I was very pleased to attend today Ag Biotech Entrepreneurial Showcase at NC Biotechnology Center, particularly the panel on corporate venturing (Technology Scouting: How to Partner with Large Companies in Animal Health and Crop Biotech) so I can learn the investing style of the panelists. As a consultant, I advise entrepreneurs to do due a diligence on potential investors before reaching out, because not all money is created equal. Once an entrepreneur accepts outside funding, that fund manager becomes her or his boss, so it is critically important that entrepreneurs and investors share the same values. Even though fundraising is very difficult and frequently fruitless effort for all startups, I would still advise startup executives to turn down letter of intent if they feel that investment fund managers do not share their vision for the company. From that perspective, attendees today had a rare opportunity to learn about the work style and value system of the investors on the panel.
Corporate Venture Fund vs. Venture Capital
The moderator, Chris Otey, Ph.D., Senior Director, Life Science, Alexandria Venture skillfully encouraged discussion around questions that all life science entrepreneurs may have about corporate venturing. He first asked the panel to differentiate a corporate venturing from traditional venture capital. Yes, both invest money into startups, but corporates bring so much more to the table in addition to the necessary financial infusion. Large corporations have already established sales and marketing channels worldwide; they bring project management discipline to technology commercialization process, significantly better lab and test environment, and teams of people experienced in working with regulatory bodies. No venture capitalist fund can match this level of staffing and industry expertise, so it’s usually easier to reach the market with the help of the strategic partner. That being said, getting a support from a corporate venture arm is not easy, because typically the technology has to fit into the corporate strategy and product portfolio. This is particularly the case with Dow AgroSciences, according to Hanping Guan, Ph.D., New Technology Leader, as he said that the technology being pitched to him has to fit nicely into Dow’s strategic plan or existing portfolio of products. On the other hand, Syngenta Venture arm, according to Patrice Sellès, Ph.D., Head, Biotechnology Technology Acquisition, seams more open to investing into technologies that are outside the company’s portfolio if they see significant market potential and an upside. Even though they are more flexible than Dow with their investments, that doesn’t mean that the fundraising process will be easy or fast. Because technology pitched is probably outside the scope of their staff’s expertise, the entrepreneur will have to spend more time educating investors about the market potential and unique competitive advantage of the technology.
A Path From University Lab to Corporate Investment
Because most Ag-Tech and biotech technologies are born in the University labs, it is interesting to know what kind of relationship do corporate venture managers have with major research Universities. Most of them do, but the quality and depth of relationship varies from company to company. Dow AgroSciences supports graduate students at top Universities; they fund the research and PhD thesis because they want to see strong, well educated people graduate and apply for jobs with Dow. Their University relationship team focuses on employee pipeline, not technology commercialization as they feel that most technologies coming out of University setting is too early stage for the company. Syngenta, again, has a different point of view, and they are willing to take on more risk. Patrice stressed numerous times that Syngenta has very well defined process for working with University researchers that should be followed and respected. One of the channels where scientists can get feedback on their work is trough their web site “Thought Leaders” that publishes the area of research interest for Syngenta, so people can submit their proposals and wait for the feedback on non-confidential basis. He gets frustrated when entrepreneurs get impatient with a large corporate organization’s perceived slow response time, so they get creative and jump seniority levels by talking directly to senior executives and some even reach CEO. When then happens, the process starts to crumble as pressure from senior executives builds, which is unnecessary according to Patrice. From my point of view, if you can get Syngenta’s CEO ear and he believes in your pitch, the more power to you, mister or misses entrepreneur! Bill Trout, Ph.D., Senior Research Scientist, Elanco Animal Health is not a big fan of people circumventing the process either. He’s very clear that he is the the focal point of contact for all technologies related to animal health. In his job, he evaluates and tests the technology itself, but 4 out 5 times, he never even starts the process because the parties cannot agree on the content of Confidential Disclosure Agreement (CDA). Hence, his biggest frustration is with paperwork and inflated expectations on the side of an entrepreneur.
Everyone on the panel agreed that finalizing the CDA document is very time consuming process that can be done faster if the scientist comes to the investor with an open mindset and willingness to negotiate very narrow language for the scope of the disclosure. This is very sensitive issue for corporations that have their own internal R&D because they don’t want to inadvertently disclose their own development plants to the outside party. Once CDA is in place, Non-Disclosure Agreement (NDA) can be executed to explore mutual business interest and start technology testing and validation phase.
It well known that most (about 80%) technologies don’t reach the market because they fail to perform as promised, so Bill Trout highly appreciates scientists who would help him speed up the time it takes to fail a critical test. He encourages researchers to think about the weak spots early on in the process and design tough stress tests, instead of spending time testing scenarios that he or she knows are easily passable. With this approach of early failure, everyone involved saves money from development budget.
Bring a Business Model, Not Only Technology
Customers don’t buy a technology, they buy a solution to their problem. Similarly, investors buy into a business model, not a raw scientific experiment. Because of that, researchers that bring to investors a well developed business model and a business plan increase their chances of success in the market place. Panelists agree that they like to see a well designed go-to-market strategy with commercialization pathway targeting one specific market segment, large enough in terms of potential revenue. For example, a market segment that is $100M is size is not large enough to be attractive for most investors. Even though most platform technologies can be applied to a number of different solutions, panelists prefer that entrepreneur selects the single best path to the market and develops a strong business plan around it. Hanping goes one step further as he likes to see how does this technology and proposed product fits into Dow product portfolio.
Life-science entrepreneurs cannot easily quit their day job and work on their startup because they need millions of dollars just to test their concept and it takes five to seven years to reach the market to generate initial sales. Investors, such as Ed Robb, D.V.M., Vice President, Business Development North America, Ceva Animal Health understand this situation well. However, they do ask scientists to spend time articulating their vision for the company that can be created around their innovation. With this vision, their business values and well articulated business plan, conversation with potential investors can be very effective.
Do Not Underestimate Business Development Costs
Ultimately, everyone involved in technology commercialization process needs to make money at some point. Panelists agree that it is not uncommon that scientists have overblown expectations about the value of their invention as they understate time, effort and cost of the business development. This mismatch in expectations can lead to long and contentious licensing negotiation process. To level-set the expectations, I would recommend that entrepreneurs spend some time analyzing the SEC fillings of publicly traded companies and focus on the cost of R&D compared to overall revenues and profit margins. Then, they need to factor in high failure rate for most new technologies. Further, most public companies will bury somewhere in their quarterly financial report information about their current licensing agreements, so royalty fee range listed in a document can give entrepreneurs valuable comparable metrics.
NC Biotech has once again assembled an excellent expert panel of investors that are very supportive of the challenges Ag-Tech and Biotech scientists face. Between panelists and numerous other investors in the audience, entrepreneurs had plenty of opportunity to network and pitch their ideas. Unlike a last year, some investors complained during the break that entrepreneur showcase presentations were not in the format of a traditional pitch, as they were more focused on details of the technology, and no one asked for funding. Lesson learned.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any of the companies, organizations or individuals mentioned in the article.
Dragana Mendel, a management consultant for startups, small and medium size businesses develops and executes growth strategies for her clients.