Risk & Reward in de Venture Capital wereld

Transcription

1 Risk & Reward in de Venture Capital wereld Risk & Reward seminar voor de biotech-, farma en life sciences industrie 24 maart 2011 Hermitage Amsterdam Dr. John de Koning Partner

2 Venture Capital Introduction Long-term financial instrument High risk, high reward Institutional investors (pension funds, insurance companies, banks, corporate, fund of funds) Risk mitigate their portfolio Spread financial instruments, sectors, geography, etc Also look for high risk / high return products that outperform the benchmark Invest in VC fund, together with multiple other institutional investors VC fund of certain size: Invest in [x] number of companies Divest (exit) after [y] years making a [z] return, typically aiming >25% IRR Exit routes: Trade sale (e.g. Big Pharma or large diagnostic corporate) (IPO) Typical fund: 10 years (possibly with 1-2 yr extension period) 2

3 Venture Capital Important Source of Capital for Life Sciences Companies Preseed / Seed Startup Growth Maturity / Profitability University Informals Seed funds Venture capital Industry Public markets 3

4 Venture Capital Added Value? Deep pockets, will reserve for further financing Long-term view Knowledge and experience Network Mostly through Supervisory Board seat (or Observer seat) For example: Strategy (Re)formulation of business model Recruiting Introductions strategic partners (Big Pharma, diagnostic corporates, etc) Further funding Exit preparations 4

5 Venture Capital Competitive Example of VC annual deal flow new investment opportunities per year are investigated in detail 2 8 investments per year 5

6 Venture Capital Deal Investment Criteria / Due Diligence Deal source Science / Content: USPs (Unique Selling Points) IP, FTO (Freedom to Operate) Business model, strategy Competition and markets Management Valuation Use of proceeds / value creating milestones Potential return on investment Exit potential Investors base / syndicate 6

7 Venture Capital Risks Related to Life Sciences Investments Development trajectory is long ( 10 years ) and success rate is relatively low Technical risks: R&D, complexity of biology (e.g. low predictive value of models) Clinical risks (e.g. translation to humans; placebo effect; human heterogeneity vs. personalized medicine) Regulatory risks Reimbursement risks Competition / Changing landscape IP Potentially resulting in: Delays Increased costs (more investments needed) Failures (write-offs) 7

8 Venture Capital Risk Mitigation Due diligence Check operational, business risks, legal, financial, IP, FTO Check USPs, R&D, models, clinical, regulatory, reimbursement, etc Check competition, exit potential Deal terms Use of proceeds well defined in order to meet value-increasing milestones Tranched investments Tranches based on milestones achieved (science, commercial, organizational) In syndicates, mostly international Minority stakes Preferred rights: liquidation preference, anti-dilution protection, tag along, drag along, approval rights, etc, etc Management retainers (option pool, vesting, investment) Reps and warranties to cover knowledge imbalance management vs. VC Board seat 8

9 Venture Capital Risk Mitigation, Additional Thoughts Portfolio companies One-product companies vs. companies with products based on platform technology Perform detailed sensitivity analyses on company s models Invest more to create a financial buffer, e.g. anticipate a one-year delay Select companies with inherent reduced risk, e.g.: Reduced time-to-market Orphan drug designation (market exclusivity, fee/tax benefit, rapid regulatory) Repositioning of drugs (old drugs, new uses): safe, lower costs, faster Portfolio management <10% of fund in 1 company >10 companies per fund Invest in different segments: therapeutics, medical devices, diagnostics Invest in different stages: early-stage to pre-exit 9

10 Conclusion I. Management and operational risks Prerequisites to increase probability high reward Primarily task of executive management Supervisory Board to monitor and advise, e.g. could advise management to consult specialized insurance brokers to assess and minimize risk exposure II. VC-related R&D technical and entrepreneurial risks Insurance? Part of the business, i.e. Venture Capital! 10

11 Contact Info Dr. John P. de Koning LSP Johannes Vermeerplein DV Amsterdam The Netherlands Tel: + 31 (0)