The following transcript was taken from the recent webinar hosted by Biotech and Money, with participants Deborah Harland of SR-One and Roel Bulthuis of MS Ventures.

Deborah Harland, Partner at SR-One.

SR One is the corporate venture capital arm of GlaxoSmithKline. The firm invests globally in emerging life science companies that are pursuing innovative science which will significantly impact medical care. Deborah joined SR One in 2005 to establish the firm’s European investment office.  She brings to SR One extensive operational, drug development and licensing experience gained through numerous roles held in clinical development, medical affairs and business development during her more than 20 year tenure in the pharmaceutical industry.

Roel Bulthuis, Head, MS Ventures

MS Ventures is the strategic, corporate venture arm of the biopharmaceutical division of Merck KGaA, Darmstadt, Germany. Roel Bulthuis joined the biopharmaceutical division of Merck KGaA, in 2006 and started MS Ventures in 2009. Previously, Roel was a Director in the Biotech Investment Banking Team at Fortis Bank, where he was responsible for the origination and execution of a wide range of financing and strategic transactions in the biotech sector based out of Amsterdam and New York. 

B&M: Debbie, Roel, let’s start with the ideas. Where are the new sources of innovation? How can they best be tapped into? 

Deborah Harland: It’s a mix but if you’re pinning me down, the best source of innovation outside of serial entrepreneurs are people that we’ve known either through our portfolio companies who are looking for their next opportunity and have diligence themselves. They may have a lot of things they might be interested in and they bring the next one to us.

Roel Bulthuis: I would absolutely agree that serial entrepreneurs are an important source of new companies. At some point you have to think about where entrepreneurs end and where academics start, there’s quite a lot of overlap there. We do spend a lot of time building top scientific advisor boards for our companies and so there’s a lot of interaction with the academic community and network.

That network typically leads to quite a lot of deal flow and then all of us are close to so many institutions where we access new deal ideas and because of the syndication aspect of venture capital there’s a lot of sharing of ideas between corporate VCs at the early stage to build good quality syndicates. It’s serial entrepreneurs, it’s a network of scientific advisors, collaborators that are close to you and then there’s deal flow from co-investors.

We get over 500 business plans per year, but a lot of the high-quality deal flow comes from those networks, from new ideas brought to us by people we have a relationship with.

B&M: I want to turn now to some of the secrets of follow-on funding, and I think it would make sense to first look at how the early stage investment environment has changed. Debbie, how you have seen the early stage investment environment change since the financial crisis?

Deborah Harland: It seems to a certain extent that particularly the role of corporate VCs has changed in that while a number of the more traditional VCs since the financial crisis turned their attention to their portfolios and later stage investing, the corporate VCs essentially stayed early or saw the opportunity or a mixture of both.

In the last 3 years we’ve done 12 series A or seed investments and 5 of those were in Europe. We’re punching above our weight from normal early stage investments here in Europe compared to the US. That’s certainly what’s changed since the financial crisis, we’ve seen corporate VCs plugging some of the gap in early stage.

There’s not enough capital from corporate alone to plug the gap completely but it’s certainly an opportunity. We’ve since for instance, the recent exit of Alios to J&J as an example. That syndicate at Series A had 3 or 4 corporate investors in it and has seen that company all the way through.

B&M: How do you approach follow on funding?

Deborah Harland: I do think about follow on funding but I think about it slightly differently. When we’re doing a Series A we aim to build the syndicate that will take the company all the way to exit. In your base case scenario, your follow-on funding is already in your syndicate. There’s so much risk in this business just around the science and all of the things we’ve spoken about earlier about how to get all of your moving parts and the balls in the air around developing your product.

Building a very robust syndicate of 3, 4 or 5 investors from the get-go and your Series A at least addresses the financial risk and it doesn’t close the door on the opportunity to bring in your investors later should you wish to do so but it means that in the best case scenario you shouldn’t have to. From my perspective and the whole SR One’s team perspective when we’re thinking about follow-on funding, we’re thinking have we got the syndicate in place to actually bear that follow-on funding right from the beginning and our main concern is not to under-syndicate our deals and to put the company at risk of having a short fall of follow-on funding.

