Banking on biotech. How bioscience companies can access non dilutive financing
For the latest issue of our Drugs&Dealers Magazine, Biotech and Money, we interviewed Nooman Hauque, the Director of Life Science at Silicon Valley Bank in the UK. Nooman is responsible for marketing SVB’s products and services to the life science market, including therapeutic companies, medical device companies and digital health companies. SVB, a relative newcomer in the UK, is making waves with its novel approach to banking, offering deep sector insight and access to its network of industry connections to life science clients and investors.
Nooman talks to us about some of the major trends he’s witnessing, when the circumstances are right for venture debt financing and some key words of advice to bioscience companies seeking finance.
B&M: What financing trends are you seeing at the moment?
SVB: VC funding continues to shrink - there’s been a big shake-out in the number of VCs across Europe as a whole. Two things have been responsible for picking up the slack and maintaining overall funding levels in the market: government funding, particularly in early stages, and we’ve also seen a rise in corporate venture capital from life science firms.
B&M: What are the most common concerns and questions clients have around your offering and the financing environment as a whole?
SVB: The concerns that businesses have around the financing environment are really about raising additional money. It’s never been cheap to start a biotech company or a medical device company!
With VC investing getting tighter and some syndicates having to get bigger, it becomes very tough. However, the greater challenge comes when you look beyond seed and series A investing in the life science sector, and consider the lack of availability of follow-on or pre-IPO finance for these businesses. Venture capital can only take a company so far and there will come a point when businesses need to source funding beyond the realms of the VC world.
The US has a very open public market, but in the UK and across Europe listing hasn’t really been an option. While we have witnessed a few successful listings this year in the UK, it’s not a common route to raising money at present. Scaling is therefore one of the biggest challenges for high-grow businesses. As corporate venture capital increasingly flows into the sector, it will be interesting to see whether it can help to support young businesses at this later stage in their growth.
B&M: This is the valley of death of funding that you’re speaking about?
SVB: That’s right, it has all sorts of names and doom and gloom. Businesses in the so-called valley of death are twiddling thumbs or being spoon fed, hampered by a lack of investment and facing the next inflection point which needs a significant amount of capital.
B&M: How do you think that is best addressed?
SVB: One way is to ask the question, ‘Can we get more done sooner?’ By pushing early stage funding to work harder and support deeper programmes, businesses can build a stronger IP portfolio and therefore improve their business case to secure future finance and ultimately list.
The other major factor is that we are in a relatively poor public market for deals at present, something that needs to be addressed over the long term.
B&M: The public market environment is obviously hugely important. What are the ingredients that are required to make it more conducive for biotech investments?
SVB: A significant factor that is hindering the current public market is a lack of industry education amongst the broker community. There are very few brokers that understand the sector well and as a result, investors are failing to become interested about early-stage life science businesses.
The UK would strongly benefit from greater depth and breadth of knowledge amongst the analyst and broker community to advise venture capitalists and angel investors on market developments and exciting ventures.
For the businesses themselves, consideration must be paid to the experience that the senior management team, and the CEO in particular, have when it comes to taking a company public. It is critical to be able to tell a compelling story about your business and be a thought leader on the wider industry. This will help to publicise the life science sector as a whole and make it a more appealing investment target.
B&M: Where do you see SVB’s role in this? We talk about getting a better public market environment, does SVB have a role in order to achieve that so what is it?
SVB: Silicon Valley Bank aims to challenge the traditional financial services model, focusing our efforts on building deep industry knowledge to support our clients and partners. We are dedicated to the innovation economy and to us, life science is a critical part of that. Our specialist life science team has a responsibility to demonstrate to the investor community that it’s an exciting and profitable sector.
There is a need to educate generalist investors a little bit further and we’re happy to invest that time.
To be clear, Silicon Valley Bank is not an investment bank so we’re not going to be the ones trading on lists ourselves but just the virtue of being a commercial bank in the sector with strong connections and knowledge means that we are in a great position to share that with others.
B&M: Educating generalist investors is a key goal of Biotech and Money. How do you think that is best achieved and what do you think generalist investors need to see in order to invest in biotech?
SVB: It comes back to knowledge. I’m a fan of qualified pitching events where you put generalist investors and brokers in front of some of these early stage companies, not necessarily those that are looking to list, but just to show them the pipeline of companies that might be looking to list in four or five years.
