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Ken Shimokawa, Founder and General Partner of G4S Capital, shares insights into what venture capitalists look for when evaluating emerging biopharmaceutical opportunities.
Seeking and acquiring venture capital (VC) in the emerging biopharmaceutical (EBP) industry is daunting for any early-stage enterprise wanting to develop novel therapeutics; it must involve the right mix of people, science, and assets. In this interview, Ken Shimokawa, Founder and General Partner of G4S Capital, a Silicon Valley VC fund, will provide some pointers on what VCs look for when evaluating EBP opportunities.
Ken Shimokawa: Society and governments want to advance new science that ends up in successful commercialization outcomes, but it requires a lot of capital; this is where VC comes in. Without VC, scientific innovation would likely dry up, and stagnate. VCs are now particularly interested in new modes of action and new modalities, such as gene/cell therapy, gene editing, and digital health, which tend to be risky investments. In addition to the science that biopharmaceutical companies are investing in, VCs also evaluate the executive team. In fact, I believe executive team member evaluation is critical to a company’s success, and is the most important factor VCs look for when investing in EBPs.
Moreover, during evaluation, VCs always check to see if the company owns intellectual property for the therapy, and the potential market achieved from the new therapy. We check market size, competitive landscape, what is the advantage of the technology over current therapies or competitors. These factors are essential for an investment decision. We expect to learn the exit strategy of the EBPs. Roughly 80% of EBPs aim for a merger & acquisition and 20% look for an initial public offering (IPO).
At G4S Capital, we are focusing on anti-aging and aging-associated diseases, especially in neuroscience. These areas include dementia, ophthalmology, and hearing loss. As you know, Asiatic countries-such as Japan, China, and Korea-are facing an aging society, and we see substantial investment opportunities in those regions, especially with improving the quality of life with the elderly.
KS: VCs have a challenging time determining whether the innovative therapy will be successful or not. We are investing in science, so even though we expect 100% success, it is often not the case. Science is very hard to predict, so we rely on people running the EBP, since we can better predict executive performance. Good executives can conquer difficulties around the science and have a higher probability of success compared to those who do not have solid backgrounds in EBP startup. Most of the innovative therapies tend to be coupled from a person who headed the therapy in academia; for example, researchers will be CSOs who have a strong scientific background, and the combination of a good CEO along with functional team members who are experienced in biopharmaceutical and therapy development tend to mitigate risks.
KS: It is because the emergence of novel therapy development methodologies are breaking through. For example, gene therapy, cell therapy, induced pluripotent stem cell therapies (iPSC), clustered regularly interspaced short palindromic repeat (CRISPR) gene editing, and digital health technologies. These innovations are all coming out about the same time, and they are setting the stage for more efficient and more effective therapy development. I've seen many digital health companies that are getting funded; some make only an app, whereas others are conducting entire clinical studies using an app. These emerging companies are changing the way biopharmaceutical companies are conducting clinical trials, and they are shaping the future clinical trial and drug development paradigm.
KS: It depends on the VC’s strategy. Smaller VC firms do not have very much capacity to deploy large funding, so they tend to invest in early stages (i.e., seed, Series A or Series B), or in a transitionary stage from preclinical to clinical or early clinical stage. On the other hand, larger VCs are able to deploy larger funding, so they can invest in late stages (Phase II or sometimes Phase III) or support from early stage to Phase II Proof of Concept studies (or sometimes later than that) by investing large amounts; that way, biopharmaceutical companies don’t need to fundraise between milestones.
MA: How do VCs that invest in early EBP stages determine ROI?
KS: It is challenging to predict ROI in such cases; however, investors want the science to be successful. Factors we look for include the rate of clinical trial enrollment, results from interim data analyses and how well the executive team is able to deal with and overcome the slough of problems that typically arise in clinical trials. Investors invest in people, as we can more easily quantify performance and ROI, hence, having a good team experiencing success as well as failure (failure is one step closer to success, and you learn more than just success), and consisting of MDs, PhDs and MBAs is important. Evaluating scientific ROI is essential, but the people who manage the company and its assets are more important. This is how we evaluate ROI in early-stage investments; from both scientific and executive performance sides.
KS: Limited partners (LPs) can be any institute or individual that wants to invest in a high return. This tends to be their first priority. LPs could include wealthy individuals, corporate institutes, or big biopharmaceutical companies that are interested in the science or the connection to the EBP field. LPs can also include people and institutions who have been successful in the IT field with altruistic motivations; they want to advance science and believe a healthy life is important.
For another look at biotech runway/financial options read the latest Pharm Exec feature here.
Moe Alsumidaie, MBA, MSF, is a thought leader and expert in the application of business analytics toward clinical trials, and Editorial Advisory Board member for and regular contributor to Applied Clinical Trials