B&M: We’ve heard that one of the principle challenges facing CVCs is around syndication especially since the financial crisis. Roel, do you agree with Deborah that syndication is vital to solve the follow-on funding challenge? And if so, how does one go about building the necessary syndicates?

Roel Bulthuis: I agree with that point that there is absolutely no way that we’re funding companies nowadays where we don’t have the confidence that we have a group around them that can take the company forward without external funding. We do give a lot of attention to structuring financing cycles and business plans around data points that we believe would allow us to go out for potential external participation. It’s a big topic for us, it is sometimes a challenge that depends on which field you are investing in, it depends on geography, it makes a huge difference whether we syndicate a deal in the US as compared to Europe for instance. If you go outside of those geographies it becomes even more complex, we have a seed fund in Israel and if you think about the amount of specialised investor money that is available there you can imagine that could be a nightmare to syndicate deals there.

The focus in syndication, to get a group together that brings quality money and great people to the table that can move things forward, the biggest challenge I’ve come across in Europe right now is that there are very few investors left that are willing to invest in that early stage biotech.

Just like SR One we start our first round investment as seed as Series A stage, that’s where we want to start to be part of the team and there’s quite a few of the investors that due to the crisis did not show very good performance on their most recent funds and stepped away from early stage investment. Some of the more recent fundraising ventures in Europe are turning that around, people are starting to look at early stage deals again but there are quite a few of the European VCs that would traditionally be involved in seed and Series A deals that are now restricting themselves to in some cases just clinical stage assets.

The board capital has become smaller and again to syndicate deals that are early stage that makes them more difficult. If we look at the market for the last 2 years, the amount of money that gets invested in venture in Europe and the number of deals, it doesn’t look that bad as in the years before if you specifically look at the early stage deals, new company creation, it’s just a fraction of the money that goes into venture in that sense as in Europe and most of that money comes from the corporate VCs. If you think about it right now, between SR One, ourselves, and a couple of others, potentially taking the majority of activities around new company creation in therapeutics in Europe. I don’t think that’s a sustainable situation; we cannot just have corporate money responsible for that part of the market.

B&M: I’d like to turn now to the investments themselves. If you try to understand what makes for a successful investment and what will be one of those 6 of your 600 business plans that succeeds what would you say are the particular characteristics that you look for? What are the things that really guide your decision-making in terms of making it an investment choice? 

Deborah Harland: It’s hard to generalise, but I believer there are 2 key elements. The first one is this: we are looking for an idea, a plan, some science which is really going to change the way that patients are treated, drugs are discovered, revolutionise the treatment environment. Not incremental change, but really disruptive technology and that can take several guises. We are agnostic of format, therapeutic area, target, it’s just all got to make sense from a disruptive messaging point of view.

The second element is the people. You might have the best idea in the world but unless you’ve got the right people, the right management team around it to actually shape it, pull together a plan, which actually has clear points of potential value inflection that whether it’s your internal syndicate or whether you are going out to try new money that they can hang their hat on to show progress. Those are the most important 2 elements for me, for people that have the right experience to advance your technology, through to key points of inflection along the pathway in drug discovery. It can take several views and several forms.

That sort of broad brush, as I said earlier we’re agnostic with regard to therapy area so we’re not specifically looking for a small molecule modulator of a certain set of targets. We know when we see it because it’s a bit like buying a house, when you see it, you like it, you buy it.

B&M: Roel, would you agree? It’s about people and disruptive technology?

Roel Bulthuis: Yes to people absolutely, for us one of the most exciting difficult and rewarding parts of what we do is helping, coaching, and supporting a management team in their work to build a company and to develop an asset and in their ability to build their teams, get additional talent on board and their ability to source expertise. Debbie described it in exactly the right way, you’re going to have mediocre science and a great team is still a company but great science and a mediocre team is never going to be a company. That is a critical aspect of everything we do.

