As has been thoroughly discussed by this author and others, the so-called “valley of death” is a critical barrier for the advancement of life science (therapeutic, vaccine, medical device, diagnostic and related) innovation. More specifically, it refers to the myriad challenges of moving early-stage discoveries towards products with real-world impact. Venture Studios (also called Venture Builders or Venture Creators) like my firm—VIC Tech—identify and carefully assess opportunities primarily from universities, institutes and national labs in the US and abroad. Technologies with the ideal attributes can lead to either the creation of and investment in a newly formed company or—if there are some questions remaining about the maturity of the innovation—be taken into our Foundry for further de-risking using non-dilutive funding. Although we are life-science focused, many of the concepts presented in here are applicable to other sectors.
Many Venture Studios have an underlying “build to sell” strategy: create a newco with the ultimate goal of acquisition by a larger company in that space. Consequently, an important part of the due diligence process is understanding how a specific innovation aligns with the unmet needs of the relevant industry sector and requires a deeper analysis of the primary drivers of each specific segment to better optimize the attractiveness of the asset to a future purchaser. As a result, Venture Studios—if they are competent—are essentially functioning as opportunity scouts and can provide value for industry partners, especially if they work together and more intentionally earlier in the process. The following are several reasons for this as well as thoughts on how to optimize interactions between the entities.
During the past several decades, many larger life science companies have reduced or eliminated altogether their internal early research and development capabilities and, instead, rely on acquiring assets from external entities. In other words, they are focusing on what they feel they do best: Mid- to late-stage development, regulatory approval (if necessary), and commercialization of the asset. This—compounded with the loss of patent protection for high-value products—has left these organizations struggling to find the next big win. In most cases, they have dedicated personnel tasked with finding and evaluating opportunities to add to their portfolio, either through partnering or bringing the technology in-house. Another route is to make investments in companies with promising technologies through a corporate venture capital function. Both of these approaches usually focus on more mature assets developed by small- to mid-size companies, and often—either by design or otherwise—miss technologies that have not yet been licensed to a company, which is the case for university-stage innovation. This isn’t surprising considering the challenges of accessing academic institutions, making heads or tails of earlier stage opportunities, and determining how best to move them forward. Since Venture Studios are often focused on sourcing and evaluating university technologies, they—by necessity—have established relationships with many domestic, and sometimes even international institutions.
Some Venture Studios like VIC also provide the initial business and technical resources for the startup which may be shared across multiple portfolio companies, thereby accelerating operations while—at the same time—reducing costs by avoiding the need to hire dedicated personnel early in the newco’s life when it neither needs nor can afford full time employees. This point is especially important as it relates to the focus of this article: large life science companies do not normally have the expertise or the ability to create and adequately manage newcos on their own. This holds true for both externally and internally created innovation. Moreover, they may not have the interest and/or experience to work with technologies at a stage well before they would normally get involved, which is more often than not at the clinical proof-of-concept stage.
With these high-level concepts in mind, what are some ways larger life science (therapeutic, vaccine, medical device, diagnostic and related) companies can work with Venture Studios?
One method involves Venture Studios sharing partnering and/or investment opportunities: companies in their portfolio that align with the strategic areas of interest of the target entity. The advantages of this approach are that these are more often than not, highly vetted and well-run entities, especially if the Venture Studio was heavily involved in both the due diligence and subsequent day-to-day operations of the startup. This should give the prospective partner/investor greater confidence that the technology being developed meets the required criteria and has been managed competently. The downside is that the large life science company was not involved earlier in the process, specifically the identification, assessment and ultimate selection of candidate assets for newco formation.
The obvious solution is to have the large life science company work with the Venture Studio from the beginning using one or more of the following approaches with increasing amounts of involvement and guidance in that the life science company:
- Does not influence what technologies are identified and how they are evaluated, but provides feedback on newco formation, especially regarding future partnering and/or co-investment interest; or,
- Does not influence what technologies are identified, but actively participates in due diligence and startup creation; or,
- Delineates which specific types of technologies fit their strategic plan, thereby guiding sourcing as well as joining in the assessment of candidates and decision on whether it merits a stand-alone company to develop the asset.
Beyond these tactics, another consideration is the extent to which the large life science company contributes in the newco following inception, either in time or money: taking board or operating roles, providing technical expertise, co-investing, etc.
VIC Tech has already partnered with a leading life science company using one of the aforementioned approaches and demonstrating near-term value for them, and we are actively pursuing opportunities to work with other therapeutic, vaccine, medical device, diagnostic and related organizations to support accessing and nurturing commercially relevant innovation. We believe that these type of relationships lead to greater success for all parties involved including the licensing institution, co-founders of the company, investors at all stages, the Venture Studio, and the large life science company partner.