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Panel Discussion: New Paradigms for Venture Financing: The Future of Early-Stage Healthcare Investment
Panel Moderator: Robert Connelly, CEO, Pulmatrix
Panelists:
Ryan Drant, GP, New Enterprise Associates
Dr. Lauren Silverman, Managing Director, Novartis Options Fund
Dr. Amir Nashat, Partner, Polaris Ventures
Dr. Ivor Royston, Managing Partner, Forward Ventures
Dr. Ronald W. Lennox, Partner, CHL Medical Partners
Summary
The closing session for this year’s Focus on Innovation featured an impressive panel of institutional and corporate venture investors who provided a real-world view of the current funding environment. Key trends mentioned by the panel included: (1) a shift towards management of the existing portfolio with less time available to evaluate new investment opportunities; and (2) a focus on cash preservation to ensure sufficient capital to continue supporting current investments; resulting in (3) a significantly higher hurdle for both new investment and follow-on investment. For new investments, panelists indicated they still want to see novel companies with innovative technologies, but also wanted to see management teams and business plans cognizant of the current environment. The hurdle has also risen for existing portfolio companies, with investors showing much lower tolerance for delays and technology failures. Overall, panelists expected the number of venture funding transactions to significantly decrease across the industry.
The venture funding pattern is also evolving. The traditional Series B round, where bringing in a new lead investor would give existing investors both a valuation jump and validation of the investment plan, is gone. The more common pattern now is for a syndicate of investors to lead both Series A and Series B, and support the company through clinical proof-of-concept. In addition, investors want management to aggressively pursue non-dilutive funding through partnerships and grants. The focus on partnership also reflects the need to build a base of support among large pharmaceutical companies to facilitate downstream M&A exit. M&A valuations have temporarily come down given the current environment, but long-term investors agreed that M&A to pharma would be the most attractive path to exit given pharma’s need for pipeline programs and their access to cash.
The trend towards early investors supporting their companies through exit has also increased the need for management teams to show significant progress by Series A. Early stage investors want to see companies that are focused on 1-2 tangible product ideas, a core platform that further supports partnerships with the pharma industry, and management teams that have thought through their business plan through exit.
Audience Q&A kicked off with a question on how Series A round syndicates are evolving. Panelists suggested two trends are emerging. First, with early rounds growing larger and timeline to exit growing longer, there is a need to maintain broad syndicates of strong “deep pocket” investors. However, investors and management also want to ensure all members of the syndicate have deep pockets and the experience to manage technology risk in a tough environment. Amir Nashat described a recent new investment at Polaris in which the firm joined a small syndicate of very deep pocket investors that had previously worked together many times.
Finally, panelists discussed emerging technology areas of interest, including molecular and genetic diagnostics, orphan diseases, and truly novel mechanisms in cancer. The panel described three questions they ask when evaluating a new technology, including (1) what is the market impact if the technology works; (2) what does Phase II look like; and (3) can we produce the molecule?
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