There’s so many things to look at when you make an investment decision. One very important principle besides the cool science and the people when we make investment decisions, is that we want to see that we’re actually developing a product and it may sound very trivial but we find that many of the business plans that we see in biotech are based on proving a scientific finding or concept and proving that to the extent that the expectation is if the science works then we have something to sell.

That is not correct in the current market anymore. This is not something we have to see in a first version of a business plan but we spend a lot of time with a company pre-investment to think about if you have that science and biology and maybe the chemistry that you’ve initially developed, if you think about the effect you are seeing with that right now, what kind of product could that generate in the end and how would that be positioned in the  market, how are we going to convince a physician, a payer to take up that molecule and how are we going to convince them, what data do we have to deliver to do that. That is what we call the commercial relevance of that product.

When you work back from that, into your business plan, if that is the product I want to put on the market, that is the data I want to present to people so what do I have to do in clinical development and in order to do those clinical trials, what do I have to do before going into clinical development. In very many cases that gets you to different experiments then the experiments would do to prove your concept against the more conventional way of thinking about that. That is a critical part for us in selecting an investment; to make sure that we have that route towards commercial relevance.

B&M: So you’re talking about beginning with the end in mind, so in other words knowing what you’re end product is going to be before you embark on the mission. Am I understanding you correctly?

Roel Bulthuis: Yes and recognising there’s going to be a lot of assumptions in that but you need to do that exercise.

Deborah Harland: I would agree with that because we beat up on our management teams a lot on what’s the target profile? How are you going to show that you can reach that profile? What does that mean for your development path through to the clinic, where is the line of sight? Why should we be excited about that, why is a potential licensee or bio going to be excited by that? It’s something that we focus on a lot with our early stage companies and as Roel quite rightly says, you can’t expect that a very early stage company will have all of that nailed but the discipline of helping them understand how important it is to go through that exercise rather than just designing their next in vivo animal experiment and showing us that something works is really important and that’s where it comes back to having the right mind-set in your management team to realise how important that is.

B&M: Let’s talk about engagement with CVCs. What’s the best route to get to SR One and MS Ventures, how do people reach you, what’s the best way?

Deborah Harland: Certainly not by cold-calling us because we get so many contacts by email and by phone. The very best way is to find somebody who knows one of us and get a personal introduction. Roel touched on it earlier; some of the best deals, the more likely we are to take a call or meet a third party is if somebody else we absolutely respect because we’ve worked with them and we like them actually passes on a contact. If you don’t know one of the partners personally, find somebody who does know us and get a personal introduction and trust me we’ll take the call. It’s a very network business, it’s a very relationship based business, if somebody we like and respect passes on a contact we will certainly follow up on that contact. That for me is the best advice I could give somebody if you want to get in touch with us.

I would hope the likes of Roel and myself and our colleagues in other corporate VCs, we participate on a lot of panels and we talk about this, about the types of things we are looking for. It’s still slightly disappointing that some of the approaches we get just don’t hit any of these things at all. That’s the big mistake that people make, they come to us just as a core science and not with the whole opportunity or not even having thought through the whole opportunity.

That being said, I’m very happy, and I prefer to actually engage early with people and give them some advice on how they need to shake their idea for it to be of interest to us. We do actually spend quite a lot of time doing that and some of the investments we end up doing with individuals and eventually companies that we’ve been speaking to for over 12 months who we’ve been giving advice to, have perhaps gone away and shaped their idea, engaged somebody to join their team or a particular skill set that they were missing, thought through their product concepts a bit better, done something on a little bit of grant funding or something else and managed to move their idea on to a stage where it would be of interest to us. That’s quite important, deals don’t happen overnight, you have to engage people early.

If you can get our attention by getting a referral early on and get some feedback from us because what we’ll quite often do, if it’s too early for us, we will perhaps make a nice connection for individuals within other parts of GSK where they can get more advice or input either on the basic science or some aspect of their product development which helps them shape their business opportunity to come back to us in a few months’ time.

