LifeX Labs.

  • Be ready to demonstrate a clear line of sight to getting your new medicine into the hands of doctors and their patients. This might sound obvious, but half-cocked ideas are a major reason 5AM only funds one out of every couple-hundred pitches it receives. Ruth calls this the company’s North Star Vision.
  • “Friendraise” before you fundraise. Ruth says building relationships and recognition before the formal ask are important factors in the VC equation. In a small-to-midsized firm like his, he suggests establishing relationships with junior and mid-level gatekeepers who might champion your company internally, as those gatekeepers are eager to pick winners and typically have good access to senior-level decision makers. He cautions, however, that some large VC firms have lots of junior associates who are tasked primarily with administrative duties and hold no sway with decision makers. He also suggests establishing relationships at multiple firms to gather a well-rounded sampling of opinions on what investors want to see. Those opinions often vary, even among decision makers in the same firm.
  • Understand who you’re talking to. Ruth suggests finding solid answers to these questions before investing the time into building those aforementioned relationships:
    • Has the firm you’re approaching funded other biopharma companies? If 5 out of its last 5 investments were made in med device, AI, or small molecule companies, you might want to look at other sources.
    • How big are the checks it’s stroking? If you need $10 million, but the firm’s past ten investments have been under $2 million, that’s a good indicator that you should keep shopping.
    • When did the firm execute its most recent fund? If it’s been a few years since it executed a fund, the firm you’re looking at might not be active or may have funding problems of its own.
  • Show evidence of early-stage funding interest. Ruth says it’s a good idea to demonstrate early investment history from sources such as the Small Business Administration’s SBIR / STTR (Small Business Innovation Research / Small Business Technology Transfer) programs, in part because those programs require some degree of proof-of-concept data and instill early-stage investment confidence.
  • Demonstrate market understanding. Prior to Ruth’s talk that evening, I made the acquaintance of a software developer in the proof-of-concept stage of building a workflow management application for clinical trials. He admitted that this was his second attempt, the first of which crashed-and-burned when a potential investor asked him to characterize his total addressable market. He’d been too busy coding to consider it.

Like that developer, many biopharma startups are launched by lab-level scientists who don’t do enough homework on the business viability of their scientific concepts. Ruth says before you pitch, you should be prepared to demonstrate a thorough understanding of your:

  • Intellectual property and its differentiators/competitive advantages over existing or competitive therapies
  • Know-how, or the brains behind the intellectual property
  • Market viability, or the lack of (or shortcomings of) existing therapies
  • Business model in the context of the payer, provider, and patient communities, or how likely the therapy is to reduce treatment costs for payers, be well-prescribed by providers, and well-received by patients.
  • Talent acquisition strategy, or how you plan to overcome the fact that biopharma/cell and gene therapy experience is extremely difficult to come by these days.   

On that latter point, Ruth says talent acquisition and retention is an incredibly limiting factor on the drugs-to-development timeline. Many emerging biopharma companies struggle to staff up with scientists boasting more than 6 months of experience, and that’s another factor VC firms take into consideration.

Ruth’s presentation marked another bright spot on the growing Pittsburgh biotech scene, and he made note to let those in attendance know that 5AM ventures is keen on innovative emerging companies anywhere—not just in its Boston and San Francisco home bases.  

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