We’ve interviewed dozens of life science venture capitalists for the production of our ebook we released last week in the run up to our VC focused event on 23 October to be held at Johnson & Johnson Innovations‘ office.

In that process we have uncovered some of the most common challenges they are facing - from keeping their investments on track through to people issues. 

1)     Finding novel science with substantial market potential.

It has to be truly innovative and novel. It needs to meet an unmet medical need and has to have the potential to be truly disruptive. Back this up with a substantial market opportunity and you’ll have a VC dancing with excitement. The search for this kind of technology is what drives VCs.

2)     Finding rock solid science and great data.

Not only does the technology have to be novel with market potential, but VC’s obsess about the quality of the science and the data itself. It all starts with the science behind what they are backing.

As Allan Marchington of the VC Apposite Capital says: ‘the science has got to drive a lot of the investment…we want to understand the science first and foremost’

VCs recognise that while people are key to great companies, they’re not absolutely required in the early stage investments whereas great science is, as it will attract great people.

3)     People. 

Ask any VC what makes for a successful venture and top of the list will be the people behind the project. No small wonder then that building strong management teams is one of things that keeps VCs awake at night.

David Grainger of Index Ventures says this is his biggest challenge, and you’ll be hard pressed to find a VC that doesn’t agree. Specifically, ‘identifying individuals to lead our projects who have a sufficiently broad experience of drug development processes. People with the required “helicopter-view” of the drug development process.’

These kind of people are very thin on the ground because most people got their experience of drug development through large pharma companies and there, with teams of hundreds of people developing a drug, there’s often no one individual who is, if you like, the overall pilot. Those individuals who understand the whole process are rare and can be the limiting factor for VC’s ability to scale the operations.

4)     Intellectual Property.

For an asset to be investible, it needs to have watertight IP. No surprise then, that the first item on the agenda in due diligence is ensuring this is there. VC’s also worry about the IP strategy that has been put into place, and the kind of advice that is being given around it.

 5)     A high level of ambition.

VC’s get out of bed in the morning to create billion dollar businesses. They are not interested or motivated by small incremental differences, so one of things that keeps them awake is pure ambition – and the search to find that level of ambition from founders and start ups.

 6)     Filling the gap left in R&D.

As Global Pharma companies trim down their R&D operations significantly over the next several years there will be a massive opportunity for the smaller biotechs to fill the gap. This could be the biggest opportunity for VCs and they are desperately looking for ways to capitalise on this trend.

As David Grainger puts it: ‘there’s going to have to be a revolution in R&D strategies and for those of us who operate small, virtual businesses, whose focus is on efficiency, on producing more per dollar rather than simply producing more, then, that revolution represents an enormous opportunity’

7)     Public perception of the biotech and pharma industry.

One hears enormous cynicism about the drugs industry. People out there generally assume that we’re all here just to rip them off, to take as much money as possible out of the system and deliver as little value as possible. This perception takes it toll on VCs as much as any other stakeholder in the industry, and they would love to see more done to tackle this challenge.

8)     Finding the killer instinct.

One of the differences between successful and unsuccessful VCs is the ability to kill things when they no longer have a sufficient chance of being successful. The biggest killer of efficiency in the large pharmaceutical drug development enterprises, and for healthcare VCs in general, is keeping going with things when somebody somewhere really knows that this is no longer the thing to pursue. We, as human beings, always like to cling on to the remaining possibilities of things working out big. We don’t like to crystallise losses. We don’t like to admit defeat. VCs struggle with this on a daily basis.

 9)     Lack of a strong public market in Europe.

As Nigel Pitchford, Chief Investment Officer of Imperial Innovations puts it:

‘There is a lack of critical mass, both in terms of exciting young companies but also those more established businesses that can anchor the sector. This translates to our public capital markets that lack sufficient mass of interesting companies to invest in or follow, and who subsequently find it hard to consider biotech. If we really are to see the sector build and grow and go from strength to strength, we’re going to have to make sure that public market money is also available for these businesses, when they need it… We need more analysts, more research, and more specialist funds dedicated to this area, to rebuild the sector and educate the generalists.’

Allan Marchington adds:

‘The challenges for me are in order to grow substantially large companies we need a strong public market in this space and unfortunately it isn’t as strong as I’d like it to be. We are seeing a few early green shoots of IPOs but we need more generalist investors to come in and actually push the IPO market harder’

 10)  Predicting what and where future corporate appetites will be for M&A.

More often than not the only exit VCs are ever going to achieve for their company is an M&A. The people who are going to do an M&A are the large or the medium to large corporates. Therefore, in the biotech space it’s really about predicting what’s going to be interesting to those companies in 5 years’ time. That’s one of the principle challenges keeping VCs awake.

 11)  Deciding where the opportunities are that are changing patients’ lives, changing clinical outcomes and that will change clinical practice.

If you can determine what will be changing patients’ lives in 5 years time, you’ll know what corporates will be prepared to pay for. For VCs, it’s this need to predict the future that occupies them.

 12)  Reimbursement and Pricing.

Is the unmet medical need a significant differentiator enough to drive reimbursement? If we consider targeted therapy pricing: is the high price model here to stay? Reimbursement and pricing is front and centre on the minds of VC’s, because ultimately there has to be a market and a buyer for the technologies they are backing, and for it to make economic sense, the price has to be right.

13)  Predicting the changes in the NHS and private pay markets.

Predicting how services are used can help you predict which devices and which therapeutics are going to become most interesting in an NHS setting. So, keeping up with the on going changes and potential future direction in the NHS and private pay markets is paramount.

14)  How to work more effectively with Tech Transfer Offices.

TTO’s are often accused of overvaluing IP, being uncommercial, slow and lacking perspective. For a VC, it is imperative to be able to work effectively with them as they are often the gateway to great science. Good TTO’s have an understanding of what a VC is looking for in an idea, they package it well and they’re pretty open and realistic in what they have. Their IP policy is clear and they give the academics the right advice and guidance in improving the idea they have. Some TTO’s do this very well. Unfortunately, however, many do not and VC’s challenge is to get the most out of them.

15)  Exciting opportunities emerging as a result of the NHS opening up.

As Allan Marchington points out: ‘There are loads of super smart people who have some great ideas who’ve never really looked beyond the NHS to get real access to capital to take those ideas from concept to fruition and really change patients’ lives. That’s the thing that really excites me at the minute, there’s a world there that is still mostly untapped.’

 16)  Keeping the investment on track.

In many ways, making the investment is relatively easy. Managing and exiting is the much harder part.Dealing with the ups and downs of any business is a major preoccupation of VCs.

The 16 challenges keeping VCs awake above is by no means an exhaustive list, but will give you a fair idea of what motivates VCs looking to operate in healthcare or life science markets. I’d be curious to hear if anyone has found anything different - or if there is something obvious we’re missing out?

To learn more about what our interviews with VCs taught us - including 9 surefire signs that your life science asset is investable, 5 signs that will set VC investor alarm bells ringing and some of the best pieces of advice a VC can give, download a free copy of your ebook today.

Nigel Pitchford will be speaking alongside Jeanne Bolger of J&J and Hakan Goker of MS Ventures at our evening event on VC and Growth Capital for Biotech on Oct 23rd, hosted by J&J innovations. Click here to find out more.