In terms of effecting real change, it is critical to show brokers and analysts how budding, early-stage life science businesses develop over time. It’s not sufficient to pop up on an investor’s radar with an immediate need for capital – the business and investor community must take time to build networks that pay dividends in the longer term. I’d like to see some sort of platform that gives industry players visibility into some of these companies and how they develop over time. How much better would it be if you’re an investor and I’m a CEO and we’ve already met two, three, four times before I even go public?
B&M: You talked about CDCs and other sources of funding or investment coming a bit earlier in the chain. In terms of non-dilutive financing options such as venture debt or things like that, where do you see that trend going? Are you seeing more clients being more open to exploring those types of non-dilutive financing options?
SVB: Venture debt is an important part of the Bank’s service offering and we have had a lot of interest from companies wanting to look at it as a solution.
Venture debt is a very useful tool in the right circumstances but it can’t help everyone.
It’s a product that hasn’t been around in the UK market for very long. It is sometimes not well understood and as a result, it’s not always had a great reputation. We spend a lot of time educating clients on exactly how we execute on non-dilutive finance solutions and what the implications are for a company of that profile.
B&M: When are the circumstances right for non-dilutive financing?
SVB: It’s almost easier to talk about when the circumstances are wrong. It’s wrong when it’s your only option - when all else has failed and you think debt is going to be the solution. The simple way of putting it is that we view venture debt as being part of the solution, not the solution itself. If you’re opening gambit is, ‘I’ve been trying to raise a financing round. I am yet to secure equity but if you can lend me money for six, nine or maybe 12 months I’m sure I can secure a deal and turn something around’. There are so many alarm bells that it’s self-explanatory as to why venture debt is not a viable solution for the business.
Venture debt is most suited to situations where it has the support of investors. It can be part of a solution where a modest amount of non-diluted finance gives a business an extra option to develop more IP or factor in more time but it doesn’t cripple the company and it doesn’t leave it with a binary situation of ‘if this goes well fine, if it fails, I’m looking at a write-off’.
We want to work with early-stage companies and provide them with tailored lending and banking services that enable them to be successful. We hope that by working closely with businesses and their investors, we are able to forge long-term relationships that result in the UK hosting more large corporates in the life science sector in the future.
B&M: So if you had some advice to give to biotech or bioscience companies looking for alternative financing what advice would you give them?
SVB: Engage early. Don’t leave it too late. I have companies that phone me and say that they are just putting an equity round together and they won’t require debt for another 18 months. My advice is that they need not necessarily take on the debt now, but fully understanding and opening your options with 18 months’ lead time is a more prepared approach. By forward planning non-dilutive products as a complement to VC funding, businesses can in effect secure longer financial support for research programmes and early stage development.
B&M: How do you see the commercial banking sector changing over the next 12 to 18 months? Do you see a big shift in what banks like yourself are offering or what is being demanded by clients?
SVB: The regulatory environment for banking is changing all the time, so that has a big impact on both investment and commercial banks. In terms of how that affects Silicon Valley Bank, we see it as an opportunity. We specialise in sectors which have been underserved with a proposition that goes beyond traditional banking. Our growth across the breadth of the innovation sector highlights that this approach is met with positivity in the market.
At Silicon Valley Bank, we like to describe what we offer as a mile deep and an inch wide. Our coverage is very narrow and focused entirely on the innovation sector and its investors, but it’s incredibly deep.
In terms of the industries we serve, over the next 12 to 18 months technology will undoubtedly remain a hot sector. In biotech specifically there will be companies that go out and make extraordinary valuations that they fail to deliver on but overall it will continue to experience a modest growth.
Both sectors are becoming more and more important and as a result, investment into them is only going to continue, whether it is from corporates or from traditional VCs as well.
The consumerisation of technology remains a prevailing trend. As technology becomes less distinct from the sectors that it has an impact on, it becomes more ingrained in society and culture as a whole. Health is a simple example, with the rise in digital wearable devices in the consumer world now beginning to cross over into a clinical environment.
B&M: What role do you think SVB can play in helping the continued upsurge in UK bioscience?
SVB: At the core, we lend to early and growth-stage companies and that gives concrete, practical help. But our approach also brings an opportunity to share knowledge and open our network in order to really champion the life science sector. Our team at Silicon Valley Bank enjoys working in the sector and we get enormous satisfaction in going beyond what is expected of a bank and trying to do whatever we can to help life science businesses and their investors.
B&M: What one piece of advice would you give to start-ups looking for those financing options? What would you say they must be aware of before engaging with you?
SVB: I have some general advice, which is to just think about where you’re going. You’ve got to really think through the implications of where and how you get funding rather than just taking the cheque. Having a financing plan for the long-term or at least just thinking about what the options and implications might be is hugely important.