B&M: Roel would you agree with Debbie that it is essentially all about the network and who you know and getting access to you is best done through an introduction?

Roel Bulthuis: If you think about the whole discussion we just had and the focus on people, relationships, teams, it’s important for the CEO, for an entrepreneur to feel comfortable with the people they have on their board from the investment side. It’s very important for us when we start to think about investing that we feel comfortable with the people we work with. If you think about the normal way of building relationships, it’s counter-intuitive to think that that you come with a business plan and then on the basis of that business plan we make a decision to invest. It makes much more sense, through those introductions to build some level of relationship where people can understand where your expertise is and on that basis have a discussion about a business plan.

The other point of that is, to Debbie’s point, if that business plan is an explanation of the great science that is there but doesn’t touch on why that would be a business and what people who run that are going to do that is going to make it very difficult. There’s still quite a few approaches where you see business plans that are purely focused on science and science is great and it’s critical to anything that we do, but science is not business and we’re not in the business of funding science, we’re in the business of creating companies that are going to be successful and successful is mostly defined as creating a return on investment. We cannot do that by just funding science.

B&M: There is one challenge we haven’t talked about very much, but in my discussions with venture capitalists over the past 5 or 6 months, it comes up again and again which is that of attrition. We know that in the industry at the moment it takes roughly 10 trials before getting to patients and time to recoup investment is shorter and shorter. One of the biggest challenges that you guys are facing is not killing projects early enough. Is this something you would agree with Debbie?

Deborah Harland: I think so yes and I’d like to think also this is where having corporates in your syndicate can help you especially when we see something that might be a seed opportunity. Apart from all the other things we’ve talked about, does it look like it could be a good investment, we think about can you design a killer experiment and it doesn’t really mean can you design something which shows that you’re hypothesis is proven, it’s can you design something which really challenges your hypothesis and it’s a definite no if it’s negative. That actually is very hard for people to think in that way but designing a killer experiment is really important and we certainly think about that all the way through our investments to try to address the issue of attrition as best as possible.

We want to fail for science, we don’t want to fail for other reasons. We want to fail because the scientific hypothesis did not pan out. We don’t want to fail because we got the dose wrong or that the manufacturing batch wasn’t the correct one when we took it into the clinic. We want to fail because the science hypothesis didn’t come to fruition. The most rigorous way that you can test that is the most important discussion you can have and challenge as an investor board member with your management team. Design rigorous experiments that are go and no go experiments. The perfect answer doesn’t exist but if you can keep that in mind as part of a management team and as an investor group at least if you fail you will fail for the right reasons. We’ll also quite often as Roel was saying, when we’re thinking through business plans and we’re syndicating together as investors, we’re tranching investments to what we feel are key data read outs and value inflection points which are usually based on some sort of go, no go decision which hopefully are the most rigorous tests of the hypothesis to date.

B&M: Roel how do you think you would tackle the attrition problem?

Roel Bulthuis: I don’t think attrition is a problem or a challenge. Attrition is a reality of drug development and to Debbie’s point, what we do as investors we essentially find the most capital efficient and the best quality data to make that decision whether we know where we have to make the decision to start the programme.

There’s no difference between biotech and pharma in the sense that there is a high risk in drug discovery and development and you have to deal with that but that’s why we are in business and for our CEOs, for our management teams the best quality management teams are the people who are work with us to get to those decisions and they are linked to make hard decisions about programmes and people who you will see again.

To the earlier point of deal flow and serial entrepreneurs, that quality gets recognised so if the reality is the drug that you are developing is not a good programme and you have a data driven way to make that decision, you have a management team that has done that for you, then you will support those people again.

Deborah and Roel will be joining the 70+ speaker faculty at London’s newest flagship life science investment congress from 3-4 February, Biotech and Money London 2015.

They will be participating in a 70mins discussion session on Corporate Venture Capital. Download the brochure to see the speakers from Roche Venture Fund, LundbeckFond, Novartis Venture Fund and Silicon Valley Bank who will be joining them, along with the other 70+ speakers already confirmed.